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    AvalonBay Communities Inc (AVB)

    Q4 2023 Summary

    Published Jan 10, 2025, 5:10 PM UTC
    Initial Price$170.80October 1, 2023
    Final Price$187.22December 31, 2023
    Price Change$16.42
    % Change+9.61%

    What went well

    • Despite a negative 1.9% new rent growth in January, AvalonBay expects rents to turn positive in Q2 and Q3 of 2024 as seasonal trends improve, indicating strong demand ahead.
    • Their suburban portfolio outperformed the urban portfolio by about 200 basis points in Q4, and they expect suburban markets to continue holding up better, which aligns with their strategic focus on shifting investments to suburban areas.
    • AvalonBay anticipates average asking rent growth of 2.25% to 2.5% in 2024, with actual rent changes in the portfolio of approximately 2%, signaling positive revenue growth for the year.

    What went wrong

    • The company reported negative new rent growth of -1.9% in January, and acknowledged that rent growth trends are modestly below historical norms, indicating potential weakness in demand.
    • Operating expenses are expected to rise due to double-digit growth in insurance costs, mid-4% increase in property taxes, and low double-digit increase in utilities expenses, which could pressure net operating income.
    • The urban portfolio was essentially flat in Q4, and urban markets like San Francisco and Seattle are expected to lag due to specific market challenges, potentially impacting overall growth.

    Q&A Summary

    1. Rent Growth Outlook
      Q: What's the expected blended rent growth for 2024?
      A: Management expects a rent change of roughly 2% in 2024, with renewals at about 4% and new move-ins essentially flat. They anticipate some acceleration in rent change in the second half of 2024 relative to the first half.

    2. Development Pipeline Contribution
      Q: How will the development pipeline contribute to earnings in 2024?
      A: The earnings accretion from development undergoing lease-up is about $0.18 per share this year, equating to approximately 170 basis points of earnings growth in 2024, consistent with typical levels.

    3. 2024 Development Starts and Yields
      Q: What's the plan for 2024 development starts and expected yields?
      A: AVB plans to start $870 million of development in 2024, mostly in the back half of the year. Expected yields are in the mid-6% range , with about one-third of starts in expansion markets like North Carolina.

    4. Established vs. Expansion Regions Performance
      Q: How do established and expansion regions compare in lease rate growth?
      A: Demand and supply fundamentals are better in established regions. In Q4, suburban portfolios saw about 200 basis points better growth than urban, but management doesn't expect this gap to persist at that level.

    5. Sensitivity to Macroeconomic Conditions
      Q: How sensitive are rent growth projections to macroeconomic conditions?
      A: Rent growth depends on job and wage growth and timing. A significant improvement in the macro environment could boost rent growth, especially if it occurs before peak leasing season.

    6. Capitalized Interest and Development Balance
      Q: How is capitalized interest expense expected to change, and why?
      A: Capitalized interest expense is expected to decrease by $5 million year-over-year due to more completions than new projects entering construction.

    7. San Francisco and Seattle Market Recovery
      Q: How are the San Francisco and Seattle markets recovering?
      A: Northern California rents are still down roughly 10% from pre-COVID peaks, with San Francisco down 12–13%. Seattle rents are up about 8%, but the urban core remains more challenged due to supply and quality-of-life issues.

    8. AvalonConnect's Impact on Revenue and Expenses
      Q: How will AvalonConnect impact revenue and expenses?
      A: AvalonConnect contributes about 80 basis points to revenue growth from other rental revenue. The associated costs are essentially 100% expensed.

    9. Transaction Market and Cap Rates
      Q: What's the outlook for acquisitions and cap rates?
      A: There's still a significant bid-ask spread. Management expects transactions to begin at cap rates between 5% and 5.5% in the next few months, primarily for highly desirable assets.

    10. Sunbelt Market Supply Impact
      Q: How is supply affecting the Sunbelt markets and revenue growth?
      A: Expansion regions are experiencing flat blended rent change, with new move-ins down about 150 basis points and renewals up low to mid-3%. The most significant revenue impact is expected in 2025 as leases roll over to lower market rents.

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