AvalonBay Communities, Inc. (AVB) Q4 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call highlights several challenges, including soft apartment demand, increased expenses, and legislative impacts on income. Although there are positive developments like strong lease-ups in New Jersey and future earnings uplift from projects, the Q&A reveals ongoing job losses, especially in key markets, and uncertainties in revenue growth. The cautious outlook, coupled with management's vague responses about future risks, suggests a negative sentiment overall, likely leading to a stock price decline.
Key Financial Performance
Revenue Growth Overall revenue growth of 2.1% during 2025, attributed to high levels of retention and strong renewal acceptance. The turnover rate was 41%, the lowest in the company's history, which contributed to this growth.
Development Projects Started $1.65 billion of projects in 2025 with a projected initial stabilized yield of 6.2%. These were funded with capital raised at a cost of roughly 5%, setting the foundation for strong earnings and value creation.
Equity Capital Raised Raised almost $900 million of equity on a forward basis in 2024 at an implied initial cost of 5%. This was a unique move among peers.
Share Repurchases Repurchased almost $490 million worth of shares in 2025 at an average price of $182 per share, with an implied yield north of 6%. This was funded through incremental debt and the sale of lower growth assets.
Capital Raised Raised $2.4 billion of capital in 2025 at an initial cost of 5%, positioning the company for future investments.
Dividend Increase Quarterly dividend increased to $1.78 per share, a 1.7% increase, maintaining a conservative payout ratio.
Same-Store Revenue Growth Projected 1.4% same-store revenue growth for 2026, driven by lease rate increases and incremental contributions from other rental revenue and underlying bad debt.
Operating Expense Growth Same-store operating expense growth projected at 3.8% for 2026, driven by factors like the phaseout of property tax abatement programs and a favorable property tax appeal settlement in Q4 2025.
Core FFO Per Share Projected $0.04 increase from same-store NOI in 2026, offset by a $0.03 decrease from overhead, management fees, and JV income.
Development Earnings Development expected to contribute $0.10 or 90 basis points to earnings growth in 2026, with a temporary dampening effect due to lower completion and ramping starts in 2025.
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Operating Highlights
Development Projects: Started $1.65 billion of projects in 2025 with a projected initial stabilized yield of 6.2%. Planned $800 million in new starts for 2026, consisting of 7 projects with an average development yield of 6.5%-7%.
Development NOI: Development is expected to contribute $0.10 or 90 basis points to earnings growth in 2026. Incremental $75 million of additional NOI expected in 2027.
Regional Revenue Growth: Revenue growth of 2% in New York/New Jersey, mid-3% in Northern California, and mid-1% in Southern California. Southeast Florida remains the strongest region with 1.5% growth.
Supply and Demand Dynamics: Supply in established regions expected at only 80 basis points of stock in 2026, with significant declines in new apartment deliveries across regions (e.g., 60% decline in Northern California).
Retention and Turnover: Achieved a turnover rate of 41% in 2025, the lowest in company history. High retention and renewal acceptance contributed to 2.1% revenue growth.
Operational Initiatives: Achieved 60% of the $80 million target for annual incremental NOI from operating initiatives, with $7 million incremental NOI slated for 2026.
Capital Allocation: Raised $2.4 billion of capital in 2025 at an initial cost of 5%. Repurchased $490 million in shares at an average price of $182 per share.
Portfolio Optimization: Sold lower growth assets and acquired tailored portfolios in Texas to improve long-term growth profile.
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Risk or Challenges
Revenue Growth: Forecasted modest revenue growth of 1.4% in 2026 due to current job and demand backdrop. Revenue growth is dependent on incremental demand, which may be impacted by macroeconomic conditions.
Regional Job Losses: Job losses in Boston and the Mid-Atlantic regions in the latter half of 2025 are expected to negatively impact revenue growth and occupancy rates in 2026.
Development Costs and Funding: Incremental funding costs from $1.65 billion in developments started in 2025 will partially offset earnings growth in 2026. Additionally, a projected $340 million increase in construction in progress will temporarily dampen earnings growth.
Supply Challenges: New apartment deliveries are projected to decline in several regions, which could impact revenue growth if demand does not pick up as expected.
Operating Expense Growth: Same-store operating expense growth is projected at 3.8% in 2026, driven by factors such as the phaseout of property tax abatement programs and increased maintenance-related costs.
Legislative Actions: Select legislative actions in 2025 are expected to reduce other rental revenue growth in 2026.
Denver Market Challenges: Denver faces a challenging environment with modest job growth and the delivery of 9,000 new units in 2026, leading to projected rent declines throughout the year.
Capitalized Interest Rate Disparity: A disparity between the capitalized interest rate (3.7%) and the initial funding cost (5%) will result in a lower capitalized interest benefit, temporarily dampening earnings growth in 2026.
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Guidance & Outlook
Revenue Growth: Forecasting modest revenue growth of 1.4% for 2026, with stronger growth expected in the second half of the year due to improved job growth, lower supply, and softer comparisons.
Development NOI: Meaningful uplift in development NOI expected as projects lease up during 2026, partially offset by funding costs from $1.65 billion of developments started in 2025.
New Development Starts: Restraining activity to $800 million in 2026, consisting of 7 projects with an average development yield of 6.5% to 7%.
Dividend Increase: Board approved an increase in quarterly dividend to $1.78 per share, reflecting a 1.7% increase.
Job Growth Assumptions: Outlook assumes slightly stronger job growth in 2026 compared to 2025, with NABE forecasting 750,000 net new jobs.
Apartment Demand: Demand supported by rent-to-income ratios below 2020 levels, relative attractiveness of renting versus homeownership, and low supply levels in established regions.
Supply Outlook: Supply in established regions expected at only 80 basis points of stock in 2026, with challenges in entitlements expected to keep supply low for the foreseeable future.
Regional Revenue Growth: Projected revenue growth varies by region, with New York/New Jersey and Northern California expected to perform better, while Denver and Mid-Atlantic regions face challenges.
Operating Expense Growth: Same-store operating expense growth projected at 3.8%, driven by property tax changes, benefits costs, and maintenance-related costs.
Core FFO Per Share: Projected $0.04 increase from same-store NOI, offset by decreases from overhead, management fees, and JV income.
Development Earnings Contribution: Development expected to contribute $0.10 or 90 basis points to earnings growth in 2026, with further outsized growth expected in 2027 as projects stabilize.
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Shareholder Return Plan
Quarterly Dividend Increase: The Board approved an increase of the quarterly dividend to $1.78 per share, representing a 1.7% increase. This positions the company with one of the more conservative payout ratios in the industry.
Share Repurchase Program: The company repurchased shares worth almost $490 million at an average price of $182 per share, with an implied yield north of 6%. These repurchases were funded through incremental debt and the sale of lower growth assets, improving the long-term growth profile.
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Key Q&A
Q:You mentioned that renewals are going out in the 4% to 4.5% range. Could you talk about whether you expect to achieve 4% to 4.5% on these renewals or if the take rate will be lower? What changed between now and the 2.5% you achieved on renewals in January?
A:Renewal offers for February and March are in the 4% to 4.5% range, but they typically settle lower, with a historical dilution of 100 to 125 basis points. For 2026, the overall rent change forecast is around 2%, with renewals averaging mid-3% and move-ins improving by 70 to 80 basis points compared to 2025. The economic environment is expected to be similar to 2025, with 40% less supply, leading to sequential improvement throughout the year.
Q:How predictable do you think the ramp from the first half to the second half is, given lingering supply in some markets?
A:The forecast reflects lingering inventory from 2025 in the first half of 2026, even though deliveries will be down significantly. Confidence in the ramp is based on models showing 60-70 basis points of improvement in move-ins and relatively flat renewals. The second half improvement is expected due to reduced supply, job growth, and softer comps.
Q:What lessons did you learn from 2025's guidance adjustments, and how did you apply them to 2026?
A:The approach to guidance remains detailed, considering upside and downside scenarios. Development earnings are seen as more concrete, with projects under construction and prefunded. The main question for the core portfolio is demand, with upside tied to job growth and downside tied to economic weakening.
Q:Why did you cut development starts in half this year and raise the hurdle rate?
A:The reduction is due to fewer deals meeting the 6.5% to 7% hurdle rate and a conscious decision to align with funding capacity and cost. The starts are more weighted towards established East Coast regions, which tend to have higher yields.
Q:How much have you had to lower pro forma rents for new developments due to market softness?
A:Pro forma rents have been slightly reduced, but this has been offset by lower costs, keeping yields stable. For example, a recent project in Northern New Jersey maintained a high 6s yield despite lower rents and costs.
Q:Should we expect additional pressure from property tax abatements or utility costs in 2027?
A:Some level of headwind from abatements is expected to continue for the next few years. Bulk Internet costs are stabilizing, with lingering costs phasing out in 2026. Smart access costs will continue for another 18-24 months but are less impactful.
Q:Are share buybacks or paired trades more attractive today, given the pullback in development funding needs?
A:The capital plan for 2026 includes modest asset sales, leaving capacity for share buybacks or other investments. Share buybacks are not included in the baseline budget but remain a potential opportunity.
Q:What was the cap rate on the San Francisco asset sale in January, and what is the update on pending sales?
A:The San Francisco asset sold at a low-5s cap rate, with heavy CapEx needs and rent control. Another sale is expected to close this month at a similar cap rate. All planned sales are older high-rise assets in urban areas.
Q:Were there specific markets driving the decline in renewal rates in Q4 and January?
A:The decline was broad-based due to seasonal moderation in Q4. Softer markets like the Mid-Atlantic, Boston, and Denver saw more negotiation to protect occupancy.
Q:What is the impact of legislative activity on other income, and are there any political initiatives to watch?
A:Legislation in Colorado and California has impacted fees and utility recovery, causing a drag on other income. Massachusetts has a potential ballot initiative, but it is considered easier to defeat than past initiatives. Increased transparency and disclosure around fees are being monitored.
Q:What are your expectations for lease-ups and new starts in New Jersey, given the supply in the market?
A:Lease-ups in New Jersey are performing well, with January numbers exceeding expectations. The market is not oversupplied, and new starts are aligned with demand and expected yields.
Q:What is your view on the D.C. market and the impact of job losses?
A:The Mid-Atlantic region lost 60,000 jobs in the last six months of 2025, impacting demand. A 60% reduction in deliveries in 2026 is expected to improve conditions, especially in the second half.
Q:What is driving cap rate compression in the transaction environment?
A:Cap rate compression is driven by competitive debt markets, equity on the sidelines, and optimism about a recovery in 2-3 years. Assets that meet criteria see robust bidding, while others do not transact.
Q:Why is same-store revenue in Denver lower than other expansion markets?
A:Denver had zero job growth in 2025 and significant deliveries. In 2026, modest job growth and 9,000 new units are expected, leading to continued softness.
Q:How do you view the White House's initiatives to promote for-sale housing?
A:The initiatives are being monitored but are not expected to have a significant impact on the portfolio. The focus remains on supporting supply-based solutions.
Q:What are bad debt levels for Q4 2025 and the forecast for 2026?
A:Bad debt was 1.63% in Q4 2025 and 1.6% for the full year. The forecast for 2026 is 1.4%.
Q:What are your expectations for tech employment growth in San Francisco and Seattle?
A:Job growth in these markets is expected to remain flat in the first half of 2026, with a slight uptick in the second half. Wage growth remains healthy, supporting renewal rent increases.
Q:How do you view the earnings inflection potential for 2027, and what is the outlook for expansion markets?
A:2026 is seen as a transition year, with stronger growth expected in 2027 due to development contributions and reduced supply. Expansion markets are expected to grow over the next 1-3 years, but 2026 will see less activity in these regions.
Q:What is the performance difference between urban and suburban markets?
A:Urban markets have outperformed suburban ones in rent change, but some of this is due to reduced concessions rather than stronger fundamentals. San Francisco and New York City are performing well, while Seattle remains soft.
Q:What is the outlook for build-to-rent (BTR) communities?
A:BTR communities are seen as a growth area, with yields similar to traditional multifamily. They attract older residents with longer stays, aligning with future demand trends.
Q:Review of Unclear Management Responses
A:Management avoided directly addressing the predictability of the ramp from the first half to the second half of 2026, providing general confidence in their models but lacking specific details on potential risks. Additionally, they did not provide a clear answer on the exact impact of legislative changes on other income, offering only broad explanations.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Atlantic job
Attachment release
AvalonBay dedication
AvalonConnect offering
Boston job
CIP
Demand
Mid
addition
apartment delivery
apartment rent
challenge
community construction
contribution debt
decline
decrease
delivery unit
development NOI
dynamic
expense
factor
funding cost
headwind
income
interest rate
job loss
lease rate
occupancy basis
point contribution
point reduction
project yield
property tax
quality portfolio
rate basis
rate term
ratio
repurchase
retention renewal
sale
share increase
size
step
team
transaction activity
unit market
AVB Transcript
AvalonBay Communities, Inc. (AVB) Q4 2025 Earnings Call Transcript
Unknown2-5
The earnings call highlights several challenges, including soft apartment demand, increased expenses, and legislative impacts on income. Although there are positive developments like strong lease-ups in New Jersey and future earnings uplift from projects, the Q&A reveals ongoing job losses, especially in key markets, and uncertainties in revenue growth. The cautious outlook, coupled with management's vague responses about future risks, suggests a negative sentiment overall, likely leading to a stock price decline.
AvalonBay Communities, Inc. (AVB) Q3 2025 Earnings Call Transcript
Unknown10-30
The earnings call presents a mixed picture: while there are positive aspects like increased development starts and strategic asset repositioning, concerns arise from higher-than-expected bad debt, challenges in specific markets, and vague guidance on future rent growth. The Q&A reveals cautious optimism but highlights uncertainties, particularly in market visibility and economic impacts. These factors, combined with stable cap rates and a leverage-neutral share repurchase plan, suggest a neutral sentiment, indicating limited short-term stock price movement.
AvalonBay Communities, Inc. (AVB) Presents At BofA Securities 2025 Global Real Estate Conference Transcript
Neutral9-9
AvalonBay Communities, Inc. (AVB) Q2 2025 Earnings Call Transcript
Unknown7-31
The earnings call summary presents a mixed picture: strong core FFO growth and reaffirmed 2025 outlook are positives, but same-store revenue growth and development NOI are below expectations. The Q&A reveals concerns about leasing pace, bad debt, and job growth affecting demand, which dampens sentiment. The absence of clear guidance for 2026 and management's vague responses further contribute to uncertainty. Overall, the positive aspects are balanced by notable challenges, leading to a neutral prediction for stock price movement.
AVB Slides
AVB Report
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