The Citi's 2026 global property CEO conference. I'm Nick Joseph here with Eric Wolfe with Citi Research. Pleased to have with us AvalonBay CEO Ben Schall. This session is for Citi clients only. Disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to liveqa.com and enter code GPC26 to submit any questions. Ben, we'll turn it over to you to introduce the company and team, provide any opening remarks, tell the audience the top reasons an investor should buy your stock today. Then we'll get into Q&A.
Great. Thanks, Nick and Eric for coming. Thanks, Nick and Eric for hosting us. Thanks, everybody, for being here. I'm joined today by Kevin O'Shea, our Chief Financial Officer, and Sean Breslin, our Chief Operating Officer. For folks who don't know us, we're AvalonBay. We're the largest of the public multifamily REITs. We own and operate, you know, close to 100,000 units across 10 regions in the country. We've been in business for 30+ years at this point, and over that time period have delivered a annualized return to shareholders of 11%. I'm gonna start by just emphasizing some of our focus areas as a leadership team and as a business to drive superior growth and also ways that we're differentiating our business in the landscape.
Yeah, I'll start with on the operating side. You know, we are in the midst now of what we call our Operating Model Transformation, really looking to leverage our scale, tap into technology, including increasingly the use of AI, along with the benefits from centralized services and the benefits from managing clusters of assets to drive more and more cash flow out of our existing communities, as well as greater returns from our new investments. To put numbers to it, we've put out a target of $80 million of annual incremental NOI to come from those operating initiatives. We're about 60% of the way there and have targeted another $7 million of incremental NOI this year from those activities. We're excited where that's headed. A lot more to come.
A lot in the lab as we think about future innovation to both better serve the customer as well as drive incremental revenue and more efficiencies for shareholders. Second category of emphasis is in and around our development capabilities and our development platform. For folks who don't know, in the public sector, we're by far the largest of the developers in the space. We, you know, over a 10-year period, developed more than all of our peers combined. My call-out, you know, today is that we have $3.6 billion under construction, all of which has been paid for, particularly with a large equity raise that we did in 2024.
That development activity is set to generate meaningful earnings, some this year, but particularly as we get into 2027 and 2028. That is a differentiated earning stream that we traditionally have had over time, but one that will be more accentuated as we look out over the next 12-24 months. Then the third area of emphasis is, you know, in and around the, you know, strength of our balance sheet. You know, when I have one of the strongest balance sheets in the REIT sector, we have an A- rating. What that balance sheet strength allows us to do in today's environment gives us a strength and a flexibility to be able to both continue to develop. We have targeted $800 million of development starts this year.
We're looking for initial stabilized yields of 6.5%-7%, which we consider attractive relative to underlying market cap rates and asset values, and also attractive relative to our cost of capital. It also gives us the strength and flexibility to buy back our stock, which we've been doing, you know, in decent size between the end of last year and the stock that we bought so far this year. We've repurchased about $600 million of our stock at an average price of $180 per share. This year's activity is being funded predominantly by asset sales.
There's the dual benefit of, one, it being an accretive capital allocation choice, effectively monetizing slower growth, higher CapEx assets into the private market, you know, in the five cap rate arena, and buying back our stock in the low six cap rate arena. There's that immediate accretion. By pruning the portfolio to facilitate that transformation, we're also setting up our future growth in a more optimized way. There's that double benefit from a shareholder perspective. You know, transitioning to the, you know, emphasized areas on, you know, why us, why our stock today. First one, again, I'd emphasize is the development earnings to come, and just to put some numbers to it, in 2025, our development NOI was about $25 million.
We're forecasting in 2026 that incremental development NOI, so above and beyond the $27 million, an incremental $47 million. As we get into 2027, there'll be an incremental $75 million on top of that. Basic math, if you think about the $3.6 billion of development we have underway at initial stabilized yields in the low sixes, that's the power and the magnitude of earnings that we have coming from our development platform. Which brings me to the second point, which is one in and around valuation. You know, we're at a point in the cycle, and it does happen from time to time, multiples come down, multiples compress across the peer set, and there's just not a lot of value being placed on our development earnings to come.
We are acting upon that, obviously by buying back our stock, but we also think it provides a attractive entry point for shareholders. I'll end, you know, particularly kind of today's environment, just by emphasizing the strength and the stability of our portfolio. We obviously very much naturally provide a necessity to filling the renter need within housing in this country. We have a very high-quality portfolio that's well-diversified across markets, sub-markets, product, and price point. That stability and resiliency that comes with that type of portfolio, along with the strength of our balance sheet, positions us to be able to continue to invest creatively on behalf of shareholders as well as take advantage of opportunities as they present themselves.
Thank you for that. Sorry about that. I'm losing my voice a little bit. You know, you mentioned at the end there your valuation, and I think, you know, I've been covering the stock for a long time, and I think if you look at your stock, as well as your peers versus REITs, it's about, you know, on a multiple basis, about as discounted as it's been, at least on a relative basis. You mentioned the earnings growth that's coming from the development pipeline. I think the market is now maybe a little bit concerned that demand is going to be structurally lower and thus pricing power is going to be structurally lower. Where does the market have it wrong? Where is the market misplaced in that?
Yeah, there are, you know, demand concerns that are out there. You know, part of it is we're in the middle of a, you know, relatively low demand environment, right? The, the jobs revisions that were put out last year, obviously not a lot of net new jobs being created. In today's world, right, there are the narratives, you know, in and around AI and the potential impact of those jobs. One is, you know, I think it's just important for us to emphasize the stability and strength of our underlying asset base. So that gets into, you know, providing a necessity. I think there are, you know, there are narratives in around where things could head that actually I think makes rental housing even more critical in terms of filling a need in this country.
I think the, you know, the diversity of our portfolio, which I mentioned, also a resident base that's 70% of that resident base is over 30 years old. Average household income is approaching, you know, $200,000, diversified across a set of industries. I think kind of that strength of our ability to deliver for shareholders over a multiple year period or throughout cycles can get lost through time. There's, you know, just also points in the cycle where the market's going to give you less value for that earnings to come. Now we've funded it. It is in our minds very tangible. You know, these are projects that are under construction. Many of them are now in lease-up or approaching lease-up.
You know, our view is that the market will, you know, fairly soon, maybe even this year, sooner than most years, turn to 2027. We've got a very differentiated earnings growth potential in 2027 than the rest of the sector.
All right. As part of your forecast, you're thinking that there's going to be a pickup in the second half of the year. I think, you know, one concern I guess I have is that what we've seen over the last two years is that the impact of supply has just taken a lot longer to sort of work its way through. I think you actually were really correct in saying that the Sun Belt was going to take a lot longer to recover because of that. I guess why won't the same be true in your markets so that the supply that hit, you know, last year, that, you know, is now seeing lower job growth, lower absorption, why won't that take longer to absorb?
Why are you going to see that pickup in the second half of this year in terms of rent growth?
Why don't I take that one? There's a number of factors that sort of underpin our assumptions around the second half, rent change accelerating. The primary driver of that, frankly, is softer comps from the second half of 2025. If you recall back to, you know, we go back to maybe June of last year around NAREIT time, most participants in the industry started talking about the peak leasing season coming to a head earlier than anticipated, kind of in the May timeframe, maybe it was early June, and then beginning sort of that downward slope into the second half of the year. At the time, you know, it seemed unusual to all of us based on the data that we were seeing in terms of the job growth being relatively healthy. We were not feeling that.
Obviously, we were a little bit of a leading indicator in that regard with significant revisions to jobs that were made for 2025. If you think about what happened last year and sort of that trend of the asking rent curve, and then you apply sort of normal seasonality this year at an absolute lower level, the lines look pretty similar for the first half of the year, kind of exceed where we peaked last year, maybe in the June timeframe, early July. The back half of the year, the spread between those two lines is simply just wider, based on the expectation for this year relative to what happened last year.
Harvesting that spread based on people that signed leases in the back half of 2025 versus 2026 gives you a little more embedded growth in both new movements and renewals as we move through 2026. Certainly that will be helped by the continuation of lower levels of supply as we move through 2026. Supply is coming down to pretty historically low levels in our established regions in particular. There was some hangover in terms of supply that was delivered in 2025 that's still absorbing in early 2026. When you get to the back half of the year, you take a market like the DMV in the Mid-Atlantic, you know, supply is going to be down 60%.
You get, you know, four, five, six, seven months of that accumulating, that does start to impact pricing power. Primary determinant is really the year-over-year comp issue, but it also is supported by significantly lower levels of supply across, in particular, established regions in 2026 and the cumulative effect of it.
I know we're early in the year, but as part of your revenue management system, obviously you have an idea of what's going to happen over the next, call it 60 days or so. Can you tell us sort of what the leading indicators are telling you as far as the early part of the peak leasing season, what type of demand you're seeing, what type of lease exposure you have, retention ratios, just anything that kind of tells you where things should trend over the next couple months?
Yeah, based on what we're seeing right now, I would say that things are trending consistent with our original outlook. Give you a couple of data points. Asking rents since the beginning of the year are up about 2.5% through the end of February, you know, the last couple of days here. That's pretty consistent with what we would have anticipated in our outlook and reflective of the domain environment that I mentioned, which is relatively modest job growth. If you went back to pre-COVID levels when we were producing jobs more than 100,000 a month, that growth from January through the end of February might have been slightly north of 3%. It's less than that, but it's consistent with what our outlook was. Turnover is down about 100 basis points year-over-year through the end of February, a little bit below what we anticipated.
Retention is slightly better, but availability is in the right place, a good spot for this time of year. Occupancy, we noted, is up about 20 basis points since December, also about consistent with what we expected. Overall, the picture looks relatively healthy and consistent with what we anticipated. You know, the jobs print in January, 130,000 jobs. We're not feeling an acceleration at this point. You know, we'll see maybe at the end of this week if that number is revised, but it feels like on balance things are about what we expected at this point in the season, and we feel good about where we are.
This is probably tough. It's very sort of qualitative, but does it feel different than, say, three, four months ago when you started seeing that sort of drop in demand? Is it sort of like you're just, you know, you're still at that lower level, but you're kind of, you know, you're going through the normal seasonal pattern that you would expect?
I mean, I'd say it feels maybe a little more in balance. I mean, the back half of last year, you go back three or four months to your point. I mean, the Mid-Atlantic did feel pretty rough. You know, the DOGE impact really wasn't felt until kind of late Q3, Q4. At the end of the day, we lost 50,000 jobs in the Mid-Atlantic. Feels a little more stable right now. Obviously, globally, things are, you know, getting a lot more attention besides just reducing the size of the federal government in terms of the focus areas. You have a market like the Mid-Atlantic with supply coming down 60%, as I mentioned.
It wouldn't take much of an uptick in jobs, which we might get out of the defense sector, frankly, just given what we've seen popping on the defense stocks to have a better year in the Mid-Atlantic. We're not expecting that at this point, there are certain things that are starting to pop up that might give you that indication that things could look a little bit better in that region in the back half of the year. You know, I would say it's kind of market dependent in terms of any significant shifts. Things feel like they're seasonally appropriate.
Let me add in an investor question effectively asking, you know, if there's any geographies that are standing out on the upside or downside so far this year. I know it's still relatively early, but any sort of maybe against on those sort of forward indicators that we talked about, are there any markets that are looking like particularly like they might get more incremental pricing power than you thought and then vice versa?
I wouldn't say anything significantly different from the guides we just provided for the full calendar year. The ones that are leading are still healthy. New York City, San Francisco is an example. Nothing's changed in Denver. Denver is still very difficult operating environment, lots of concessions, lots of supply, anemic demand. Again, nothing materially different from what's reflected in our outlook.
On the turnover front, you know, one of the, I think, things that, you know, is a little bit of a fear for some investors is that the whole industry has seen this lower turnover, higher retention. Some of it seems to be associated with the housing market. You have President Trump out there trying to stimulate demand. You know, is there anything that you've seen thus far or any reason for you to believe that that turnover is going to change for you? Are there any policies out there that you, I guess, don't hope don't get implemented that you think could actually really stimulate the housing market at your detriment?
Nothing at this point in terms of our dashboards that are indicating any kind of increase in turnover as a result of the housing market. I think one thing to keep in mind here is in our established regions, which is the majority of our portfolio, it costs more than, you know, $2,000 per month more to acquire the median price home as compared to the median price rent. You need to have more than just a modest adjustment in interest rates or a modest correction in values or a meaningful shift in policy to fuel, you know, lower spreads on mortgage rates or whatever it might be. We don't see that.
Frankly, our view is that a fundamentally healthy housing market is good for the macro economy and good for all the various jobs associated with it and creates a little more activity in terms of people, you know, in terms of mobility and things of that sort that we think is actually good for our industry, that a good, solid housing market can coexist well with a good rental market. We have seen that in the past. That probably has more incrementally positive benefits for our business than negative benefits if there's some modest activity that spurs a little more demand.
You mentioned supply is coming down. I think you said, what, the lowest in how many years? Like 10, 15 years, something.
Yes, it's just post the GFC. It's down to 80 basis points, which is really consistent with what we saw in the decade of the 90s.
I guess some of your peers, and I think you've talked about some savings on the construction side as well. You know, are you seeing any sort of incremental signs that activity on the construction side is picking up, especially with some of those construction savings? I guess my question is, you know, over the next year, are we going to see more incremental starts that such that like, you know, 2028, you start seeing more supply again? Do you think we are sort of in this low supply environment for the foreseeable future?
Well, it definitely depends on which markets we're talking about. You know, we've used the term about lower for longer supply in our established regions, primarily because just how long and how challenging it is to get new entitlements. Just the life cycle of a project is longer. That is less so in some of the Sunbelt and some of our expansion markets. To your broader question, Eric, you know, new starts are not coming down to zero, right? There is activity out there. That said, I do think we're continuing to be in an environment where starts are going to be low. We at AvalonBay can get our outside share of that start activity. It goes back to our balance sheet strength, our cost of capital.
We are for sure seeing right now, and this is one of the benefits of being an active developer, we self-perform on the construction side. We are seeing meaningful buyout savings in the projects that we're underway with. There's not very often where we talk about as a book of business, we're actually buying out and having our construction costs come in below budget. That is, you know, on the margin having us lean in. It had us lean in last year in terms of starts. It has us, you know, thinking about sort of an attractive cohort this year. In our business, you live with your basis forever, right? Rents, you'll get marked to market every year, but we'll live with that basis forever.
An opportunity to tap into one of our core capabilities and deliver product that's, you know, $10,000 a unit, $20,000 a unit lower than it otherwise would be, we think will play out to the benefits of shareholders over time.
I guess switching to capital allocation, you mentioned the big ramp that you're going to see in earnings. Thank you for giving us the specific numbers. It makes it easier to calculate. I think if you think about the last sort of two years, the contribution that you've got from earnings from development has been a little bit lower than in history, given, you know, some things that you discussed on your call. I guess my question is, are those same things going to impact those numbers next year, even though you're seeing this ramp in NOI as things get leased up? Are you also going to be suffering from some of those things such that the contribution stays lower than its history?
Yeah, I'll start at a high level and Kevin can add on. You know, at sort of the most simplistic terms, sort of layman's terms for the group to understand, you know, what's happening this year. We do have a lot of contributions coming this year from development. Given that we started $1.7 billion of attractive accretive projects this year, the balance of what we have under construction versus what is income producing is more heavily weighted towards what's under construction. As we get into next year, there will be a greater set of projects that are on the income producing side. That naturally will provide a switch over. The second component, and this gets a little bit nuanced, is just the level of construction activity that we have going on, what's happening with our construction in progress.
This year, we are going through a ramp of that activity as we forecast and we provided some details in our presentation around this. We generally expect construction in progress to remain relatively flat this year going into 2027. You won't have some of those impacts in terms of how it flows through earnings. Kevin, if you want to.
Sure. Sure. Thanks, Ben. I'd say just to frame the discussion a little bit, as you referenced, Eric, this year, if you look at the underneath external components of growth, we anticipate development will provide about 100 basis points of earnings growth this year. You know, last year was about with the SIP activity about 100 basis points as well. Throughout much of this decade, given the variability in funding costs and economic environments that we've had since the pandemic, we've had a more volatile level of starts. Generally speaking, through much of this decade, we've had a start volume of about $1 billion a year. We're set up to do about $1.5 billion, which is what we started last year. That will start to flow through in our earnings profile in 2027 and beyond.
I would expect a higher level, and we've messaged this in our materials, a higher level of occupancies next year than this year. Occupancies are really, you know, the foundational element to generating NOI growth. As Ben mentioned in his opening remarks, we had $25 million of NOI last year. That's a fairly subpar level. This year, $47 million, which is a more normal level. We do have some unique offsets this year with transaction activity timing suppressing the contribution of development earnings growth in 2026. We don't necessarily anticipate, you know, unusual dynamics next year. We expect to have above level contribution of development earnings growth in and of itself in 2027, just by virtue of having an incremental $75 million of NOI anticipated ± for next year.
Next year is set up to be a stronger year of underlying contribution from development earnings growth, just by virtue of the impact of a higher level of start activity started last year starting to flow through into our earnings profile in 2027 and beyond. To the extent we can kind of stay at that more elevated level of development starts, we'll be able to have a more durable level of earnings contribution from development that's more in the 150 basis points or more that you're accustomed to seeing from us.
We had an investor ask if there's any sort of market rent growth, you know, embedded into your NOI to get that. I guess I'd just maybe say, like, you know, more qualitatively, like, you just assuming sort of like a normal lease-up cycle to get to those NOI targets. Maybe just talk about the assumptions that you're using to get to those NOIs.
Let me handle it just from a development perspective, and then Sean can talk more broadly, given we're just covering development. One thing I wanna be clear with investors on is we do not trend rent. When we're underwriting rents, we're doing it on those rents at that period in time, and we don't then mark the market the rents until we're much further along in terms of the leasing activity. We feel pretty good about the development NOI activity. A lot of these are projects that are starting to be in lease-up, so we have real data points. This set of lease-ups this year are actually in some are more heavily weighted to our established regions, so a little bit more stability there.
I have, I'd say, good line of sight, delivering the development NOI numbers that we communicated. I'll turn it to Sean to talk more broadly about our guidance.
Yeah, I think just to reinforce that point, we really underwrite on a spot basis, both costs and rents, NOI overall. What we've benefited from recently is that costs have come down, so we're booking some pretty good cost savings, and would expect that trend to continue here for a little while. Typically inflationary levels are gonna come through on the rent roll side in terms of rents growing during the construction period. Again, we don't underwrite that. In terms of leasing velocity, things have been pretty healthy. You know, we were averaging around 20-21 a month during the fourth quarter. That ticked up in January to the mid-20s. We've seen pretty good velocity across the lease-ups that we have.
We manage that very tightly. Feel pretty good about what the projected NOI is for this year based on our original assumptions. The velocity has been good so far. We try to lease up those communities just so people know who are not aware, typically within 12 to 13 months of when we open for first deliveries.
At the beginning, you mentioned that you've been a buyer of size of your stock. You see good value there. Can you talk about how you're looking at that program? You know, there's sort of two pieces to it. There's one piece where I guess you're effectively hedging yourself by sort of selling assets, and you can sort of arbitrage, those cap rates versus where you're trading. There's another piece where you could theoretically increase your leverage. That's sort of a different, sort of decision. Can you talk about those two, sort of the max potential around them and whether you'd be willing to let leverage drift higher or not?
Well, I'll start with, let me just sort of parse through what was in our guidance versus what potentially could play out with buyback activity, and then, Kevin can talk about the potential capacity, and how we think about executing this in a leverage-neutral way. We have not assumed any benefit from share buyback activity in 2026 into our 2026 guidance. What we had in our baseline guidance was to be a small net seller this year. Roughly, we were assuming we were gonna monetize about $500 million of assets and then buy $400 million of individual assets. That's what's in our baseline budget. As you've seen, we've started the year by buying back some of our stock.
We have now between either what's sold and closed and/or under agreement about $400 million of assets, teed up for disposition. Looking at the current landscape, from a capital allocation standpoint, makes a lot more sense for us to be using disposition proceeds, particularly if we're pruning the portfolio of slower growth assets to buy back our remaining portfolio in the low 6s than it would be to be buying back individual assets, you know, in the high 4s or the low 5s. That's our, that's our orientation as capital allocators. Kevin, I'll turn it to you to add more.
Sure. Thanks, Ben. The short answer is we intend to execute any additional buyback activity and the activity we've already done this year, the $113 million, on a leverage-neutral basis so that we end the year with the same leverage that we otherwise planned to end the year with when we put forth our initial guidance. Background behind that, as you know, when we reported Q4, our fourth quarter leverage was 4.7x on a net debt to EBITDA basis using the last quarter annualized. That calculation does not give ourselves credit for the undrawn equity $400 million-$800 million, which we expect to pull down this year. Had we done so, that 4.7x leverage would've been probably more like 4.2x or 4.3x leveraged.
Our financial plan contemplates that we will end up this year in the fourth quarter somewhere around the same level of 4.7x net debt to EBITDA. You know, as Ben pointed out, we didn't have any additional buyback activity in this year's financial plan. We anticipated simply selling $500 million of assets and buying $400 million of assets. We'll see how the year paces out. If instead what we end up doing is continuing to sell a similar amount of assets, but rather buying back, you know, stock and, you know, up to around $400 million, we'll execute that plan in a more or less leverage-neutral basis consistent with what we initially guided to.
For the assets that you've sold, it sounds like $400 million. Is there like a general like cap rate around that, like 5%? I guess one question I have is, you know, are you seeing private market participants talk about AI and job losses or any of the sort of things that seem to be very topical among public investors? Or is the change in pricing really more of a public market phenomenon that's not really impacting the private market yet?
Yeah. To your first question, the $500 million of planned dispositions, you know, we're targeting generally sort of in the low five cap type of range. You know, to your broader question, I'd say for the last 18 months or so, the transaction market within multifamily remained relatively steady, cap rates have remained for sort of institutional quality assets in the high 4s, call it 4.75%-5.25%. It really does speak to, you know, our asset class, right? These are the stability of the asset class, continued desire for lots of different forms of capital to have exposure to the asset class. You know, these are assets that are relatively bite-size, right? You think about an average multifamily asset being kind of $75 million-$150 million worth, you know, of value, right?
That provides a deeper pool than exists in some of the other real estate asset classes. You know, to your kind of your last question there, I think if I was gonna kinda describe one difference in the market kinda 18 months ago to today is the financing markets are more conducive today. What you have is buyers underwriting less upfront negative leverage. Now, they may be underwriting a little bit softer top line, given, you know, just what the, what the fundamentals are, but I think those have sort of remained relatively in balance.
It has remained a, you know, a very attractive, asset class with strong values, and hence, you know, our ability at this point to be able to monetize, assets that we don't see as go forward in our portfolio at some pretty attractive values, and then buy back the remainder of our portfolio at an attractive yield.
We had a question come in about the impact of AI on job growth. I think it probably goes to a broader conversation. I think in the past you've been thoughtful of repositioning your portfolio through expansion markets of where different knowledge workers and where different opportunities are kind of medium and longer term. How does the potential impact of AI on white-collar job growth impact your thought of where the portfolio should be in the medium and longer term?
Yeah. Obviously, again, a lot of attention, and rightfully so. We need to acknowledge that AI is a transformative technology. You know, we are very much looking to utilize it to be able to deliver enhanced value to our customers and do it at a lower cost. I think we also need to acknowledge this. It is gonna have impacts and, you know, shifts on the makeup of the job workforce. Obviously, very challenging to know how all of that will play out. So, you know, my emphasis is, you know, we need to acknowledge that there are gonna be changes, but we're also starting off with a significant amount of stability and strength. You know, the areas that I emphasize, I hit on some of these before, you know, one, just like we provide a necessity, right?
We provide a necessity of rental housing, in this country that will continue. There are scenarios where that we have a greater place, in that housing ecosystem. Two gets into the, you know, the diversity of the portfolio, cross-markets, price points, product, industries. Doesn't mean we won't shift over time, right, to better position the portfolio based on where future job and wage growth is going, but it does provide a diversification and the stability that exists there.
The third point is, you know, the extent that there is dislocation or changes that do occur, large-scale players like ourselves, you think about our size, our scale, ability to tap into our operating capabilities to drive cash flow, our access to capital, our cost to capital, we will be well-positioned to take advantage of opportunities that come down the road.
We have our rapid fire questions. Any other questions in the room? All right. Same store NOI growth for the apartment sector overall next year in 2027.
2%.
Will there be more, fewer, the same number of public apartment companies a year from now?
Same.
Terrific. Thank you very much.
Good to see you guys. Thanks, everyone, for joining us.