AVB

Good afternoon, ladies and gentlemen, and welcome to AvalonBay Communities' First Quarter 2026 Earnings Conference Call. [Operator Instructions] Your host for today's conference call is Matthew Grover, Senior Director of Investor Relations. Mr. Grover, you may begin your conference call.

Thank you, operator, and welcome to AvalonBay Communities First Quarter 2026 Earnings Conference Call. Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the company's Form 10-K and Form 10-Q filed with the SEC. As usual, the press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used during today's discussion. The attachment is also available on our website at investors.avalonbay.com, and we encourage you to refer to this information during the review of our operating results and financial performance. [Operator Instructions] And with that, I will turn the call over to Ben Schall, CEO and President of AvalonBay Communities for his remarks. Ben?

Thank you, Matt, and thank you, everyone, for joining us today. I'm here with Kevin O'Shea, our Chief Financial Officer; Sean Breslin, our Chief Operating Officer; and Matt Birenbaum, our Chief Investment Officer. As is our custom, we've also posted an earnings presentation, which Sean and I will reference during our prepared remarks before turning to Q&A. Starting with the key takeaways on Slide 4. Our first quarter results exceeded our expectations, driven by lower expenses, higher development NOI and the benefits of our share buyback activity, which was not included in our original outlook for 2026. Our portfolio is well positioned heading into peak leasing season with very low turnover, solid occupancy and rents tracking as expected through the first 4 months of the year. We are also benefiting from the ramp in development NOI in 2026, which will further accelerate during the year and into 2027. Leasing velocity at our projects in lease-up has been strong in a typically slower first quarter, which bodes well for the upcoming peak leasing season. And during the quarter, we completed $340 million of dispositions and repurchased $200 million of our shares at an implied cap rate in the low 6% range. Turning to Slide 5. Same-store residential revenue grew 1.6% year-over-year with occupancy up 10 basis points to 96.1%. During the quarter, we started nearly $190 million of new development with 2 starts in suburban New Jersey and are on track for $800 million of planned 2026 development starts with projected initial stabilized yields of 6.5% to 7%. Our performance in Q1, both operationally and from a capital allocation perspective sets us up well for the balance of the year. Slide 6 details the components of our favorable first quarter core FFO per share results relative to our initial outlook. Of our $0.02 of NOI outperformance: 20% was revenue driven, and 80% was attributable to lower operating expenses. On the expense side, certain operating costs budgeted for the first quarter are now expected to be incurred over the balance of the year. Other drivers of our outperformance for the quarter were $0.01 of favorable development NOI from our lease-up communities as well as $0.01 from our share repurchases in the quarter. Looking ahead, Slide 7 highlights several factors that continue to support apartment demand and our operating outlook as we move through 2026. First, market occupancy in our established regions remain solid, supporting near-term fundamentals and allowing us to enter the peak leasing season with relative strength. Second, our customers continue to experience healthy wage growth, which will support rent growth throughout the year. Third, the supply backdrop remains very constructive in our markets with new market rate apartment deliveries expected to stay at historically low levels for the foreseeable future. And fourth, the economics of renting versus home ownership remain very favorable. During the quarter, the percentage of customers leaving us to purchase a home declined to 8%. Taken together, these factors give us confidence in the resiliency of apartment fundamentals and in the positioning of our portfolio as we move through the balance of the year. Slide 8 highlights the strength of our operating and development capabilities to drive differentiated internal and external growth in the years ahead. On operations, we continue to leverage our scale and leadership in centralization, technology and AI to deliver superior service for our residents and drive operating efficiencies and incremental NOI. Our forecast has us on track to generate $55 million of annual incremental NOI by year-end, our original Horizon 1 target. Our next set of priorities include the further deployment of AI solutions and our seamless digital self-service experiences, additional enhancements to our technology and data platforms and further optimization of neighborhood and centralized staffing, all on our way to our Horizon 2 target of $80 million of annual incremental NOI in the coming years. On development, our sector-leading platform is poised to contribute meaningful earnings and value creation in the coming years with $3.5 billion of development underway with a projected initial stabilized yield of 6.3% at quarter end. These investments were match funded with capital raised over the past 3 years at a weighted average initial cost of 4.9%. This spread is well within our strike zone, targeting yields of 100 to 150 basis points above our cost of capital and underlying market cap rates. These deals were conservatively underwritten on an untrended basis and in many instances, are seeing favorable construction cost buyouts relative to pro forma. These communities will also deliver into an operating environment with meaningfully less new supply. With this tailwind of activity, we continue to expect a meaningful ramp in development NOI and are projecting $47 million of development NOI this year, increasing to $120 million in 2027. Turning to Slide 9. We had 3 dispositions closed during the first quarter, and we continue to deploy capital into accretive share repurchases. Beyond crystallizing the significant public-private disconnect in asset values, selling 40-year-old high-rise assets improves our go-forward cash flow growth profile, particularly after factoring in CapEx. Including our repurchases last year, we've now repurchased $690 million of our stock and have $914 million of remaining authorization. In summary, we have a high-quality portfolio, well positioned heading into the peak leasing season, operating and technology initiatives that continue to drive internal growth, and a development platform that we expect to contribute an accelerating stream of earnings over the next several years. And with that, I'll turn it over to Sean to walk through the operating environment and leasing trends in more detail.

All right. Thank you, Ben. Turning to Slide 10 to address recent portfolio trends. Year-to-date asking rent growth has been pretty consistent with historical norms and our original expectations for this year. Since January 1, the average asking rent for our same-store portfolio has increased in the high 4% range. And importantly, the growth we've experienced this year is well ahead of what we realized in 2025, setting us up well for better rent change as we look forward. Turning to Slide 11. Our same-store portfolio is well positioned as we look ahead to the peak leasing season. Occupancy has been north of 96% and trending modestly ahead of our budget. Turnover remains well below historical norms and even ticked down 50 basis points compared to Q1 of last year, supported by a variety of factors, including a historical low 8% of residents moving out to purchase a new home and declining new supply in our established regions. As a result, the number of homes available to lease has been lower than last year and has contributed to the 260 basis point ramp in rent change we've experienced since the beginning of the year. Looking forward, we expect a continued acceleration in rent change. Renewal offers for May and June were delivered at an average increase in the 5% to 5.5% range, which is about 100 basis points higher than where we sent offers for February and March. In terms of regional color, the stronger performance continued to be the New York Metro area and Northern California, both of which produced revenue growth slightly ahead of our budget through Q1. Within the New York Metro area, the strongest markets were New York City and Northern New Jersey. In Northern California, San Francisco has been the strongest market, followed by San Jose and then the East Bay. The entire region has benefited from relatively healthy net job growth the last few quarters. So the strengthening we've experienced in San Francisco and San Jose started to spill over into the East Bay this past quarter. The Mid-Atlantic also outperformed our revenue budget for the quarter, albeit modestly, with slightly higher occupancy across the region and greater other rental revenue. With the hangover from job cuts over the past year starting to fade, we believe the meaningful reduction in new supply will help support the stabilization of the Mid-Atlantic region sometime this year. I wouldn't say it's turned the corner just yet, but it's definitely more stable than mid- to late last year. In terms of the weaker markets: Boston, L.A. and Seattle modestly underperformed our revenue expectations during the quarter, and the other regions were collectively on plan. Moving to Slide 12 to address our lease-up portfolio. We generated very strong leasing velocity of 32 per month during Q1, well ahead of our historical velocity of 23 a month. And we generated that velocity at an average effective rent that's slightly above our original pro forma. It's clear our customers value the new differentiated product we're delivering in these various submarkets and selected an average lease term that exceeded 15 months during the quarter. The occupancies that result from our leasing activity will continue to support the meaningful increase in development NOI projected for this year and into 2027, as Ben noted earlier. So overall, we're off to a good start this year with same-store metrics trending at or slightly ahead of expectations, strong leasing activity in our lease-up communities, and the recycling of capital into buybacks at a compelling value. So now I'll turn it back to our operator, Chamali, to begin Q&A.

[Operator Instructions] Our first question comes from the line of Jamie Feldman with Wells Fargo.

So I guess just if you could provide an update on your thoughts on hitting your new renewal and blend guidance for the rest of the year, you still have a pretty meaningful ramp. So can you just remind us what you're thinking in terms of, one, kind of the math behind it and what kind of tailwind that gives you? And then as you think about the markets that are doing better, the markets that are doing worse, and you also didn't mention the expansion markets, but how they fit into the story. But just, what gives you comfort on keeping the guidance where it is and your ability to hit those numbers?

Jamie, it's Sean. Yes, in terms of the outlook, just to remind everybody what we said is we expected rent change to average 2% for the calendar year 2026, which reflected the first half forecast at 1.25% and the second half at 2.5%. And then in terms of breaking it out between move-ins and renewals, we essentially reflected move-ins being about 0 for the year and renewals averaging around 3.5%, blending to that 2%. As I mentioned in my prepared remarks, asking rent growth is pretty much tracking about where we expected. It's actually slightly ahead, just a little bit. So where we came out in the first quarter was slightly better than we anticipated, and we have pretty good momentum going into the second quarter. Obviously, you can interpolate the math required for Q2 to get to the 1.25%. We feel very confident that we're in the right strike zone, so to speak, in terms of hitting those numbers. In terms of the various markets, what I would tell you, consistent with my prepared remarks in terms of where the momentum is, it's certainly the New York Metro area, as I mentioned, the Bay Area certainly has good momentum. It's nice to see things start to spill over into the East Bay part of Northern California in the first quarter, which we sort of expected to happen. It typically lags behind San Francisco and San Jose. And then the expansion regions are performing pretty much collectively as expected at this point. Some are slightly ahead, some are slightly behind. But as a basket, they're pretty much on track.

Our next question comes from the line of Eric Wolfe with Citibank.

It looks like the percentage of available homes in April is down year-over-year, and you mentioned the very low turnover in April as well. My question is if that allows you to be a bit more aggressive on asking rents and new leases going forward? Maybe just some thoughts on what the current data is telling you about pricing power in May and some of the early sort of results on new leases in May.

Yes, Eric, happy to take that as it relates to what we've been seeing. I would tell you that based on what we saw in the first quarter, as I mentioned, and Ben also indicated in his prepared remarks, we're slightly ahead of our revenue plan. That's a little bit on rate, a little bit on occupancy. As we look forward in terms of our expectation, again, if you interpolate the math based on what we needed in the second quarter, I think to get to our 1.25% blended for the first half, and we start with April kind of in the high 1% range, almost 2%, I think we're in good shape overall as we look forward. And in terms of the low turnover, the low availability, all that does continue to support slightly better pricing power, and we're certainly seeing that relative to what we experienced in 2025, where around this time of year, things started to soften. And so you're starting to see those lines continue to spread further, which certainly bodes well for the rest of the leasing season in the second half of the year.

Our next question comes from the line of Steve Sakwa with Evercore ISI.

Just wanted to focus maybe a little bit on the dispositions and the buyback. Can you help us kind of frame out how, I guess, aggressive or how large you'd be willing to pursue, I guess, both sides of that equation given the dislocation we've seen in apartment valuations of late?

Yes. Sure, Steve. This is Kevin. I'll offer a few comments. Others may want to offer their own as well. I guess I'd start off by saying with respect to the buyback question, we are in a very strong position, as you mentioned, to create value through both development and share buyback activity, supported, of course, by our balance sheet and continued access to the asset sale in the debt market. So in terms of how we're thinking about the buyback activity we've done so far to date and what we might do going forward, I'd probably frame it out with a few points. The first is buybacks and development are both highly attractive to us today. So it's not a binary choice. At current pricing, our stock implies a cap rate in the low 6% range, which makes repurchases attractive and immediately accretive. At the same time, development remains compelling for us with projected initial stabilized yields in the mid-6% range or higher, while also driving longer duration earnings growth and portfolio refreshment. So that's important to us. Second, our capital plan for the year contemplated that we would be a net seller of about $500 million -- sorry, net seller of $100 million with roughly $500 million of dispositions and $400 million of acquisition activity. Year-to-date, as you could see from the release, we've completed already $340 million of asset sales and $200 million of share repurchases, which has effectively replaced a portion of the acquisition activity that we originally had planned. The third point is, looking forward, we are already marketing additional communities for sale. So that will give us additional proceeds here. As those sales are completed, if our stock remains attractively priced, we would consider additional repurchases. And to the extent we did so, we would do that instead of acquiring the remaining $200 million of acquisitions that are in our plan, and we do so on a leverage-neutral basis. How much we might do beyond that? We're certainly open to the idea of doing more. We're prepared to be nimble, while also preserving our balance sheet strength and flexibility, so that we could deploy capital to the incrementally, the highest best use that's available to us. I wouldn't put a single fixed number on how much more we could flex dispositions up to fund buyback activity. We can do a fair bit, quite a bit, I'd say. But the ultimate level of activity will depend in terms of buybacks, will depend on the timing and amount of future asset sales, the valuation of our shares at the time and the remaining capital gains capacity that we have. As you know from our prior discussions, we typically have in a normal year without engaging any special tax planning efforts about $500 million in disposition capacity where we can keep the proceeds. So that's essentially part of what we were thinking about with our plan this year. So we do have capacity in that regard. Beyond that, we have a very clean tax position. We could use onetime levers to increase disposition capacity up and have that proceeds available for any purpose, including a buyback activity. But as I said, I wouldn't put any fixed number on how much more we could flex it up beyond what's contemplated in our plan by potentially repurposing proceeds to acquisition activity.

Our next question comes from the line of Jana Galan with Bank of America.

Congrats on the strong start to the year. Just a question on the decision to maintain the midpoint of FFO guidance despite the $0.05 outperformance in the first quarter. And I think you said close to $0.02 is the expenses that may be incurred later in the year, but then you're also benefiting from the share repurchases being maybe a little bit larger and earlier. So if you can kind of walk us through that.

Sure, Jana. This is Kevin. We think affirming guidance is a disciplined and appropriate decision today. To be sure, as you point out, we are off to a strong start with revenue trends on track, our first quarter earnings beat and completed buyback activity that should add a couple more cents of incremental earnings as the year progresses. At the same time, as you know, we're still early in the year with peak leasing still ahead of us. And some of the Q1 beat was expense timing, as we've alluded to, not a full year run rate change. So while full year earnings are currently tracking modestly ahead of our original plan, we think it's more appropriate to affirm full year guidance today and revisit it on the second quarter call when we'll have a much better read on the peak leasing season in the balance of the year.

Our next question comes from the line of John Pawlowski with Green Street.

Matt, a question for you on the Avalon Sunset Tower sale. Are you able to share the cap rate both on your seller NOI as well as your best guess of the cap rate on the buyer's NOI? I think you owned the property since the mid-'90s. So I'm just curious what type of property tax reset would be felt on that property.

Yes. John, that is a very atypical transaction. You're right, it's a very old asset, early 60s vintage and -- or late 60s vintage, and it's subject to San Francisco rent control. So it really is not representative of where the San Francisco asset sales market would be today. There's also quite a bit of overhang there with some regulatory upgrades that are going to be required, seismic and sprinkler retrofits, which really was part of what drove us to sell it. The cap rate, kind of what we would talk about as a market cap rate, which would be kind of the buyer's forward T12, we think was probably in the low 5% range. But that does provide an allowance for a certain amount of CapEx that the buyer is going to have to do related to that retrofit work. So it doesn't really map cleanly to anything else. I would say -- there are other assets we own in the city of San Francisco, where I would say, given the loss to lease that are -- that would probably be honestly in the low to mid-4 cap rate today. And so if you think about it just relative to how to value the portfolio, that's probably more typical.

Okay. And then, Sean, a question on two markets where the economies have been kind of stuck in the mud. Maybe a multiple choice question. So D.C. and Los Angeles, do you expect pricing power to either reaccelerate from here in the coming quarters, just muddle along or get worse before it gets better in both D.C. Metro and Los Angeles?

Yes, John, good questions. A little bit of crystal ball questions, I guess. But what I'd say is, as I see it today, based on what we know, things feel a little bit better in the Mid-Atlantic. Things were rough mid- to late last year in the Mid-Atlantic. What we can tell in terms of the feedback from our teams, both on the ground in terms of people coming through the front door in terms of leasing or people contacting our renewals team, definitely not as much angst in the system in terms of prospective renters and/or existing renters executing renewals. We've been able to peel back on concessions a little bit. The average asking rent year-over-year is about flat right now. We thought it'd be down a little bit. So I'd say it feels a little bit better in the Mid-Atlantic. The job worries have faded. I'd say maybe there's even in certain submarkets, probably more defense sector oriented, maybe a little bit of optimism. So if I had to pick 1 of the 2 right now, I'd say we're getting a little more anecdotal feedback and on the ground data that supports the Mid-Atlantic probably being a little bit better as we look forward. I wouldn't say that it's overly positive compared to the Bay Area or something, but I think it looks pretty good. And then in L.A., L.A. has been tough, as you well know. And so there's not necessarily a near-term catalyst other than potential investments that relate to World Cup, Olympics, things like that kind of bringing in jobs. They did pass some tax subsidies, as you may know, last year to help promote entertainment content being developed in L.A. broadly across California but mainly L.A. That hasn't really trickled in just yet, but it's still early. So I would say we haven't yet seen a catalyst quite yet in L.A. other than very diminished supply, but we're looking for it on the demand side.

Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets.

Sean, maybe sticking with you. You had referenced the operating momentum you've seen into the second quarter. I guess, was there any specific pickup in demand into April that drove the acceleration in lease rate growth after what kind of appeared to be a fairly modest improvement from 4Q to 1Q? Or just anything specific, I guess, as we get into the early part of the spring leasing season that drove the improvement?

Yes. I mean I wouldn't necessarily point to significant macro factors, Austin. I think it really is kind of regional drivers for the most part. You probably just heard my commentary on the Mid-Atlantic and why that's feeling a little bit better. Yes, there's been good momentum in the New York Metro area for obvious reasons there in terms of the employment growth that we've experienced there in other markets. And the softer places are what we would have expected. I mentioned L.A., still last 6 months, basically no job growth in Boston, very little in Seattle. So I think it's more of a regional story in terms of where you're seeing the momentum versus not as opposed to a macro shift one direction or another at this point.

Our next question comes from the line of Adam Kramer with Morgan Stanley.

I wanted to ask, maybe it's a little bit more of a philosophical academic question. But I know in the past, we've sort of focused on job growth. I know you guys have had job growth charts in the deck for some time. Noticed today sort of has a wage growth chart in there. Obviously, 2 different data points can mean different things and sort of work together. But wondering, again, maybe a little bit more philosophically, if you sort of think one is a better indicator of apartment demand, be it wage growth or job growth. And then I guess maybe a second part to that question is, just with regards to job growth, I think if I remember correctly from the last deck, there was sort of an increase embedded into the assumptions, I think, sort of using the NABE forecast for 2H. Wondering if that's sort of still the assumption that you guys are working under that there's going to be that uptick in job growth in the second half or maybe there's a different forecast out there now?

Adam, this is Ben. I'll start us off there. So in terms of drivers of rental demand, it is both, right? It is both jobs and wage. We very much look to total income growth as the drivers of rent growth over time. To your second question, our guidance and our reaffirmed outlook for this year is based on sort of an economic environment that we were experiencing in the second half of last year and sort of continuing into the first quarter. So we weren't -- our outlook was not based on any inflections looking forward. Really the 2 main drivers that we talked about being different in the second half of the year. One was the cumulative benefits of lower levels of supply, which, as we've noted, is now down to 80 basis points in our established regions. And the second is just the dynamic of softer comps in the second half of the year, which you can see on one of the presentation slides. So those are the main drivers. We naturally do look at job forecasts. Those are tough to peg month-to-month. We've generally looked at NABE. NABE's forecasts are down some. But when we put the pieces together, it doesn't change our outlook for the second half of the year. And given Sean's commentary and our start to the first 4 months are feeling pretty good about our progress so far and the setup for peak leasing season and the remainder of the year.

Our next question comes from the line of Rich Hightower with Barclays.

To ask a question on development. And just given the progress you're seeing year-to-date, I think Matt mentioned that construction costs are maybe a little more attractive here and there versus original underwriting. So how quickly can you possibly ramp up the development pipeline given all of the moving parts and, of course, other potential uses of available capital, maybe to increase the development start number? Or what's the lag on that sort of a process internally?

Sure. Rich, it's Matt. It's always a bit of a combination of what I'd say is bottom up and top down. So bottom-up is the deals themselves. And at any given point in time, we have a significant pipeline that we're always managing through entitlements, through final design and permitting. At the end of the first quarter, I think our development rights pipeline was about $4 billion, a little more than that, $4.2 billion. And through the normal course of time, those deals would bubble up over the next couple of years to being ready. Then there's the top down, which is how are they underwriting and what is our cost of funds and what are our other alternatives investment uses and what is the capital allocation decision we're going to make. So we do focus a lot on preserving flexibility, and I think we do a really good job with that. So we would have the ability to dial up development more, whether that's next year or even later this year if conditions are favorable and it's the right capital allocation decision. The other thing I would say is that in addition to our own pipeline, most of that $4.2 billion is kind of AvalonBay development. We also have our developer funding program where we provide capital to third-party merchant builders. I think maybe 5 of the 30 deals or 25 deals we have under construction today are DFP deals. Those deals we can ramp up even more quickly because in those cases, somebody else is doing all that early prework and it's ready and just looking for capital. And there's a lot of that business out there right now. Most of it doesn't underwrite, which is why you're not seeing start activity pick back up in any meaningful way. And we like that. We are very consciously trying to take a larger share of what is a shrinking pie of development activity, and we think we're well positioned to keep doing that.

Yes, Rich. This is Ben, just to add on to Matt's commentary, at points in the cycle like we're in now where others are pulling back, but we've got a set of competitive advantages and a cost of capital that's differentiated. It also allows us to structure deals more optimally. And so when Matt talks about having $4.2 billion in a development pipeline, we control that at a very low cost. And we do see that shift, and we've seen that in this environment, which we're able to get control of land with much more flexibility in today's environment than in past environments.

And Rich, this is Kevin to add on. We do have the financial flexibility to lean into those opportunities should they manifest. Our access to the loan market is excellent. We priced 10-year debt in the low 5% range. We have access to the transaction market. We just sold $340 million of 40-year-old assets at a 5.4% cap rate. We could sell more representative assets at a lower cap rate. So that would give us an opportunity to fund accretively deals, development projects that might stabilize in the mid-6s if there's more that we want to have as a quick start to lean into.

Our next question comes from the line of Haendel St. Juste with Mizuho Securities.

I was looking earlier at the turnover chart in your report, and it's pretty striking how we've gone from almost 60% back in 2009, 41% a year ago and sitting in the low 30s today. And so understanding some of that is the affordability dynamics you laid out, some maybe demographics, some of the operating platform. But I guess I'm curious, as you think about it and as you look at it, is this level in the low 30s, is it sustainable? Is it a new norm? Curious on perhaps what you feel the more appropriate longer term or intermediate-term way to think about turnover over the next year or 2? And remind us again what's embedded in the guide for this year?

Yes, Haendel. This is Sean. I'll take that one. In terms of the turnover rate, the one thing I would try to parse out a little bit is the seasonal shifts here. So that 31% is really a Q1 number, tends to be one of the lower quarters of the year. If you looked at it on an annual basis, the last couple of years, we were kind of in mid-40s and then low 40s. Our expectation for this year is we remain in the low 40s. And there's a number of different factors that really drive turnover. Some of it relates to substitutes, which includes the availability of for-sale product. That is one sort of macro factor we don't see changing anytime soon. Even if you see rates come down some, just the available inventory is not there across especially our established regions. So we think that remains certainly a tailwind or at least a neutral impact on the business for the next couple of years, at least the foreseeable future. The other thing that comes to mind in terms of substitutes is other available supply. That certainly has ticked in our favor over the last couple of years, coming down to historical levels and projected for the next year or 2 to dip down even further. So the substitute factor isn't really there. And then the rest of it really comes down to kind of normal life events. And that's the stuff that you really can't control. So whether it's people getting married, people getting divorced, people having children, taking care of parents, multigenerational things like that come and go. That's typically embedded in that data year in, year out. So I think the primary things that tend to tick it up or down are the things that I mentioned in terms of other options within a market. The life stuff just continues to happen. And I don't think there's a lot that I would point to that would tell you that we'd see a meaningful uptick in the next couple of years based on what I know today in terms of the -- those particular factors. It takes a while to build new multifamily, takes a long time to build and title single-family in these markets. So we've got a pretty good runway for a couple of years on that point.

Our next question comes from the line of Michael Goldsmith with UBS.

I'm here with Ami Probandt. On the renewals, nice acceleration there. What's driving that? Is that in line with your expectations? And then how have renewal negotiations trended recently?

Yes, Michael, this is Sean. Overall, in terms of renewals, we've seen nice acceleration this year, as we indicated in our earnings release in terms of the movement from the first quarter into April. I also mentioned earlier in response to the question that both occupancy and lease rates are blending to slightly ahead of our original budget. So we're in pretty good shape there overall. In terms of the various markets, for the most part, we see a seasonal uptick in asking rents. Renewals tend to drift that behind it. The markets that I mentioned earlier that are the stronger markets tend to see a little nicer pickup as compared to some of the ones that have been softer, as I mentioned, like Boston, L.A. and Seattle. But we've seen good movement across most of the regions with a few exceptions, and it's slightly ahead of our original expectation.

Our next question comes from the line of Alexander Goldfarb with Piper Sandler.

Going to the lease-ups, the pace of lease-ups that you had and certainly, we've seen similar from private developers. If new rents overall are still sort of muted, but the pace of leasing is exceeding what normally would be a normal monthly pace. How do we think about this as far as you talked about like sort of only 2 shout-out markets, New York and Northern California, and yet a lot of your development is in other places. So how do we think about the pace of leasing versus still the muted rents overall? Is it just heavy concessions? Or what's the read-through on why lease-ups are so strong yet rent pricing is still soft?

Yes, Alex, it's Sean. I'll make a couple of comments, and then Matt can chime in here. So on those -- on that lease-up basket for the quarter, that's 9 communities in there. Just to give you a little bit of insight what's in that basket. There's 4 in New Jersey, 1 in Charlotte, 2 in the Mid-Atlantic, 1 in South Miami, 1 in Austin, those are 9. And I think in general, what we've seen is that in these submarkets, people are really compelled by the product that we're offering in many of these cases. I'll let Matt talk about New Jersey. But in terms of the concessions and stuff, I mean, we're talking about people choosing on average, a longer lease term over 15 months, and we're doing like 6 weeks free. So it's around 9% or so. So that's not terribly different from what we would normally do. So I think it's really about the product. I'll let Matt talk a little bit about what we're doing with some of the products there.

Yes. Alex, as Sean mentioned, it's really a combination of offering a compelling product in many cases, in submarkets that just have not seen much new supply in a long time. So a lot of it is the geographic mix. And where the -- most of the development NOI is coming from is from the 4 New Jersey deals plus South Miami. That's -- those are the ones where the rents are quite a bit higher than the other markets that Sean mentioned. And in most of those cases, that's really what it's about. There's plenty of supply in South Florida, but not in a location like South Miami where that community is over a brand-new Fresh Market on the kind of South/East side of U.S. 1 and all the competition is in kind of other neighborhoods that don't have the same walkability, that don't have the same schools. Similarly, you think about New Jersey, give you one example, Avalon Wayne, where we have both townhomes and flats. That's the first new product Wayne has seen in probably 35 years. And that's very much a part of our development strategy. When you look at our 2 starts this quarter, one of them is Saddle River. That's another place 7-figure home values up there in Bergen County and another place that hasn't seen any new multifamily and 2 generations. So again, it's part of the same story where we really are getting an outsized share of the demand that's there because of the differentiated and compelling nature of what we're offering.

Our next question comes from the line of Brad Heffern with RBC Capital Markets.

Sean, just to follow on, on that average lease term number that you've given a couple of times over 15 months. Does that come from you just nudging people in that direction to lower expirations in the off-season? Or is there something that's driving a broader shift of tenants away from selecting just a normal 1-year lease term?

It's a little bit of both. So in the season that you're in and the expiration profile that we want in the subsequent year does matter. But it's nice to see in some of these markets where we're leasing townhomes as an example, and some of these assets. Matt mentioned Wayne, South Miami, some townhomes. They're bringing their kids. They want to get through the school year and have some time that on average, I would say we were nudging less in Q1 than normal and people were picking up on the longer lease terms and product like that. So a little bit of a combination of both, but it's nice to see the preference for a slightly longer lease term come through from customers as well.

Our next question comes from the line of Rich Anderson with Cantor Fitzgerald.

So I guess I wanted to sort of dive into a specific metric that being, well 2, new and renewal lease rate growth. You mentioned, I think offers out 5% to 5.5% into the spring leasing season, yet your guidance still has 3.5% renewal for the full year. Understanding you're looking to gather more information before you revisit guidance. But is it fair to say that as you sit here today that the flat new lease rate growth that's embedded in the current guidance would be something greater than that based on the numbers you see today, but you don't know yet what the future holds, so you're sort of holding the line. Is that a reasonable way to think of your mindset as it relates to that specific part of your guidance going forward?

Yes, Rich, it's Sean. In terms of the way we think about it is, one, what we have -- what we put forth in terms of our original guidance. And I would say that we're generally tracking on plan. I mentioned rates are slightly ahead. But the Q1 leasing period, there's fewer expirations in Q2, Q3. We see a nice trajectory as it relates to asking rent growth, and we're basically in a position where things look pretty good, but we're going to have a much better set of data as we get through the second quarter, a lot more leasing to do with the expiration volume in Q2 that we would be able to revisit where we are at midyear and give you an update as to what our thinking is at that point in time. But we've not seen anything yet that says we should be doing anything different other than what we reaffirm what we already said.

Our next question comes from the line of John Kim with BMO Capital Markets.

I wanted to know what you're seeing in terms of the market concessions that your competitors are offering, if there's been any noticeable change as you're entering the peak leasing season? And what you're expecting in terms of offering concessions versus what you provided last year?

Yes. John, it's Sean. The concession story is very much regional. So what I would tell you is the markets that I indicated in my prepared remarks that are either a little bit stronger or a little bit weaker than what we anticipated. That's where you're going to see the concession activity. So our concessions up in Boston and Seattle and L.A. year-over-year, yes. Are they down meaningfully? Yes. In Northern California, New York Metro area? Yes. So it really depends on the market. And you can go into submarkets where -- in Denver, it's very rough in certain particularly urban submarkets, and you'll see 2.5 to 3 months free. And then you go out to suburbs, it might be 6 weeks. You come here to parts of the Mid-Atlantic, and there are some places that it's down to no concessions and there are some places where it's a month. So it's hard to generalize overall, I would say, it really is a function of the various regions in terms of the specific data points that you're looking for. And as I said earlier, on a net effective basis for rate, things are pretty much tracking in line with what we expected. It's modestly ahead, but not a lot.

And we have reached the end of the question-and-answer session. I would like to turn the floor back over to President and CEO, Ben Schall, for closing remarks.

Great. Well, thanks for your question today. Thanks for joining us, and we look forward to visiting with you soon.

Thank you. And this concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.

Good afternoon, ladies and gentlemen, and welcome to AvalonBay Communities Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Your host for today's conference call is Matthew Grover, Senior Director of Investor Relations. Mr. Grover, you may begin your conference call.

Thank you, operator, and welcome to AvalonBay Communities Fourth Quarter 2025 Earnings Conference Call. Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the company's Form 10-K and Form 10-Q filed with the SEC. As usual, the press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion. The attachment is also available on our website at investors.avalonbay.com, and we encourage you to refer to this information during the review of our operating results and financial performance. And with that, I will turn the call over to Ben Schall, CEO and President of AvalonBay Communities for his remarks. Ben?

Thank you, Matt, and good afternoon, everyone. I'm joined today by Kevin O'Shea, our Chief Financial Officer; Sean Breslin, our Chief Operating Officer; and Matt Birenbaum, our Chief Investment Officer. Looking back on 2025, I want to begin by thanking our nearly 3,000 associates across AvalonBay for their dedication and commitment. It was a year that required us to be nimble, disciplined and highly focused on execution. Our teams rose to that challenge, consistently demonstrating our core values of integrity, continuous improvement and a genuine spirit of caring. As summarized on Slide 4, our operating results in 2025 reflect the quality of our portfolio, the proactive steps we've taken to optimize our portfolio's growth and the strength of our operating teams. Keeping existing residents satisfied and engaged was a clear priority, and that focus showed up in our results with high levels of retention and strong renewal acceptance serving as a ballast to overall revenue growth of 2.1% during the year. In fact, our turnover rate of 41% in 2025 and was the lowest in our company's history. My particular thanks to our operating teams for delivering a near all-time high Mid-Lease Net Promoter Score of 34, one of the metrics we utilize to measure customer engagement and with clear connections to retention and renewal outcomes. Our regional development, construction and operating teams were also successful last year in sourcing attractive development opportunities using our strategic capabilities and balance sheet strength when many competitors were on the sidelines. All in, we started $1.65 billion of projects with a projected initial stabilized yield of 6.2%. Funded with capital that we previously raised at a cost of roughly 5%, this investment activity sets the foundation for strong earnings and value creation in the years ahead. We have one of the strongest balance sheets in the industry and also pride ourselves in remaining nimble in capital sourcing and capital allocation. Among our peer set, we were the only one to raise equity capital in size in 2024, having raised almost $900 million of equity on a forward basis at an implied initial cost of 5%. And at the end of 2025, we are one of the only to repurchase shares in size, having acquired almost $490 million at an average price of $182 per share and an implied yield north of 6%. These repurchases were funded with incremental debt and the sale of lower growth assets, which in turn improves our long-term growth profile. In total, during 2025, we raised $2.4 billion of capital at an initial cost of 5%, positioning us to continue investing in our existing portfolio and in new development in 2026, which transitions us to this year with our key themes for 2026 summarized on Slide 5. First, on the operating side, while we expect fundamentals to improve as the year progresses, we are forecasting modest revenue growth of 1.4%, given the current job and demand backdrop. Given the supply backdrop, particularly in our established regions, we will not need much incremental demand to facilitate stronger revenue growth than assumed in our budget. And irrespective of the macro environment, we will continue to utilize our scale, particularly our investments in technology and centralized services to drive incremental growth from our existing portfolio. We're now 60% of our way towards a target of $80 million of annual incremental NOI from our operating initiatives, with an incremental $7 million of NOI slated for this year. In terms of development earnings, we will have a meaningful uplift in development NOI as projects lease up during 2026, with earnings partially offset by the funding costs from the $1.65 billion of profitable developments we started in 2025. Kevin and Matt will further detail this dynamic. In terms of new starts, we are restraining activity to $800 million, consisting of 7 projects with an average development yield of between 6.5% and 7%, providing a strong spread to both underlying cap rates and our cost of funding. And finally, our Board approved an increase of our quarterly dividend to $1.78 per share, which after the 1.7% increase continues to position us with one of the more conservative payout ratios in the industry. Delving a little deeper into the setup for 2026, our outlook assumes a job growth environment that is slightly stronger than 2025 but still relatively modest. As shown on Slide 6, NABE is currently forecasting 750,000 net new jobs in 2026. As the year progresses, enhanced economic and policy certainty, the benefits from recent tax legislation and the potential for further Fed easing are among the catalysts that could translate into higher levels of business investment, improved consumer confidence and stronger hiring in our key resident industries. Turning to Slide 7. Demand for apartments will also be supported by rent-to-income ratios, which are now below 2020 levels in our established regions, given that incomes have grown faster than apartment rents over the past few years. Demand will also continue to benefit from the relative attractiveness of renting versus home ownership, which is particularly acute in our established regions, where it's over $2,000 per month more expensive to own a home, given home price levels, mortgage rates, and the increases in other cost of homeownership, such as insurance and property taxes. And then there's the supply outlook with supply in our established regions expected at only 80 basis points of stock this year, levels we have not seen since the period coming out of the GFC. And given the challenges of getting entitlements and how lengthy the process is in our established regions, we expect this supply backdrop to serve as a tailwind for us for the foreseeable future. Balancing these series of dynamics, Slides 9 and 10 provide our outlook for 2026. We entered the year with a high-quality portfolio concentrated in suburban coasts with historically low levels of supply, a differentiated development platform and one of the strongest balance sheets in the REIT sector. And while our guidance assumes modest growth in 2026, we are well positioned to generate meaningful earnings and value creation as operating fundamentals improve and development earnings ramp into 2027. Sean will now walk through our operating outlook in more detail.

All right. Thanks, Ben. Moving to Slide 11. The primary driver of our expected 1.4% same-store revenue growth is an increase in lease rates with incremental contributions from other rental revenue and underlying bad debt. We're expecting year-over-year revenue growth in the second half of the year to exceed what we produced in the first half, with slightly better job growth and improved mix of jobs, the cumulative effect of lower supply and softer comps supporting better rate and revenue growth. Our forecast reflects like-term effective rent change of 2% for the full year 2026, with the first half expected to average in the low 1% range and the second half improving into the mid-2s. In terms of recent leasing spreads, while Q4 performance was modestly below our expectations, it improved in January compared to both November and December. We expect continued sequential improvement in February and March, and renewal offers for those months were delivered in the 4% to 4.5% range. For other rental revenue, we're continuing to drive incremental growth from our various operating initiatives, but it will be partially offset by lower income due to select legislative actions in 2025. Excluding those headwinds, other rental revenue growth would have been closer to 5% versus roughly 3.5% reflected in our outlook. Turning to Slide 12 to address regional trends. Revenue growth of roughly 2% in New York, New Jersey is primarily driven by healthy contributions from New York City and Westchester, which are projected to be in the mid- to high 3% range. Demand in Boston has been impacted by job losses in the back half of 2025. Our outlook reflects a projected year-over-year decline in occupancy of approximately 40 basis points, the majority of which is expected to occur in the first half of 2026, given our very strong occupancy level in the first half of 2025 and another 40 basis points from a projected year-over-year decline in rent relief payments. New apartment deliveries are projected to decline by about 30% to 4,000 units in the market, which will support better revenue growth when demand picks up. In the Mid-Atlantic, job losses in the back half of 2025 were the highest of our established regions. Our outlook reflects just under 1% revenue growth for the year, with negative net effective lease rate growth during 2026, offset by a roughly 20-basis point improvement in occupancy, approximately 30-basis point reduction in underlying bad debt and 30-basis point contribution from other rental revenue growth. New apartment deliveries in the market are projected to decline by roughly 60% to 5,000 units. So the outlook could turn more positive in the second half of 2026, if we see an improvement in job growth. Moving to the West. Northern California is projected to produce mid-3% revenue growth, supported by built-in lease rate growth of 1%, relatively stable occupancy at approximately 96% and continued healthy rate growth throughout 2026. New apartment deliveries are also projected to decline by about 60% to 3,000 units in that region. In Seattle, total employment was flat for the last 6 months of 2025. Our outlook reflects modest net effective rate growth throughout 2026, an approximately 20-basis point reduction in occupancy and a 40-basis point contribution from growth in other rental revenue. New unit deliveries are projected to decline by about 50% to 5,000 units, which will support improved performance as we move through the year. And in Southern California, our outlook reflects revenue growth in the mid-1% range, driven by stable occupancy and approximately 20-basis point contribution from lower bad debt, driven primarily by L.A., and incremental effective rate growth projected primarily in Orange County and San Diego. Unit deliveries in the region are projected to decline by about 40% to 11,000 units, with the most meaningful declines projected to occur in the L.A. market. And lastly, in our expansion region, Southeast Florida will remain the strongest region with revenue growth of roughly 1.5%. Denver suffered from the combination of 0 net job growth during 2025 and the delivery of approximately 16,000 new apartments. The outlook for '26 reflects a challenging environment with modest job growth and another 9,000 new units being delivered into the market. Built-in lease rate growth is minus 1%, and rents are projected to continue to decline throughout the year. And then moving to the outlook for operating expense growth on Slide 13, we expect same-store operating expense growth of 3.8%, 130 basis points above our organic growth rate of 2.5%. In terms of the items projected to drive growth higher in 2026, the phaseout of property tax abatement programs will add roughly 70 basis points. In addition, we settled a very favorable property tax appeal in Q4 2025, which established a much lower assessment and led to a meaningful refund, but is creating a 50-basis point headwind for 2026. In addition, the net impact of operating initiatives is contributing about 10 basis points as the added costs from our AvalonConnect offering is mostly offset by incremental labor efficiencies. And then in terms of the quarterly cadence of OpEx growth, we're expecting heavier growth in the first half of the year before it moderates in the second half, driven primarily by utilities, including the impact of credits received in the first half of 2025, benefits costs and maintenance-related costs given our lighter spend in the first half of 2025. Now I'll turn it to Kevin to go deeper into our earnings outlook for the year.

Thanks, Sean. Turning to Slide 14. We show the building blocks of our 2026 core FFO per share. For internal growth, our guidance reflects a projected $0.04 increase from same-store NOI, partially offset by a $0.03 decrease from overhead, management fees and JV income. For external growth, there are a few components. We expect a $0.10 increase in net development earnings , which I'll discuss further on the next slide as well as a $0.07 increase from our Structured Investment Program and 2025 share repurchases, which consists of $0.02 from our SIP program and $0.05 from our recent buyback activity in 2025. These sources of external earnings growth are offset by a $0.07 decrease from refinancing activity across 2025 and 2026, and a $0.10 decrease from transaction activity. Here, I've emphasized that our recent elevated transaction activity and associated impact on earnings reflects our having acted on some unique opportunities last year, including the timely sale of a portfolio of assets in a challenged submarket in Washington, D.C., and acquisition of a tailored portfolio of communities at a very attractive cost basis in Texas. We don't execute meaningful trades of that nature very frequently, but we do take advantage of them when opportunities arise. Of this $0.10 in earnings headwinds for transaction activity, $0.06 is timing related, driven primarily by the impact of selling assets in late 2025 and in early 2026. And the remaining $0.04 is the result of selling slightly higher cap rate assets, including in D.C., in order to better position the portfolio for stronger growth over time. Turning to Slide 15. Development is expected to contribute $0.10 or 90 basis points to earnings growth this year. This is lower than is typical for us and is driven by 2 factors. First, due to lower completion and ramping starts last year, the proportion of communities generating development NOI as a percentage of the total development underway is lower than normal. This is reflected in $0.33 of expected earnings growth from our 2026 development communities as well as a handful of other communities that stabilized in 2025 and are now in our other stabilized bucket. And it compares to incremental funding costs of $0.33, attributable to the 26 communities that are under construction today as shown on Attachment 9 of our earnings release, and 8 communities that are expected to start construction in 2026. The second factor relates to a projected $340 million increase in construction in progress or CIP, for 2025 to 2026. This temporarily dampens earnings growth in 2026 because our 5% initial funding cost exceeds our required capitalized interest rate under GAAP during construction, which is currently 3.7%. Therefore, we project a capitalized interest benefit of only $0.10 this year, which is a few cents lower than if our capitalized interest rate equaled our initial funding cost of 5%. Nevertheless, our decision to lean into accretive development does set the stage for further outsized earnings growth in 2027 and beyond as current development projects are completed and stabilized at yields in excess of 6% and accretion steps up, which Matt will discuss more fully.

Exactly. Thanks, Kevin. As shown in the chart on the left on Slide 16, we started $2.7 billion in new development over the past 2 years at yields 110 to 130 basis points higher than the cost of capital sourced to fund those new projects, and we expect an even wider spread on the $800 million in starts we're planning for 2026. Because our development activity can vary substantially from year-to-year in response to market opportunities and capital market conditions, the flow-through of this activity to earnings can also vary in any given year. The majority of the earnings benefit is realized once all those new apartments are occupied. And as shown in the middle chart on this slide, we are still early in this ramp-up in 2026 with occupancies growing from 1,812 homes in '25 to roughly 3,175 homes this year. We expect that to grow further still to over 4,100 occupancies in 2027. As you can see on the chart on the right, this translates into $47 million of development NOI this year and an incremental $75 million of additional NOI next year. Slide 17 takes a closer look at the expected 2026 lease-up activity, over 90% of which is coming from 11 communities including 8 where we have already achieved first occupancy and have active leasing underway and another 3 set to open in Q1 or Q2. All of these assets are in suburban submarkets and more than half of the occupancies are coming from the New York, New Jersey region and South Florida, 2 of our most stable regions with above-average expected same-store performance for the year. In addition to the earnings boost we expect from these communities in '26 and '27, we're excited about their long-term positioning for future cash flow growth as brand-new assets built and designed by us to respond to future demographic trends. We are including more larger format homes designed for working from home in our unit mix, including 8 communities with a BTR component and many feature excellent infill locations walkable to nearby retail. And with that, we're ready to open up the line for questions.

[Operator Instructions] Our first question comes from the line of Eric Wolfe with Citi.

You mentioned that renewals are going out in the 4% to 4.5% range. I guess, first, could you talk about whether you expect to achieve 4% to 4.5% on these renewals or the take rate will be lower? And then second, what changed between now and the 2.5% you achieved on renewals in January? It just feels like there's been a bit of a jump over the last month or 2. I'm just wondering what caused that.

Yes, Eric, I can talk a little bit about how we see the rent change forecast playing out throughout the year. But to your specific question, what I indicated in my prepared remarks is that the renewal offers for February and March were out in the 4% to 4.5% range. As you probably know, they always settle at something less than that, the historical range. The settlement is probably 100 to 125 basis points of dilution or something like that depending on the market environment. But that's what's happening with the renewal offers and where you think they might settle. In terms of the overall forecast, just to provide some commentary for '26, we're expecting it to come in around 2%, which is only about 30 basis points above what we actually realized in 2025. Our assumption is that the renewals will basically average about the same as 2025 sort of in the mid-3% range. And we're expecting move-ins to improve by roughly 70 to 80 basis points in 2026 as compared to 2025 so that it comes in instead of being modestly negative, it comes in around flat for the year 2026. And for context, and Ben referred to this as well, we are expecting a relatively similar economic environment as '25, but about 40% less supply. So we are forecasting sequential improvement quarterly until we get to Q4. So that kind of gives you the broad picture of the full year. And then as it relates to the first half versus the second half outlook, we are expecting the first half performance to be pretty similar to what we experienced in the second half of 2025, which was roughly basically 1.2%. We're basically about the same level as we come into the first half of 2026. And then in terms of the expected improvement in the second half versus the first half, it's really driven by 4 factors. First is, as Ben noted, a slight uptick in job growth, which is expected to occur in the second half of the year and a slightly better mix of jobs, but also importantly, sort of the cumulative effect of 40% less supply and the absorption of some of the standing inventory from the end of 2025 carrying through the first half of '26. And then lastly, it's just some softer comps as we get into the back half of 2026, given what we actually achieved in the back half of 2025. So tried to provide a little bit of an overview as to how we're thinking about it overall. And hopefully, that's helpful in terms of the trends we're expecting.

Yes, that's very helpful. I guess the question really is sort of how predictable do you think that sort of ramp is because it's just a bigger ramp right from the first half to the second half. And so we've seen supply, I think, linger a bit longer than people expected, especially in some of these Sunbelt markets, which you're not in. But I guess the question is, how predictable do you think the sort of this impact from supply is going into the second half of the year? And how much the supply or the impact of supply really drop off in the back half?

Yes. No, I mean that's what our forecast reflects. And in part, why we're expecting the first half to be a little bit weaker is some of that lingering standing inventory in some markets that's carrying over from the back half of '25 through the first half of '26, even though deliveries will be down meaningfully in both the first half and the second half, there is some standing inventory to absorb. And once that occurs, then there are just much fewer options for people to choose from. And as I noted, particularly on the move-in side, which is where we expect 60, 70 basis points of improvement relative to 2025, that's where you're going to see it the most. We expect renewals to be relatively flat, if you think about it for '26 relative to '25. So I think that's -- in terms of our confidence in that, that's what our models reflect at this point in time. And certainly, we'll be able to update you as we go through the year. But that's part of the reasons why we -- part of the reason why we look at it that way in terms of first half versus second half.

And Eric, on the demand side, just to give you some more color there, we're not assuming a huge pickup in terms of job growth this year. If you look at the NABE figures, ended the year at roughly 20,000 jobs per month. That is a similar place as we come into 2026 and then builds into the range of 70,000 to 75,000 jobs as we get into the back half of 2026.

Our next question comes from the line of Steve Sakwa with Evercore ISI.

Look, I know in '25, you guys had to take a couple of bites at the guidance and make some reduction. So as you thought about setting guidance for this year, maybe what lessons did you learn in '25 that you carried over this year? And when you kind of look at Page 14, I guess, is the building blocks, are there some of those figures that you have more confidence in their upside? And I guess, which ones are you a little bit more worried about having downside risk?

Sure, Steve. I'll start on the kind of guidance approach question and then others can weigh in on the upside, downside scenarios. Our approach to guidance remains as it has been. We go through a very detailed process, particularly at the beginning of each year, and it's also as part of our midyear reforecast. And we're looking at the best data that we have available at that point in time. We naturally think through upside scenarios, downside scenarios, but we use all that to come up with our best estimate looking forward out over the next 12 months. And then importantly, provide that transparency to investors so that you understand what's underneath those assumptions, and we can discuss those as the year unfolds. Yes. In terms of looking at Slide 14, the development earnings, I put that very much in the concrete category. These are -- and Matt talked about this in his commentary, the earnings coming online this year, those are projects that are under construction. A lot of them are already in their initial phases of lease-up. We've got pretty good clarity about how that income will roll in over time. We've prefunded that activity. So I put that in the category of fairly baked in earnings to attribute to investors as the year progresses.

Steve, the only thing I would add is, for the most part, as it relates to sort of the core same-store portfolio, I think the main question is the demand question. And depending on how you look at the outlook from an economic standpoint, the upside to downside is really tied to demand there. And so we saw job growth accelerate more quickly with the reductions in supply, like I mentioned, in the Mid-Atlantic with supply coming down to 60%, that could give you a little bit of a springboard to better performance sooner than the second half. If that were the case, then you start to see more of that benefit accrue into 2026 as opposed to 2027. And obviously, the downside scenario is if we saw a significant weakening in the environment from where we are today, then that would be sort of your downside case.

Okay. And then I guess a follow-up on the development, maybe just for Matt. I know you guys kind of cut the starts number in half this year, and you sort of raised the hurdle rate a bit. Is the reduction more a function of enough deals don't pencil at that 6.5% to 7%? Or was it more of a conscious decision to just say, given the choppy environment, we just don't want to start $1.5 billion of projects even if they make the hurdle, just given the uncertainty in the environment today?

Steve, it's Matt. It's a little bit of both. I mean we look at it very much -- it starts bottom up, where are the deals, what's going on in our pipeline and kind of how big is that opportunity set? And then there is a top-down piece as well, which is does that align with kind of our funding capacity and cost. So usually, particularly now that we have this DFP, the developer funding program, we can see our AvalonBay starts coming a year or 2 in advance or 3 years -- 4 years in advance in some cases because of the entitlement process. But then we also have the ability to fund other developers through our developer funding program. Those deals come more quickly. And so the last couple of years, our starts list has included both deals we know about in our pipeline and kind of an allowance for quick start business, which could be DFP or it could be in this environment, deals that other developers just can't get capitalized and have given up on and are now willing to sell, sometimes selling the land at a loss. We've done a few of those deals, too. So a lot of it is just we're going to the year expecting less of that quick start business to underwrite. And then some of it is, yes, I mean, we are looking at demanding higher yields, and we are seeing that. So some of that's in the geographic mix as well. The starts we plan this year are much more heavily weighted to our established East Coast regions. Last year, it was maybe 40% West Coast, 40% expansion, 20% established East. This year, it's like 70%, 80% established East and a little bit of expansion and really nothing on the West Coast. So -- and those regions tend to have higher yields.

The next question comes from John Pawlowski with Green Street.

Matt, I want to continue that conversation. The $800 million in starts this year, how much have you had to lower pro forma rents just given the softness in market rents over the last 6 to 12 months, even in those established East Coast regions?

Yes. It's interesting, John. There are a couple of deals. Some are pretty much even. What we've seen in a couple of cases, actually, we just started a deal in Q4 in Northern New Jersey, Kanso Parsippany. And that deal is a high 6s yield and when we underwrote it kind of in due diligence 1.5 years ago, 2 years ago, the rents were higher and the costs were higher. And what we saw is when we went to our final, what we call Class III budgets, the hard cost came in and the rents are down a little bit. And those 2 more or less washed out so that the yield kind of stayed the same. So that's what we're seeing for the most part with that particular mix of business is a little bit less rent and a little bit less cost. And in some cases, the cost reduction is more than the NOI reduction and, in some cases, not.

Okay. Just what I'm getting at is I'm very surprised about how high the yields are. And I know you guys are very good at what you do. But if there's high 7% yields versus, I don't know, maybe low to mid-5 cap rates in these markets, if that's true economics, we should expect to see development start to reaccelerate across your markets. So is there anything idiosyncratic in this $800 million pipeline that's not representative of market yields? Or do you think that it's a representative sample size?

It is more select. I mean it's hard -- there aren't as many deals that we're finding that can achieve that spread, but I'll say, we're finding more than our share and it's been our view for a while that we can get an expanding share of a shrinking pie here. A lot of these, John, are deals we've been working on in the entitlement process for years. And there are kind of unique factors there. There may be an affordable component. There may be a pilot, not a New York City pilot, but a long-term pilot. There may be other things there that are difficult for folks that haven't been in this business and in these markets on the ground for years and years to kind of reconstruct. So I do think we're seeing a little more supply in some of these more supply-constrained East Coast jurisdictions, but we're getting a bigger share of it. And our volume is dropping, too. So I'm not overly worried that we're going to suddenly see a flood of supply that a lot of people can recreate it.

And John, just for the broader listening audience out there, I just want to correct, we're targeting for those $800 million of projects, yields in the 6.5% to 7% arena relative to cap rates in and around sort of circa 5% today.

Okay. Last question for me. Should we expect additional pressure from property tax abatements in 2027 or any other pressure from utility costs in AvalonConnect? Or is 2026 the peak of the pressures, if you will?

Yes, John, this is Sean. In terms of the abatements, yes, we do expect some level of headwind from abatements to continue, but it does move around from year to year, but we do expect that for the next few years here in terms of that element. In terms of AvalonConnect, there's 2 components there. There's this bulk Internet piece, there's a smart access piece. The bulk Internet piece, we pretty much have stabilized. There's a little bit of lingering cost there for 2026, and that pretty much phases out. The smart access component, which is far less impactful, will continue for probably another 18 to 24 months, but it's relatively modest as compared to the bulk side of it.

Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets.

When you guys think about the remaining gains capacity, are share buybacks or paired trades from the established regions into your expansion regions more attractive today? And does the pullback in development funding needs provide any additional capacity for you for share buybacks without either levering up or evaluating paying a special dividend?

Austin, this is Kevin. I'll start. Others may want to jump in here. What I'd say is, this year, our capital plan contemplates only modestly sourcing capital from disposition activity. So that does leave us with a healthy level of asset sales capacity to fund incremental investment activity, whether it's for a share buyback or incremental development activity before we have to worry about a distribution obligation. So we do have capacity to sell a very healthy level of additional assets and retain the capital for future investment purposes.

I'll add. Kevin, just to clarify, in our baseline budget, we're not assuming any share buyback activity. We do still very much see it on the menu of potential opportunities for this year. And to your question and comment, the potential opportunity of selling slower growth, higher CapEx assets out of our existing portfolio and then redeploying that capital into share buybacks in today's range in sort of the low 6s, one, not only accretive, but also helps position the go-forward portfolio for stronger growth.

And then can you share what the cap rate was on the asset sale in San Francisco in January and then provide an update. I think you had another $235 million or so of pending sales that were previously under agreement as of late last year.

Yes. Austin, it's Matt. So the asset we sold in San Francisco last week actually, that's the low-5s cap. There's a bigger spread there between the cap rate and the yield given that we've done that for a while. So there's a Prop 13 overhang there. But that's also an asset that had some pretty heavy CapEx needs in front of it. So you kind of have to factor all that into kind of what I'd say is the economic cap rate, so to speak, kind of in the low-5s. The ones that we -- we have a couple of others either in the market or working that are -- some are a little bit higher than that in terms of the economic cap rates, some are a little bit lower. We'll see where they clear the market. We have at least one more that we expect to close here this month, it's probably around the same kind of low 5s cap rate, a little bit less of a spread there. So the yield is probably not as high as that Sunset Towers. And then we have a couple of others in the market working where we'll see there. It really is -- varies a lot based on what market you're selling into and I will say this, everything we have either planned for sale this year or currently in the market are all older high-rise assets and most of them are in urban jurisdictions. So they are very much aligned with our longer-term portfolio goals.

Yes, Austin, one thing I'd add on that San Francisco assets specifically, is that's a 50-plus year old high-rise asset with some heavy CapEx subject to rent control. So it's a little bit of an outlier for our portfolio, not necessarily representative of the rest of the assets that we own in the city.

Our next question comes from the line of Jana Galan with Bank of America.

Following up on the renewal rates in the fourth quarter in January, were there any specific markets that kind of drove the decline versus the third quarter? I know you mentioned layoffs in Boston. I'm just curious if there's any markets where you're willing to maybe negotiate a little bit more to protect occupancy?

Yes. Good question. It's Sean. I would say, in general, what we see is a little bit of moderation in Q4 because seasonally, you're seeing the asking rents for move-ins come down, and there is a correlation between the renewal rates you can achieve and what -- think about it, what people see on the website for the deal down the street. So as you had softer move-ins, and usually a little bit softer in Q4 of this past year, you see it trend down. So it was more broad-based than individual. I would say the markets where we probably negotiated more are some of the softer markets that I mentioned earlier in terms of the Mid-Atlantic, as an example, Boston and then Denver probably the outliers to the weaker side as compared to the average.

The next question comes from the line of Jamie Feldman with Wells Fargo.

Can you talk more about the other income drag from the legislative activity last year? And then also, I guess, along those lines, I mean, it's a midterm election year, affordability is a hot topic. Any other initiatives you guys are watching closely? I know there's a Massachusetts potential ballot initiative. Just what should we keep our eyes on this year from the political front?

Jamie, it's Sean. First, on the other rental revenue side, there's really 2 or 3 drivers to it are probably the ones that are most meaningful to call out, legislation passed in Colorado that is impacting the ability to charge certain fees or cap certain fees that's flowing through other rental revenue. In addition to that, by the way, we didn't call this out on the OpEx slide, but it also limits our ability to recover some utility components as well, which is about a 15-basis point drag in terms of OpEx growth. It wasn't something, again, we called out on the slide. And then the other one is new legislation in California, AB 1414 that provides residents with the option to opt out of a bulk Internet program to the extent there is another offering available at the community. We don't know exactly how many people will opt out, but we have looked at other programs for residents who have an opt-out right like rent control program, et cetera, and modeled it to reflect that type of outcome. Those are the 2 primary ones that are dragging. There's a couple of other small things, but those are the 2 big ones. And then as it relates to kind of the forward looking in terms of the election, what I'd say is, yes, we're keeping an eye on Massachusetts. I think I mentioned on the last call, the way that ballot initiative was drafted is pretty onerous. And so onerous enough that already various political leaders in Massachusetts have already come out and said that they are opposed to it, completely opposed to it. So we will have to go through a process here to potentially defeat it, but we do believe that relative to other initiatives we fought like in California, this one probably is set up to be a little bit easier to defeat. And then other things we're keeping an eye on are things that are similar to what happened in Colorado or California, where people are being thoughtful about not going directly at things like rent control, but wanting to make sure there is increased transparency and disclosure around the fees that you're charging for different things, how do you recover utilities, et cetera. Those are the ones that we're keeping an eye on and the National Multi-housing Council as well as a lot of the various associations around the country are very engaged in those types of activities to make sure people are aware of what's good legislation versus not.

Okay. And then I guess just going back to the comments on New Jersey, I think you had mentioned rents are lower, but costs are lower on new developments. You've got a decent amount of lease-up in those markets. And I think your latest start is also in New Jersey and then your stats over the year on the weaker side of your markets. Can you just give more color on your expectations both on the lease-up side, timing of getting those projects done and even the new start? What gives you confidence to start there, given there is so much supply coming in that market?

I guess I can start and then maybe Sean can talk as well about the stabilized portfolio. On the -- there's not necessarily that much supply coming there, maybe a little more than what we've seen in the past. But it is still one of our strongest markets. And it's not as strong this year as New York City, but it tends to be within New York City as a core bit, obviously, particularly Northern New Jersey. So our lease-ups there are doing fine. They're generally tracking on plan. And in general, our lease-ups actually picked up a little bit here. We saw in Q4 across our whole lease-up book, which includes 3 or 4 in New Jersey, average leases in Q4, which is a slow quarter, was about 20. And in January, we actually did 26 across the 9 deals or 8 deals -- 7 deals, whatever we have in lease-up. So we're continuing to get good traction. We basically will price to get the communities full before we have our first renewal. So typically within a year to 15 months. And we'll kind of adjust the pricing if needed to meet the pace that we're looking to meet. What we are seeing is, like last year, we had a completion in New Jersey that finished, I think, 20 or 30 basis points above pro forma. That's what we've seen in general over the last couple of years. I'd say where we are today, the deals that we have currently in lease-up, they're tracking on pro forma. So not necessarily beating pro forma anymore, but we still feel good that the initial spread that we underwrote is holding.

Jamie, just in terms of the specific deals, we had 3 deals with lease-up activity through Q4 into January. So through Q4, kind of average monthly pace was around 20 a month. When you get into January, the 3 deals, Avalon Parsippany did 32, West Windsor did 20, Avalon Wayne did 24, which are pretty good numbers in January, where it was also pretty darn cold. So those are pretty good numbers in our view, above what we would have expected in January, frankly.

Okay. That's good to hear. It's better to be indoors than outdoors, I guess, leasing space.

Very true.

The next question comes from the line of Rich Hightower with Barclays.

Curious if you can give us an update on your views around the D.C. market and surrounding markets and the DOGE impact. I think maybe it was a little bit understated as of a quarter ago. So where do we sit today with that?

Yes, Rich, it's Sean. I can start and then others can add, if needed. I mean the fundamental issue has been you had lots of jobs. If you look at the last 6 months actual, with the data trued up and everything, we lost about 60,000 jobs across the Mid-Atlantic. Yes, that's the primary driver of the softness. So I think the question that people have asked, and there's not a 100% clear answer is, is there more to come or not? When we were talking about this earlier in 2025 back in Q2 and even Q3, the data was certainly lagging and it takes time for it to filter through. So we think we got '25 relatively captured, but there could be another revision here soon, but we'll have a good feel for that. I think the way to think about the Mid-Atlantic is, obviously, the impact of that has been meaningful in terms of demand in the market. What we feel a little bit better about is, one, as I mentioned earlier, about a 60% reduction in deliveries in 2026 as compared to 2025. That is a very large number. So if we start to see at least some stabilization from the federal government and other major employers or even some modest growth, without that kind of supply, particularly as we get to the back half of the year, things should start to look better. And if we see an uptick in job growth beyond what we've already forecasted, then it's potentially a market that could have some upside to it. I think what Ben noted is there needs to be a little more business confidence as it relates to making investments in a stable environment. And consumer confidence as well, just so they feel comfortable making those commitments. But I think it's a little bit of a TBD, but we're expecting basically the first half of this year to look a lot like the second half of last year.

Okay. That's helpful, Sean. And then I guess the second question is just maybe more general about the transaction environment. When we hear on your call and some of your peers calls that market cap rates, in many cases, are 5% or even in the 4s in certain markets. Just curious what is driving that if we sort of segment it between capital flows, debt availability or underlying optimism around fundamentals. What do you think is sort of driving that cap rate compression where we sit today?

Yes. This is Matt. I guess I can take that one. It is a little bit surprising, but we've been saying that really for the last couple of years. So I think you've got a couple of different crosscurrents here. I know a bunch of folks were just out at NMHC last week. So probably the biggest recent shift in favor of supporting cap rates where they are is the debt markets, which has become very competitive, very deep and liquid. And so spreads have come in quite a bit. And so for buyers out there, they're levered buyers, they definitely have access to lower cost and larger check size debt than they did a year or 2 ago. That is, to some extent, counteracted by a little bit of headwinds in the numerator, which is obviously the NOI being capped with relatively flattish NOI growth, positive in some markets, negative than others. And then the third piece of it is just investor sentiment and equity, and there is a lot of equity that's on the sidelines that's anxious to get in. And we've seen that really growing for the last couple of years. There's dry powder out there. It's looking to be deployed. There's a lot of people whose livelihoods depend on it. So what we continue to see is this bifurcated market where for the assets that check the boxes, the bid is deep, the bid is robust and buyers are optimistic enough that they will underwrite through another year or so of operating softness to what they expect to be a pretty robust recovery 2 or 3 years from now. But then there are another subset of assets where they're only going to transact if there is a wider spread between the debt rate and the going-in yield or cap rate and a lot of those are the deals that are not transacting.

Rich, maybe one addition to it, just to give you a little bit more market color. I mean we're not overly active on the buying front right now, but obviously, we're attuned and do selectively look at deals and the types of assets that we would focus on, people are still stepping up and paying cap rates that are in the [ 4.7%, 4.8% ] type of range.

The next question comes from the line of John Kim with BMO Capital Markets.

I know it's not your biggest market, but when you look at your expectations for same-store revenue in Denver, it's noticeably lower than other expansion markets and what you have delivered last year. So I'm wondering what's driving that for you?

Yes, John, this is Sean. As I mentioned in my prepared remarks, I think 2025 was a tough year for the Denver market. Essentially 0 job growth and significant deliveries. This year, what we're expecting is very modest job growth, consistent with the outlook that Ben provided earlier but there's still another 9,000 units to come. So you've got some hangover inventory from 2025 that was delivered but not absorbed. And then you add another 9,000 units to that with very modest job growth, that's a simple story of just too much supply given the relatively anemic demand and that's the near-term outlook for that market.

And is this market more vulnerable to tech layoffs than others?

I'm not sure on a relative basis, it would be, given the concentration of tech jobs in Denver is below some other regions we're in like Seattle and Northern California per se. It would have exposure, but I'm not sure that it punches above its weight class in terms of exposure to the tech.

Our next question comes from Nick Yulico with Scotiabank.

I just wanted to go back to the decision to have lower development starts this year. How much of that was driven by a focus on improving your FFO growth given some of the sort of near-term dilutive aspects of development? And I guess, specifically, I think, Kevin, you're kind of saying that there was some benefit then to 2027 from doing that. So if you could just flesh that out.

Sure, Nick, it's Kevin. I'll offer a few comments. Others may want to add some additional color. I'd say, really, it wasn't a factor at all in our decision about the development start volume for this year. Our decision in that regard, as we discussed earlier, was really, as Matt outlined, driven by our own sense about the opportunity set that we have within our own portfolio, what we think we might be able to achieve through our DFP program and the related funding costs in terms of the economic value add that, that activity will provide for our shareholders over time. I think in terms of the dynamics that I referenced in my scripted remarks in regard to kind of Slides 14 and 15, I think what we're trying to provide there is a little bit more transparency to investors on the -- really the several dynamics that determine development earnings, which is not merely the NOI yield and development NOI that we received from development activity as it stabilizes and the associated funding costs but also the impact of capitalized interest as it flows through. That seems to be a dynamic that based on our own discussions with investors hasn't always been uniformly well understood. And so we thought we'd use this as an opportunity to provide a little bit more clarity on that for investors. But in terms of informing our capital allocation decisions, that's not really a factor at all. It's been a dynamic that we've had to reflect in our GAAP financials really over our 30-year history. And it's kind of sometimes it's been a plus and sometimes it's been a negative, but at the margin, it all washes out and really what drives our core FFO growth over time is not only what happens to the same-store book, but importantly in this regard, the underlying profitability of our development activity, which continues to be quite attractive. And so for us, I think it's really just looking at the incremental yields versus the incremental funding costs and the opportunity set that's driving our sizing of the opportunity for development starts this year.

Okay. And then I guess my second question is if we stay in this higher interest rate world where you're having that impact from capitalized interest versus borrowing cost, harder to raise maybe common equity where you want to raise it. Is there an approach perhaps of going towards, I don't know if the company has considered doing a fund, doing more JVs as a way to source capital and also minimize some of this earnings dilution that is coming from the development on the balance sheet.

Nick, it's Ben. Less your last point there about dealing with the earnings dynamic, but in terms of your broader question, is private capital something that we think about? Yes, we -- I do think about private capital as being a tool in our toolbox. We actually have a large joint venture via Invesco with a state pension fund for a number of our New York City assets. People remember back long enough in Avalon-based history, we did have funds at that point. Nothing we're actively working on at this point, sort of the channels that we've generally thought about. One would be in and around a portfolio allocation objective where there could be a pool of assets where we want to monetize a portion of those assets, but importantly, retain the operating density in the market. Those could be a pool that we look to put into a joint venture or a private capital vehicle. And the second bucket would be in and around external growth, right, as we think about funding potentially a larger pie of activity with capital that's in addition to our mothership capital.

And maybe, Nick, just to kind of add a little bit more color on what we can do year in, year out from an investment standpoint without accessing the equity markets or levering up. The way we tend to think about our capacity is in terms of what we describe as the leverage to fund capacity through the sum of free cash flow, leveraged EBITDA growth and asset sales before we hit our distribution obligation. That typically averages around $1.25 billion a year. So if you think about what we can do on the investment front each year typically is around $1.25 billion of development starts, more give or take that we can do year in or out of the opportunity set there. So by starting $800 million this year, we are quite deliberately allowing ourselves room and capacity to do more if it makes sense either in the form of our buyback activity or development activity. So we do have that flexibility.

Our next question comes from the line of Anthony Paolone with JPMorgan.

First question relates to just the series of initiatives and announcements coming out of the White House to prompt more for-sale housing activity, it seems. Any of those that you think might have teeth or that you're watching more closely in terms of it impacting your portfolio and potentially prompting move-outs or having implications back on rents?

Something we're monitoring, watching. But the short answer to your question is no. Really, our focus at the national and federal level is working with trade associations like NHC (sic) [ NHMC ] to support supply-based solutions. We very much see ourselves as a creator of housing, most of our developments, we provide 20% to 30% affordable housing as part of that, that typically comes with the approval requirements. So finding ways that we, both individually at AvalonBay and as an industry can help support further supply is where we've been focusing our efforts.

Okay. And just second one, can you give us bad debts in 4Q and '25 and then also the -- what's in your guidance for '26?

Yes, Tony, happy to do that. Essentially, where we ended up is right -- you said fourth quarter specifically?

Yes, 4Q and then the full year in order to get some sense as to what '26 is and whether that's a headwind, tailwind?

Okay. Got you. Yes. So at a high level, so basically, for 2025, we ended at 1.6%. Our forecast is 1.4% for 2026. As it relates to the fourth quarter, which is normally a slightly higher quarter than average, that came in like 1.63%.

Our next question comes from the line of Haendel St. Juste with Mizuho Securities.

Two quick ones here. So first, wanted a little bit color on San Francisco, Seattle. Maybe you could talk a bit more about your expectation for tech employment growth there near term, lots of layoff announcements of late, AI headlines, software cons in the market. It seems like the situation is still evolving. Maybe it gets better, maybe not, but curious how you factor that into your employment outlook and rent expectations for those markets?

Yes, it's Sean. What I would say is the pace that we saw in the back half of 2025 is sort of what we expect to continue, particularly through the first half of '26. And then as Ben noted, a slight uptick in job growth for the forecast from NABE in the back half of the year, Seattle lost jobs in the back half of 2025. And then across the Bay Area, it's relatively flat. San Francisco was ahead, but San Jose and East Bay were a little bit behind. So that's sort of what's embedded in the forecast right now. What's important to note, in addition to actual job growth is wage growth, though, and wage growth continues to be pretty good. It's moderating a bit, but still pretty healthy, certainly healthier than what you might expect that's implied by our move-in rent change, but it's probably more consistent with what you would expect on the renewal side. So that's a key component that we monitor to make sure that existing resident capacity is there to pay higher rents.

That's good color. I appreciate that. One more, if I would. It sounds like one of the messages from this call is, this year is a bit of a transition year. The setup for next year looks more exciting, at least at this at this point. You mentioned inflection in your rent into the back half of the year, more development contribution. So I guess, overall, fair assessment. Is that a fair assessment? And would you say or how excited are you about the earnings inflection potential for the portfolio into '27? And then maybe some comments on the Sunbelt expansion market, how you expect those to play out in the course of this year and next year?

There's a lot in there. I'll comment on part of it. And just given time, we can circle back with you, Haendel. In terms of the year, I really would bifurcate it in terms of sort of the internal growth aspects of it, the operating fundamentals are softer than we expected 6 months ago. Supply is, for sure, going to be a tailwind. And in a soft/uncertain demand environment, our view is markets that are going to be the relative winners are going to be those with the lowest levels of supply and we feel well positioned there both in the near term and for the foreseeable future, particularly given our suburban coastal concentrations. And then on the external growth side, yes, I mean you -- we consciously did provide more visibility to investors in our presentation about the ramping of activity, both development NOI and development earnings as we progress through 2026 and 2027, and that was intentional.

[Operator Instructions] Our next question comes from the line of Michael Goldsmith with UBS.

Can you kind of provide a breakdown of the performance between urban and suburban. And does that vary by the East Coast, West Coast and the Sunbelt markets?

And Michael, just so I understand what you're referring to. You're talking about revenue growth? Are you talking about rent change. Kind of what are you exactly thinking there.

Yes. Just the rent change, I guess, just trying to understand the kind of the performance in these markets.

Yes. What I can tell you in terms of, call it, submarket type for rent change, for the last couple of quarters, the urban portfolio has outperformed our suburban portfolio. One thing you have to keep in mind in that regard is it doesn't mean in absolute sense that those markets are healthier. You have to look at each one because in some cases, what's inflating that rent change in some of the urban submarkets is that they are less bad than they were a year ago. You have concessions for 3 months, another 2 months, that's an 8% effective rent change right there. So I would just keep that in mind as you think about it. So some markets are pretty healthy. San Francisco is looking very healthy. Some of that is concession driven, but it's also good lease rate growth. New York City is quite positive. But then there are places probably like Seattle, where it's still pretty soft, but concessions aren't as bad as they used to be. So just keep that in mind.

Got it. And my follow-up question is starts in the fourth quarter included a Kanso and a townhome community. So could there be more opportunities in these types that may be a competitive advantage for AvalonBay over other builders?

Yes. It's Matt. I would say, yes. I appreciate the call out there. We do -- in our '26 starts, we do have another townhome BTR community planned, and we give another Kanso planned. So we are -- we have a wider variety of product offering to the market than what a typical merchant builder would provide. And as I mentioned in my opening remarks, we are trying to build to where we think future demand is headed and also access some of those maybe underappreciated niches, which also gets a little bit of an earlier question about kind of are we able to generate yields higher than maybe others, and that's all part of it.

Our next question comes from the line of Alex Kim with Zelman & Associates.

Just piggybacking quickly off of that last one. You've highlighted BTR as a strategic growth channel. Just curious if you could provide more color on some of the yield differentials between townhome product versus traditional multifamily? And then how do operating metrics like rent growth, turnover, occupancy compare?

Yes. It's Matt. I can speak to that a little bit, and Sean may want to as well. It's really too early to tell kind of longer term. I don't think the product's been around there long enough. We have a subset of our portfolio of its rental townhomes that we've had for quite a while, and those have generally tended to perform as well as or maybe slightly better than the communities to which they're attached. We have a number of communities where we might have 20, 30, 40 townhomes and 200, 300 flats. We have a few that are 100% townhome. But it does open up additional sites. And it also, we believe, is aligned for future growth better. One of the things we've said going all the way back to our Investor Day is, in some ways, we feel like our portfolio is better positioned for the next decade's worth of demand than the last decade's worth of demand. So there's not a whole lot of long-term history yet. The yields are kind of similar. The expense profile is different. It's less at the community level, more at the home -- individual home level, if you've got an actual dedicated BTR community. But we do think that it is a niche, which is kind of where the puck is headed in terms of future demand. And so we are very consciously trying to increase the proportion of our portfolio that will access that demand. They do tend to be older residents that do tend to stay longer. And over time, that should drive greater profitability.

Our next question comes from Alexander Goldfarb with Piper Sandler.

Kevin, just a question for you on your commercial paper program. Traditionally, you guys have kept your credit line balance at 0. You've done prefunding for the development program. But since you launched the CP program a year ago, it's really definitely you've taken advantage of it, and it was -- it sort of jumped about $500 million from third quarter to fourth quarter. So is this sort of what you're using to help fund the development program? Or is this more like a warehousing for future bond deals? I know you guys just did a bond deal, but just trying to understand the CIP -- the CP program, which you're actively using versus traditionally the line of credit, which was almost always 0 at quarter close.

Sure. Thanks, Alex. So it's Kevin. Yes, we -- in terms of our commercial paper program, we've had it for a little while. As you may recall, we increased the size of it when we renewed our line about 9 months ago. And we did so very consciously because not only because of the relative attractiveness of short-term debt costs today, but importantly, because we felt there was room in our debt capital structure, particularly at this point in the cycle for more floating rate debt. And our other floating rate debt in our capital structure has slowly whittled down to about $400 million to where it is today. And we'd like to have more in commercial paper. It just happens to represent the most attractive form of floating rate debt. So our view was that we wanted to make more room in our capital structure for a little more than $400 million of floating rate debt and the commercial paper was the most efficacious way of getting that. And so we upsized our commercial paper. And so you're seeing us probably run with a slightly higher level of persistent commercial paper balances as a consequence of that. So it's probably going to run at least in the $400 million to $500 million range, most every time, flex up a little bit more or less depending on what's going on in our -- in funding the business.

Okay. And then the second question is on stock buybacks versus development. I think in our numbers, we have you trading at sort of a high 5s implied cap, and you spoke about sort of low 6s on a development yield basis. It would almost seem like right now, the stock buyback is the more accretive use of capital. But as you mentioned in the guidance, there is nothing planned for stock buybacks. So can you just talk a little bit more about that, especially given your liquidity, would just seem like stock buybacks would be more advantageous in the near term given the current math, the spread between the 2?

Sure. So Alex, I'll say a couple of things, and Ben may want to chime in. Just from our point of view, our shares are terrifically attractively priced right now, probably an implicit cap rate in the low 6% range. If you look at our development start activity that we planned for 2026, the expected yields on that are higher at 6.5% to 7%. So for us, the opportunity to development or buyback activity isn't necessarily binary for us. We can do both. And as you saw last year, we did exactly that. So we do believe that the $800 million that we programmed in for this year starts are attractive. We also recognize that potentially doing additional buyback activity may make sense for us. But we've not woven into our plan for this year. It's something we'll look at as we proceed further into the year. But it's hard to sort of estimate what exactly you're going to get in terms of volume, price and so forth. And so our approach to that is likely to be more opportunistic, but we have the flexibility and the capital capacity to do both here.

Our next question comes from the line of Omotayo Okusanya with Deutsche Bank.

Just a quick one. I wanted to go back to Haendel's question about the expansion market. And again, just given your outlook for those markets, how quickly you still think you might be growing over the next kind of 1 to 3 years in regard to exposure to those markets?

Yes, it's a multiyear journey for us. As you know, we've been growing in our expansion markets now for 7 or 8 years. We're about halfway towards our target of 25%. And then there are certain years where either because of deal opportunities or more importantly, the relative trade as we think about redeploying capital from our established regions into our expansion regions, that has looked more attractive. So last year, we were pretty active on that front in terms of repositioning part of the portfolio. For this year, as you've heard, we're planning generally less transaction activity. On the buying side, it would be very selective, particularly given the opportunities of using disposed proceeds to buy back our stock. And then from a development perspective, as Matt mentioned earlier, this year, we have a heavier weighting towards our established East Coast region. So not expecting this year to be sort of a meaningful movement, but we'll continue over a multiyear period headed in that direction towards our targets.

As there are no further questions at this time, this now concludes our question-and-answer session. I would like to turn the floor back over to Ben for closing comments.

Thanks, everyone, for joining us today. We appreciate the questions and look forward to seeing you soon.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. Please disconnect your lines, and have a wonderful day.