Benjamin W. Schall
Chief Executive Officer and President at AvalonBay Communities
Thank you Jason, and thank you everyone for joining us today. I will start with an overview of our outperformance in Q2, speak to the limited new supply in our markets as compared to most other markets and then provide additional color on our guidance raise, our second raise of the year. Sean will speak to our underlying market fundamentals, including the progress we are making on bad debt and provide a further update on our operating model initiatives, which are exceeding expectations. And then Matt will highlight the continued outperformance of our new projects and lease-up and summarize our recent transaction activity, including the sale of three assets at a 4.7% cap rate. Our balance sheet is as strong as it has ever been, with total liquidity of $3 billion, and Kevin is also here with us for Q&A.
Turning to Slide 4 in the presentation that we posted yesterday, we achieved second quarter core FFO of $2.66 per share, which equates to a 9.5% growth as compared to last year and which is $0.07 per share higher than the Q2 guidance that we provided in April. I'll speak more to the underlying drivers of that outperformance in a second. We completed two new developments this quarter and started one new project. And as a reminder, early in Q2, we completed the exercise of our $500 million equity forward, capital we raised at $245 per share and has subsequently been investing safely at rates in the low 5% range.
In terms of our outperformance in Q2, it was primarily revenue-driven with same-store revenue growing 6.3% or 110 basis points higher than we had anticipated, as shown on Slide 5. Lease rates and other rental revenue were modestly favorable to our prior guidance, partially offset by slightly lower occupancy. The most significant driver of the favorable variance was underlying bad debt, where we have been successful as our landlord rights have been reinstituted of getting back and re-leasing apartments that were previously generating no revenue. As we look forward, we continue to expect our portfolio, which is two-thirds located in suburban coastal markets, to benefit from significantly less competitive new supply coming online than in the Sunbelt and other parts of the country.
Slide 6 shows the magnitude of this differential, where starts in our established regions have remained stable over time, while Sunbelt starts have increased 50% since 2020. The ramification of this activity is that in 2023, new apartment deliveries will be almost 4% of existing stock in the Sunbelt as compared to only 1.5% of stock in our established regions. And this meaningful differential was set to continue in 2024.
Moving to Slide 7. We are raising our full year guidance for core FFO to $10.56 per share, which equals a 7.9% increase over 2022. As a reminder, we increased guidance by $0.10 in April to $10.41 per share, which was attributed primarily to Q1 outperformance and the earnings benefit of accelerating our equity forward. The second increase of an additional $0.15 per share incorporates our outperformance in Q2 and reflects our latest revenue and expense forecast for the year, including improved expectations for bad debt. As part of this updated guidance, we have increased our same-store revenue growth expectation of 6%, kept expense growth constant at 6.5%, and the resulting same-store NOI growth outlook of 6% is up 175 basis points at the midpoint. For bad debt, we are now assuming underlying bad debt of 2.3% for 2023, an improvement of approximately 50 basis points from our initial estimates.
As it relates to operating expenses, while the midpoint of our guidance remains the same, we expect lower payroll costs driven by our innovation efforts and lower repair and maintenance and property tax expenses to be offset by higher legal, eviction, and bad debt costs as we reclaim apartments from non-paying residents. The further breakdown of the increase from $10.31 to $10.41 and now to $10.56 per share is shown on Slide 8, with $0.14 coming from same-store NOI. We also continue to adjust our capital allocation approach based on the changing external environment. While our developments in lease-up continue to perform exceptionally well, we have raised our acquired returns on new development starts given our increased cost of capital and focused on maintaining 100 basis points to 150 basis points of spread between underlying market cap rates and our projected development. Based on these factors and as part of our guidance update, we have reduced our expected level of starts in 2023 to $775 million from $875 million.
On the transaction side, as part of our portfolio repositioning, we continue to take the tack of selling assets first, locking in that cost of capital and then pursuing acquisitions in our expansion markets. Given this cadence and given that we are remaining selective on the acquisitions that we pursue, our guidance now assumes that we'll be net sellers of assets this year with expected dispositions exceeding acquisitions by roughly $200 million.
And with that, I'll turn it to Sean.
