AvalonBay Communities Inc. (AVB) reported fourth-quarter 2014 funds from operations (“FFO”) of $1.76 per share that came 16.6% ahead of the prior-year quarter figure of $1.51, but missed the Zacks Consensus Estimate by a penny.
Nevertheless, core FFO per share rose 7.4% year over year to $1.74 for the quarter. The company also announced a 7.8% increase in its quarterly dividend rate and expects over 8% growth in its 2015 core FFO per share.
While the company experienced growth in revenues from development communities and established communities, a decrease in real estate sales and related gains marred that positive impact.
Total revenue of this residential real estate investment trust (“REIT”) increased 10.2% year over year to around $440.7 million in the fourth quarter, surpassing the Zacks Consensus Estimate of $432 million.
For full year 2014, FFO per share grew 43.6% to $7.25 from $5.05 in 2013, while core FFO rose 8.8% year over year to $6.78. Total revenue for 2014 increased 11.9% from the prior-year level to nearly $1.7 billion.
Quarter in Detail
Same-store rental revenues improved 4.1% year over year, thanks to a 3.8% escalation in average rental rates and 0.3% hike in economic occupancy. Same-store operating expenses edged up 0.9% year over year and consequently, same-store NOI rose 5.9% year over year to $233.7 million.
Liquidity
As of Dec 31, 2014, AvalonBay had no borrowings outstanding under its $1.3 billion unsecured credit facility. The company had around $605.1 million in unrestricted cash and cash in escrow as of that date. Moreover, the company’s annualized net debt-to-adjusted EBITDA was 5.2 times for the fourth quarter.
Notably, in Sep 2014, AvalonBay had inked a forward contract to sell 4.5 million shares of common stock for an initial forward price of $151.74 per share, net of offering fees and discounts ("Forward"). While the company has not sold any shares of common stock under the Forward yet, settlement of the same is slated to occur on one or more dates not later than Sep 8, 2015.
Edgewater Fire impact
This residential REIT anticipates the fire that occurred on Jan 21 at Avalon at Edgewater apartment community located in Edgewater, New Jersey, will impact its 2015 projected FFO per share by 10 cents.
As per the company, its insurance policies significantly cover this incident, subject to deductibles as well as a self-insured part of the property insurance, under which AvalonBay is obligated for 12% of the first $50.0 million in losses.
Outlook
For first-quarter 2015, AvalonBay expects FFO per share in a range of $1.86 to $1.90 and core FFO per share in the range of $1.71 to $1.75. The Zacks Consensus Estimate for the same is currently pegged at $1.79.
For full-year 2015, the company projects 2015 FFO per share in the range of $7.25 to $7.55 and core FFO per share in the range of $7.20 to $7.50. The Zacks Consensus Estimate of $7.42 falls in the band.
Importantly, the company’s full year 2015 FFO figure is backed by expectations of 3.5% to 4.5% growth in same store rental revenue, 3% to 4% increase in same store operating expenses and 3.5% to 5% escalation in same store NOI.
Dividend Hike
Encouragingly, AvalonBay announced a 7.8% increase in its first-quarter 2015 dividend. The company would now pay $1.25 per share on its common stock as against $1.16 per share paid earlier. This increased dividend would be paid on Apr 15, 2015 to common stockholders of record as of Mar 31.
In Conclusion
While an earnings miss even by a penny is discouraging, we believe that this residential REIT is well poised to grow, amid favorable demographics, along its markets, healthy demand and development deliveries.
AvalonBay currently carries a Zacks Rank #3 (Hold). We presently look forward to the results of other residential REITs – Equity Residential (EQR), Essex Property Trust Inc. (ESS) and UDR, Inc. (UDR) – which are scheduled to report in the upcoming weeks.
Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.
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