Aided by growth in rental revenue, AvalonBay Communities Inc. (AVB) delivered a positive earnings surprise of about 3.16% in the third quarter of 2013. The apartment real estate investment trust (REIT) reported core funds from operations (FFO) of $1.63 per share, beating the Zacks Consensus Estimate of $1.58 per share. The core FFO per share was also 15.6% ahead of the prior-year quarter figure.
Improved results from its new development communities as well as its stabilized portfolio have helped the company post encouraging quarterly results. However, including non-routine items, FFO per share declined 18.1% year over year to $1.18 from $1.44 for the prior-year period.
Total revenue during the reported quarter increased 47.2% year over year to $400.3 million and came ahead of the Zacks Consensus Estimate of $395 million.
Quarter in Detail
Same-store rental revenues increased 3.9% year over year to $214.9 million. This was aided by an escalation in average rental rates but partly dwarfed by a fall in economic occupancy. Average rental rates climbed 4.4% year over year, while economic occupancy declined 0.5%.
Same-store operating expenses moved up 3.3% year over year to $66.8 million and consequently, same-store NOI during the reported quarter escalated 4.2% year over year to $148.1 million.
Notable Portfolio Activities in Q3
During the reported quarter, AvalonBay commenced the construction of four communities – Avalon Willoughby Square/AVA DoBro in Brooklyn, N.Y.; Avalon at Stratford in Stratford, Conn.; Avalon Hayes Valley in San Francisco, Calif.; and Maple Leaf (a legacy Archstone joint venture) in Cambridge, Mass. – for a projected total capital cost of $592.8 million.
AvalonBay accomplished the development of two communities – Avalon Shelton in Shelton, Conn. and Avalon Hackensack in Hackensack, N.J. – for an aggregate capital cost of $93.9 million.
AvalonBay added two development rights during the quarter. It also acquired land parcels (to develop three apartment communities) for approximately $48.8 million.
AvalonBay started the redevelopment of one Eaves branded community with a projected total capital cost of $11.9 million (excluding costs incurred prior to redevelopment).
Moreover, the redevelopment of two Avalon branded communities were accomplished by the company during the quarter for a total capital cost of 12.8 million (excluding costs incurred before redevelopment).
During the quarter, AvalonBay Value Added Fund, L.P. – a real estate investment vehicle in which the company retains an equity stake of around 15% – disposed Avalon at Cedar Place in Columbia, Md., for $26.0 million. AvalonBay reaped a gain of nearly $0.7 million from this deal. Following the quarter end, the company sold Archstone Vanoni Ranch in Ventura, Calif., for $82.0 million.
Liquidity
As of Sep 30, 2013, AvalonBay had no borrowings outstanding under its $1.3 billion unsecured credit facility. The company had nearly $211.3 million in unrestricted cash and cash in escrow as of that date.
During the reported quarter, AvalonBay issued unsecured notes worth $400.0 million. The notes are due Oct 2020 and were issued at a 3.625% interest rate.
Outlook
AvalonBay anticipates fourth-quarter 2013 FFO per share to range from $1.54 – $1.60. For full-year 2013, the company has revised its outlook and now expects FFO per share in the range of $5.09 – $5.15 versus the prior range of $5.05 – $5.25.
Our Viewpoint
We remain encouraged with the solid second-quarter results at AvalonBay. The comapny’s high quality assets located in some of the premium markets of the nation enable it to generate steady rental revenues.
Moreover, the company, which along with Equity Residential (EQR) closed the Archstone acquisition in February, continues to aim for expansion in the high barrier-to-entry regions of the U.S. Also, its decent operating platform, enhanced development pipeline that is mainly pre-funded and growth prospects in the multifamily sector keep us optimistic.
However, with a considerable number of projects in the market nearing completion, we expect the supply to increase in the near term. This, in turn, may lead to a slow down in rent growth as companies would seek occupancy increases.
AvalonBay currently carries a Zacks Rank #3 (Hold). We now look forward to the results of other REITs that are scheduled to release second-quarter 2013 results this week. These include Taubman Centers Inc. (TCO) and Ventas Inc. (VTR).
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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