Aided by growth in rental rates, AvalonBay Communities Inc. (AVB) reported second-quarter 2014 funds from operations (FFO) of $1.71 per share that came 3.0% ahead of the Zacks Consensus Estimate.
FFO per share also climbed 10.3% from the prior-year quarter figure, driven by improved performance of its newly developed and acquired communities.
Total revenue of this residential real estate investment trust (REIT) increased 6.1% year over year to $413.8 million and surpassed the Zacks Consensus Estimate of $405 million. Results were driven by the existing and stabilized development communities as well as the Archstone acquisition.
Quarter in Detail
Same-store rental revenues increased 3.1% year over year to around $330.0 million, thanks to a 3.2% escalation in average rental rates, partly dwarfed by a 0.1% fall in economic occupancy. Same-store operating expenses climbed 3.6% year over year to $100.0 million and consequently, same-store NOI rose 2.8% year over year to $230.0 million.
AvalonBay sold two wholly owned communities – Oakwood Philadelphia (acquired as part of the Archstone acquisition) for nearly $28.9 million, leading to a gain of around $3.3 million (GAAP); and Avalon Danvers, located in Danvers, MA, for $108.5 million, resulting in a gain of $41.0 million (GAAP).
Besides, the company completed developing three communities for a total cost of $191.1 million and commenced construction of four communities for an estimated capital cost of $421.4 million.
Liquidity
As of Jun 30, 2014, AvalonBay had no borrowings outstanding under its $1.3 billion unsecured credit facility. The company had around $519.1 million in unrestricted cash and cash in escrow as of that date. Moreover, the company’s annualized net debt-to-EBITDA was 5.5 times for the second quarter.
Outlook
AvalonBay anticipates core FFO per share to range in $1.69 – $1.75 for third-quarter 2014 and $6.73 – $6.87 for full year 2014, following adjustments for the recognition of its promoted interest and other non-routine items. Notably, both the Zacks Consensus Estimates of $1.72 for the third quarter and $6.77 for full year 2014 falls within the ranges provided.
Our Viewpoint
We believe that going forward, the company’s FFO per share would experience solid contribution from development deliveries. Moreover, favorable demographics along its markets keep us optimistic about its growth prospects.
However, with a number of projects in the market nearing completion, we anticipate the supply to increase in the near term. This may temper the growth momentum of occupancy levels and put pressure on rents.
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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