AvalonBay Communities Inc. (AVB) reported third-quarter 2014 funds from operations (FFO) of $2.14 per share that came 6.5% ahead of the Zacks Consensus Estimate and jumped 81.4% from the prior-year quarter figure.
The impressive results were driven by improved performance of its newly developed and acquired communities. Additionally, AvalonBay’s core FFO rose 6.1% year over year to $1.73 per share.
Total revenue of this residential real estate investment trust (REIT) increased 7.5% year over year to $430.5 million and surpassed the Zacks Consensus Estimate of $422 million. Results were driven by the rise in revenues from established communities and development communities.
Quarter in Detail
Same-store rental revenues increased 3.7% year over year to around $336.5 million, thanks to a 3.7% escalation in average rental rates. Same-store operating expenses climbed 0.1% year over year to $102.9 million and consequently, same-store NOI rose 5.5% year over year to $233.5 million.
AvalonBay’s two private discretionary real estate investment vehicles – AvalonBay Value Added Fund, L.P. (‘Fund I’) and AvalonBay Value Added Fund II, L.P. (‘Fund II’) – in which it holds stake of around 15.2% and 31.3%, respectively, divested assets in two separate transactions. Fund I sold its final apartment community for $34.3 million. On the other hand, Fund II vended two communities (total 711 apartment homes) for $167 million. AvalonBay’s shares of reaped proceeds (on GAAP basis) from these two transactions were $0.3 million and $21.6 million, respectively.
Additionally, an entity called ‘CVP I, LLC’, in which AvalonBay has 20% stake, sold Avalon Chrystie Place (New York, NY) for $365 million. AvalonBay’s share of the garnered proceeds (on a GAAP basis) was $50.5 million. In addition to this, the company reaped $57.5 million in accordance with its promoted interest in CVP I, LLC.
Besides, the company completed developing eight communities (total 1,595 apartment homes) for a total cost of $466.1 million and commenced construction of three communities for an estimated capital cost of $438.6 million.
Liquidity
As of Sep 30, 2014, AvalonBay had no borrowings outstanding under its $1.3 billion unsecured credit facility. The company had around $535.7 million in unrestricted cash and cash in escrow as of that date. Moreover, the company’s annualized net debt-to-EBITDA was 5.2 times for the third quarter.
Outlook
For full-year 2014, AvalonBay has increased the lower end of the FFO per share guidance and decrease the upped end by 5 cents. However the mid point remains the same at $7.26. The revised 2014 FFO per share outlook range now stands at $7.23 – $7.29 (previous one being $7.18 – $7.34). The Zacks Consensus Estimates for the same is currently pegged at $7.13.
The company also provided its outlook for fourth-quarter 2014 FFO per share in the range of $1.74 – $1.80. The Zacks Consensus Estimates of $1.77 for the same lies within this range.
Our Take
We are encouraged by the impressive third-quarter earnings of AvalonBay, on the back of growth in rental rates. 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, the pressure in the Washington D.C. market may disrupt the company’s growth momentum in the near term.
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 this week.
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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