AvalonBay Communities Inc. AVB, the residential real estate investment trust (“REIT”), expects rental revenues for its established communities to grow 5.4% – 5.5% year over year in the third quarter of 2015. This reflects a rise from the second quarter, in which rental revenue for established communities improved 4.7% year over year driven by an escalation in average rental rates.
AvalonBay also provided like-term effective rent change metrics for its established communities. Its average new move-in and renewal effective rent change is 6.2% in the third quarter (includes activity through Sep 27). The figure is unchanged from the previous quarter but up from 4.4% recorded in the year-ago quarter.
This 6.2% growth is backed by a change of 6.6% in renewals and 5.8% in new move-ins. Notably, the effective rent change for renewals of 6.6% is ahead of 6.4% reported in the prior quarter. However, for new move-ins, the effective rent change of 5.8% reflects a decrease from 5.9% recorded in the second quarter.
AvalonBay had earlier guided third-quarter funds from operations (“FFO”) in the range of $2.01–$2.05 per share and core FFO within $1.90–$1.94 per share. The Zacks Consensus Estimate currently stands at $2.03 for the third quarter.
The company also has an Earnings ESP of +0.49% (reflecting the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate). The positive ESP, when combined with a Zacks Rank #3 (Hold), increases the likelihood of AvalonBay beating estimates in the upcoming results.
The uptrend at AvalonBay keeps us encouraged. We believe that the company will be able to leverage growing demand backed by household formation and favorable demographics across its markets. Nonetheless, completion of a number of projects in its markets, which will lead to higher supply, and an anticipated rise in interest rates keep us concerned.
Key Picks in the Sector
Investors interested in the residential REIT industry may consider stocks like Armada Hoffler Properties, Inc. AHH, Camden Property Trust CPT and Sun Communities Inc. SUI. All these stocks carry a Zacks Rank #2 (Buy).
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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