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AvalonBay (AVB) Updates on Q1 Operations, Rental Revenues Fall

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Zacks Equity Research
·4 min read
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In the recently-released first-quarter operating update, AvalonBay Communities, Inc. AVB announced that its total residential rental revenues for established communities for the two-month period ended Feb 28, declined 9.1%, year on year. However, management noted that this is in line with the company’s expectation for the first quarter which was issued in early February.

Per the operating update, like-term effective rent change for established communities was a negative 7.9% in February compared with a negative 9.9% in January and negative 10.8% in December. Northern California and Pacific Northwest recorded the sharpest February rent slump, marking a 15.1% and 12.7% decline, respectively, in the month.

The pandemic has resulted in macroeconomic uncertainties and a choppy job-market environment, in turn, causing household contraction and consolidation. Moreover, a number of factors are affecting rental demand, including health concerns of living in dense environments and the continuation of the work-from-home mandates that is resulting in a shift of renter demand away from higher cost and urban/infill markets.

AvalonBay’s urban communities too have been affected, though there seems to be some recovery in the month of February. Particularly, rents in established communities in urban region fell 16.6% in February compared with 19.5% in January and 20.5% in December. Rents in established communities in suburban region fell 4.3% in February compared with 5.0% in January and 5.9% in December.

Encouragingly, AvalonBay witnessed an improvement in average physical occupancy for established communities, which improved to 95% in February, from 94.7% in January and 94.3% in December. As anticipated, suburban communities are enjoying better occupancy compared to urban communities.

Average physical occupancy for suburban communities improved to 95.5% in February, from 95.2% in January and 95% in December. In case of urban communities, average physical occupancy improved to 93.7% in February from 93.3% in January and 92.3% in December.

Region wise, in February, Southern California and Metro New York/New Jersey experienced highest occupancy with average physical occupancy of 95.9% and 95.2%, respectively. However, Pacific Northwest and Mid-Atlantic had the lowest occupancy, with average physical occupancy of 94.1% and 94.4% level, respectively.

Apart from AvalonBay, other residential REITs, including Equity Residential EQR, Essex Property ESS and UDR Inc.’s UDR businesses have been affected by the pandemic, with demand for rental units and tenants’ rent-paying capabilities bearing the brunt, leading to high concessions and uncollectible lease revenues.

However, things seem to have turned round and leasing activity is still taking place despite the months being considered as seasonally weak months in normal times. Recently, Equity Residential issued its operating update and noted that it is witnessing “good demand for its apartment units in February 2021 as evidenced by a continued trend of Move Ins exceeding Move Outs translating into higher Physical Occupancy.” This residential REIT’s physical occupancy improved to 95.3% in February, from 95.1% in January and 94.4% in December.

Currently, AvalonBay holds a Zacks Rank # 5 (Strong Sell), while Equity Residential, Essex Property and UDR Inc. carry a Zacks Rank of 4 (Sell).

You can see the complete list of today’s Zacks #1 Rank stocks here.

Here’s the price performance chart of the above-mentioned residential REITs in the past six months.

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