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AvalonBay Sees Higher-than-Expected Q4 Rental Revenue Growth

Per the recently-announced quarterly update, residential REIT AvalonBay Communities Inc. AVB expects rental revenues for established communities in Q4 to climb 2.5-2.6% from the prior-year quarter.

The midpoint of the fourth-quarter outlook denotes a 15-basis-point (bp) expansion from what was expected for the quarter when it provided the 2018 established communities rental revenue growth outlook in October.

This projection, however, excludes the impact of the five Manhattan communities that are likely to be contributed to a joint venture during this quarter. Rather, established communities refer to those consolidated communities, which have stabilized occupancy as of Jan 1, 2017, and are neither executing nor planning any significant redevelopment work. These consolidated communities are not held for sale or planned for disposition in the current year.

Also, the company provided established communities’ like-term effective rent change for October and November (includes data through Nov 27, 2018). Specifically, like-term effective rent change for both the months was 3% in Northern California and 2.4% in Mid-Atlantic. For Metro NY/NJ, like-term effective rent change was 2.9% for November and 2.7% for October. For the company’s overall established communities, like-term effective rent change was 2.3% for November and 2.7% for October.

Moreover, anticipating the closing of the New York JV and the receipt of proceeds from that move, AvalonBay plans to prepay $250 million 6.10% notes due 2020. The company plans to do this on or before Dec 31, 2018. This move will result in the company incurring a prepayment penalty of around $10 million. This is estimated to adversely impact earnings per share and funds from operations (FFO) per share by about 7 cents. However, core FFO per share will bear no impact.

Notably, high apartment deliveries have been a case of concern for the U.S. apartment market in recent years because that curtails landlords’ power to raise rents, lowers occupancy level and results in high concessions. But the latest trend in rent seems encouraging and the residential REITs, including AvalonBay, Equity Residential EQR, Essex Property Trust Inc. ESS and UDR Inc. UDR, have a reason to rejoice. In fact, per a monthly data released in October by the real estate technology and analytics firm, RealPage, Inc. RP, U.S. apartment rental rates went up 3.2% year over year as of October, denoting the fourth consecutive month of slight upward momentum.

Particularly, AvalonBay is expected to benefit from its high-quality assets in premium locations, favorable demographics, household formation, recovering economy and job-market growth. However, high supply of new apartments in the markets might dent the growth momentum to some extent in the near term. Rate hike adds to its woes.

Currently AvalonBay has a Zacks Rank #3 (Hold). The company’s shares have appreciated 2.6% in the past three months compared with its industry’s growth of 1%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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