Residential REIT AvalonBay Communities Inc. AVB has completed the sale of 80% interest in five Manhattan apartment communities. The move comes as part of the company’s effort to monetize a considerable portion of investments in these properties.
Specifically, AvalonBay announced the contribution of its fee ownership of Avalon Morningside Park, Avalon Bowery Place I and Avalon Bowery Place II, along with leasehold stake in Avalon West Chelsea and AVA High Line. The interests were contributed to a newly-created joint venture (JV) with an institutional client of real estate investment manager, Invesco Real Estate. AvalonBay kept a 20% interest in it, and now serves as managing member and property manager for these properties.
The transaction, which is based on a total asset valuation of around $760 million, helped AvalonBay improve financial flexibility. In fact, the company reaped net proceeds of around $470 million from the move.
Moreover, around $194 million of variable rate mortgage notes secured by Avalon Bowery Place I and Avalon Morningside Park were repaid by AvalonBay. As of Sep 30, 2018, these had a weighted average interest rate of 3.8%. Furthermore, approximately $396 million of secured financing at a weighted average interest rate of 3.9% were originated by the JV.
Notably, solid job growth in recent months indicates more household formations and raises expectations of a revival of the U.S. residential real estate market fundamentals. Also, per a quarterly update, the company expects rental revenues for established communities in the fourth quarter to be up 2.5-2.6% from the prior-year quarter. The mid-point of the fourth-quarter outlook denotes a 15-basis-point (bp) expansion from what was expected earlier, when it provided the 2018 established communities rental revenue growth outlook this October. This projection excluded the impact of the five Manhattan communities contributed to the JV.
Nonetheless, the struggle to lure renters will continue in the upcoming quarters as well, when much of new supply might come on course. Moreover, the fourth and first quarters mark slow leasing periods, thanks to the cold weather that inhibits shift of households and limits growth in demand. Therefore, landlords’ ability to command more rents is likely to be restricted and concessions might be rampant in the near term. This is expected to affect performance of residential REIT stocks like AvalonBay, UDR Inc. UDR, Mid-America Apartment Communities Inc. MAA and American Homes 4 Rent AMH.
Nevertheless, AvalonBay is expected to benefit from its high-quality assets in premium locations, favorable demographics, household formation, recovering economy and job-market growth. However, new apartment deliveries are anticipated to remain elevated in the company’s markets in the near-to-mid term. Rate hike adds to its woes.
AvalonBay currently has a Zacks Rank #3 (Hold). In the past six months, the stock has returned 6.4% compared with the industry’s 4.2% growth. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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