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AvalonBay's (AVB) Q2 FFO Misses, Revenues Beat Estimates

Zacks Equity Research

AvalonBay Communities, Inc.’s AVB second-quarter 2019 core funds from operations (FFO) per share of $2.27 inched up 1.8% year over year. However, the figure missed the Zacks Consensus Estimate of $2.31.

The year-over-year improvement indicates increase in average rental rates though economic occupancy registered a decline.

Total revenues of $577.3 million were up 1.4% year over year. The revenue figure also surpassed the Zacks Consensus Estimate of $572.7 million.

Quarter in Detail   

In the reported quarter, revenues from established communities improved 3.2% year over year to $457.8 million. Rental revenues from established communities were up 3.1% as average rental rates climbed 3.2%, while economic occupancy edged down 0.1%.

Operating expenses for established communities flared up 4.2% on a year-over-year basis. Consequently, NOI from established communities increased 2.8% year on year to around $326.8 million.

During the second quarter, the company acquired Avalon Cerritos, in Cerritos, CA, comprising 132 apartment homes for $60.5 million. The company sold Archstone Toscano, a wholly-owned operating community in Houston, TX, for $98 million, leading to a benefit of $20.6 million in accordance with GAAP.

Further, during the quarter, the company completed the development of Avalon Piscataway, in Piscataway, NJ, comprising 360 apartment homes, for a total capital cost of $91 million.

As of Jun 30, 2019, AvalonBay had 21 communities under construction (expected to contain in total 7,023 apartment homes and 94,000 square feet of retail space), which will likely be accomplished for a projected total capital cost of $2.58 billion.

Balance-Sheet Position

As of Jun 30, 2019, AvalonBay did not have any borrowings outstanding under its $1.75-billion unsecured credit facility. The company had around $330 million in unrestricted cash and cash in escrow as of the same date. In addition, the company’s annualized net debt-to-core EBITDA for the April-June quarter was 4.8 times.

Moreover, the company sold 239,580 shares of common stock at an average sale price of $208.70 per share, reaping net proceeds of $49.25 million under its current continuous equity program established in May 2019.

Outlook

For full-year 2019, the company expects core FFO per share of $9.25-$9.45. This represents a 5-cent increase from the prior guidance at the mid-point. The Zacks Consensus Estimate for the same lies within this range and is currently pinned at $9.34.

The ongoing year’s same-store rental revenues is expected to grow 3% at the mid-point, unchanged from the prior outlook. However, same-store NOI outlook has been revised upward by 25 basis points at the mid-point to 3.25%, backed by favorable same-store expense forecast. Lease-ups will likely be conducive to core FFO growth.

In Conclusion

Although AvalonBay managed to beat revenue expectations in the quarter, we are slightly disappointed with the FFO miss. The company witnessed growth in average rental rates in the quarter, but a fall in occupancy and rising operating expenses played spoilsport.

Nevertheless, lease ups are performing well and are likely to contribute considerably to core FFO growth. Additionally, with an uptick in same-store NOI outlook for the current year, aided by upbeat same-store expense forecast, this residential REIT seems well poised for growth. The company will likely benefit from its high-quality assets in premium locations, favorable demographics and household formation. Nonetheless, new apartment deliveries might remain elevated in the company’s markets in the near-to-mid term, curtailing robust rent growth.

AvalonBay currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

AvalonBay Communities, Inc. Price, Consensus and EPS Surprise
 

AvalonBay Communities, Inc. Price, Consensus and EPS Surprise

AvalonBay Communities, Inc. price-consensus-eps-surprise-chart | AvalonBay Communities, Inc. Quote

Performance of Other Reidential REITs

Equity Residential EQR reported second-quarter 2019 normalized FFO per share of 86 cents, which surpassed the Zacks Consensus Estimate by a whisker. Moreover, normalized FFO per share figure comes in 6.2% higher than the 81 cents reported in the year-ago quarter. Results mirrored improved same-store NOI and lease-up NOI, and other non-same store NOI.

Backed by improved net operating income from its communities, Essex Property Trust Inc. ESS delivered a better-than-expected performance for the June-end quarter. The company reported core FFO per share of $3.33 for the quarter, outpacing the Zacks Consensus Estimate of $3.26. Core FFO per share improved 6.1% from the year-ago quarter figure of $3.14, as well as exceeded the mid-point of the company’s guided range by 11 cents.

UDR Inc.’s UDR second-quarter 2019 FFO as adjusted per share of 52 cents came in line with the Zacks Consensus Estimate. The figure came in higher than the prior-year quarter reported tally of 49 cents. Results reflected year-over-year growth in same-store NOI. Yet, weighted average same-store physical occupancy remained flat, year on year.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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