EUR 850.00 For Business Accounts Only

Morningstar | Smooth Sailing in AvalonBay’s 2Q Results

AvalonBay Communities had a solid quarter, with results that slightly beat our expectations and give us confidence in our $181 fair value estimate and no-moat rating. Rental revenue growth for established communities was up 2.5% for the quarter, in line with our expectations, driven by a 20-basis-point increase in occupancy and a 2.3% increase in average rental rates. AvalonBay did a better job in containing expense growth than we expected, which led to net operating income growth of 2.9%, 70 basis points higher than our estimate for the quarter. Management raised 2018 NOI growth guidance by 30 basis points at the midpoint, bringing it in line with our estimate. Core funds from operations was up 6.7% year over year to $2.23, 3 cents above our estimate, and raised 2018 core FFO by 4 cents at the midpoint, which is 1.5% above our 2018 estimate.

The company announced a series of investments that make sense for the company's strategy. AvalonBay announced three new development starts totaling $265 million in projected costs, in line with our expectations for development starts for the company. This shows that while development is becoming harder for the industry to economically pencil out due to tightening lending standards and rising construction costs, AvalonBay has been able to source continued development activity. Separately, AvalonBay sold three assets for $307 million at a 4.7% cap rate, a larger amount at a better cap rate than we expected. Two of the announced development projects along with three of the disposed assets are in Massachusetts suburbs, which shows that AvalonBay can find development opportunities and recycle capital at attractive prices in the same markets. We believe AvalonBay can continue to turn over its portfolio without significantly changing its market exposure, which should help generate returns for shareholders over time.