EUR 850.00 For Business Accounts Only

Morningstar | Solid 4Q and Improving 2019 In Line With Our Expectations for AvalonBay

AvalonBay Communities' fourth-quarter results and 2019 guidance are both very much in line with our expectations. As a result, we don't plan any changes to our $191 fair value estimate for the no-moat company. Occupancy in the established portfolio remained flat at 96.1%, in line with our estimate, though rate growth was below our estimate at 2.7% growth for the quarter. Operating expenses were up 2.7%, slightly above our 2.6% estimate, leading to net operating income growth of 2.7% for the established portfolio. As a result, AvalonBay reported $2.31 core funds from operations for the fourth quarter, which was in line with our expectations.

Management set guidance for 2019, with revenue, expense, and NOI growth for the same-store portfolio all in the range of 2.5% to 3.5%. We are estimating 3.1% growth for all three metrics, so we are only slightly above the midpoint and well within the guidance range. Core FFO guidance for 2019 was set at $9.05 to $9.55, so our $9.45 estimate is higher than the midpoint but also within guidance. Our expectations of $1 billion of development starts for 2019 are also within management guidance of $850 million to $1.05 billion in development starts this year. We are encouraged that our views for 2019 are in line with management's views and expect 2019 to be another solid year for high-quality apartments.

AvalonBay provided additional color on market supply and demand dynamics that match our own thoughts on how the apartment market should perform this year. While 2018 surprised to the upside, with 2.6 million jobs added, job growth should be more modest in 2019 with only 1.8 million jobs expected to be added. Management expects this lower job growth in all of their markets, though Seattle and Northern California will see the biggest drop as hiring in the tech industries slows. However, this is offset by an expected increase in wage growth, which could be as high as 3% in 2019 for the U.S. Therefore, management believes that total income growth should stay steady around the 4.5% range for most markets with only Seattle seeing a meaningful decline to 5% income growth in 2019 from 7% growth in 2018. While development starts should slow as construction costs are now growing nearly 6% annually and with construction lending standards continuing to tighten, AvalonBay still expects that projects underway will continue and that supply in 2019 will pick up slightly from 2018 with only Boston expected to see supply decelerate this year. Still, embedded rent growth from the end of 2018 and the increased wage growth should lead to higher same-store revenue growth for all markets (except Southern California, which will be inline) with the total portfolio expected to achieve 2019 revenue growth 50 basis points higher than 2018. Most of these market dynamics match our own beliefs and what we have incorporated in our model for the company, so we have greater conviction about how 2019 apartment fundamentals are shaping up.