Morningstar | Strong Revenue Growth Across All Markets and Low Expense Growth Lead to Beat for AvalonBay
AvalonBay Communities reported first-quarter results ahead of our estimates, though we don't anticipate any material changes to our $194 fair value estimate and no-moat rating. Occupancy fell 10 basis points sequentially to 96.0% but rate growth went up 3.5% year over year. As a result, rental revenue grew 3.4% for the established communities, ahead of our 3.1% estimate. Operating expenses grew only 0.2%, well below our 3.1% estimate as payroll costs were down due to lower bonuses and lower utility costs due to solar and lighting initiatives reducing electricity costs and use. The lower expense growth led to AvalonBay reporting 4.9% net operating income that beat our 3.3% estimate for the quarter. The higher NOI growth combined with lower interest expense in the quarter led AvalonBay to reporting funds from operation of $2.30 for the quarter, beating our estimate by 6 cents. However, AvalonBay did not update 2019 guidance, so incorporating the first quarter beat would put our 2019 estimate on top of the midpoint of management's guidance.We like how broad-based the same-store revenue growth was across AvalonBay's portfolio. Rate growth was not only higher than we expected in every market but also higher than the full-year growth seen in 2018 for every market except for Oakland and San Diego. This led to revenue growth being at least 3.2% in every region. While we had assumed that the West Coast markets would continue to show strong growth given the presence of the booming tech industry, we are encouraged to see that the East Coast markets of New York and Washington, D.C., which had been weak for the past few years, are recovering faster than we anticipated. We like that AvalonBay can push rates and maintain occupancies despite elevated supply growth in most of its markets and think that the company should be able to produce solid internal growth this year.
AvalonBay Communities is a real estate investment trust. The company develops, redevelops, acquires, owns and operates multifamily communities primarily in New England, the New York/New Jersey metro area, the Mid-Atlantic, the Pacific Northwest, and Northern and Southern California. The company owns or holds a direct or indirect ownership interest in: operating apartment communities containing apartment homes in various states and the District of Columbia; communities under development; and rights to develop an additional communities.
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