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Helped by growth in rental rates, AvalonBay Communities Inc. (AVB - Analyst Report) reported first-quarter 2014 core funds from operations (FFO) of $1.63 per share that came 7.9% ahead of the prior-year quarter FFO per share. The results were in line with the Zacks Consensus Estimate.

Improved results from its existing portfolio along with leasing from its developed communities have helped this residential real estate investment trust (REIT) post encouraging quarterly results. Including non-routine items, FFO per share more than doubled to $1.64 from 78 cents in the prior-year period.

Total revenue during the reported quarter increased 27.0% year over year to $400.7 million and came ahead of the Zacks Consensus Estimate of $394 million. Results were driven by the Archstone acquisition and new developments as well as growth in same-store revenues.

Quarter in Detail

Same-store rental revenues increased 3.7% year over year to nearly $235.0 million thanks to an escalation in average rental rates but partly dwarfed by a fall in economic occupancy. Average rental rates climbed 3.8% year over year, while economic occupancy declined 0.1%.

Same-store operating expenses moved up 6.5% year over year to $72.4 million and consequently, same-store NOI during the reported quarter rose 2.6% year over year to $162.7 million.

Notable Portfolio Activities in Q1

AvalonBay accomplished the development of 2 communities in Houston, TX, and Bloomingdale, NJ for a total capital cost of $119.0 million. The company also commenced construction of 4 communities in Seattle, WA, Roseland, NJ, Falls Church, VA and Marlborough, MA for an estimated total capital cost of $314.5 million. It further acquired land parcels associated with two apartment communities’ development for a total of $29.9 million as well as added 4 development rights.

AvalonBay also began the redevelopment of 2 Avalon communities (1,122 apartment homes in total) for a total capital cost of $32.6 million, prior to including any costs incurred before the redevelopment. On the other hand, AvalonBay sold Avalon Valley in Danbury, CT (268 apartment homes) for $53.3 million, leading to a gain of $37.9 million.


As of Mar 31, 2014, AvalonBay had no borrowings outstanding under its $1.3 billion unsecured credit facility. The company had around $476.9 million in unrestricted cash and cash in escrow as of that date. Moreover, the company’s annualized net debt-to-EBITDA was 5.7 times for the first quarter of 2014.


AvalonBay anticipates second-quarter 2014 FFO per share to range from $1.62 – $1.66, incorporating a cost of 2 cents for non-routine items. However, this is below the Zacks Consensus Estimate of $1.70 per share for the second quarter.

Nevertheless, management expects NOI from apartment homes being delivered for initial occupancy to be the major driver of its FFO growth in the rest of the year.

Our Viewpoint

Going forward, AvalonBay’s solid operating platform, development deliveries and favorable demographics along its markets keep us optimistic about its growth prospects. The Archstone acquisition is also projected to aid in top-line improvement.

Yet, with a considerable number of projects in the market nearing completion, we expect the supply to increase in the near term. This may lead to a slowdown in rent growth as companies would seek occupancy increases.

AvalonBay currently carries a Zacks Rank #3 (Hold). We now look forward to the results of other residential REITs – Equity Residential (EQR - Analyst Report), Essex Property Trust Inc. (ESS - Snapshot Report) and UDR, Inc. (UDR - Analyst Report), which are scheduled to report in the upcoming weeks.

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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