AvalonBay Earnings: Rent, Revenue, Operating Expenses, and Net Operating Income All Up Around 5%

Third-quarter results for AvalonBay Communities AVB were relatively in line with our expectations, leading us to reaffirm our $233 fair value estimate for the no-moat company. Same-store occupancy fell 20 basis points sequentially to 95.7% in the third quarter, slightly worse than our estimate of 95.9%. However, rental rates for the same-store portfolio were up 5.4% year over year, slightly better than our estimate of 5.1% growth, and same-store revenue increased 5.2% year over year, slightly better than our 5.1% estimate. Same-store operating expenses were up a similar 5.0%, leading to same-store net operating income growth of 5.3% that was slightly better than our estimate of 4.8% growth. AvalonBay reported normalized funds from operations of $2.66 per share in the third quarter, $0.04 better than our $2.62 estimate for the quarter.

AvalonBay completed three development projects during the quarter that were constructed for $302 million. Also during the quarter, the company started construction on two new development projects that have an initial total anticipated capital cost of $268 million. As a result, the company’s current development pipeline of 16 properties has an estimated total cost of $2.257 billion, which is approximately the size the company has kept the pipeline at since 2019 but is below the $4.0 billion peak the company reached in 2017. We will note that the average anticipated development yield on the pipeline of projects increased to 6.0% in the third quarter from 5.8% in the second quarter, so we are encouraged that management can find high-yielding projects at a time when construction costs are very high and believe in managers’ ability to hit their targeted yields given their lengthy record of success with their development pipeline.