AvalonBay Sees Higher-than-Expected Q2 Rental Revenue Growth

In the recently-announced quarterly update, residential REIT AvalonBay Communities Inc.AVB noted that it expects total rental revenues for established communities in Q2 to climb 2.4-2.5% from the prior-year period.

The midpoint of the latest outlook denotes a 15 basis point expansion from what the company had previously projected for the second quarter when it provided the 2018 established communities total rental revenue growth outlook this January. The company reported a 2.4% increase in rental revenues for established communities in the first quarter.

Established communities refer to those consolidated communities which have stabilized occupancy as of Jan 1, 2017, and are neither executing nor planning any significant redevelopment work, and are not held for sale or planned for disposition in the current year.

Moreover, the company mentioned that it has begun construction on two new communities for an estimated total capital cost of around $205 million in the second quarter. On the other hand, the company sold two wholly-owned operating communities for approximately $195 million. Two other wholly-owned communities are under contract or in advanced marketing stages for a projected price of around $280 million.

Notably, in the peak leasing session, AvalonBay is expected to benefit from its high quality assets in premium locations, favorable demographics, household formation, recovering economy and job market growth.

However, new apartment deliveries are anticipated to remain elevated in the company's markets in 2018 and modestly descend in 2019. Specifically, the Metro New York, New Jersey and Mid-Atlantic regions are likely to remain turbulent amid rising supply of residential units in the upcoming quarters. In fact, in the Mid-Atlantic region, supply is expected to continue through 2019, while in New York, New Jersey market, supply might attain peak level this year, before declining in 2019. Additionally, supply continues to be the most noticeable in the urban sub-markets.

This high supply in a number of the company's markets is likely to put pressure on rental rates. Hence, growth in AvalonBay's stabilized portfolio is expected to remain modest in the near future. Furthermore, there is high concession activity amid higher supply, which remains a concern.

Nonetheless, this elevated supply has not only affected AvalonBay, but other residential REITs as well, including Equity Residential EQR and Essex Property Trust Inc. ESS , curbing their near-term growth momentum to some extent. And there seems to be no respite from this dreary environment any time soon, with aggressive deliveries anticipated to continue through early next year too.

In fact, according to a report from real estate technology and analytics firm - RealPage, Inc. RP - during the last half of 2017, across the nation's 150 largest metros "annual pace of completions" climbed above the 300,000-unit level. Further, through early 2019, "scheduled new supply" will keep adding on to the flow at about the same annual pace.

AvalonBay currently has a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

The company's shares have appreciated 2.3% in the past month compared with its industry 's growth of 1.1%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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