AvalonBay Communities recently reported its Q2 results and on the earnings call, Timothy Naughton, the firm’s CEO, said that highlights for the quarter include core FFO growth of 6.7% or $0.04 per share above the midpoint of our Q2 outlook. Same-store revenue growth came in at 2.5%, which was about 20 basis points higher than budget for the quarter and roughly 30 bps above budget year-to-date, he said.
“We completed $140 million in new development at an average initial projected yield of 6.4% and so far this year completed $430 million at a projected yield of 6.5%,” he said. “And then, lastly, we raised about $300 million of external capital through the sale four communities at an average cap rate of 4.7% as the transaction market continues to be very healthy.”
On the firm’s outlook update for the full year, core FFO growth is now projected at 4.1% or 50 basis points above our original outlook, he continued. “Same-store revenue and NOI growth are expected to come in at 2.4% and 2.3% respectively, both up by about 30 basis points from our original outlook. Expected NOI from development is unchanged at $52 million as deliveries, occupancies, and rates are all largely consistent with plan.”
As for projected development starts for the year, he says things are still tracking at a plan of roughly $900 million. “Lastly, planned external funding for the year is now $950 million.” He pointed out that that number was about $300 million less than originally expected, mainly due to reduced development spend at some new developments that started or expected to start a little later in the year than we had originally planned.
He also pointed to higher than expected stabilized community NOI from same-store and redevelopment, which he said was driving the upward revision with virtually all of that coming from stronger-than-expected revenue growth. “Minor revisions to our capital plan and updated overhead projections more or less offset one another for the balance of the revisions to our forecast.”
As for what is driving the upward revision? “It’s really coming from stronger-than-expected economic and job growth,” he said on the call. “And if you look at it nationally, job growth is expected to be about 400,000 jobs or about 20% higher than initial forecast that was embedded in our original outlook. And about 150,000 jobs or about 30% higher than originally anticipated in our markets, which are even stronger.”
On the supply side, in looking at projected deliveries in the REIT’s markets, he said they expect to be off by about 5% from what the REIT had anticipated at the beginning of the year. “And so that the operating performance is really being driven by stronger-than-expected fundamentals on both the demand and supply side.”