As promised we are publishing more fulsome thoughts on the numbers and upside on Best Idea Long AVB after a very thorough re-scrubbing of our model:
- First and foremost, as Keith mentioned on The Call this morning, AVB is Top-10 in terms of signal strength and is Bullish Trade/Trend/Tail which trumps everything.
- Based on the math around rental rate growth, we see significant upward estimate revisions forthcoming in both FY22/23 based on the following:
- +11% SSRev growth, +4.7% SSExp growth and +14% SSNOI growth in FY22. No one is talking about mid-teens NOI growth next year, which is becoming increasingly likely and similar to EQR would be all-time record results off of a low base.
- +11% realized rental rate growth in FY22, driven by +10% effective rent change (leasing spreads) driving lease rates up +8.5%, +150bps of tailwind from lower concession levels, and +100bps of tailwind from lower bad debt/uncollectible revenue.
- The above assumption needs to be taken into context along with +8% effective rent change in 3Q21 and an acceleration to the low-double-digits in September, so not unreasonable and perhaps conservative.
- On the SSExp side we are modeling +5% y/y growth in property taxes and payroll.
- Finally, we model ~$95 million of NOI contribution from recently developed assets in lease-up + assets currently under development and set to deliver through the end of FY22.
- As show in Figure 1 below, we see a significant divergence in earnings growth relative to Street estimates though FY22 and into FY23. We are +8.5%/+8.3% above Consensus on FY22/23E Core FFO of $9.62/$10.26. These are among the largest potential upward estimate revisions we see in our REIT coverage right now along with AMH.
- From a return perspective as shown in Figure 2, the numbers support a mid-teens total return and IRR through year-end FY22 with an upward bias. Of note, if AVB was to remain consistent with its historical ~70% dividend payout on AFFO, this would support a +3% dividend increase next year and an +8-10% raise in FY23 following a flat dividend since 1Q20.
Figure 1: Core FFO Estimate Divergence
Source: FactSet, Hedgeye
Figure 2: AVB IRR Analysis
Source: Company reports, Hedgeye
Figure 3: Hedgeye REITs Position Monitor
Please call or e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
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