10/28/21 06:35 AM EDT

REIT RECAP | 10/27/21 | AVB 3Q21 RESULTS

Rob Simone, CFA

Takeaway: Solid quarter, remains our favorite Apartment long

AVB: Best Idea Long AVB reported a headline 3Q21 Core FFO ($2.06/share) beat of +$0.03/share (+1.3%) vs. Hedgeye and +$0.05/share (+2.4%) vs. consensus. Peeling back the layers a bit, it looks like $0.02/share of the beat relative to our model was driven by a lower share count, with the remaining net +$0.01/share from below-NOI line items + rounding error. So taken together a relatively in-line quarter, but again we keep stressing a focus on forward-looking leasing spreads as being especially critical at this point in the cycle for the Apartment REITs, or in the case of AVB "like-term effective rent change." These numbers indicate an improving forward growth profile for AVB similar to EQR and ESS (although for ESS the seq. monthly trend is positive but a little choppy), as the spreads front-run actual improvements in realized lease rates which drive revenue. The 1Q/2Q/3Q/October trend for AVB is -8.3%/-1.3%/+7.8%/+11%, so very positive from a RoC perspective. We think AVB and the other Coastals are moving into a 3-4 quarter period that could be the best we ever see from a SSNOI and earnings growth perspective. Other notes with the call at 1pm ET today:

In the same store portfolio it looks like we were just a little light on occupancy and rental rate growth by a few basis points, so essentially right on target. AVB picked up $+0.03/share in the non-same store portfolio relative to our model, however, as we had ~$200 million of disposition activity baked in the quarter which did not occur. The same store + non-same-store contribution netted to a zero delta, so all-in very in-line with our expectations amidst a rapidly improving trend in rental rate growth. We were off on NOI by ~$184k - better to be lucky than good.
FY21 Guidance: 4Q21 Core FFO projected in the range of $2.19 to $2.29 on SSNOI +5.5% to +7.5%, so as expected SSNOI growth now definitely inflecting positive after JUST missing the crossover point in 3Q (-0.2%). This compares to Hedgeye at $2.20 and +9% for 4Q21, so we need to (1) take numbers up but also (2) re-work the mix between same store and non-same store contribution. Consensus was at $2.13 on 4Q21 coming into the print - thanks for coming out!
AVB moved into the Dallas and Charlotte metro areas in the quarter, acquiring one 425-unit community in Flower Mound, TX and two communities totaling 429 units in Charlotte for a total of ~$274 million. Again just reading the tea leaves from a macro perspective, AVB's and EQR's capital recycling and redeployment efforts are telling you where the most favorable demographics and residential fundamentals are. Denver (+11.9%) and Southeast Florida (+17.4%) were by far the highest revenue growth markets in the quarter.
Bad debt is normalizing: AVB picked up +140bp of revenue growth contribution as uncollectible lease revenue moved from 2.77% in the prior year to 1.37% in the quarter. There are ~3 additional quarters of similar tailwind going forward as we fully lap the pandemic.