It's no secret that apartment developers are starting to postpone or even shutter new projects as banking financing dries up.
For apartment REITs with cash, like Arlington, Virginia–based AvalonBay Communities, this provides a potential opportunity.
“Some of these dropped land contracts are starting to come back to the market with much lower pricing expectations,” said Matt Birenbaum, chief investment officer for AVB, on the company’s first quarter 2023 earnings call last month. “We've already been able to take advantage of several of these situations with recent additions to our development pipeline and we do expect to see more as the market adjusts.”
Discount land prices aren’t the only way the construction slowdown is helping AVB, according to Birenbaum. He said the company is starting to see “retraction” in subcontractor pricing after three years of outsized increases.
“An environment where capital is scarce and certainty of execution becomes more critical, both to land sellers and subcontractors, plays well to our strengths as both the developer and the general contractor,” Birenbaum said. “And we have traditionally seen some of our most profitable investment opportunities when these more challenging cyclical conditions have prevailed.”
As AVB prepared for future opportunities, it also posted strong numbers in Q1. Here are three other major takeaways from AVB’s call:
Market dynamics hold up
Of the three REITs — including Memphis, Tennessee–based MAA and Denver-based UDR — that released earnings on the same day two weeks ago, “AVB posted the best blended rent growth and momentum,” according to Haendel St. Juste, managing director of REITs for investment bank Mizuho Securities.
AVB tallied blended rent growth of 4.2% in February, 4.6% in March and 4.9% in April. Of the 16,000 leases signed in the company’s portfolio, the average concession was less than $200.
“About 30% of the concession volume that we experienced in the quarter in terms of leases that were captured were spread across Seattle and the Bay Area, particularly in San Francisco,” said AVB Chief Operating Officer Sean Breslin on the call. “So that’s where most of the volume is, frankly.”
However, the concession picture is improving. Of leases generated in the weeks prior to the earnings, less than 10% included concessions, according to Breslin. And those were still concentrated in San Francisco and the Pacific Northwest. “Those are the two places where we’re focused on the most in terms of moving volume, but it’s not a significant issue elsewhere,” Breslin said.
AVB announced last month that it had entered into an agreement for its centralized service center to support Atlanta-based Gables Residential’s portfolio of over 25,000 apartments.The REIT will handle customer service and account inquiry support, billing, legal and eviction support, delinquency notification and payment and security deposit processing services.
BY THE NUMBERS
|Net operating income||$430.4 million||10.7%|
|Operating expenses||$192.5 million||7.1%|
|Funds from operations||$2.54||13.4%|
|Rent per unit||$2,859||0.7%|
|Occupancy rate||96.1%||-10 bps|
AVB will not handle the operational and business decisions related to the Gables portfolios. “We are not offering property management services under our agreement with Gables nor do we intend to do so,” AVB CFO Kevin O'Shea said on the call. “All business and operational decisions related to AvalonBay and Gables’ portfolios will continue to be managed separately by each company.”
O’Shea said AVB could “create additional value for the shareholders by offering support services to other institutional multifamily owners now and in the future,” though it isn’t currently “proactively looking” for other opportunities.
“We do hope, looking ahead, to be able to do more business like this over time,” O’Shea said. “And we think it does make sense for us to do it because it allows us to scale and more fully invest over time and import capability that allows us to further differentiate ourselves from our peers.”
In addition to the Gables agreement, AVB is also seeking other ways to expand outside of its traditional in-house development platform. “We're looking for ways to continue to drive earnings profit and ways to differentiate that we think can lead to long-term value creation,” CEO Benjamin Schall said on the call.
Like some of its REIT peers, AVB is partnering with third-party developers. The outside developers source and construct the property, which the REIT will ultimately own and operate. In Q1 2023, 345-unit Avalon Lake Norman, located in Mooresville, North Carolina, was being developed through the program.
AVB also provided three mezzanine loans in the first quarter, totaling up to $92.4 million, for outside developers in its markets. The company has funded $42.1 million of these commitments as of the end of March.
AVB is “leveraging its development DNA in new ways,” according to Schall.
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