When AvalonBay Communities and Equity Residential first announced their merger in May, one of the original selling points was the potential for synergies from corporate overhead savings, property management, overhead efficiencies and property expense savings, according to Vivmark President and CEO Benjamin Schall.

In the newly formed REIT’s first earnings release on Nov. 4, Vivmark increased its expected annual net run-rate operating efficiencies by $10 million to $135 million, driven by increased portfolio net operating income opportunities.

It also raised its targeted property NOI synergies from $60 million to $70 million, reflecting additional opportunities identified as the company took a deeper look at its operations.

“The incremental $10 million comes primarily from new identified opportunities in telecom, streaming and parking, and this is all beyond our original $60 million target,” Executive Vice President and Chief Operating Officer Michael Manelis said on a Thursday earnings call. “Our existing merger-related initiatives across procurement, centralized operations and maintenance also remain on track.”

Vivmark also expects total merger-related costs to fall $25 million below its original expectation of $750 million, per its earnings release.

“The combination of higher synergies and lower transaction costs increases the projected run rate merger creation to approximately 3% from 2%, and increases estimated upfront value creation by an additional $200 million to approximately $1.45 billion,” Schall said on the earnings call.

While efficiencies were a major topic of discussion on Vivmark’s call, the new REIT’s management pointed to improving rent trends across its markets. The company raised its full-year same-store revenue growth guidance by 20 basis points to 2.2%. With increasing pricing power, massive scale and a strong credit rating, Vivmark is positioning itself for further growth in the years ahead.

Rents show improvement

In Q3, Vivmark saw “improved pricing momentum across much of the portfolio,” with its blended rate growth rising 150 basis points year over year to 3.1%, according to Manelis.

“More importantly, our current net effective asking rents are running 4% above last year, reflecting continued pricing strength as we move through the fall leasing season,” Manelis said.

Q3 turnover declined 50 bps YOY to 12.7%, putting the REIT on track for “another year of historically low turnover,” according to Manelis. With strong retention, Vivmark is reducing turnover-related costs. 

“Equally encouraging, rent-to-income ratios remain healthy, supporting the underlying stability of our rent roll,” Manelis said. “And with homeownership affordability remaining challenged, we're continuing to see historically low levels of residents moving out.”

In what is becoming a theme of this round of earnings calls for bicoastal REITs, Northern California was the top market for Vivmark in Q3, posting revenue growth of 7.8% YOY, according to a company filing with the Securities and Exchange Commission. The New York City-New Jersey region was Vivmark’s second-best performer with 3.2% revenue growth. Boston, at 1.8%, was third, per the SEC filing.

“Northern California and New York continue to demonstrate strength, while we're seeing signs of stabilization in many of our more supply-challenged markets,” Manelis said.

Denver was Vivmark’s weakest performer, with revenue down 6.2% YOY, followed by North Carolina at -1.2% and Texas at -0.3%. 

The mid-Atlantic region, with blended rate growth at 0.4% and revenue growth of 0.6%, has not yet seen pricing power materialize, even as new deliveries declined by 65%, according to Manelis.

“While the reduction in supply remains very supportive, the market clearly has just taken longer than expected to absorb the kind of previously delivered units,” Manelis said. “We did have a little bit of pricing power boost at the end of the peak leasing season, but it was pretty short-lived.”

Going into Q4, Vivmark saw its blended rates retreat 60 bps. “Sitting here today, I would expect that the fourth quarter lands somewhere around a 1.25% blend [and] probably puts us on track for a full-year blended rate increase about 2.25%, maybe a little bit above that,” Manelis said.

Portfolio growth

In Q3, Vivmark sold two properties, totaling 467 units, for $208 million, per its release. The REIT started one property, totaling 281 units, at a total capital cost of $98 million. It completed two properties, totaling 761 homes, for $291 million and one partially owned property with 270 units for $122 million.

Currently, Vivmark has $4.4 billion worth of projects underway “with an average stabilized yield north of 6%, which was substantially funded at yesterday's cost of capital,” Schall said. “For 2027, these projects are expected to generate an incremental $70 million of NOI, which we expect to directly contribute to outsized earnings growth next year.”

Vivmark expects to eventually double development activity, taking advantage of its access to capital, lower cost of capital and capabilities to deliver more earnings growth per share through its development channel, according to Schall. “In order to do that, we need to make sure that we're allocating capital appropriately,” he said.

Right now, Vivmark controls more than $4 billion in development rights, Executive Vice President and Chief Development Officer Matt Birenbaum said on the call. 

“A lot of those could start next year, and what we're looking at is a mix next year that's likely a little heavier to California, where operating fundamentals are strong, almost no new supply, and those are markets where cap rates and yields are a little bit lower,” Birenbaum said.

Currently, Vivmark’s starts have been centered on the mid-Atlantic through New Jersey and Boston, though it could look to other parts of the country as well. The firm is looking for yields in the high-6% to low-7% range, Birenbaum said.

“We have a couple of sizable starts potentially in South Florida in the first half of next year,” Birenbaum said. “That's also very stable.”

On Aug. 18, S&P Global Ratings raised Vivmark’s long-term issuer credit rating to “A” with a stable outlook from “A-” for both AVB and EQR, which should allow the firm to pursue development, investment and capital opportunities, Executive Vice President and CFO Kevin O’Shea said on the call.

“With an A credit rating and more than $2 billion of annual leverage-neutral investment capacity, we can remain patient and highly selective in challenging environments and act with conviction when opportunities are compelling,” O’Shea said.

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