Earlier today, the two largest apartment REITs, Chicago-based Equity Residential (EQR) and Arlington, Va.–based AvalonBay Communities (AVB), talked about their fourth-quarter earnings and 2012 projections. The results didn’t disappoint.
AvalonBay’s same-store net operating income (NOI) increased 10.1 percent compared with the fourth quarter of 2011, and its revenues rose 6.2 percent. The company’s big news was its introduction of two new rental lines—the “AVA” and “eaves.” AVA will be designed for urban renters wanting to live in cutting-edge areas, whiles eaves will provide housing in more suburban areas for the cost-conscious.
New CEO Tim Naughton said rents and valuations recovered to pre-downturn levels during the year. Fundamentals were aided by homeownership rates dropping 50 basis points and job growth moving 2 percent for the younger cohort that AVB hopes to attract. “Rental growth was stronger among that important group,” Naughton said on today’s conference call.
Avalon saw 3.1 percent sequential growth in San Francisco and a 0.8 percent decline in Chicago. Its rates and occupancy were up in Boston; the Washington, D.C., metro; and San Jose, Oakland–East Bay, Los Angeles, and Orange County, Calif. For 2012, it expects Northern California to post 7 to 8 percent growth; Washington, D.C., to come in at around 4 percent; and the remainder of its portfolio to be at 5.5 to 6 percent. Overall, AVB's assumptions included same-store NOI growth of 6 to 8 percent and continued development and redevelopment.
EQR reported that same-store NOI increased 7.7 percent, while same-store revenues went up 5.8 percent, comprising a 5.4 percent increase in rents and a 0.4 occupancy increase. Occupancy was 95.0 percent versus 94.6 percent in the fourth quarter of 2010 and 95.4 percent in the third quarter of 2011. Revenue growth was best in San Francisco, with 10.2 percent growth, and Denver, with 8.9 percent growth. EQR's weakest markets were suburban Maryland and Inland Empire, Calif., both at 2.6 percent, and San Diego, at 2.8 percent.
Both REITs had strong indicators for 2012, as well. Both AVB and EQR bought land for development. For next year’s starts, both firms are projecting yields between 6 and 7 percent on current rents.
EQR said its rents were only at 17.2 percent of incomes, giving it room to push further. Its renewal increases were up 6 percent in the fourth quarter but jumped to 6.7 percent in January. Avalon said its renewal letters for Feb. 2, 2012, quoted 6 to 7 percent rent increases; the company expects an erosion of only around 50 basis points.