Avalonbay Surpasses Estimates


Avalonbay Communities Inc. (AVB), a leading multifamily real estate investment trust (:REIT), reported strong third quarter 2012 results with a 30.4% year-over-year increase in funds from operations (:FFO) to $140.2 million compared to $107.6 million in the year-earlier quarter. On a per share basis, FFO surged 23.1% to $1.44 during the reported quarter from $1.17 in the year-ago period.

The better-than-expected performance was primarily attributable to incremental contribution from newly developed and acquired properties and a decrease in net interest expense. The reported FFO for third quarter 2012 surpassed the Zacks Consensus Estimate by 4 cents. Total revenues during the reported quarter increased 11.6% year over year to $271.9 million and exceeded the Zacks Consensus Estimate of $265 million.

Same-store quarterly rental revenues increased 5.6% year over year to $194.8 million due to a 5.1% rise in average rental rates to $2,125 per unit. Economic occupancy increased 0.5% on a year-over-year basis to 96.3%. Same-store net operating income (:NOI) during the reported quarter surged 7.1% compared to the prior year.

Avalonbay started four new development projects during the quarter totaling 837 apartment homes for an estimated total cost of $258.9 million. These included Avalon at Wesmont Station II in Wood-Ridge, New Jersey; Avalon Bloomingdale in Bloomingdale, New Jersey; AVA 55 Ninth in San Francisco, California; and Avalon Morrison Park in San Jose, California.

At the same time, the company completed the construction of Avalon North Bergen in North Bergen, New Jersey, and Avalon Ocean Avenue in San Francisco, California for a total capital cost of $101.1 million.

Avalonbay started redevelopment activities during the quarter on The Avalon in Bronxville, New York. This redeveloped project has 110 apartment homes and is estimated to cost about $8.3 million.

The company also completed the redevelopment of five communities (1,034 apartment homes) for a total cost of $32.1 million. These included Eaves Foster City in Foster City, California; Eaves Santa Margarita in Rancho Santa Margarita, California; AVA Newport in Costa Mesa, California; Avalon Wilton I in Wilton, Connecticut; and Avalon at Lexington in Lexington, Massachusetts.

During the reported quarter, Avalonbay acquired four land parcels for $51.3 million. In addition, the company also acquired a joint venture property titled Avalon Del Rey in Los Angeles, California. Avalonbay has a 30% ownership stake in this 309 apartment home community.

As of September 30, 2012, Avalonbay had full availability under its $750 million unsecured credit facility and $714.0 million of unrestricted cash and cash in escrow. During the reported quarter, the company sold over 1.0 million shares for $141.87 each for net proceeds of $146.1 million. At quarter-end, the company had a total debt burden of $3.8 billion.

Avalonbay expects FFO for fourth quarter 2012 in the range of $1.40 to $1.45, while FFO for full year 2012 is expected in the range of $5.45 to $5.50.

We maintain our long-term Neutral rating on Avalonbay, which presently carries a Zacks #3 Rank that translates into a short-term Hold recommendation. We also have a Neutral recommendation and a Zacks #3 Rank for Apartment Investment & Management Co. (AIV), a competitor of Avalonbay.

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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