AvalonBay's Earnings Top, Guides High

Zacks

AvalonBay Communities Inc.’s (AVB) first quarter 2013 core funds from operations (:FFO) reached $1.36 per share, a cent above the Zacks Consensus Estimate. Including non-routine items, FFO per share descended 39.1% year over year to 78 cents from $1.28 for the prior-year period.

Results included the positive impact from community sales and related gains in 2013, a rise in net operating income (:NOI) from the Archstone Acquisition and existing and developed communities. However, acquisition costs and increased depreciation associated with the Archstone Acquisition acted as dampeners.

Total revenue during the reported quarter increased 23.9% year over year to $315.6 million and came ahead of the Zacks Consensus Estimate of $305 million.

Quarter in Detail

Same-store rental revenues increased 4.9% year over year to $205.8 million, thanks to an increase in average rental rates and economic occupancy. Average rental rates climbed 4.7% year over year, while economic occupancy advanced 0.2%.

Same-store operating expenses escalated 3.3% year over year to $62.8 million and consequently, same-store NOI during the reported quarter surged 5.6% year over year to $143.0 million.

The Archstone Aquisition

In Feb 2013, AvalonBay, along with Equity Residential (EQR) completed the acquisition of all the assets and assumed all of the liabilities of Archstone Enterprise LP. Particularly, AvalonBay acquired 40% of Archstone’s assets and liabilities. This included the direct and indirect interests in 64 operating communities, 6 communities that are under development and/or in lease-up currently. Furthermore, it includes interests in development rights and certain other joint ventures.

As part of its payment for the acquisition, AvalonBay issued 14.9 million shares of its common stock, assumed $3.5 billion principal amount of consolidated secured indebtedness, paid $749.0 million in cash and assumed certain other liabilities of Archstone. Notably, the first quarter results include around $69.3 million in costs related to the Archstone Acquisition.

Liquidity

As of Mar 31, 2013, AvalonBay had no amounts outstanding under its $1.3 billion unsecured credit facility. It had $541.1 million in unrestricted cash and cash in escrow as of that date.

AvalonBay repaid $100.0 million principal amount of its 4.95% coupon unsecured notes pursuant to their scheduled maturity in March. Moreover, in April, the company paid back a 4.69% fixed-rate, secured mortgage note in the amount of $170.1 million pursuant to its scheduled maturity.

Outlook

AvalonBay anticipates second quarter 2013 FFO per share to range from $1.49 – $1.53. For full-year 2013, management has revised its outlook upwards and now expects FFO per share to range from $4.98 – $5.28, up from $4.11 – $4.47 per share.

Our Viewpoint

We believe AvalonBay’s focus on expansion in the high barrier-to-entry regions of the U.S, will serve as a driving factor for its top-line growth. The Archstone deal can be regarded as a big move toward strengthening its presence in the upscale regions.

Also, the company has a strong balance sheet with adequate liquidity and limited debt maturities. Consequently, it has funds to capitalize on potential acquisition opportunities, which augur well for its top-line expansion. Yet, the company has a significant development pipeline, which increases its operational risks.

AvalonBay currently holds a Zacks Rank #3 (Hold). Other REITs that are performing better and are worth a look include Simon Property Group Inc. (SPG) and Acadia Realty Trust (AKR), both carrying a Zacks Rank #2 (Buy).

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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