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Ahead of the Bell: AvalonBay Communities

NEW YORK (AP) -- A Citi Investment Research analyst raised his rating and price target for AvalonBay Communities Inc., citing the apartment building owner's appealing stock price.

Michael Bilerman boosted AvalonBay to "Neutral" from "Sell" and increased its price target to $135 from $120. In a client note, the analyst said that the company's underperformance has brought about an attractive entry point for investors. For the year to date, AvalonBay's shares are down 5.5 percent. Its shares finished at $128.09 on Monday.

Bilerman said that the main issues impacting the stock are a disappointing same-store revenue growth outlook; overhang from the Lehman Estate which may eventually need to exit its equity position and anticipation that equity will be issued to fund the 2013 capital plan.

The analyst says that the impact from these issues is overdone and expects the stock will rise. He said that the same-store revenue growth outlook, which has a midpoint of a 4.3 percent, is down from 2012's 5.8 percent but is likely conservative. Bilerman also pointed out that the focus on the slowdown is overshadowing that AvalonBay's same-store revenue growth has remained historically strong, averaging 2.1 percent growth over the past 10 years.

The overhang from the Lehman Estate may be lessened if the Estate potentially gets creative in its liquidation. Bilerman said that the Estate could sell part of its equity stake to a long-term capital source and sell part through a secondary offering. Bilerman said that this would help get the Estate under a 5 percent ownership level, which could help remove the overhang.

The analyst also said that many people assumed that AvalonBay's approximately $800 million of capital needs in 2013 would be funded at least in part with the issuance of common equity. Bilerman said that the company has many alternatives to fund its capital needs, including common equity, preferred equity, debt issuance or additional asset sales. The analyst said that one should also keep in mind that the company's guidance assumes about $300 million in acquisitions, which could be lowered, which would then decrease its overall capital needs.

AvalonBay declined to comment on the views expressed by the analyst.