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AvalonBay Misses, Hikes Dividend

Zacks Equity Research

AvalonBay Communities Inc. (AVB) reported modest results in the fourth quarter of 2012 as higher expenses related to the Archstone acquisition and Superstorm Sandy hurt its financials. The company reported fourth quarter 2012 funds from operations (:FFO) of $1.27 per share, missing the Zacks Consensus Estimate of $1.40 per share.

This multifamily real estate investment trust (:REIT), which inked a deal in November to purchase 40% of Archstone’s assets and liabilities, incurred acquisition costs worth 16 cents per share in the reported quarter. Yet, capitalizing on its strong operating platform and future growth potential, the company announced a 10.3% hike in its dividend.

On a year-over-year basis, fourth quarter FFO per share increased 6.7%, helped by an incremental contribution from newly developed and acquired properties and a decrease in net interest expense.

For full year 2012, AvalonBay’s FFO per share came in at $5.32, up 16.4% from $4.57 reported a year ago. This fell short of the Zacks Consensus Estimate of $5.45 per share as expenses remained high.

Total revenue during the reported quarter increased 7.9% year over year to $275.8 million and was almost in line with the Zacks Consensus Estimate of $276 million. For full year 2012, total revenue advanced 7.5% from a year ago to $1.06 billion and marginally topped the Zacks Consensus Estimate of $ 1.05 billion.

Quarter in Detail

Same-store rental revenues increased 5.0% year over year, thanks to an increase in average rental rates and economic occupancy.  Average rental rates climbed 4.7% year over year to $2,127 per unit, while economic occupancy advanced 0.3% to 96.3%. Same-store net operating income (:NOI) during the reported quarter surged 5.9% year over year to $136.4 million.

The Archstone Deal

In November, AvalonBay, along with Equity Residential (EQR), entered into an agreement with Lehman Brothers Holdings Inc. to acquire the entire ownership stake of Archstone Enterprise LP – one of the largest investors, developers and operators of apartment communities in the U.S.

The deal will entitle AvalonBay to acquire 40% of Archstone’s assets and liabilities, while the remainder will be acquired by Equity Residential. The transaction is expected to be accomplished by the first quarter of 2013.

Notable Transactions during 4Q

AvalonBay acquired a garden-style community – Eaves Burlington – located in Burlington, MA, for nearly $40.3 million.

Moreover, the company sold 2 communities – Avalon Wildreed and Avalon Highgrove, both located in Everett, Wash. for $94.5 million. In addition, it realized income from a residual profit interest of nearly $1.9 million associated with the sale of a community in Kirkland, Wash.

AvalonBay commenced the construction of 3 communities during the quarter, totaling 696 apartment homes for an estimated total cost of $202.8 million. These included Avalon Wharton in NJ, Avalon Ossining in NY and AVA Little Tokyo in California.

Moreover, the company completed the development of 2 communities – Avalon Green II in NY and Avalon at Wesmont Station I in NJ – aggregating 710 apartment homes for a total cost of $166.1 million.

In addition, AvalonBay acquired 4 land parcels for $24.7 million. It started the redevelopment of 2 communities, totaling 1,096 apartment homes, for an estimated total cost of $31.7 million. Also, the company accomplished the redevelopment of 4 communities, totaling 1,111 apartment homes, for an aggregate cost of $41.3 million.


As of Dec 31, 2012, AvalonBay had no amounts outstanding under its $1.3 billion unsecured credit facility. It had $2.8 billion in unrestricted cash and cash in escrow as of that date. Notably, in December, the company entered into an amendment to enhance its unsecured credit facility, extend the term and reduce its interest expense and annual facility fee.

Moreover, to pre-fund the Archstone deal, AvalonBay raised $2.1 billion from a common stock offering of 16.7 million shares. It also issued $250 million principal amount of unsecured notes.

2013 Outlook

AvalonBay anticipates first quarter 2013 FFO to be a loss of 62 cents to 66 cents per share. This will mainly result from costs related to the Archstone acquisition.

For full year 2013, management expects FFO per share to range between $4.11 and $4.47, based on same store rental revenues of 3.5% to 5.0% and same store NOI of 4.0% to 5.5%. Notably, the full year 2013 FFO per share would represent a decline from the 2012 FFO per share of $5.32.

Dividend Raise

Concurrent with its fourth quarter earnings release, AvalonBay announced a 10.3% hike in its quarterly dividend rate to $1.07 per share from 97 cents paid earlier. The increased dividend will be paid on Apr 15, to common stockholders of record as of Mar 29.

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. Though the costs related to the Archstone deal will affect its financials in the near term, the deal can be regarded as a big move towards 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 augurs well for its top-line expansion.

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 Brandywine Realty Trust (BDN), both carrying a Zacks Rank #2.

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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