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AvalonBay Surpasses Estimates

Zacks Equity Research

AvalonBay Communities Inc. (AVB), a leading multifamily real estate investment trust (:REIT), reported fiscal 2012 first quarter funds from operations (:FFO) of $122.0 million or $1.28 per share, compared with $93.5 million or $1.08 in the year-earlier quarter. Funds from operations, 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.

Excluding certain non-recurring items, FFO for the reported quarter was $1.29 per share. The recurring FFO for first quarter 2012 exceeded the Zacks Consensus Estimate by 5 cents. Total revenues during the reported quarter increased 7.9% year-over-year to $254.5 million and exceeded the Zacks Consensus Estimate of $253 million.

Same-store quarterly rental revenues increased 6.6% year-over-year due to a 6.4% rise in average rental rates. Economic occupancy increased 0.2% on a year-over-year basis to 96.2%. Same-store operating expenses decreased 1.1% during the quarter compared with the year-ago period, while NOI (net operating income) increased 10.2% year-over-year.

AvalonBay started a new development project during the quarter. Spanning 531 apartment homes, this new project (‘Avalon Mosaic’) is located in Tysons Corner, Virginia, and is estimated to cost $120.9 million when fully completed. The company also completed the redevelopment of two communities during the quarter for a total cost of $32.5 million.

During the quarter, AvalonBay Value Added Fund, L.P., a private discretionary real estate investment vehicle in which the company holds an equity interest of approximately 15%, sold 2 communities in Chicago, Illinois, for a GAAP profit of $1.1 million. These included the sale of ‘Avalon Lakeside’ (204 apartment homes) for $20.5 million and ‘Avalon Poplar Creek’ (196 apartment homes) for $27.2 million.

During the reported quarter, the company acquired ‘The Mark Pasadena’ – an 84 apartment home community in Pasadena, California, for $19.4 million. In addition, AvalonBay Value Added Fund II, L.P., a private discretionary real estate investment vehicle in which the company holds an equity interest of approximately 31%, acquired ‘Avalon Watchung’ – a 334 apartment home community in Watchung, New Jersey, for $63.0 million.

As of March 31, 2012, AvalonBay had $321.1 million of unrestricted cash and cash in escrow and a total debt of $3.4 billion. In addition, the company had full availability under its $750 million unsecured credit facility.

During the first quarter of 2012, AvalonBay repaid $179.4 million worth of the principal amount of its 5.5% coupon unsecured notes. The company also repaid a variable rate secured mortgage note at par, totaling $48.5 million in advance of its scheduled maturity in November 2039.

AvalonBay reported better-than-expected results during first quarter 2012, driven by higher rental demand as new supply remained muted. With apartment vacancies remaining at an 11-year low at 4.9% in first quarter 2012, AvalonBay expects FFO for second quarter 2012 in the range of $1.30 to $1.34.

We maintain our long-term Neutral rating on AvalonBay, which presently has 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), one of the competitors of AvalonBay.

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