On Feb 20, 2013, we reiterated our long-term recommendation on
AvalonBay Communities Inc.
) at Neutral. This reflects the company's successful execution of
strategic efforts to enhance its portfolio and its healthy
balance sheet with adequate liquidity. However, short-term
revenue headwinds arising from acquisitions and huge development
pipeline, which will lead to an increase in operational risks,
remain the matters of concern.
AvalonBay's expert local operating teams and strategically
located Class A properties helped it realize superior
performances in 2012. It achieved same-store quarterly
improvement in rental revenues of 5.8% year over year
attributable to a 5.6% rise in average rental rates and a 0.2%
increase in Economic occupancy.
Northern California and Seattle regions remained the major
revenue growth drivers due to leasing of new units and portfolio
expansions. Going forward, we believe that its efficient
operating platform will help it keep posting better results and
this, in turn, will boost its financial results.
Moreover, in 2012, according to its repositioning strategy, the
company, along with
), entered into an agreement with Lehman Brothers Holdings Inc.
to acquire the entire ownership stake of Archstone Enterprise LP.
The deal is slated to close by the first quarter of this year.
The acquisition is expected generate decent revenue for AvalonBay
in the long run.
Also, management projected to continue its expansion spree with
estimated acquisitions worth $300 million of in-service
communities in the current year apart from the purchase of
Archstone portfolio. We believe that this portfolio repositioning
activity will improve the internal growth metrics, enabling the
company to emerge stronger once the real estate markets fully
In addition, AvalonBay has a reasonably strong balance sheet with
moderate near-term debt maturities and adequate liquidity.
At the end of 2012, the company had no amounts outstanding under
its $1.3 billion unsecured credit facility. Moreover, the company
enhanced its shareholders' value in the fourth quarter with a
10.3% hike in its dividend payout.
However, AvalonBay's fourth quarter 2012 FFO of $1.27 per share
missed the Zacks Consensus Estimate of $1.40. The results were
hurt by higher expenses related to the Archstone acquisition and
However, on a year-over-year basis, FFO increased 6.7%,
reflecting incremental contribution from newly developed and
acquired properties and a decrease in net interest expense. We
believe that the short-term revenue headwinds will limit the
stock's upside potential to some extent.
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Also, the company provided negative guidance for the first
quarter of 2013. AvalonBay expects FFO per share to be a loss of
$0.66-$0.62 in the upcoming quarter. The modest guidance
reflected the negative impact of Archstone acquisition charges.
Following the release of the fourth quarter and full year 2012
results, the Zacks Consensus Estimate for full year 2013 has
inched down 1.0% to $6.03 per share with 2 estimates moving north
and 3 moving south.
Also, the Zacks Consensus Estimate for full year 2014 fell 3.9%
to $6.91 per share as 2 estimates were revised downward. With the
Zacks Consensus Estimates going down for both full year 2013 and
2014, the company now has a Zacks Rank #3 (Hold).
Other Stocks to Consider
REITs that are currently performing well include
Simon Property Group Inc
). Both having 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.