Avalonbay Communities Inc. (AVB), a leading multifamily real estate investment trust (REIT), reported fiscal 2011 second quarter funds from operations (FFO) of $99.9 million or $1.13 per share, compared with $87.8 million or $1.04 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 $1.12 per share. The recurring FFO for second quarter 2011 was in line with the Zacks Consensus Estimate. Total revenues during the reported quarter increased 11.1% year-over-year to $244.9 million and exceeded the Zacks Consensus Estimate of $242 million.
Same-store quarterly rental revenues increased 4.5% year-over-year due to a 4.8% rise in average rental rates. Economic occupancy decreased 0.3% on a year-over-year basis to 96.1%. Same-store operating expenses decreased 2.5% during the reported quarter compared with the year-ago period, while net operating income (NOI) increased 8.0% year-over-year.
Avalonbay started 3 new development projects during the quarter totaling 506 apartment homes for an estimated total cost of $205.4 million. These included Avalon Garden City in Garden City, New York; Avalon Andover in Andover, Massachusetts; and Avalon Exeter in Boston, Massachusetts. At the same time, the company completed the construction of Avalon at the Pinehills II – a 91 apartment home community in Plymouth, Massachusetts for a total capital cost of $17.6 million.
During the reported quarter, Avalonbay acquired 2 land parcels for $33.3 million for the development of 808 apartment homes. Subsequent to the quarter-end, the company also acquired 2 additional land parcels for $22.6 million for the development of 658 apartment homes. Avalonbay also acquired Fairfax Towers, a high-rise community consisting of 415 apartment homes in Virginia, for $89.2 million.
Avalonbay started redevelopment activities during the quarter on Avalon at Nob Hill – a 185 apartment home community in San Francisco, California. Furthermore, the company also completed the redevelopment of Avalon Summit in Quincy, Massachusetts, and Avalon at Decoverly in Rockville, Maryland. These communities included 809 apartment homes and were redeveloped for a total cost of $15.2 million.
During the reported quarter, Avalonbay exchanged a portfolio of 3 apartment communities and a small land parcel for 6 apartment communities of UDR Inc. (UDR) and $26 million in cash. The transaction was structured as a Like Kind 1031 Exchange, whereby the property owner could defer the tax gained from the subsequent sale of the asset.
The Avalonbay properties included 2 apartment communities and a small land tract in metropolitan Boston and an apartment community in San Francisco. On the other hand, the UDR properties were mostly concentrated in the Southern California region (metropolitan Los Angeles, Orange County and San Diego).
The swap deal was part of the long-term strategy of the company to realign its portfolio according to its portfolio allocation goals. With the mutual exchange of properties, Avalonbay reallocated capital from markets where it had a comparatively large portfolio of higher price point assets to an under-allocated region with multiple price point assets.
More specifically, the company exchanged assets in Boston and San Francisco (areas with huge development pipelines) with that of Southern California – a region which is presently in the early stages of an economic recovery.
Also during the quarter, 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 Yale Village Townhomes in Rockville, Maryland for $49.5 million.
As of July 30, 2011, Avalonbay had $360.2 million of unrestricted cash and cash in escrow and a total debt of $4.0 billion. In addition, the company had full availability under its $1 billion unsecured credit facility. Avalonbay intends to replace the existing credit facility scheduled to mature in November 2011 with a new credit facility that would have a slightly less borrowing capacity to the tune of $750 million.
Avalonbay reported better-than-expected results during second quarter 2011 driven by the underlying strengths of apartment fundamentals. Avalonbay expects FFO for third quarter 2011 in the range of $1.15 to $1.18, while FFO for full year 2011 is expected in the range of $4.60 to $4.75.
We maintain our long-term ‘Neutral’ rating on Avalonbay, which presently carries a Zacks #2 Rank that translates into a short-term Buy recommendation and indicates that the stock is expected to perform well above the overall U.S. equity market for the next 1–3 months.
AVALONBAY CMMTY (AVB): Free Stock Analysis Report
UDR INC (UDR): Free Stock Analysis Report
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