AvalonBay Communities Inc. (AVB), a leading real estate investment trust (REIT), reported fiscal 2010 fourth quarter funds from operations (FFO) of $1.01 per share, which was in line with the Zacks Consensus Estimate. Fund 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.
We cover below the results of the recent earnings announcement, as well as the subsequent analyst estimate revisions and the Zacks ratings for the short-term and long-term outlook for the stock.
Earnings Report Review
Total revenues during the reported quarter increased 8.2% year-over-year to $231.9 million and exceeded the Zacks Consensus Estimate of $230 million. For full year 2010, total revenues increased 5.2% year-over-year to $895.3 million and exceeded the Zacks Consensus Estimate of $889 million.
Same-store quarterly rental revenues increased 2.5% year-over-year due to a 2.9% rise in average rental rates, partially offset by a 0.4% decrease in economic occupancy. Same-store operating expenses increased 1.7% during the quarter compared with the year-ago period, while net operating income (NOI) increased 2.9% year-over-year.
Earnings Estimate Revisions: Overview
Fiscal earnings estimates have moved up for AvalonBay since the earnings release, meaning that analysts are bullish about the long-term performance of the company. Let’s dig into the earnings estimate details.
Agreement of Estimate Revisions
In the last seven days, fiscal 2011 earnings estimates were raised by 11 analysts out of 17 covering the stock, while none had lowered the same. For fiscal 2012, seven out of 18 analysts covering the stock have revised their estimates upward, while none have lowered it during the same time period. This indicates a clear positive directional movement for the fiscal year earnings.
Magnitude of Estimate Revisions
Earnings estimates for fiscal 2011 have increased by 14 cents in the last seven days to $4.59. For full year 2011, AvalonBay expects FFO in the range of $4.50 to $4.75. For fiscal 2012, earnings estimates have increased by 12 cents to $5.15.
Management felt that the apartment sector should benefit in the coming quarters from continued economic recovery and the soft -for-sale housing market. Furthermore, the company expects its supply-constrained markets to outperform during the next few years, thereby beefing up its sustained long-term growth.
The long-term earnings estimate picture for AvalonBay is positive. AvalonBay has Class A assets located in premium markets, such as Washington, D.C., New York City and San Francisco, where the spread between renting and owning is still high despite home price declines.
The company is one of the leading multi-family REITs, focusing primarily on the high barrier-to-entry regions of the U.S., where there are limited new apartment construction activities. In addition, the company has a strong balance sheet with adequate liquidity and limited debt maturities. Consequently, AvalonBay can capitalize on potential acquisition opportunities, which augurs well for its top-line growth.
However, a substantial number of apartment leases of AvalonBay are for a term of one year or less, enabling the residents to leave at the end of the lease term without any penalty. Consequently, its rental revenues are impacted by declines in market rents which affect its short-term profitability.
We maintain our "Neutral" rating on AvalonBay, which currently has a Zacks #2 Rank that translates into a short-term "Buy" rating, indicating that the stock is expected to outperform the overall U.S. equity market for the next 1-3 months. We also have a "Neutral" recommendation and a Zacks #3 Rank (short-term "Hold") for Apartment Investment & Management Co. (AIV), a competitor of AvalonBay.