AvalonBay Communities: Earnings Preview

| About: AvalonBay Communities, (AVB)

AvalonBay Communities Inc. (AVB), a multifamily real estate investment trust (REIT), is scheduled to report its fiscal 2012 first quarter earnings results after the market closes on April 25. The current Zacks Consensus Estimate for the first quarter earnings is $1.24, representing year-over-year growth of 15.1%.

Fourth Quarter Recap

AvalonBay reported fiscal 2011 fourth quarter funds from operations (FFO) of $113.4 million or $1.19 per share, compared with $86.8 million or $1.01 per share 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. The reported quarterly FFO missed the Zacks Consensus Estimate by 2 cents.

For full year 2011, the company reported FFO of $414.5 million or $4.57 per share, compared with $338.4 million or $4.00 per share in the previous year. The reported fiscal FFO missed the Zacks Consensus Estimate by 3 cents.

Total revenues during the reported quarter increased 11.0% year over year to $251.4 million and missed the Zacks Consensus Estimate of $254 million. For full year 2011, total revenues increased 10.8% year over year to $968.7 million.

Agreement of Analysts

In the last 7 days, two out of 17 analysts covering the stock raised the earnings estimate for first quarter 2012, while none revised it in the opposite direction. For fiscal 2012, one out of 18 analysts covering the stock raised the earnings estimate in the last 7 days, while none decreased. This signifies that the analysts are bullish about the both the short- and long-term earnings prospects of the company.

Magnitude of Estimate Revisions

Earnings estimates have remained steady in the last 7 days for the first quarter at $1.24. However, for fiscal 2012, earnings estimates have inched up by a penny during the same time period to $5.43 per share, meaning that analysts are upbeat about the long-term performance of the company.

Moving Forward

We presently have a Neutral recommendation on AvalonBay, which currently has a Zacks #3 Rank that translates into a short-term Hold rating. We also have a Neutral recommendation and a Zacks #3 Rank for Apartment Investment & Management Co. (NYSE:AIV), one of the competitors of AvalonBay.

AvalonBay is one of the best-positioned apartment REITs in the U.S., primarily focusing on developing multi-family apartment communities for higher-income clients in high-barrier-to-entry regions. AvalonBay has Class A assets located in premium markets such as Washington DC, New York City and San Francisco, where the spread between renting and owning is still high despite home price declines.

In addition, AvalonBay has a reasonably strong balance sheet with moderate near-term debt maturities and adequate liquidity. Consequently, the company has the ability to fuel its expansion drive though inorganic growth.

However, AvalonBay has a huge development pipeline, which increases operational risks in the current credit-constrained market, exposing it to rising construction costs, entitlement delays, and lease-up risk. Consequently, we remain neutral on the stock for the long-term.