Buy This REIT Despite Near Term Headaches
Adnan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
AvalonBay Communities (NYSE: AVB) operates as an equity real estate investment trust that develops and manages multi-family communities in the high barrier-to-entry markets in the US. The company has a large concentration in New England, New York, New Jersey, Washington DC and the Midwestern regions. These are the regions with limited new supply of apartment homes, and lower housing affordability in these markets will result in higher growth in cash flows relative to other markets.
UDR (NYSE: UDR) and Equity Residential (NYSE: EQR) are among the closest peers of AvalonBay Communities. Both disclosed their fourth quarter performance Feb. 5. In my article on UDR, I noted that it has a well diversified apartment portfolio both in terms of asset types and geographical distribution. The company’s reported funds from operations (FFO) of $0.35 remained $0.02 behind what Street was expecting. Both the bottom line and rental income surged 2.3% and 7% compared to the prior year. According to the company’s guidance, the three year outlook remains solid.
Equity Residential’s reported FFO of $0.94 per share for the fourth quarter climbed from $0.64 per share a year ago. The bottom line of $365.98 million or $1.17 per share is up from the prior year’s $99.02 million or $0.33 per share. The top line, compared with a year ago surged 11% to $547.65 million. The company expects normalized FFO of $0.62 to $0.66 per share. Equity Residential is another REIT which invests in high growth apartment properties in the US.
Recent Quarter’s Performance
The company reported modest fourth quarter 2012 performance on Jan. 30. Higher expenses related to Archstone acquisition and Sandy storm are said to be the reason for such modest performance.
The reported revenues of $275.8 million advanced 7.9% year over year, while FFO were $1.27 per share. Same-store rental revenues increased 5% over the prior year, largely due to increase in average rental rates and economic occupancy. While average rental rates advanced 4.7% over the previous year, economic occupancy edged up 0.3% over the same time period. Same-store net operating income surged 5.9% year over year. The fourth quarter NOI was 136.4 million, while average rentals and economic occupancy touched $2127 per unit and 96.3%, respectively.
During the fourth quarter of the prior year, AvalonBay along with its closest peer, Equity Residential, entered into an agreement to buy the entire stake of Archstone Enterprise. The acquisition incurred costs worth $0.16 per share during the fourth quarter. Archstone happens to be one of the largest developers and manager of apartment communities in the US. The acquisition transaction is expected to be completed in the first quarter of the current year.
In a deal amounting to $40.3 million, AvalonBay acquired Eaves Burlington located in Burlington, MA. Eaves happens to be a garden-style community. The company sold two communities, Avalon Wildreed and Avalon Highgrove, for $94.5 million. Additionally, AvalonBay realized residual income from interest of almost $1.9 million associated with the sale of a community in Kirkland.
Construction work started on three more communities, totaling 696 apartment homes costing $202.8 million, while work on two communities was finished during the quarter. During the fourth quarter, AvalonBay started redevelopment of two communities, while redevelopment work on four communities was finished during the quarter.
At the end of the fourth quarter, the company had $2.8 billion of unrestricted cash and cash in escrow, while AvalonBay had no amounts outstanding under its $1.3 million unsecured credit facility.
For the first quarter of 2013, AvalonBay expected FFO to be a loss within $0.62 and $0.66 per share. The loss was mainly blamed on the cost incurred from the acquisition of Archstone. Based on the 3.5% to 5% growth in same-store rental revenues and same store NOI growth between 4% and 5.5% for the full year 2013, FFO per share is expected to be within the range of $4.11 and $4.47. This is a decline from 2012’s FFO per share of $5.32.
I believe costs related to the Archstone acquisition will depress the stock price and the company’s financials in the near term, but the company’s focus on expansion in the high barrier-to-entry regions will drive the top line. In this regard, the Archstone deal will strengthen the company’s presence in those targeted high barrier-to-entry regions. Therefore, I believe the company presents a long-term investment opportunity.
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