Avalonbay Communities

Shares of Avalonbay Communities Inc. ( AVB - Analyst Report ) have been on a long-term uptrend since mid-2010, barring volatility during late 2011 when the industry was marred by incessant fears of a double-dip recession. The stock is currently trading at a 52-week high of $149.05. With a decent dividend yield of 2.6%, this apartment REIT (real estate investment trust) promises to be a solid pick for investors seeking both growth and income.

Solid first quarter 2012 results, including an 18.5% year-over-year jump in funds from operations (FFO), add further zing to this Zacks #2 Rank (Buy) stock. Earnings are presently expected to grow 19.7% and 12.3% for 2012 and 2013, respectively.

Strong First Quarter

Avalonbay reported strong first quarter results on April 25, with a 10.5% year-over-year growth in total revenues to $252.5 million. Same-store quarterly rental revenues increased 6.6% year-over-year to $179.5 million, due to a 6.4% rise in average rental rates to 2,022 per occupied home. Same-store NOI (net operating income) increased 10.2% year-over-year to $125.4 million.

Funds from operations (FFO) came in at $1.28 per share, surpassing the Zacks Consensus Estimate by 3.2%. This also compared favorably with year-ago FFO of $1.08 per share. Economic occupancy during the quarter, which represents actual rental revenues recognized as a percentage of gross potential rental revenues, remained fairly high at 96.2%.

For the second quarter of 2012, Avalonbay expects FFO to be in the range of $1.30 to $1.34.

Earnings Estimates Inching Higher

Analysts have revised their earnings estimates higher for both 2012 and 2013, driving the stock to a Zacks #2 Rank (Buy). Over the past 90 days, the Zacks Consensus Estimate for 2012 increased 0.9% to $5.47, implying a year-over-year growth of 19.7%. For 2013, the Zacks Consensus Estimate has increased 0.8% to $6.14 over the same time period, representing a year-over-year growth of 12.3%.

Dividend Payout

Avalonbay paid a dividend of 97 cents per share in the first quarter of 2012, which marked an 8.7% increase over the year-ago quarter. Since 1998, the company has paid an uninterrupted quarterly dividend, along with a special dividend of $1.81 per share in December 2008. The current dividend payment affirms a yield of 2.6%.

Premium Valuation

Shares of Avalonbay currently trade at a premium on a price-to-earnings (P/E) and price-to-sales (P/S) basis. On a forward P/E basis, shares are trading at a forward P/E of 27.24x versus the peer group average of 19.72x. On a P/S basis, shares are trading at 14.21x versus 8.71x for the peer group average. A healthy earnings growth prospect warrants the premium valuation of the company.

Since January 20, 2012, Avalonbay shares have consistently fared better than the simple moving average for 200 days, or SMA (200). In addition, the stock has outperformed the S&P 500 index since August 20, 2011. The year-to-date return for the stock is noteworthy at 14.13% compared to an S&P 500 tally of 7.88%.

The Bottom Line

With a favorable supply/demand relationship, rising earnings estimates, robust growth projections and a healthy dividend yield, Avalonbay offers an enticing upside potential going forward. In addition, a continued focus on some of the premium markets of the country in major metropolitan areas bode well for its long-term growth.

Headquartered in Alexandria, Virginia, Avalonbay focuses on developing multi-family apartment communities for higher-income clients in high barrier-to-entry regions. These markets include the Northeast, the Mid-Atlantic, the Midwest, Pacific Northwest, Northern California and Southern California regions of the U.S. As of March 31, 2012, the company owned or held ownership interests in 199 apartment communities, with 59,090 apartment homes in about 10 states in the U.S. and the District of Columbia, including 20 communities under construction and 10 communities under redevelopment. The company currently has a market cap of $14.21 billion.