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Growth & Income

AvalonBay Communities Inc. (AVB - Analyst Report) expects to hike its dividend by 8% – 12% in the first quarter of 2013, based on its solid operating platform and the recent acquisition of Archstone. Currently, this Zacks Rank #2 (Buy) REIT pays a regular quarterly dividend that yields 2.9% annually. The company reported impressive third-quarter results in October and consequently witnessed positive earnings estimate revisions for 2013.

With the solid dividend return and an expected long-term FFO growth rate of around 10.9%, AvalonBay appears to be a promising pick for investors seeking both growth and income.

Impressive Third Quarter Earnings

AvalonBay is scheduled to release its fourth-quarter 2012 results on Jan 30. The Zacks Consensus Estimate for fourth quarter FFO is currently pegged at $1.40 per share.

On October 24, AvalonBay reported strong third-quarter FFO per share of $1.44, topping the Zacks Consensus Estimate by 2.9% and the year-ago FFO by 23.1%. The better-than-expected performance was primarily due to incremental contribution from newly developed and acquired properties, as well as a decrease in net interest expense.

Total revenue increased 11.6% year over year to $271.9 million and exceeded the Zacks Consensus Estimate of $265 million. On a year-over-year basis, same-store quarterly rental revenues advanced 5.6% to $194.8 million, thanks to a 5.1% rise in average rental rates to $2,125 per unit.

Archstone Acquisition

In November, AvalonBay, along with Equity Residential (EQR), entered into an agreement with Lehman Brothers Holdings Inc. to acquire the entire ownership stake of Archstone Enterprise LP – one of the largest investors, developers and operators of apartment communities in the U.S. The deal will entitle AvalonBay to acquire 40% of Archstone’s assets and liabilities, while the remainder will be acquired by Equity Residential. The transaction is expected to be accomplished by the first quarter of 2013.

Considering the transaction, AvalonBay reaffirmed its FFO guidance for 2012 between $5.45 and $5.50 per share and fourth quarter FFO between $1.40 and $1.45.

FFO Estimates Moving Higher

The Zacks Consensus Estimate for 2012 is currently pegged at $5.45, representing year-over-year growth of about 19.3%. Moreover, the Zacks Consensus Estimate for 2013 advanced 0.7% to $6.17 in the past 60 days, suggesting year-over-year growth of around 13.1%.

Dividend Payment

AvalonBay hiked its dividend by nearly 9% to 97 cents per share in the first quarter of 2012. The current dividend rate affirms an annual yield of 2.9%. Furthermore, based on its solid operating platform and current trends as well as the Archstone portfolio acquisition, the company expects to enhance its first quarter 2013 common stock dividend in the range of 8%–12%.

Premium Valuation

Shares of AvalonBay currently trade at 22.0x 12-month forward earnings, a 27.9% premium to the peer group average of 17.2x. Its price to book ratio of 2.8 is on par with the peer group average. Given its strong fundamentals, the premium valuation is justified.

Moreover, the company has a trailing 12-month ROE of 7.8%, compared with the peer group average of 5.0%. This implies that the company reinvests its earnings more efficiently than its peer group.

AvalonBay has been continuously outperforming its 50 days moving average since the middle of last month.

Headquartered in Alexandria, Virginia, AvalonBay Communities is a real estate investment trust that is engaged in developing, redeveloping, acquiring and managing apartment communities in high barrier-to-entry markets in the U.S. It was founded in 1978 and, as of Sep 30, 2012, the company owned or held ownership interests in 205 apartment communities, with 60,101 apartment homes in about nine states in the U.S. and the District of Columbia, including 22 communities under construction and seven communities under redevelopment. The company has a market cap of about $15.3 billion.


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