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On Aug 13, Zacks Investment Research upgraded AvalonBay Communities Inc. (AVB - Analyst Report) to a Zacks Rank #2 (Buy). This apartment real estate investment trust (REIT) posted decent second-quarter 2013 results and raised its outlook for the year. We believe any short-term weakness in the price (the stock was down 1.01% during yesterday’s regular trading session) should be viewed as a good buying opportunity given its solid growth prospects in the multifamily apartment sector.

Why the Upgrade?

Aided by growth in rental revenue, AvalonBay reported core funds from operations (FFO) of $1.62 per share in the second quarter of 2013 that was 20.9% ahead of the prior-year quarter figure. Improved results from its operating portfolio and leasing of new development communities have helped the company post encouraging quarterly results. Including non-routine items, FFO per share ascended 15.7% year over year to $1.55 from $1.34 in the prior-year period.

Total revenue during the reported quarter increased 49.0% year over year to $390.1 million and same store revenue and net operating income (NOI) results have surpassed expectations. Therefore, prompted by decent multi-family operating fundamentals, the company raised its revenue, NOI and adjusted FFO growth outlook. This upward revision of the guidance also boosts investors’ confidence.

The company, which along with Equity Residential (EQR - Analyst Report) closed the Archstone acquisition in February, continues to aim for expansion in the high barrier-to-entry regions of the U.S. Moreover, its decent operating platform and prospects for growth in the multifamily sector keep us optimistic.

Following the solid performance and guidance hike analysts became more constructive on the stock’s future performance. This is evident from the movement witnessed in the Zacks Consensus Estimate that remained flat at $6.19 for 2013 and rose 0.1% to $6.91 per share for 2014 in the past 7 days.

Additionally, the long-term earnings growth forecast for the company is 9.28%. Hence, the favorable estimate revisions, driven by positive second-quarter results and expansion efforts made way for the upgrade in the rank.

Other Stocks to Consider

Apart from AvalonBay, the other stocks worth considering in the REIT industry include BRE Properties Inc. and UDR, Inc. (UDR - Analyst Report), both carrying a Zacks Rank #2 (Buy).
Note: FFO, a widely used metric to gauge the performance of REITs, are obtained after adding depreciation and amortization and other non-cash expenses to net income.

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