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Avalonbay Communities Inc. (AVB - Analyst Report), a leading multifamily real estate investment trust (REIT), reported fiscal 2011 third quarter funds from operations (FFO) of $107.6 million or $1.17 per share compared with $84.5 million or 98 cents in the year-earlier quarter. Fund 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 FFO for third quarter 2011 marginally missed the Zacks Consensus Estimate by a penny. Total revenue during the reported quarter increased 11.3% year-over-year to $251.1 million and exceeded the Zacks Consensus Estimate of $250 million.

Same-store quarterly rental revenues increased 5.8% year-over-year due to a 5.9% rise in average rental rates. Economic occupancy decreased 0.1% on a year-over-year basis to 95.7%. Same-store operating expenses decreased 0.9% during the reported quarter compared with the year-ago period, while net operating income (NOI) increased 9.3% year-over-year.

Avalonbay started 4 new development projects during the quarter totaling 921 apartment homes for an estimated total cost of $210.1 million. These included Avalon Irvine II in Irvine, California; Avalon Ballard in Seattle, Washington; Avalon Shelton III in Shelton, Connecticut; and Avalon Hackensack in Hackensack, New Jersey.

At the same time, the company completed the construction of Avalon Springs II – a 100-unit apartment in Wilton, Connecticut and Avalon Brandemoor II – an 82-unit apartment in Lynnwood, Washington for a total capital cost of $45.1 million.

During the reported quarter, Avalonbay acquired 6 land parcels for $65.3 million for the development of 1,740 apartment homes. Avalonbay started redevelopment activities during the quarter on Avalon Foster City in Foster City, California; Avalon at Ballston – Washington Towers in Arlington, Virginia; and Avalon Santa Margarita in Rancho Santa Margarita, California. These redeveloped projects have 933 apartment homes in aggregate and are estimated to cost about $28.4 million.

Furthermore, the company also completed the redevelopment of Avalon Princeton Junction in West Windsor, New Jersey; Avalon Commons in Smithtown, New York; and Avalon Pleasanton in Pleasanton, California. These communities included 1,280 apartment homes and were redeveloped for a total cost of $39.0 million.

During the reported quarter, the company sold 3 unimproved land parcels for $34.5 million, resulting in a profit of $13.7 million. Also during the quarter, Avalonbay Value Added Fund I, L.P., a private discretionary real estate investment vehicle in which the company holds an equity interest of approximately 15%, sold Avalon Redondo Beach – a 105-unit apartment home in Redondo Beach, California, for $33.1 million.

During third quarter 2011, Avalonbay Value Added Fund II, L.P., a private discretionary real estate investment vehicle in which the company holds an equity interest of approximately 31%, acquired Captain Parker Arms – a 94-unit garden-style community in Lexington, Massachusetts, for $20.8 million. Subsequent to the quarter-end, Avalonbay Value Added Fund II, L.P. acquired Highlands at Rancho San Diego – a 676-unit apartment home in San Diego, California, for $124.0 million.

The company replaced its existing $1 billion credit facility scheduled to mature in November 2011 with a new 4-year $750 million credit facility during the quarter. The new credit facility has an accordion feature to extend the maturity by a year as well as extend the borrowing capacity to $1.3 billion. As of September 30, 2011, Avalonbay had full availability under its credit facility and $759.0 million of unrestricted cash and cash in escrow.

During the reported quarter, the company sold approximately 5.9 million shares for $128.25 each for net proceeds of $725.8 million. At the same time, as part of its second continuous equity offering program, Avalonbay sold 256,167 shares during the quarter at an average price of $127.90 for net proceeds of $32.3 million. At quarter-end, the company had a total debt burden of $3.8 billion.

Avalonbay expects FFO for fourth quarter 2011 in the range of $1.19 to $1.23, while FFO for full year 2011 is expected in the range of $4.57 to $4.61.

We maintain our long-term ‘Neutral’ rating on Avalonbay, which presently carries a Zacks #3 Rank that translates into a short-term ‘Hold’ recommendation. We also have a ‘Neutral’ recommendation and a Zacks #3 Rank for Apartment Investment & Management Co. (AIV - Analyst Report), a competitor of Avalonbay.

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