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AvalonBay Communities Inc. (AVB - Analyst Report), a real estate investment trust (REIT), reported funds from operations (FFO) of $128.2 million or $1.34 per share in the second quarter of 2012 compared with $99.9 million or $1.13 per share in the year-earlier quarter. While total FFO increased 28.3% year over year, FFO per share increased 18.6% during the reported quarter. The superior results were primarily due to an increase in real estate sales and related gains, rise in Net Operating Income (NOI) from existing and newly developed and acquired communities, and a decline in net interest expense.

Reported FFO per share in the quarter marginally missed the Zacks Consensus Estimate by a penny. Total revenue during the reported quarter increased 9.9% year over year to $258.8 million.

Same-store quarterly rental revenues increased 5.8% year over year to $190.2 million, based on a 6.2% rise in average rental rates to $2,085 per apartment unit. Economic occupancy dipped 0.4% on a year-over-year basis to 95.8%. Same-store operating expenses increased 3.0% year over year during the quarter to $57.7 million, while NOI  increased 7.1% to $132.5 million

AvalonBay started construction on four communities during the quarter. With 1,226 apartment homes on completion, these four new communities will involve investments of $308.7 million. Additionally, the company completed construction of four communities spanning 887 apartment homes for $245.9 million  The company also commenced the redevelopment of Eaves Fairfax, containing 141 apartment homes for a total cost of $4.9 million during the quarter.

During the quarter, AvalonBay sold two communities located in Oakland and Chicago for a GAAP profit of $ 95.0 million. These included the sale of ‘Waterford’ (544 apartment homes) for $86.5 million and ‘Arlington Heights’ (409 apartment homes) for $87.3 million.  Concurrent with the divestiture of Waterford, the company repaid the outstanding $33.1 million variable rate note secured by the community before its scheduled maturity.

Additionally, AvalonBay Value Added Fund, L.P., a private discretionary real estate investment vehicle where the company holds an equity interest of approximately 15%, sold a community l in Chicago, Illinois. The property called ‘Avalon Lombard (256 apartment homes) was sold for $35.4 million. With these asset sale transactions  in the reported quarter, the company exited the Chicago market.

During the reported quarter, the company acquired Eaves Cerritos containing 151 apartment homes  in Artesia, California, for  $29 .5 million. Also, the company acquired two land parcels for $24.6 million.

As of June 30, 2012, AvalonBay had $431.9 million of unrestricted cash and cash in escrow and a total debt of $3.4 billion. In addition, the company had full availability under its $750 million unsecured credit facility. The company expects to raise a total of $700 million to $900 million of new debt and equity capital during 2012. During second quarter 2012, AvalonBay repaid a variable rate secured mortgage note of $14.6 million.

AvalonBay expects FFO for third quarter 2012 in the range of $1.38 to $1.42 per share and for  2012, FFO is projected in the range of $5.39 to $ 5.53 . The company expects same-store revenue and NOI to grow in the range of 5.5% - 6.0 % and 7.0% - 8.0% respectively in the remainder of 2012.

AvalonBay currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock. One of its competitors, Apartment Investment & Management Co. (AIV - Analyst Report), currently retains a Zacks #3 Rank.

Note: FFO, 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.

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