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Avalonbay Rides High on Solid Apartment Fundamentals

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We issued an updated research report on Avalonbay Communities Inc. (AVB - Free Report) on Jan 13, 2016.

This Arlington, VA-based residential real estate investment trust (“REIT”) mainly focuses on developing multifamily apartment communities for higher-income clients in high barrier-to-entry regions of the U.S. Its Class A assets located in premium markets and improved apartment fundamentals enable it to generate steady rental revenues.

Notably, during the period 2010-2014, the REIT was able to improve its core funds from operations (“FFO”) per share by more than 70%, which is much higher than the sector average of around 47%. The factors that aided results were robust portfolio performance, better contribution from newly developed and acquired properties and a sturdy balance sheet. During third-quarter 2015, core FFO per share increased 11.6% year over year to $1.93, driven by a rise in net operating income (“NOI”) from newly developed and existing operating communities, which was partly offset by a rise in common shares outstanding.

With expectations for solid apartment market fundamentals, Avalonbay has projected 2015 core FFO per share growth rate of 11.2%, up from the company’s mid-year outlook of 11.1% growth and original expectations of an 8.4% increase, which is encouraging.

However, completion of a number of projects in its markets, leading to higher supply, keeps us concerned. Moreover, stiff competition and any further hike in interest rates will add to its woes.

Over the past two months, current quarter estimates have risen from $1.95 to $1.96 per share, while 2015 estimates have risen from $8.01 to $8.02 per share. Also, for 2016, estimates moved from $8.22 per share to $8.23. This has helped Avalonbay to earn a Zacks Rank #2 (Buy), further underscoring the company’s solid position.

Other Stocks to Consider

Other well-ranked stocks in the residential REIT space include Apartment Investment and Management Company (AIV - Free Report) ,  Equity LifeStyle Properties, Inc. (ELS - Free Report) and Essex Property Trust Inc. (ESS - Free Report) . All three stocks have the same Zacks Rank as Avalonbay.

Note: FFO, a widely accepted and reported measure of the performance of REITs, is derived by adding depreciation, amortization and other non-cash expenses to net income.

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