Avalonbay Communities Inc. (AVB), a leading multifamily real estate investment trust (REIT), has recently updated its fiscal 2011 outlook and revised its earnings guidance for the second quarter based on portfolio trend analysis under the current market scenario. Trend analysis is a form of comparative analysis that is often employed to identify current and future movements of an investment or group of investments.
Avalonbay had earlier expected FFO (funds from operations) for second quarter 2011 in the range of $1.06 to $1.10, while FFO for full year 2011 was expected in the upper end of $4.50 to $4.75. 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. Presently, FFO for second quarter is projected to be between $1.09 and $1.12, while FFO for the fiscal is expected to be in the range of $4.70 to $4.85.
Same-store revenue during the second quarter is anticipated to increase by 4.4% compared to the year-ago period. For fiscal 2011, same-store revenue is expected to increase 5.0% to 5.75% compared to the previous year. The company further expects same-store Net Operating Income (NOI) to increase by 7.0% to 8.5% for full year 2011 compared to the prior year.
The assumptions are broadly based on strong job growth among younger age cohorts, a continued decline in homeownership and a record low level of new residential supply. According to industry reports, first quarter 2011 witnessed maximum job growth in 20-34 age bracket – a demographic profile that has historically shown more propensity to rent and thereby generating an increase in demand for multifamily apartments.
The national homeownership rate has also plummeted to 66.5% during first quarter 2011, with stringent mortgage underwriting standards, declining home prices, and continued uncertainty regarding the overall economy of the U.S. This has resulted in decline in ‘for-the-sale’ housing market, which in turn has benefited rental housing. Furthermore, the supply of new multifamily apartments is projected to be at an all-time low with 110,000 units expected to be completed in 2011 – the lowest level of deliveries in 50 years.
Avalonbay has Class A assets located in some of the premium markets of the country, such as Washington DC, New York City, and San Francisco, where the spread between renting and owning is high. This enables the company to continually increase rents to fuel its growth engine.
In addition, Avalonbay’s assets are primarily located in infill supply-constrained areas, where there are very limited new apartment construction activities. In addition, the company mostly focuses on developing properties for higher-income clients in high barrier-to-entry regions of the U.S. This safeguards the company from any short-term volatility in the market and provides a strong upside potential.
We maintain our Neutral recommendation on Avalonbay, which presently has a Zacks #3 Rank that translates into a short-term ‘Hold’ rating. We also have a Neutral recommendation and a Zacks #3 Rank for Apartment Investment & Management Co. (AIV), a competitor of Avalonbay.
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