AvalonBay Communities Inc. (AVB), a leading real estate investment trust (REIT), reported fiscal 2010 second quarter funds from operations (FFO) of $1.04 per share, which exceeded the Zacks Consensus Estimate by 4 cents. Funds 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.
We cover below the results of the recent earnings announcement, as well as the subsequent analyst estimate revisions and the Zacks ratings for the short-term and long-term outlook for the stock.
Earnings Report Review
Total revenues during the reported quarter increased 3.9% year over year to $220.5 million. Total revenues also exceeded the Zacks Consensus Estimate of $218 million. Same-store quarterly rental revenues decreased 2.1% year over year due to a 3.3% dip in average rental rates, partially offset by a 1.2% increase in economic occupancy.
Same-store revenue decreased across all geographic segments, except Mid-Atlantic. Same-store operating expenses increased 2.5% during the quarter compared with the year-ago period. Same-store net operating income (NOI) decreased 4.4% year over year to $105.5 million.
(Read our full coverage on this earnings report: AvalonBay Tops Estimates)
Earnings Estimate Revisions- Overview
Fiscal earnings estimates have remained static for AvalonBay since the earnings release, meaning that analysts are cautious about the long-term performance of the company. Let’s dig into the earnings estimate details.
Agreement of Estimate Revisions
In the last 7 days, fiscal 2010 earnings estimates were raised by 3 analysts out of 22 covering the stock, while 3 have lowered. For fiscal 2011, four of 22 analysts covering the stock have revised their estimates upward, while 4 have lowered. This does not indicate clear directional movement for fiscal year earnings. Management further observed that the real benefit of a steady improvement in the operating trends across the portfolio will be felt over the next few years.
Magnitude of Estimate Revisions
Earnings estimates for fiscal 2010 have remained steady in the last 7 days at $3.96. For fiscal 2011, earnings estimates have increased by a penny to $4.28. Management also perceived that while fundamentals had shifted decidedly in favor of rental housing, they were still impacted by challenging broader economic trends, and consequently retained its cautious outlook.
Moving Forward
The long-term earnings estimate picture for AvalonBay is positive. The housing meltdown will continue to help apartment REITs like AvalonBay and we expect this sector to remain comparatively stable in the upcoming fiscal years. AvalonBay has Class A assets located in premium markets, such as Washington DC, New York City and San Francisco, where the spread between renting and owning is still high despite home price declines. Consequently, AvalonBay is relatively better equipped than its peers to weather the prolonged economic downturn.
However, AvalonBay competes with other housing alternatives such as rental apartments, condominiums and single-family homes that are available for rent, and new and existing condominiums and single-family homes available for sale. Consequently, the company is under severe stress to maintain profitability.
Currently, we maintain our long-term Outperform rating on AvalonBay with a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation and indicates that the stock is expected to perform in line with the overall U.S. equity market for the next 1-3 months.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
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