Once again, Virginia-based real estate investment trust AvalonBay (NYSE: AVB) came through with another big quarter as the rental market continues to stay hot.
Last week, the company announced that its third-quarter funds from operations (FFO) had increased 22% to $1.11 per share, up from $0.91 per share in the year-ago quarter. FFO for the nine months ended Sept. 30, meanwhile, increased by 15.8% over the comparable period in 2005. The results exceeded expectations and led AvalonBay to raise its full-year FFO outlook to a range of $4.36 to $4.40 per share.
AvalonBay Chairman and CEO Bryce Blair noted that same-store net operating income "increased almost 10% year over year, our highest NOI growth in five years." That growth rate allowed the company to raise its full-year financial forecast, he said.
Given this company's past performance, I was not surprised by the results. AvalonBay has proved to be one of the better-performing REITs in both up and down markets over the past 10 years. Although Fools who buy into AvalonBay might not see a run-up equivalent to the 45% climb this stock has seen year to date, this train is not about to run off the tracks. External and internal conditions are favorable for another strong quarter and beyond.
According to real estate performance analysis company Reis, the nationwide vacancy rate for rental housing dropped to 5.4% during the quarter ended Sept. 30, from 6.7% in the same period in 2004. And because AvalonBay targets premier real-estate markets, such as New York and Southern California, occupancy rates have been even better for this REIT. The company reported a rate of 96.8% for all of its properties at the end of Q3, an improvement over the 96.4% rate in Q3 2005. The towering demand for apartment rentals also allowed AvalonBay to increase its average rental rates by 5.9% for the nine months ending Sept. 30 compared with the same period last year.
The demand played a crucial role in pushing AvalonBay to a new 52-week high earlier today. It has done the same for many of the other publicly traded apartment REITs, including Equity Residential (NYSE: EQR), Aimco (NYSE: AIV) and Archstone-Smith (NYSE: ASN), which are all trading at or near 52-week highs.
AvalonBay also continues to forge ahead with its ambitious construction and acquisition plans. During the third quarter, it agreed to purchase its partner's 51% interest in its Avalon Run community in Lawrenceville, N.J. The company also acquired Southgate Crossing in Columbia, Md., for $35.9 million and recently completed the construction of its Avalon Del Ray and Avalon Camarillo properties in Los Angeles and Camarillo, Calif. It had 17 additional properties under construction at the end of Q3.
The company did report a 56.2% year-over-year decrease in earnings per share for the quarter. However, this decrease is primarily the result of a skewed 2005 quarter in which the company experienced atypical gains on the sale of assets.
Following another strong quarter for AvalonBay, I continue to believe that the company's future is bright. An unyielding rental market and persistent expansion activity should ensure shareholders of this REIT that they can expect many more quarters in the black.
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Fool contributor Billy Fisher does not own shares of any of the companies mentioned.
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