We've heard it again and again: Real estate investment trusts (REITs) have outperformed the market for six consecutive years. But some REITs have done better than others, and they still have solid prospects. This group includes apartment REIT AvalonBay Communities
For the quarter and year, Avalon Bay turned in funds from operations (FFO) of $0.93 and $3.77 per share, respectively, which are increases of 5.7% and 12.2% over last year's comparable numbers. The company also estimates that FFO will increase to between $3.95 and $4.15 per share in 2006. That would represent a 4.8% to 10.1% boost over this year's performance.
On the earnings-per-share front, Avalon Bay turned in a decrease of 17.1% for the quarter, and an increase of 44.2% for the year. This contrast is largely the function of property sales; the company made more of them in the fourth quarter of last year and earlier this year. The company doesn't expect to sell as many properties in 2006, so it predicts that earnings per share will decline.
Avalon Bay's dividend of $2.84 is well-funded, since it represents only 75% of the company's $3.77 in FFO. However, with the sharp run-up in the shares over the last couple of years, the yield is only 2.9%, which is small by REIT standards. This may improve a bit next year, since the company announced that it will raise its dividend by 9.8% starting with the first-quarter 2006 dividend payment. This increase brings the forward yield up a bit to 3.2%, which is an improvement, but still a bit low compared to historical REIT yields.
As a general strategy, patrolling apartment REITs for a neglected value isn't a bad idea. With home prices very high in many markets, renting can make a lot of sense. In addition, we've all heard the various stories about the rising percentage of interest-only loans in the last few years. When these borrowers can no longer stand the pain of rising interest rates -- I think that's a matter of when, not if -- they're likely to become renters again.
However, judging by Avalon Bay's current price-to-FFO multiple of 26.1, investors are counting on continued improvement in the apartment rental market, and expecting 2006 FFO to arrive at the high end of the company's range. I don't disagree that apartments, and Avalon Bay in particular, will perform well with the wind at their backs, but it looks like that performance is largely priced into Avalon Bay's shares already. Before you invest, I think checking into AMLI Residential Properties Trust
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