Management at real estate investment trust AvalonBay (NYSE:AVB) previously predicted strong but moderating fundamentals in 2007. In the first quarter, it got exactly that.
On a normalized basis (excluding land sales), funds from operations were up 16% versus last year. Rental revenue in established communities increased 6.6%, on a 7% increase in rental rates, and a 0.4% decrease in occupancy, to 96.1%. Net operating income for established communities was up 8.5%, which AvalonBay achieved by leveraging its 6.6% same-store sales growth.
The outlook for the rest of the year remains stable. The company is looking for 1% job growth in its markets versus 1.5% last year, and a 0.6% increase in new apartment supply.
The current housing slump has been both a positive and a negative for the company. The mortgage meltdown has pushed some people out of the buying market and into the rental market, which helps demand. The slump has also reduced competition from homebuilders for land, materials, and construction services. On the other hand, the conversion of unsold condos and homes to rental properties provides increased competition.
AvalonBay's management noted that the strongest local markets were in Seattle and Northern California, thanks to strong job growth and tight capacity in those areas. Capitalization rates -- or the projected yield of acquired properties -- continued to stay low at 4%-5% for apartments. These low cap rates indicate that it's still a seller's market.
All indicators seem to support a healthy environment for AvalonBay and competitors Apartment and Investment Management (NYSE: AIV) and Archstone-Smith Trust (NYSE: ASN). They just won't be enjoying the same blazing pace of 2006.
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Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates your comments, concerns, and complaints. The Motley Fool has a disclosure policy.
