- The Washington Times - Monday, January 26, 2004

The nation’s apartment markets aren’t cutting AvalonBay Communities Inc. much slack. But somehow, the company is staying above ground and even flourishing, analysts say.

The Alexandria-based developer of apartment communities said Wednesday that its net income more than doubled in 2003, and reported net income of $100.3 million for the fourth quarter of 2003, compared with $66.8 million during the comparable quarter of 2002.

Shares of the company have risen $1.48 since the announcement, and went up 76 cents yesterday to close at $48.47 on the New York Stock Exchange.

For the past two years, analysts have cautioned investors about buying shares of apartment REITs, suggesting that office REITs will bring greater returns. Real-estate-investment trusts are companies that buy real estate and earn income off of leases and rent. These companies allow people to invest in real estate without owning properties themselves.

With mortgage interest rates near record-low levels, many prospective tenants are choosing to buy a home rather than rent. Consequently, many apartment developers are struggling with high vacancy rates, and must offer costly incentives to lure tenants.

In the fourth quarter of 2003, for instance, AvalonBay spent about $949 per unit in concessions like free rent or parking, up from $873 during the previous quarter.

But some analysts anticipate a rebound in the apartment sector this year, noting that AvalonBay has enough new properties to benefit once tenant demand increases.

“We believe AvalonBay’s strong balance sheet and large development pipeline can provide significant upside potential once recovery commences,” Wachovia Securities said in a report last week.

Wachovia said it did not expect AvalonBay shares to continue rise, but said the stock was still attractive given the size of its dividend, at $2.80 per share.

Merrill Lynch analyst Steve Sakwa said he was surprised by AvalonBay’s announcement that it earned 81 cents per share in funds from operations in the fourth quarter of last year.

Other analysts had predicted no more than 80 cents per share. Funds from operations are similar to net income, but money from the sale of buildings and other nonrecurring events are excluded. AvalonBay sold 12 apartment communities for a total of $453.9 million in 2003, including three for $159 million in the fourth quarter alone.

AvalonBay acknowledged that demand for apartment space was still lacking. But the company said it would be poised to take advantage of a recovery.

“We executed in a way that allowed us to meet our originally budgeted expectations, while taking actions that position us well for an improving economy in 2004 and 2005,” said Bryce Blair, AvalonBay’s chairman and chief executive officer.

What’s more, AvalonBay operates in communities like Washington, Boston and Northern California where the apartment market has remained relatively strong, analysts said.

“We believe that AvalonBay’s apartment markets should outperform the national apartment market over the long run due to lower levels of supply and lower housing affordability,” Mr. Sakwa said.

AvalonBay, like most REITs, is required to pay out at least 90 percent of its net income in the form of dividends to shareholders. In exchange, the company does not pay corporate income tax.

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