Fourth quarter funds from operation (FFO) increased 8.6% compared to the year earlier period. Growth was driven by higher rental rates, modest expense increases and contributions from new developments. The AvalonBay Communities, Inc.'s (NYSE: AVB - News) portfolio continues to perform at the top of its peer group due to AVB's quality asset base which is concentrated in good long term markets. However, we continue to rate AVB shares a Hold due to a still-high comparative valuation and what could be worsening multi-family fundamentals.

More and more rental stock is being put back into the market, as people are failing to sell their homes and condos. In addition, job growth, the major precursor to apartment demand, is moderating and will continue to drop in 2008. AvalonBay continues to trade at a substantial premium to its apartment peer group. Shares have fallen over the past six months due to a sector-wide sell-off in response to a weakening economy.

AVB currently trades at a 34% premium to the Zacks apartment REIT weighted average 2008 FFO estimates and now an 8% discount to our calculated NAV (net asset value). Fundamentals are still good and the company is pushing rents while holding stable occupancy.

We rate AVB a Hold due to valuation and the possibility of a continued US economic slowdown. More unsold condos and single family homes will continue to enter the market and we expect occupancy and rental rate increases to moderate in the coming months. We are setting our price target at 21x 2008 FFO estimates, or $103 per share.

Read the full analyst report on AVB.