UPDATE 1-AvalonBay third-quarter FFO rises

NEW YORK, Nov 5 (Reuters) - Apartment landlord AvalonBay Communities Inc (AVB.N) said on Wednesday its quarterly funds from operations rose 3.9 percent, partly on better performance from its apartment communities.

Third-quarter funds from operations (FFO), a performance measure for real estate investment trusts, were $99 million, or $1.28 per share, slightly ahead of the $1.27 analyst on average had expected, according to Reuters Estimates, and within the $1.26 to $1.30 per share the company had forecast.

A year earlier Alexandria, Virginia-based AvalonBay reported FFO of $95.3 million, or $1.19 per share.

FFO strips out the profit-reducing effect of depreciation and usually excludes building sales.

"During 2008, we've sourced $1.8 billion of liquidity, including asset sales of $500 million," Bryce Blair, chairman and chief executive, said in a statement. "With access to cost effective capital funding a reduced level of development activity, we are well positioned to weather current challenging economic conditions."

At the end of the quarter, AvalonBay owned or had a stake in 178 apartment communities containing 50,370 apartment units.

For properties AvalonBay has owned at least a year, rental revenue rose 2.7 percent as the company pushed up average rents by 2.9 percent. Net operating income, a reflection of the properties' performance, rose 2 percent, a much slower rate than the 5.6 percent the company reported the prior quarter and 5.3 percent a year earlier.

AvalonBay shares closed down 12.2 percent, or $8.75 at $63.23 on a day the benchmark MSCI U.S. REIT Index .RMZ fell 10.5 percent.

AvalonBay sees fourth-quarter FFO of $1.25 to $1.29 per share. Wall Street expects $1.25 per share, according to Reuters Estimates.

The company expects to declare a special dividend in the range of $1.75 per share to $1.85 per share sometime before September 2009 as a result of selling 10 communities this year, excluding any excise tax that could result from the special dividend.

Other apartment real estate investment trusts, such as Equity Office, have said they expect 2009 to be more difficult as U.S. job losses mount.

On Wednesday, private employment service ADP said 157,000 jobs were lost in October and revised September's job loss figures up to 26,000 from 8,000.

Job growth paves the way for landlords to raise rents because it creates more needs for housing as people move to take new positions and young people strike out on their own.

Real estate research firm Property & Portfolio Research has forecast the U.S. apartment vacancy rate would rise 0.95 percentage points in 2008 to 6.85 percent and jump to 7.9 percent in 2009.

It also sees average U.S. apartment rent rising 0.2 percent in 2008 to $18.15 and falling to $17.78 by the end of 2009. It expects U.S. apartment buildings to lose 20 percent of their value in 2009. (Reporting by Ilaina Jonas; Editing by Andre Grenon)