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Is it Worth Holding on to AvalonBay (AVB) Stock for Now?

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AvalonBay Communities, Inc. (AVB - Free Report) is well-poised to gain from its premium assets in the high-barrier-to-entry regions of the United States. The markets are characterized by growing employment in the high-wage sectors of the economy, higher home ownership costs, and diverse and vibrant quality of life.

AvalonBay has also been making concerted efforts to expand its portfolio in the growing markets of Raleigh-Durham and Charlotte, NC; Southeast Florida; Dallas and Austin, TX; and Denver, CO.

The residential REIT is leveraging technology, scale and organizational capabilities to drive innovation and margin expansion in its portfolio. AVB is making significant progress in transforming the operating model innovation and is expected to enhance the net operating income margins by 200 basis points.

AvalonBay’s encouraging development pipeline is expected to be accretive to its earnings growth in the upcoming years. From the beginning of the year through Jul 27, 2022, the company completed $600 million worth of developments, with a weighted average initial projected stabilized yield of 6.2%. Development starts totaled $460 million for the same period.

Approximately 90% of the company’s developments are match-funded with long-term debt and equity capital. This highlights the company’s prudent capital management practices.

On the balance sheet front, AvalonBay had $1.3 billion of liquidity and no outstanding borrowings under its $1.75-billion unsecured credit facility as of Jun 30, 2022. The annualized net debt-to-core EBITDAre for the April-June period was 4.9 times.

With a well-laddered debt maturity schedule and enough financial flexibility, AVB is well-positioned to capitalize on growth opportunities.

Analysts seem bullish on the Zacks Rank #3 (Hold) stock. The Zacks Consensus Estimate for the company’s 2022 funds from operations (FFO) per share has moved nearly 1% upward in the past month to $9.83.

Shares of AVB have gained 3.7% compared with the industry's growth of 0.5% in the quarter-to-date period.


Zacks Investment Research
Image Source: Zacks Investment Research


However, health concerns of living in a dense environment and work-from-home flexibility have driven away the demand from the costlier urban/infill markets to suburban markets, adding to AvalonBay’s woes. Rent-control regulations in some major markets might also curb the growth tempo.

Stiff competition from other housing alternatives like rental apartments, condominiums and single-family homes restricts AvalonBay from raising rents, stalling its growth pace.

Interest rate hikes might affect AVB’s ability to purchase or develop real estate. Its dividend payout might become less attractive than the yields on fixed-income and money market accounts.

Stocks to Consider

Some better-ranked stocks from the residential REIT sector are Spirit Realty Capital (SRC - Free Report) , Independence Realty Trust (IRT - Free Report) and BRT Apartments (BRT - Free Report) , each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Spirit Realty Capital’s 2022 FFO per share has moved marginally northward in the past month to $3.57.

The Zacks Consensus Estimate for Independence Realty Trust’s current-year FFO per share has moved 1.9% northward in the past two months to $1.08.

The Zacks Consensus Estimate for BRT Apartments’ ongoing year’s FFO per share has been raised 5.8% over the past two months to $1.63.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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