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AvalonBay's (AVB) Shares Up 15.4% YTD: Here Are the Key Factors

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Shares of AvalonBay Communities, Inc. (AVB - Free Report) , currently carrying a Zacks Rank #3 (Hold), have gained 15.4% in the year-to-date period compared with the industry's growth of 5.8%.

Amid the peak leasing season, residential real estate investment trusts (REITs) like AvalonBay, are benefiting from the healthy demand for their residential properties. High interest rates have made home ownership costlier, making renting apartments a more viable option. Also, technological advancements to drive margin expansion and rent growth augur well for such REITs.

In the first quarter of 2023, AVB’s core funds from operations (FFO) per share of $2.57 increased 13.7% year over year and beat the Zacks Consensus Estimate of $2.54. Same-store residential rental revenues increased 9.5% year over year, driven by solid lease rate growth.

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Let us discuss the factors that supported the uptick.

AvalonBay has properties located in the high-barrier-to-entry regions of the United States, which generally command the highest rents in the markets. These markets are characterized by growing employment in the high-wage sectors of the economy and a diverse and vibrant quality of life. This has enabled the company to capture renter demand in these markets, helping it generate steady rental revenues.

Also, high home ownership costs amid rising interest rates and limited single-family home inventory are making the transition from renter to homeowner difficult in its markets. This is making renting apartment units a viable option in this scenario.

Per the company’s recent second-quarter operating update, same-store residential rental revenues for the two months ended May 31, 2023 rose 6.5% compared with the prior-year period’s levels. The figure was nearly 80 basis points higher than its recent expectation on Apr 26, 2023. Same-store residential rental revenues will likely increase 5.3% year over year in 2023.

AvalonBay is leveraging technology, scale and organizational capabilities to reduce costs and drive innovation and margin expansion in its portfolio. A significant progress in transforming the operating model innovation boosted net operating income (NOI) in the recent past. The trend is expected to continue in the upcoming period. We project 2023 same-store residential NOI to grow 4.9% year over year.

There has been a shift in renter’s demand to the suburban markets due to post-pandemic outmigration and a flexible working environment. Amid this, AvalonBay’s strategic acquisitions and efforts to expand its portfolio in the growing markets of Raleigh-Durham and Charlotte, NC; Southeast Florida; Dallas and Austin, TX; and Denver, CO, are likely to pay off well.

In 2022, the company acquired four wholly-owned communities — Avalon Flatirons in Lafayette, CO, Waterford Court in Addison, TX, Avalon Miramar Park Place in Miramar, FL, and Avalon Highland Creek in Charlotte, NC, — for $536.2 million.

This residential REIT’s healthy balance sheet position and ample liquidity have enabled it to capitalize on long-term growth opportunities. AVB had $254.5 million in unrestricted cash and cash equivalents and $121.6 million in cash in escrow as of Mar 31, 2023. As of the same date, it did not have any borrowings outstanding under its $2.25 billion unsecured credit facility.

AVB’s trailing 12-month return on equity is 9.17% compared with the industry’s average of 4.90%, indicating that it is more efficient in using shareholders’ funds than its peers.

Solid dividend payouts are arguably the biggest enticements for REIT shareholders, and AvalonBay remains committed to the same. In February 2023, concurrent with its fourth-quarter 2022 earnings release, it increased its first-quarter 2023 dividend to $1.65 per share from $1.59 paid out in the prior quarter. This represented a sequential hike of 3.8%. Such efforts boost investors’ confidence in the stock.

Nonetheless, the lack of rental relief payments and regulatory issues in 2023 may weigh on AVB’s revenue growth to a certain extent in some regions and markets. Also, a high interest rate environment is likely to increase the company's borrowing costs, affecting its ability to purchase or develop real estate.

Stocks to Consider

Some better-ranked stocks from the residential REIT sector are ELME COMMUNTIES (ELME - Free Report) and BRT Apartments (BRT - Free Report) .

The Zacks Consensus Estimate for ELME COMMUNTIES’ 2023 funds from operations (FFO) per share is pegged at 99 cents, suggesting an increase of 1% over the past month. ELME carries a Zacks Rank #2 (Buy).

The Zacks Consensus Estimate for BRT Apartments’ current-year FFO per share has moved 33.6% northward in the past month to $1.55. BRT sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Note: Anything related to earnings presented in this write-up represents FFO — a widely used metric to gauge the performance of REITs.

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