Back to top

Image: Shutterstock

Should Investors Hold on to AvalonBay (AVB) Stock for Now?

Read MoreHide Full Article

AvalonBay Communities, Inc.'s (AVB - Free Report) premium assets located in some of the key markets of the United States position it well to ride the growth curve. These markets are characterized by growing employment in the high-wage sectors of the economy and a diverse and vibrant quality of life, and generally command the highest rents. This assures stable revenue generation for the company.

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

In addition, high interest rates and limited single-family home inventory have acted as catalysts, making home ownership costlier and renting apartments a more viable option.

The residential REIT also leverages technology, scale and organizational capabilities to drive innovation and margin expansion in its portfolio. It is making significant progress in transforming the operating model innovation, which is expected to enhance the net operating income (NOI). We project current-year same-store residential NOI to grow 4.9% year over year.

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 support its external growth.

Moreover, its encouraging development pipeline gears it up for long-term growth. As of Mar 31, 2023, AVB had 18 consolidated development communities under construction (expected to contain 5,762 apartment homes and 56,000 square feet of commercial space).

AvalonBay has a healthy balance sheet with a well-laddered debt maturity schedule. Given its ample financial flexibility, it is well-poised to capitalize on long-term growth opportunities. Also, its trailing 12-month return on equity (ROE) is 9.17% compared with the industry’s average of 4.62%, highlighting the more efficient utilization of using shareholders’ funds than its peers.

Shares of this Zacks Rank #3 (Hold) company have gained 17.7% in the year-to-date period compared with the industry's growth of 6.1%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Zacks Investment Research
Image Source: Zacks Investment Research

Nonetheless, the continuation of the flexible working environment has resulted in lower renter demand for costlier and urban/infill markets, raising concerns for AvalonBay’s properties that are located in the urban markets.

Stiff competition from other housing alternatives could limit the company’s ability to raise rents, stalling its growth tempo. Also, the lack of rent relief in 2023 might weigh on AVB’s revenue growth to a certain extent in some regions and markets.

Further, high interest rates are 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 Sun Communities (SUI - Free Report) , Invitation Home (INVH - Free Report) and BRT Apartments (BRT - Free Report) . While Sun Communities and Invitation Home carry a Zacks Rank #2 (Buy), BRT Apartment sports a Zacks Rank #1.

The Zacks Consensus Estimate for Sun Communities’ current-year FFO per share has been raised marginally over the past month to $7.34.

The Zacks Consensus Estimate for Invitation Home’s 2023 FFO per share has moved 1.1% northward over the past month to $1.78.

The Zacks Consensus Estimate for BRT Apartments’ ongoing-year’s FFO per share has moved 33.6% upward in the past two months to $1.55.

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.

Published in