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AvalonBay's (AVB) Shares Rise 11.4% YTD: Will the Trend Last?

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Shares of AvalonBay Communities (AVB - Free Report) , currently carrying a Zacks Rank #3 (Hold), have rallied 11.4% in the year-to-date period against the industry’s decline of 0.5%.

AvalonBay has high-quality assets located in some of the premium markets of the country, which enable the company to generate steady rental revenues. The company’s properties generally command the highest rents in its markets. Its portfolio is well-diversified, comprising a decent number of both suburban and urban assets.

Per its recent operating update, AvalonBay reported a 5.3% increase in same-store residential rental revenues for the two months ended Aug 31, 2023 compared with the prior-year period. This is roughly 40 basis points higher than the company’s most recent expectation on Jul 31, 2023. This demonstrates its adaptability in the face of market shifts.

Physical occupancy for its same-store residential communities of 95.6% in August increased from 95.2% in the prior month. AvalonBay had recorded physical occupancy of 95.5% in the second quarter. However, the like-term effective rent change for same-store residential communities dropped to 3% in August from 3.9% in July. This declining trend in rent change is in sync with industry trends.

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Let us now decipher the factors behind the surge in the stock price and also check whether this trend will last.

AVB mainly focuses on adding properties situated in the leading metropolitan areas where the market is characterized by growing employment in the high-wage sectors of the economy, higher home ownership costs and diverse and vibrant quality of life. This offers AvalonBay an edge for generating superior long-term risk-adjusted returns on apartment community investments over other markets that lack such characteristics.

This residential REIT reported second-quarter 2023 core funds from operations (FFO) per share of $2.66, beating the Zacks Consensus Estimate of $2.60. Moreover, the figure climbed 9.5% from the prior-year quarter’s tally. The quarterly results reflected a year-over-year increase in same-store residential rental revenues, driven by solid lease rate growth.

AVB’s earnings growth over the intermediate term is likely to be further supported by ongoing developments and new starts. As of Jun 30, 2023, AvalonBay had 17 consolidated development communities under construction (expected to contain 5,761 apartment homes and 29,000 square feet of commercial space), which is encouraging. The estimated total capital cost of these development communities at completion is around $2.3 billion. Over the next few years, the developments underway are expected to deliver more than $130 million of incremental net operating income (NOI).

AvalonBay is also leveraging technology, scale and organizational capabilities to drive margin expansion in its portfolio. The company is making significant progress in transforming operating model innovation, and it is expected to enhance the NOI meaningfully.

Management expects around $16 million of incremental NOI from its innovation efforts in 2023. We project current-year same-store residential NOI to increase 6.5% year over year.

This residential REIT has a healthy balance sheet and ample liquidity. As of Jun 30, 2023, it had $769.6 million in unrestricted cash and cash equivalents and $177.4 million in cash in escrow. AVB has a well-laddered debt maturity schedule with a weighted average year to maturity of 7.6 years. Its annualized net debt-to-core EBITDAre was 4.1 times, and the unencumbered NOI was 95%, providing scope for tapping the additional secured debt capital if required.

Solid dividend payouts are arguably the biggest enticements for REIT investors, and AvalonBay has consistently paid out dividends each year since it went public in 1994. In February 2023, concurrent with its fourth-quarter earnings release, AvalonBay increased its first-quarter 2023 dividend to $1.65 per share from $1.59 paid out in the prior quarter. This represented a hike of 3.8% from the prior payout. The REIT has maintained the same dividend thereafter. Along with the healthy balance sheet, such efforts boost investors’ confidence in the stock.

However, an expected moderation in rent growth and an elevated supply of apartments in some markets raise concerns for AvalonBay. A high-interest-rate environment adds to the company’s woes.

Stocks to Consider

Some better-ranked stocks from the REIT sector are Invitation Homes Inc. (INVH - Free Report) and American Homes 4 Rent (AMH - Free Report) . Invitation Homes and American Homes 4 Rent each carry 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 Invitation Homes’ current-year FFO per share has been revised marginally north over the past two months to $1.79.

The Zacks Consensus Estimate for American Homes 4 Rent’s 2023 FFO per share has been revised marginally north in the past month to $1.65.

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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