Ushering in good news for AvalonBay Communities, Inc. (AVB - Analyst Report) , Moody's Investors Service – the rating arm of Moody's Corp. (MCO - Analyst Report) – announced that it has upgraded all ratings of the company with a stable outlook. This included an elevation of the company’s senior unsecured debt rating to A3 from Baa1.
Per the rating agency, this upgrade reveals AvalonBay’s position as one of the leading apartment real estate investment trust (REIT), backed by its solid credit profile, strong liquidity position and conservative balance sheet. However, the company has exposure to some core markets which have been experiencing slowing rental growth rates from their highs and high level of new supply. The company also has a large development platform, though it has been substantially pre-funded.
The stable outlook reflects the rating agency’s anticipation that the apartment REIT’s balance sheet would be aptly managed by its strong management team. Also, it expects the development pipeline to be substantially pre-funded. Further, the rating agency expects the company to sustain its flexibility, both operational and financial, to weather any volatility or slowdown in its markets affected.
The rating upgrade enhances a company’s creditworthiness in the market and is likely to boost investors’ confidence in the stock. Specifically, rating upgrades provide companies an opportunity to enjoy reduced costs on debts and better access to capital.
Of late, things have turned worse for residential REITs as increased supply in many of the markets has raised an alarm. In fact, markets with high rents like San Francisco, New York and San Jose have been highly affected and the high end and luxury apartment categories have been flooded with new supply. Usually, higher supply curtails landlords’ ability to demand higher rents and leads to lesser absorption. Also, job losses in the energy sector are weighing on the Houston market. However, market fundamentals are still steady in the mid-range markets.
AvalonBay currently has a Zacks Rank #3 (Hold).
Investors can also consider some better-ranked stocks in the REIT industry like InfraREIT, Inc. (HIFR - Snapshot Report) that has a Zacks Rank #1 (Strong Buy) and American Campus Communities, Inc. (ACC - Snapshot Report) which sport a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
While InfraREIT has a long-term expected growth rate of 10% against the industry average of 5.8%, American Campus Communities has witnessed a 2.3% increase in full-year 2016 estimates over the past three months.
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