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Should You Retain AvalonBay Communities Stock in Your Portfolio Now?
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AvalonBay Communities (AVB - Free Report) is well-poised to gain from the healthy renter demand for its residential properties in the high barrier-to-entry regions of the United States as favorable demographic trends and high home ownership costs are likely to keep driving demand. The company’s efforts to leverage technology and scale to drive margin expansion and operational efficiency seem encouraging.
Strategic buyouts and development projects, backed by a healthy balance sheet position, augur well for long-term growth. However, the elevated supply of rental units in certain markets is likely to fuel competition and curb pricing power, impeding the rent growth momentum to some extent.
Over the past six months, shares of this Zacks Rank #3 (Hold) company have rallied 24.8%, outperforming the industry's upside of 17.7%. Analysts, too, seem bullish on AVB, with the Zacks Consensus Estimate for its 2024 funds from operations (FFO) per share being raised five cents over the past months to $11.02.
Image Source: Zacks Investment Research
What’s Aiding AvalonBay Communities?
AvalonBay has high-quality assets located in some of the country's premium markets of the country. It 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 a diverse and vibrant quality of life. This offers AvalonBay an edge for generating superior long-term risk-adjusted returns on apartment community investments over the other markets that lack such characteristics.
AVB’s portfolio is also well-diversified, with its same-store portfolio comprising a decent number of suburban and urban assets. With these factors in place, AvalonBay remains well-poised for growth. We expect year-over-year growth of 3.7% in the company’s same-store residential rental revenues in 2024.
AvalonBay also has an encouraging development pipeline. As of June 30, 2024, AVB had 17 consolidated development communities under construction (expected to contain 6,066 apartment homes and 65,000 square feet of commercial space), which is encouraging. The estimated total capital cost of these development communities at completion is $2.54 billion. Over the next few years, the developments underway are expected to deliver meaningful incremental net operating income (NOI) upon completion and stabilization and are expected to fuel FFO and net asset value growth.
AvalonBay is leveraging technology, scale and organizational capabilities to drive margin expansion in its portfolio. The company is focusing on self-serve digital experiences to provide a seamless, personalized customer experience. Such efforts are likely to bring about operational efficiency and reduce costs, aiding NOI growth.
AvalonBay has a healthy balance sheet with ample liquidity, placing it well to capitalize on long-term growth opportunities. The company has a well-laddered debt maturity schedule with a weighted average year to maturity of 7.3 years. In the second quarter of 2024, its annualized net debt-to-core EBITDAre was 4.2 times. From the beginning of 2024 through July 31, 2024, unencumbered NOI was 95%, providing scope for tapping the additional secured debt capital if required.
What’s Hurting AvalonBay Communities?
The struggle to lure renters will persist as supply volume is expected to remain elevated in some markets where the company operates. Also, AVB faces competition from other housing alternatives, such as rental apartments, condominiums and single-family homes. Such a competitive landscape limits the company’s ability to increase rent, restricting its growth momentum to some extent.
An expected moderation in rent growth in 2024 could impede revenue growth to a certain extent in some regions and markets. The like-term effective rent change for same-store residential was 3.5% in August 2024, down from 3.6% in July. The figure also marked a decrease from 3.7% in the second quarter of 2024.
The continuation of the flexible working environment is resulting in a shift of renter demand away from higher cost and urban/infill markets. This is likely to impact the demand for some of AvalonBay’s properties in the urban markets and put pressure on occupancy levels.
The Zacks Consensus Estimate for Essex Property Trust’s 2024 FFO per share is pegged at $15.55, up 3.5% year over year.
The Zacks Consensus Estimate for Independence Realty Trust’s 2024 FFO per share is pegged at $1.14.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO), a widely used metric to gauge the performance of REITs.
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Should You Retain AvalonBay Communities Stock in Your Portfolio Now?
AvalonBay Communities (AVB - Free Report) is well-poised to gain from the healthy renter demand for its residential properties in the high barrier-to-entry regions of the United States as favorable demographic trends and high home ownership costs are likely to keep driving demand. The company’s efforts to leverage technology and scale to drive margin expansion and operational efficiency seem encouraging.
Strategic buyouts and development projects, backed by a healthy balance sheet position, augur well for long-term growth. However, the elevated supply of rental units in certain markets is likely to fuel competition and curb pricing power, impeding the rent growth momentum to some extent.
Over the past six months, shares of this Zacks Rank #3 (Hold) company have rallied 24.8%, outperforming the industry's upside of 17.7%. Analysts, too, seem bullish on AVB, with the Zacks Consensus Estimate for its 2024 funds from operations (FFO) per share being raised five cents over the past months to $11.02.
Image Source: Zacks Investment Research
What’s Aiding AvalonBay Communities?
AvalonBay has high-quality assets located in some of the country's premium markets of the country. It 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 a diverse and vibrant quality of life. This offers AvalonBay an edge for generating superior long-term risk-adjusted returns on apartment community investments over the other markets that lack such characteristics.
AVB’s portfolio is also well-diversified, with its same-store portfolio comprising a decent number of suburban and urban assets. With these factors in place, AvalonBay remains well-poised for growth. We expect year-over-year growth of 3.7% in the company’s same-store residential rental revenues in 2024.
AvalonBay also has an encouraging development pipeline. As of June 30, 2024, AVB had 17 consolidated development communities under construction (expected to contain 6,066 apartment homes and 65,000 square feet of commercial space), which is encouraging. The estimated total capital cost of these development communities at completion is $2.54 billion. Over the next few years, the developments underway are expected to deliver meaningful incremental net operating income (NOI) upon completion and stabilization and are expected to fuel FFO and net asset value growth.
AvalonBay is leveraging technology, scale and organizational capabilities to drive margin expansion in its portfolio. The company is focusing on self-serve digital experiences to provide a seamless, personalized customer experience. Such efforts are likely to bring about operational efficiency and reduce costs, aiding NOI growth.
AvalonBay has a healthy balance sheet with ample liquidity, placing it well to capitalize on long-term growth opportunities. The company has a well-laddered debt maturity schedule with a weighted average year to maturity of 7.3 years. In the second quarter of 2024, its annualized net debt-to-core EBITDAre was 4.2 times. From the beginning of 2024 through July 31, 2024, unencumbered NOI was 95%, providing scope for tapping the additional secured debt capital if required.
What’s Hurting AvalonBay Communities?
The struggle to lure renters will persist as supply volume is expected to remain elevated in some markets where the company operates. Also, AVB faces competition from other housing alternatives, such as rental apartments, condominiums and single-family homes. Such a competitive landscape limits the company’s ability to increase rent, restricting its growth momentum to some extent.
An expected moderation in rent growth in 2024 could impede revenue growth to a certain extent in some regions and markets. The like-term effective rent change for same-store residential was 3.5% in August 2024, down from 3.6% in July. The figure also marked a decrease from 3.7% in the second quarter of 2024.
The continuation of the flexible working environment is resulting in a shift of renter demand away from higher cost and urban/infill markets. This is likely to impact the demand for some of AvalonBay’s properties in the urban markets and put pressure on occupancy levels.
Stocks to Consider
Some better-ranked stocks from the REIT sector are Essex Property Trust (ESS - Free Report) and Independence Realty Trust, Inc. (IRT - 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 Essex Property Trust’s 2024 FFO per share is pegged at $15.55, up 3.5% year over year.
The Zacks Consensus Estimate for Independence Realty Trust’s 2024 FFO per share is pegged at $1.14.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO), a widely used metric to gauge the performance of REITs.