Residential REIT AvalonBay Communities Inc. (AVB - Free Report) is expected to benefit from its high-quality assets, located in some of the premium markets of the United States, favorable demographics, household formation, healthy economy and job-market growth.
Particularly, high consumer confidence on the back of job growth and rising wages will likely spur demand for the company’s properties. In fact, the company’s same-store like-term rent change improved in the first quarter as well, led by its East coast markets. Moreover, AvalonBay’s current development activity is expected to contribute significantly to its net operating income growth.
Moreover, demographic growth continues to be strong in the young-adult age cohort, which has a higher propensity to rent. In fact, a significant change in lifestyle has taken place and life-cycle events are getting delayed. This is leading to an extension of the average age of first-time homeownership.
This age cohort has also experienced a considerable part of the net job growth and is helping grow primary renter demand. Household formation is also picking up pace, which is encouraging.
Also, in the recently-issued operating update for the second quarter, AvalonBay mentioned that its total rental revenues for established communities were up 3.4% for the two-month period ending May 31, 2019. This is 40 basis points (bps) higher than what was expected by the company for the period, when it provided the 2019 established communities rental revenue growth outlook in February.
Furthermore, the company noted that established communities’ like-term effective rent change for April and May were 3.2% compared to the 3% witnessed in the comparable period last year. Additionally, the company stated that the renewal offers for June and July are being provided to residents at an average rise of 5.3% over the existing lease.
AvalonBay has a healthy balance sheet and ample liquidity to support its growth needs. The company has reduced near-term debt maturities and enhanced financial flexibility. As of Mar 31, 2019, AvalonBay did not have any borrowings outstanding under its $1.75-billion unsecured credit facility. The company had around $195.2 million in unrestricted cash and cash in escrow as of the same date.
In addition, the company’s annualized net debt-to-core EBITDA for the January-March quarter was 4.6 times. Also, during the first quarter, the company sold 755,054 shares of common stock at average sales price of $198.26 per share, reaping net proceeds of $147.5 million under its current continuous equity program established in December 2015.
However, new apartment deliveries are anticipated to remain elevated in a number of the company’s markets in the near-to-mid term. This high supply might put pressure on rental rates. Hence, growth in its stabilized portfolio is likely to remain modest in the upcoming period. Further, there is high concession activity amid higher supply which is a concern.
In fact, not only AvalonBay, other residential REITS, like Equity Residential (EQR - Free Report) , Essex Property Trust Inc. (ESS - Free Report) and UDR Inc. (UDR - Free Report) , have been plagued with elevated deliveries in their markets.
AvalonBay currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. The company’s shares have gained 19.9% in the year-to-date period compared with the industry’s growth of 20.3%.
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