5 Reasons That Make AvalonBay (AVB) Stock a Solid Portfolio Pick
AvalonBay Communities’ AVB high-quality assets located in some of the premium markets of the United States are well-poised to benefit from the healthy demand for residential properties. Its portfolio diversification efforts and focus on expanding into suburban markets are likely to aid in generating stable rental revenues over time. This residential real estate investment trust (REIT) is also banking on technology and scale to drive margin expansion.
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.
Analysts seem bullish on this Zacks Rank #2 (Buy) stock. The estimate revision trend for 2023 funds from operations (FFO) per share indicates a favorable outlook for the company as it has increased five cents upward over the past month to $10.56.
Shares of AVB have rallied 11.9% in the past six months, outperforming the industry's increase of 2.7%. Given its strong fundamentals and positive estimate revisions, the stock is likely to keep performing well in the quarters ahead.
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What Makes AvalonBay a Solid Pick?
Solid Market Fundamentals: AVB mainly focuses on 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 other markets that lack such characteristics.
Furthermore, apart from escalating home ownership costs amid high interest rates, limited single-family home inventory is making the transition from renter to homeowner difficult in its markets. This makes renting apartment units a viable option. We expect same-store residential rental revenues to rise 6.1% year over year in 2023.
Developments Underway: 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, developments underway are expected to deliver more than $130 million of incremental net operating income (NOI). The projects, upon completion and stabilization, are expected to fuel FFO growth in the future. Our estimate indicates a year-over-year increase of 8.8% in core FFO in 2023.
Technological Advancements & Process Enhancements: AvalonBay is 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.
Balance Sheet Strength: 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.
Dividend: 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, AVB 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. Given its robust balance sheet position and a sustainable cash flow from operations, the dividend payout is likely to be sustainable in the forthcoming quarters.
Other Stocks to Consider
Some other top-ranked stocks from the residential REIT sector are American Homes 4 Rent AMH and Centerspace CSR. While Centerspace sports a Zacks Rank #1 (Strong Buy), American Homes 4 Rent has a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for American Homes 4 Rent’s 2023 FFO per share has moved marginally northward in the past month to $1.65.
The Zacks Consensus Estimate for Centerspace’s current-year FFO per share has moved 8.1% northward in the past two months to $4.65.
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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