AvalonBay (AVB) Up 16% in a Year: Will the Rally Continue?
Shares of AvalonBay Communities, Inc. AVB have gained 15.9% in the past year compared with the industry's growth of 3.3%.
The recovery in demand for rental residential units has been a key driving force behind the growth in residential real estate investment trusts (REIT) like AvalonBay in the post-pandemic era. High costs of home ownership coupled with the resumption of economic activity, especially in the urban sector, have aided the demand for such REITs. Also, technological advancements to drive margin expansion have helped them in riding the growth curve so far.
Analysts seem bullish on the Zacks Rank #3 (Hold) company. The Zacks Consensus Estimate for its 2023 funds from operations (FFO) per share has been raised marginally over the past month.
Image Source: Zacks Investment Research
Let us now decipher the factors behind the increase in the stock price and check whether the trend will last.
AvalonBay owns a portfolio of multi-family apartment communities located in the high-barrier-to-entry regions of the United States, which generally command the highest rents in the markets. These markets are characterized by growing employment in the high-wage sectors of the economy and a diverse and vibrant quality of life. This allows AvalonBay to generate superior long-term risk-adjusted returns on apartment community investments over other markets that lack such characteristics.
Moreover, the cost of homeownership has risen relative to rents due to a high interest rate environment. Limited single-family home inventory has made the transition from renter to homeowner difficult in the markets where the company operates.
As a result, renting residential units has turned out to be a more flexible and viable option among renters, especially among the young adult age cohort, which has a higher propensity to rent. We expect this positive trend to continue in the upcoming period, providing a favorable operating environment for AvalonBay.
This residential REIT is leveraging technology, scale and organizational capabilities to reduce costs and drive margin expansion across its portfolio. It focuses on enhancing self-serve digital offerings to customers to provide them with a seamless and personalized experience and bring about operational efficiency.
Such efforts will likely drive net operating income (NOI) growth in the near future. Per AvalonBay’s 2023 Investor Presentation, it expects to generate around $80 million of total incremental NOI from its operating model transformation in two horizons.
AvalonBay has an encouraging development pipeline, and its earnings growth over the intermediate term is likely to be further supported by the increased development deliveries. As of Sep 30, 2023, it had 16 consolidated development communities under construction (expected to contain 5,402 apartment homes and 59,000 square feet of commercial space).
The lion’s share of the company’s developments underway are match-funded with long-term debt and equity capital. Over the next few years, the developments underway are expected to deliver meaningful incremental NOI upon completion and stabilization.
The company maintains a healthy balance sheet position and had $508.6 million in unrestricted cash and cash equivalents and $234 million in unrestricted cash as of Sep 30, 2023. It has a well-laddered debt maturity schedule with a weighted average year to maturity of 7.5 years. Also, a high percentage of unencumbered NOI as of the end of the third quarter provides scope for tapping additional secured debt capital if required. Hence, a solid financial position is likely to support AVB’s growth endeavors.
In addition, AVB’s trailing 12-month return on equity is 8.07% compared with the industry’s average of 5.07%. This shows that it has been more efficient in using shareholders’ funds than its peers.
Nonetheless, an elevated supply of new units in some markets and an expected moderation in rent growth raise concerns for AvalonBay. A high interest rate environment is likely to increase the company's borrowing costs, affecting its ability to purchase or develop real estate.
Stocks to Consider
Some better-ranked stocks from the REIT sector are EastGroup Properties EGP, Park Hotels & Resorts PK and UMH Properties UMH. While PK sports a Zacks Rank #1 (Strong Buy), EGP and UMH each carry a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for EastGroup Properties’ 2023 FFO per share has moved marginally upward in the past two months to $7.70.
The consensus mark for Park Hotels & Resorts’ current-year FFO per share has moved nearly 1% northward over the past month to $2.03.
The consensus estimate for UMH Properties’ ongoing year’s FFO per share has increased 1.2% over the past two months to 84 cents.
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.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
AvalonBay Communities, Inc. (AVB) : Free Stock Analysis Report
EastGroup Properties, Inc. (EGP) : Free Stock Analysis Report
Park Hotels & Resorts Inc. (PK) : Free Stock Analysis Report
UMH Properties, Inc. (UMH) : Free Stock Analysis Report
