AvalonBay Communities, Inc. is a US$29b large-cap, real estate investment trust (REIT) based in Arlington, United States. REITs are basically a portfolio of income-producing real estate investments, which are owned and operated by management of that trust company. They have to meet certain requirements in order to become a REIT, meaning they should be analyzed a different way. Below, I'll look at a few important metrics to keep in mind as part of your research on AVB.
Funds from Operations (FFO) is a higher quality measure of AVB's earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For AVB, its FFO of US$1.3b makes up 86% of its gross profit, which means the majority of its earnings are high-quality and recurring.
Robust financial health can be measured using a common metric in the REIT investing world, FFO-to-debt. The calculation roughly estimates how long it will take for AVB to repay debt on its balance sheet, which gives us insight into how much risk is associated with having that level of debt on its books. With a ratio of 18%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take AVB 5.43 years to pay off using operating income alone. Given that long-term debt is a multi-year commitment this is not unusual, however, the longer it takes for a company to pay back debt, the higher the risk associated with that company.
Next, interest coverage ratio shows how many times AVB’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. With an interest coverage ratio of 5.89x, it’s safe to say AVB is generating an appropriate amount of cash from its borrowings.
In terms of valuing AVB, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. In AVB’s case its P/FFO is 21.48x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
As a REIT, AvalonBay Communities offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in AVB, I highly recommend taking a look at other aspects of the stock to consider:
- Future Outlook: What are well-informed industry analysts predicting for AVB’s future growth? Take a look at our free research report of analyst consensus for AVB’s outlook.
- Valuation: What is AVB worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether AVB is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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