AvalonBay Communities Inc is a US$24.3b large-cap, real estate investment trust (REIT) based in Arlington, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how AVB’s business operates and also how we should analyse its stock. Below, I’ll look at a few important metrics to keep in mind as part of your research on AVB.
A common financial term REIT investors should know is Funds from Operations, or FFO for short, which is a REIT’s main source of income from its portfolio of property, such as rent. FFO is a cleaner and more representative figure of how much AVB actually makes from its day-to-day operations, compared to net income, which can be affected by 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.
In order to understand whether AVB has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take AVB to pay off its debt using its income from its main business activities, and gives us an insight into AVB’s ability to service its borrowings. With a ratio of 17%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take AVB 5.85 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.
I also look at AVB’s interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it’s better to use FFO divided by net interest. With an interest coverage ratio of 6.29x, 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 19.37x, compared to the long-term industry average of 16.5x, meaning that it is slightly 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
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