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Why Should You Hold AvalonBay Communities (AVB) Stock Now?

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In the peak leasing season, residential REIT AvalonBay Communities Inc. AVB is expected to benefit from its high quality assets located in some of the premium markets of the country. In fact, in 2017, the company delivered the seventh consecutive year of above-sector average core funds from operations (FFO) per share growth, which is encouraging. Based on its strong fundamentals, this uptrend is expected to continue going forward.

Moreover, in the recently-announced quarterly update, AvalonBay noted that it expects total rental revenues for established communities in Q2 to climb 2.4-2.5% from the prior-year period. The mid-point of the latest outlook denotes a 15-basis-point expansion from what the company had previously projected. The company had reported a 2.4% increase in rental revenues for established communities in the first quarter.

Increasing consumer confidence backed by job growth, rising wages and a healthier balance sheet promise solid prospects for AvalonBay. Additionally, corporate profits are up and business confidence has recovered.

Also, demographic growth continues to be strong in the young-adult age cohort, which has a higher propensity to rent. This age cohort has also experienced a considerable part of net job growth and is helping spur primary renter demand. Household formation is also picking up pace, which is encouraging.

Furthermore, the company has a healthy balance sheet and ample liquidity to support its growth needs. As of Mar 31, 2018, AvalonBay had no borrowings outstanding under its $1.5-billion unsecured credit facility. In addition, the company’s annualized net debt-to-core EBITDA for first-quarter 2018 was 5.1 times.

Nonetheless, hike in interest rate can pose a challenge for the company. Essentially, rising rates imply higher borrowing cost for the company, which may affect its ability to purchase or develop real estate and lower dividend payouts as well. Further, the dividend payout might become less attractive compared to the yields on fixed income and money market accounts.

In addition to the above, new apartment deliveries are anticipated to remain elevated in the company’s markets in 2018 and modestly decrease in 2019. Specifically, Metro New York, New Jersey and Mid-Atlantic regions are likely to remain choppy amid rising supply of residential units in upcoming quarters.

In addition, supply continues to be most noticeable in the urban sub-markets. This high supply in a number of the company’s markets is likely to put pressure on rental rates. Hence, growth in its stabilized portfolio is likely to remain modest in the upcoming period. Furthermore, there is high concession activity amid higher supply, which remains a concern.

Nevertheless, AvalonBay is not the only company reeling under this high supply pressure. Other residential REITS like Equity Residential EQR and Essex Property Trust Inc. ESS too are facing the brunt. This unhealthy environment is unlikely to dissipate any time soon, with aggressive deliveries feared to continue into early next year as well.

Per a report from real estate technology and analytics firm — RealPage, Inc. RP — during the last half of 2017, across the nation’s 150 largest metros “annual pace of completions” climbed above the 300,000-unit level. Further, through early 2019, “scheduled new supply” will keep adding on to the flow at about the same annual pace.

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 appreciated 2.2% in the past three months compared with its industry’s growth of 5.4%.

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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