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Here's Why You Should Retain AvalonBay (AVB) Stock for Now

The healthy demand for AvalonBay Communities, Inc.’s AVB residential properties in high-barrier-to-entry regions of the United States, which generally command the highest rents in the markets, positions it well for growth.

These markets are characterized by growing employment in the high-wage sectors of the economy, and diverse and vibrant quality of life, enabling the company to generate steady rental revenues.

Also, higher home ownership costs amid rising interest rates and limited single-family home inventory are making the transition from renter to homeowner difficult in its markets. As a result, renting apartment units is a viable option in this scenario, aiding demand for the company’s apartment units.

We estimate same-store residential rental revenues to improve 5.3% year over year in 2023.

AvalonBay is also leveraging technology, scale and organizational capabilities to drive innovation and margin expansion in its portfolio. The company’s significant progress in transforming the operating model innovation is expected to enhance its net operating income (NOI) meaningfully in the upcoming period. We project 2023 same-store residential NOI to grow 4.9% year over year.

Further, to enhance its portfolio quality, this residential REIT has been focusing on strategic acquisitions. In 2022, the company acquired four wholly-owned communities for $536.2 million.

It is also making concerted efforts to expand its portfolio in the growing markets of Raleigh-Durham and Charlotte, NC; Southeast Florida; Dallas and Austin, TX; and Denver, CO, to capture the renter demand in these markets, which is likely to pay off well.

Moreover, AvalonBay has an encouraging development pipeline, with a majority portion being match-funded with long-term debt and equity capital. The projects, upon completion and stabilization, are expected to fuel funds from operations (FFO) and NAV growth in the future. Our estimate for core FFO indicates a 6.3% year-over-year increase for 2023.

On the balance sheet front, AvalonBay had $254.5 million of unrestricted cash and cash equivalents, and $121.6 million in cash in escrow as of Mar 31, 2023. As of the same date, the company did not have any borrowings outstanding under its $2.25 billion unsecured credit facility. With a well-laddered debt maturity schedule and enough financial flexibility, AVB is well-positioned to capitalize on growth opportunities.

In addition, its trailing 12-month return on equity (ROE) is 9.17% compared with the industry’s average of 4.90%. This reflects that the company is more efficient in using shareholders’ funds than its peers.

Shares of this Zacks Rank #3 (Hold) company have gained 8.3% in the past six months compared with its industry's growth of 1.6%.

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Zacks Investment Research

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Nonetheless, the lack of rent relief in 2023 may weigh on AVB’s revenue growth to a certain extent in some regions and markets. Elevated supply in certain markets is another key concern.

Rising interest rates are 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 VICI Properties VICI, Iron Mountain IRM and Host Hotels & Resorts HST, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for VICI Properties’ current-year FFO per share is pegged at $2.13.

The Zacks Consensus Estimate for Iron Mountain’s ongoing year’s FFO per share is pegged at $3.96.

The Zacks Consensus Estimate for Host Hotels & Resorts’ 2023 FFO per share is pegged at $1.87.

Note: Anything related to earnings presented in this write-up represents FFO — a widely used metric to gauge the performance of REITs.


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AvalonBay Communities, Inc. (AVB) : Free Stock Analysis Report

Host Hotels & Resorts, Inc. (HST) : Free Stock Analysis Report

Iron Mountain Incorporated (IRM) : Free Stock Analysis Report

VICI Properties Inc. (VICI) : Free Stock Analysis Report

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