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

Given the improving demand for apartment living post the pandemic, AvalonBay Communities, Inc. AVB is well-positioned for growth.

AvalonBay has premium assets 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, higher home ownership costs and diverse and vibrant quality of life, enabling the company to generate steady rental revenues.

The residential REIT has been 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, which have several demand drivers such as a young, well-educated workforce and the recent migration trends of renters. Its efforts to capture the renter demand in these markets are likely to pay off well.

The company is also leveraging technology, scale and organizational capabilities to drive innovation and margin expansion in its portfolio.

AvalonBay has an encouraging development pipeline which bodes well for its long-term growth. From the beginning of the year through Sep 30, 2022, the company completed $600 million worth of developments, with a weighted average initial projected stabilized yield of 6.2%. Development starts totaled $665 million for the same period.

Moreover, a major chunk of AVB’s developments is match-funded with long-term debt and equity capital. This highlights the company’s prudent capital management practices and relieves the pressure on its balance sheet.

On the balance sheet front, AvalonBay exited third-quarter 2022 with $1.9 billion of liquidity and an annualized net debt-to-core EBITDAre of 4.6X.

In September 2022, the company amped up its financial flexibility by increasing the borrowing capacity on its unsecured credit facility from $1.75 billion to $2.25 billion. It also extended the maturity from Feb 28, 2024, to Sep 27, 2026, which can be prolonged by exercising the two six months extension option.

Therefore, with a well-laddered debt maturity schedule and enough financial flexibility, AVB is well-positioned to capitalize on growth opportunities.

Nonetheless, the continuation of the flexible working environment has resulted in lower renter demand for costlier and urban/infill markets, raising concerns for AvalonBay’s properties that are located in the urban markets.

Stiff competition from other housing alternatives like rental apartments, condominiums and single-family homes restricts AvalonBay from raising rents, stalling its growth pace.

Rising interest rates are likely to increase the company's borrowing costs, affecting its ability to purchase or develop real estate.

Analysts, too, seem bearish on the Zacks Rank #3 (Hold) stock. The Zacks Consensus Estimate for the company’s 2022 funds from operations (FFO) per share has moved marginally downward in the past week.

Shares of AVB have lost 19.1% compared with its industry's decline of 13.6% in the past three months.

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Stocks to Consider

Some better-ranked stocks from the REIT sector are VICI Properties VICI, MidAmerica Apartment Communities MAA and Lamar Advertising LAMR, 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 $1.92.

The Zacks Consensus Estimate for MidAmerica Apartment Communities’ ongoing year’s FFO per share is pegged at $8.42.

The Zacks Consensus Estimate for Lamar Advertising’s 2022 FFO per share is pegged at $7.34.

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

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