AvalonBay Communities Up 15.4% YTD: Will It Rise Further?

Shares of AvalonBay Communities AVB have rallied 15.4% year to date compared with the industry's upside of 9.8%.

Last month, AvalonBay reported a second-quarter 2024 core funds from operation (FFO) per share of $2.77, which beat the Zacks Consensus Estimate of $2.71.

The quarterly results reflected a year-over-year increase in both same-store total revenues and average rental revenue per occupied home.

This residential REIT also raised its guidance for 2024 core FFO per share, same-store residential revenues and net operating income (NOI).

Analysts also seem bullish on this Zacks Rank #3 (Hold) company, with the Zacks Consensus Estimate for its 2024 FFO per share revised upward over the past week to $10.97.

Image Source: Zacks Investment Research

Let us decipher the factors behind the surge in the stock price.

AvalonBay focuses on adding properties situated in the leading metropolitan areas where the market is characterized by growing employment in the high-wage sectors of the economy, higher home ownership costs, and a diverse and vibrant quality of life. This allows AvalonBay to generate superior long-term risk-adjusted returns on apartment community investments over the other markets that lack such characteristics.

AVB's portfolio is well-diversified, with its same-store portfolio comprising a decent number of both suburban and urban assets. Moreover, limited single-family home inventory is making the transition from renter to homeowner difficult in its markets, and renting apartment units is a viable option. Hence, with these factors in place, AvalonBay remains well-poised for growth.

To enhance its overall portfolio quality, AvalonBay has carried out several strategic acquisitions over the years. From the beginning of 2024 through Aug 1, 2024, the company completed acquisitions worth $225 million. Moreover, given the favorable residential real estate market fundamentals in the newly expanded markets of Raleigh-Durham and Charlotte, NC; Southeast Florida; Dallas and Austin, TX, and Denver, CO, AVB is tracking opportunities to increase its asset base there.

AvalonBay has an encouraging development pipeline. As of Jun 30, 2024, the company had 17 consolidated development communities under construction. Over the next few years, the developments underway are expected to deliver meaningful incremental NOI upon completion and stabilization and are expected to fuel FFO and net asset value growth.

AvalonBay is leveraging technology, scale and organizational capabilities to drive margin expansion across its portfolio. Such efforts are likely to bring about operational efficiency and reduce costs, aiding NOI growth.

The company maintains a healthy balance sheet position. As of Jun 30, 2024, AvalonBay did not have any borrowings outstanding under its $2.25 billion unsecured credit facility. AVB has a well-laddered debt maturity schedule with a weighted average year-to-maturity of 7.3 years.In addition, in the second quarter of 2024, its annualized net debt-to-core EBITDAre was 4.2 times, and the unencumbered NOI was 95%, providing scope for tapping the additional secured debt capital if required.

However, the elevated supply of rental units in certain markets is likely to fuel competition and curb pricing power, thereby impeding the rent growth momentum to some extent. A high interest rate adds to its woes.

Stocks to Consider

Some better-ranked stocks from the REIT sector are Essex Property Trust ESS and Cousins Properties CUZ, each carrying a Zacks Rank #2 (Buy) at present.

The Zacks Consensus Estimate for Essex Property Trust's 2024 FFO per share is pegged at $4.82, up 3.26% year over year.

The Zacks Consensus Estimate for Cousins Properties' 2024 FFO per share is pegged at $2.66, up 1.53% year over year.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO), a widely used metric to gauge the performance of REITs.

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