AvalonBay Communities AVB is positioned to benefit from strong rental demand fueled by a solid job market, favorable demographic trends, and elevated home ownership costs. The company’s focus on leveraging technology and its operational scale to enhance efficiency is promising.

Additionally, strategic acquisitions and development initiatives supported by a solid balance sheet are likely to drive sustainable long-term growth. However, challenges persist due to increased rental unit supply in select markets and the burden of high-interest expenses.

Over the past six months, shares of this residential REIT, with a Zacks Rank #3 (Hold), have gained 4.4% against the industry's decline of 3.8%. Analysts, too, seem bullish on it, with the Zacks Consensus Estimate for its 2024 and 2025 funds from operations (FFO) per share having risen marginally over the past months to $11.04 and $11.57, respectively.

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What’s Aiding AvalonBay Communities?

AvalonBay owns high-quality assets situated in some of the nation’s most sought-after markets, allowing it to achieve consistent rental income. The company prioritizes expanding its portfolio in key metropolitan areas characterized by robust employment growth in high-wage industries, elevated homeownership costs and a dynamic quality of life. These attributes provide a competitive advantage, enabling AvalonBay to achieve superior long-term, risk-adjusted returns on its apartment community investments compared to markets lacking such favorable conditions. We expect year-over-year growth of 3.5% in the company’s same-store revenues in 2024.

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

AvalonBay’s growth over the intermediate term is likely to be further supported by the increased development deliveries. In the first nine months of 2024, AvalonBay developed five wholly owned communities with 1,530 apartment units and 9,200 square feet of commercial space. In the next few years, the developments underway upon completion and stabilization are expected to fuel FFO and net asset value growth. We expect core FFO to increase by 3.7% year over year in 2024 and 4.5% in 2025.

AvalonBay has a healthy balance sheet with ample liquidity, placing it well to capitalize on long-term growth opportunities. As of Sept. 30, 2024, the company had $552.4 million in unrestricted cash and cash equivalents and did not have any borrowings outstanding under its $2.25 billion unsecured credit facility. It has a well-laddered debt maturity schedule with a weighted average year-to-maturity of seven years. In addition, in the third quarter of 2024, its annualized net debt-to-core EBITDAre was 4.2 times. For the nine months ended Sept. 30, 2024, unencumbered NOI was 95%, providing scope for tapping the additional secured debt capital if required.

What’s Hurting AvalonBay Communities?

The challenge of attracting renters is likely to continue as certain markets where the company operates experience elevated supply levels. Furthermore, competition from alternative housing options, including rental apartments, condominiums, and single-family homes, adds pressure. This competitive environment constrains the company’s ability to raise rents, thereby moderating its growth potential.

The like-term effective rent change in the third quarter of 2024 decreased to 3.2% from 3.7% reported in the year-ago period. We expect same-store average rental rates to increase by 2.5%, 2% and 1.6%, respectively, in the first three quarters of 2025.

Despite the Federal Reserve announcing rate cuts in recent times, the interest rate is still high and is a concern for AvalonBay. AvalonBay has a substantial debt burden, and its total debt was approximately $8.4 billion as of Sept. 30, 2024. For 2024, we project a year-over-year rise of 10.1% in the company’s interest expenses.

Stocks to Consider

Some better-ranked stocks from the residential REIT sector are Equity Lifestyle Properties ELS and Veris Residential VRE, 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 Equity Lifestyle Properties’ 2024 FFO per share has been raised marginally over the past three months to $2.92.

The Zacks Consensus Estimate for Veris Residential’s 2024 FFO per share has been raised marginally over the past month to 61 cents.

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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