AvalonBay Communities AVB is well-poised to gain from healthy renter demand for its residential properties in the high barrier-to-entry regions of the United States. The company’s efforts to leverage technology to drive margin expansion seem encouraging. Strategic buyouts and development projects, backed by a healthy balance sheet position, augur well for long-term growth. However, elevated rental unit supply in select markets and high-interest expenses raise concerns.

On Feb. 27, 2025, AvalonBay announced that it was under contract to acquire two apartment communities in Austin and agreed to acquire six apartment communities in the Dallas-Fort Worth metropolitan area. The move highlights the company’s portfolio expansionary efforts in high-growth regions of Texas to boost its revenues and enhance the portfolio quality.

What is Aiding AvalonBay Communities?

AvalonBay mainly focuses on adding properties in the leading metropolitan areas where the market is characterized by growing employment in high-wage sectors of the economy, higher homeownership costs, and diverse and vibrant quality of life. This offers it an edge for generating superior long-term risk-adjusted returns on apartment community investments over the other markets that lack such characteristics.

AvalonBay is leveraging technology, scale and organizational capabilities to drive margin expansion in its portfolio. The company is focusing on self-serve digital experiences to provide a seamless, personalized customer experience. Such efforts are likely to bring about operational efficiency and reduce costs, aiding NOI growth.

To enhance its overall portfolio quality, AvalonBay has carried out several strategic acquisitions over the years. The company is also disposing of non-core assets for capital recycling. Moreover, the company's growth over the intermediate term is likely to be further supported by its increased development deliveries. 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 4.3% in 2025.

AvalonBay has a healthy balance sheet with ample liquidity, placing it well to capitalize on long-term growth opportunities. As of Dec. 31, 2024, the company had $108.6 million in unrestricted cash and cash equivalents. As of the same date, AvalonBay did not have any borrowings outstanding under its $2.25 billion unsecured credit facility.

The company has a well-laddered debt maturity schedule with a weighted average year-to-maturity of seven years. In addition, in the fourth quarter of 2024, its annualized net debt-to-core EBITDAre was 4.2 times. For 2024, the unencumbered NOI was 95%, providing scope for tapping additional secured debt capital if required.

What is Hurting AVB?

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 fourth quarter of 2024 decreased to 1.1% from 3.2% reported in the prior quarter. We expect same-store average rental rates to increase 2.6%, 2.1% and 1.8%, respectively, in the first three quarters of 2025.

Despite the Federal Reserve announcing rate cuts late in 2024, the interest rate is still high and a concern forAvalonBay. The company has a substantial debt burden and its total debt was approximately $8.13 billion as of Dec. 31, 2024. For the first quarter of 2025, interest expenses are expected to rise 7.6% year over year.

Over the past six months, shares of this residential REIT, with a Zacks Rank #3 (Hold), have lost 0.4% compared with the industry's 2.9% decline. Analysts seem bearish on it, with the Zacks Consensus Estimate for 2025 FFO per share having been revised marginally southward over the past week to $11.47.

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Stocks to Consider

Some better-ranked stocks from the broader REIT sector are SL Green Realty SLG and Welltower WELL, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for SL Green Realty’s 2025 FFO per share is pegged at $5.52, which implies year-over-year growth of 9.7%.

The Zacks Consensus Estimate for Welltower’s 2025 FFO per share is pinned at $4.88, which indicates an increase of 13% from the year-ago period.

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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This article originally published on Zacks Investment Research (zacks.com).

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