AvalonBay Communities AVB is well-poised to gain from the healthy renter demand driven by favorable demographic trends and rising home ownership costs. The company’s efforts to leverage technology and scale to drive operational efficiency seem encouraging.

Strategic buyouts and development projects, backed by a healthy balance sheet position, augur well for long-term growth. However, the elevated supply of rental units in certain markets and high interest expenses add to its woes.

Over the past six months, shares of this residential REIT with Zacks Rank #3 (Hold) have gained 12.1%, outperforming the industry's upside of 6.3%. Analysts, too, seem bullish on it, with the Zacks Consensus Estimate for its 2024 funds from operations (FFO) per share being raised marginally over the past week to $11.04.

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What’s Aiding AvalonBay Communities?

AvalonBay mainly focuses on adding properties in the leading metropolitan areas. The market is characterized by growing employment in high-wage sectors of the economy, higher homeownership costs and a 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. 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. The company targets to achieve a $10 million incremental NOI for 2024.

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. The company 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 struggle to lure renters will persist as supply volume is expected to remain elevated in some markets where the company operates. Also, the company faces competition from other housing alternatives, such as rental apartments, condominiums and single-family homes. Such a competitive landscape limits the company’s ability to increase rent, restricting its growth momentum to some extent. 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’ current-year FFO per share has been raised marginally over the past two months to $2.92.

The Zacks Consensus Estimate for Veris Residential’s current-year FFO per share has been raised marginally over the past two months to 58 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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