AvalonBay Communities (AVB Quick QuoteAVB - Free Report) is well-poised to benefit from the healthy renter demand for its residential properties in the high barrier-to-entry regions of the United States as favorable demographic trends and rising home ownership costs are likely to keep driving demand. The company’s efforts to leverage technology and scale to drive margin expansion and 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 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.

What’s Aiding AVB?

AvalonBay has high-quality assets located in some of the premium markets of the country, which enable the company to generate steady rental revenues. It mainly 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 offers AvalonBay an edge for generating superior long-term risk-adjusted returns on apartment community investments over the other markets that lack such characteristics.

Its 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 a viable option. Hence, with these factors in place, AvalonBay remains well-poised for growth.

For the first quarter of 2024, management expects same-store residential revenues to increase 3.7-3.8% year over year. The midpoint of this range is approximately 45 basis points higher than its most recent expectation on Jan 31, 2024. We expect year-over-year growth of 3.1% in the company’s same-store residential rental revenues in 2024.

To enhance its overall portfolio quality, AvalonBay has carried out several strategic acquisitions over the years. In 2023, the company completed acquisitions worth $277.2 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 here. A young, well-educated workforce, in-migration trends and a high concentration of science, technology, engineering or math jobs are the demand drivers for these markets.

AvalonBay also has an encouraging development pipeline. Over the next few years, the developments underway are expected to deliver meaningful incremental net operating income (NOI) upon completion and stabilization and are expected to fuel FFO and NAV growth.

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.

AvalonBay has a healthy balance sheet with ample liquidity, placing it well to capitalize on long-term growth opportunities. The company has a well-laddered debt maturity schedule with a weighted average year to maturity of 7.7 years. In addition, in the fourth quarter of 2023, its annualized net debt-to-core EBITDAre was 4.2 times, and in 2023, the unencumbered NOI was 95%, providing scope for tapping the additional secured debt capital if required.

Over the past month, shares of this Zacks Rank #3 (Hold) company have risen 3.5% compared with the industry's upside of 2.2%.

Image Source: Zacks Investment Research

What’s Hurting AVB?

The continuation of the flexible working environment is resulting in a shift of renter demand away from higher cost and urban/infill markets. This is likely to impact the demand for some of AvalonBay’s properties in the urban markets and put pressure on occupancy levels.

The struggle to lure renters will persist as supply volume is expected to remain elevated in some markets where the company operates. Also, AVB 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, thereby restricting its growth momentum to some extent. Further, an expected moderation in rent growth in 2024 could impede revenue growth to a certain extent in some regions and markets.

A high interest rate environment is a concern for AvalonBay. The company may find it difficult to purchase or develop real estate with borrowed funds as the costs are likely to be on the higher side. AvalonBay has a substantial debt burden, and its total debt was approximately $8.04 billion as of Dec 31, 2023. For 2024, we project a year-over-year rise of 4.6% in the company’s interest expenses.

Stocks to Consider

Some better-ranked stocks from the broader REIT sector are Host Hotels & Resorts (HST Quick QuoteHST - Free Report) and Lamar Advertising (LAMR Quick QuoteLAMR - Free Report) , 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 HST’s 2024 funds from operation (FFO) per share has moved 2.6% northward over the past week to $1.97.

The Zacks Consensus Estimate for LAMR’s current-year FFO per share has been raised marginally over the past month to $7.74.

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.