AvalonBay Communities, Inc. AVB is well-poised to benefit from the healthy demand for its residential properties in high-barrier-to-entry regions of the United States, which generally command the highest rents in the markets.
These markets are characterized by growing employment in the high-wage sectors of the economy, higher home ownership costs, and diverse and vibrant quality of life, enabling the company to generate steady rental revenues. For 2023, we estimate same-store residential rental revenues to improve 5% year over year.
The company is leveraging technology, scale and organizational capabilities to drive innovation and margin expansion in its portfolio. It is making significant progress in transforming the operating model innovation, which is expected to enhance the net operating income (NOI) meaningfully in the upcoming period. We project 2023 same-store residential NOI to grow 4.6% year over year.
Further, to enhance its portfolio quality, this residential REIT has been focusing on strategic acquisitions. In 2022, the company acquired four wholly-owned communities for $536.2 million.
It is also making concerted efforts to expand its portfolio in the growing markets of Raleigh-Durham and Charlotte, NC; Southeast Florida; Dallas and Austin, TX; and Denver, CO, to capture the renter demand in these markets, which is likely to pay off well.
AvalonBay has an encouraging development pipeline, with 17 consolidated development communities under construction (expected to contain 5,417 apartment homes and 56,000 square feet of commercial space) as of Dec 31, 2022. This is expected to drive the company’s earnings growth in the upcoming period.
Our estimate for core funds from operations (FFO) indicates a 5.3% year-over-year increase in 2023. While the same is anticipated to moderate in 2024, we expect the growth to be 9.5% for 2025.
Additionally, in 2022, AVB’s development starts totaled $730 million. Management expects the same to be $900 million for 2023.
On the balance sheet front, AvalonBay exited 2022 with $613.19 million of unrestricted cash and cash equivalents, and $121.06 million in cash in escrow. Its annualized net debt-to-core EBITDAre for fourth-quarter 2022 was 4.5 times. With a well-laddered debt maturity schedule and enough financial flexibility, AVB is well-positioned to capitalize on growth opportunities.
Solid dividend payouts are arguably the biggest enticements for REIT shareholders, and AvalonBay remains committed to the same. In February 2023, concurrent with its fourth-quarter 2022 earnings release, the company increased its first-quarter 2023 dividend to $1.65 per share from $1.59 paid out in the prior quarter. This represented a sequential hike of 3.8%. Such efforts boost investors’ confidence in the stock.
Shares of this Zacks Rank #3 (Hold) company have lost 2.5% compared with its industry’s decline of 5.2% in the past three months.
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Nonetheless, the lack of rent relief in 2023 may weigh on AVB’s revenue growth to a certain extent in some regions and markets. Elevated supply in certain markets is another key concern.
Rising interest rates are likely to increase the company’s borrowing costs, affecting its ability to purchase or develop real estate. In 2023, we anticipate net interest expenses to increase 3.8% year over year.
Stocks to Consider
Some better-ranked stocks from the REIT sector are Alexandria Real Estate Equities ARE and Terreno Realty TRNO, each currently carrying a Zacks Rank #2 (Buy), and Service Properties Trust SVC, sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Alexandria Real Estate’s 2023 FFO per share is pegged at $8.95.
The Zacks Consensus Estimate for Terreno Realty’s current-year FFO per share is pinned at $2.17.
The Zacks Consensus Estimate for Service Properties Trust’s 2023 FFO per share is pegged at $1.89.
Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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