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AvalonBay Communities AVB 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. The company’s efforts to leverage technology and scale to drive margin expansion and operational efficiency seem encouraging.

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 country's premium markets. It 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 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 is a viable option. Hence, with these factors in place, AvalonBay remains well-poised for growth.

In 2024, management expects same-store residential revenues to increase 3.1% year over year. We expect year-over-year growth of 3.3% in the company’s same-store residential rental revenues in 2024.

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 funds from operation (FFO) and net asset value 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 7.4 years. In addition, in the first quarter of 2024, its annualized net debt-to-core EBITDAre was 4.3 times, and the unencumbered NOI was 95%, providing scope for tapping the additional secured debt capital if required.

Over the past three months, shares of this Zacks Rank #2 (Buy) company have rallied 13.5% compared with the industry's upside of 10.8%.The Zacks Consensus Estimate for AvalonBay Communities' second quarter 2024 FFO per share has risen marginally upward over the past two months to $2.71. AVB is slated to release quarterly numbers on Jul 31 after the closing bell.

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What’s Hurting AVB?

The struggle to lure renters will persist as the supply volume is expected to remain elevated in some markets where the company operates. Such a competitive landscape limits the company’s ability to increase the rent, thereby restricting its growth momentum to some extent.

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 Mar 31, 2024. For 2024, we project a year-over-year rise of 8.4% in the company’s interest expenses.

Stocks to Consider

Some other top-ranked stocks from the residential REIT sector are Essex Property Trust ESSand Equity Residential EQR, each carrying a Zacks Rank #2 at present.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Essex Property Trust’s 2024 FFO per share has moved marginally northward over the past month to $15.41.

The Zacks Consensus Estimate for Equity Residential’s 2024 FFO per share has moved marginally northward over the past two months to $3.88.

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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.