AVB - AvalonBay: No Margin Of Safety At The Current Price

2024-06-28 08:12:00 ET

Summary

• AvalonBay's NOI growth has been decelerating. They are increasing their exposure to the Sunbelt region to position their portfolio for continued growth.
• For the business, AvalonBay has the scale, expertise and access to lower cost of debt which should continue to buoy their business in both current and expansion markets.
• As an investment, AvalonBay's net asset value per share estimate is $178.29, indicating shares are overvalued.
• There are well reasoned studies that suggest buying REITs at a premium to NAVPS can lead to underperformance.
• For investors looking for a margin of safety, it may be worthwhile to wait for a better entry.

Introduction

AvalonBay Communities ( AVB ) is currently trading at about 18.6x 2024 FFO and slightly above their four-year average dividend yield. They are also trading at a premium to the sector as measured by the P/AFFO. In this article, we estimate AvalonBay’s value using the net asset value per share (NAVPS). The NAVPS of a REIT is not as readily available as the other valuation statistics. One reason for this is because there is a fair amount of subjectivity that is required to estimate the NAVPS. Notwithstanding this limitation, there are well reasoned studies that support the view that purchasing REITs at a discount to NAVPS leads to outperformance and, conversely, purchasing REITs at a premium to NAVPS leads to underperformance. At a minimum, investors can use the NAVPS in conjunction to the other valuation statistics to support an investment action....

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