2023-04-04 08:30:00 ET
Summary
- AvalonBay is seeing growth across all its geographic regions and same store rental revenue momentum is continuing this year.
- It carries a very strong balance sheet with plenty of liquidity on tap.
- Now may be a great opportunity to layer into this above average stock at a below average valuation.
It's been a while since I last visited AvalonBay Communities ( AVB ) in December of last year here , and it appears that my bullish take has paid off, giving investors a 5.6% total return in just over 3 months. In this article, I revisit the stock, highlight recent developments, and provide an updated valuation and recommendation.
Why AVB?
AvalonBay Communities is one of the largest multifamily REITs on the market today, with exposure to major metropolitan areas in 12 U.S. states and Washington D.C. At present, AVB has ownership interest in 294 apartment communities comprising over 88,000 units.
REITs like AVB make it easy for retail investors to have a stake in the real estate game while gaining immediate diversification across many buildings at the same time. Plus, having a professional management team in place means that retail investors don't have to worry about the headaches that come with being a landlord.
Scale matters in this space, and AVB's large size with equity market cap of $23.5 billion means that it's able to spread corporate overhead costs over a large asset base. AVB's property quality and scale gives it advantages over smaller players and this is reflected by AVB's outperformance compared to the Vanguard Real Estate ETF ( VNQ ) over the past decade. As shown below, AVB has largely beaten VNQ in terms of total return over much of the past decade.
Seeking Alpha
Meanwhile, AVB appears to be doing just fine amidst all the concerns around inflation. This is reflected by Core FFO per share growth of 14% YoY during the fourth quarter, far outpacing the rate of inflation. This was driven by strong 10% same store revenue growth, outpacing the 8% same store operating expense growth. This healthy operating leverage resulted in same store NOI growth of 11%. As shown below, AVB is seeing growth across the board in all its geographic regions.
AVB Press Release
Also encouraging, it appears that AVB's rental revenue momentum is continuing this year, as it saw 10.5% same store rental revenue growth in the first two months of the year compared to the same prior year period. Moreover, the occupancy rate actually increased in February to 96.2%, up from 95.8% in January and 95.6% in December. This trend is expected to continue, as management delivered 7% renewal rate increases to expiring leases in both March and April.
AVB is also well-positioned from a balance sheet standpoint, as it's just one of a handful of REITs to have an A- credit rating from S&P. It also carries a safe net debt to TTM EBITDA ratio of 4.9x, sitting far below the 6.0x level that most ratings agencies consider to be safe for REITs. Lastly, it has $613 million in cash on hand, and an additional $2.25 billion in untapped capacity on its revolving credit line, giving it ample ability to fund near term development and debt maturities.
Importantly for income investors, AVB currently yields a respectable 4% and the dividend is well-protected by a Core FFO payout ratio of 64%. Management resumed dividend growth this year, growing it by 4%, after freezing it over the past couple of years. I see potential for dividend growth to pick up pace should interest rate hikes stabilize and even decline should the inflation rate ease and decline.
Turning to valuation, AVB currently trades in value territory at the price of $167 with a forward P/FFO of 16.0, sitting far below its normal P/FFO of 23.2. While AVB may not deserve to trade at its normal P/FFO at the moment considering competing high yield from treasury bonds and bank CDs, I don't think it's unreasonable for AVB to trade 10% to 15% above where it is now, considering all of the above.
Analysts have a consensus Buy rating on the stock with an average price target of $191 , implying a potential 14% upside from the current price, and a potential 18% total return over the next 12 months.
FAST Graphs
Investor Takeaway
Given AVB's strong fundamentals and very strong balance sheet, it appears to be well-positioned to not only weather the current economic uncertainty, but also thrive in the long run. It also currently trades at a discount compared to its normal valuation multiples and pays a well-covered dividend. As such, investors seeking a decent starting yield with strong capital appreciation potential may want to give AVB stock a hard look at current levels.
For further details see:
AvalonBay Communities: I'm Moving Into This Premier Multifamily REIT