We have recently upgraded our recommendation on Avalonbay Communities Inc. (AVB), a leading multifamily real estate investment trust (REIT), from Neutral to Outperform.
With a continued decline in the single-family homeownership rate across the U.S. and gradual improvement in the overall economy, apartment REITs performed strongly in fiscal 2010. We expect this sector to remain comparatively stable in the coming quarters as well, since renting has emerged as the only viable option for customers who could not get mortgage loans or are unwilling to buy a house at present. Consequently, we remain bullish on Avalonbay, one of the best-positioned apartment REITs in the U.S.
Avalonbay has Class A assets located in some of the premium markets of the country, such as Washington DC, New York City and San Francisco, where the spread between renting and owning is relatively high. The company’s assets are primarily located in infill supply-constrained areas, where there are very limited new apartment construction activities.
In addition, Avalonbay mostly focuses on developing properties for higher-income clients in high barrier-to-entry regions of the U.S. This safeguards the company from any short-term volatility in the market and provides a strong future upside potential.
Furthermore, Avalonbay has a reasonably strong balance sheet with moderate near-term debt maturities and adequate liquidity. Consequently, the company has the wherewithal to capitalize on potential acquisition opportunities due to distressed selling from owners and developers who cannot refinance their properties, which augurs well for its top-line growth.
However, Avalonbay has a huge development pipeline, which increases operational risks in the current credit-constrained market, exposing it to rising construction costs, entitlement delays and lease-up risk.
Moreover, a substantial number of apartment leases of Avalonbay are for a term of one year or less, enabling the residents to leave at the end of the lease term without any penalty. Consequently, its rental revenues are impacted by declines in market rents which affect its long-term profitability.
Avalonbay presently has a Zacks #1 Rank, which translates into a short-term ‘Strong Buy’ rating, indicating that the stock is expected to outperform the overall U.S. equity market for the next 1–3 months. In contrast, we have a Neutral recommendation and a Zacks #3 Rank (short-term ‘Hold’) for Apartment Investment & Management Co. (AIV), a competitor of Avalonbay.
APARTMENT INVT (AIV): Free Stock Analysis Report
AVALONBAY CMMTY (AVB): Free Stock Analysis Report
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