Should You Retain AvalonBay (AVB) Stock In Your Portfolio?

We updated our research report on AvalonBay Communities Inc. (NYSE:AVB) on May 15.

Late in April, this residential REIT reported first-quarter 2017 core funds from operations (FFO) per share of $2.09, missing the Zacks Consensus Estimate of $2.11. However, the figure came 6.1% higher the year-ago figure of $1.97. Growth in net operating income (NOI) from existing, acquired and newly developed operating communities attributed to this year-over-year increase. The benefit was partly offset by a rise in interest expense.

Revenues from established communities – those that stabilized operations as of Jan 1, 2016 and are neither executing nor planning any significant redevelopment work during the current year – improved 3.2% year over year. This was driven by a 3.1% rise in average rental rates and 0.1% increase in economic occupancy. Net operating income from established communities grew 3.9% year over year to $276.1 million.

Admittedly, completion of a number of projects in its markets, leading to higher supply is a concern. Higher supply usually leads to lesser absorption, curtails the landlord’s capability to demand more rents and results in a rise in concession activity. As such, growth in the company’s stabilized portfolio is likely to be moderated in the near term. Furthermore, hike in interest rates adds to its woes.

Nevertheless, AvalonBay has high quality assets located in some of the premium markets of the country, which enable the company to generate steady rental revenues. In addition, increasing consumer confidence stemmed by job growth, rising wages and a healthier balance sheet, promise solid prospects for AvalonBay.

Additionally, demographic growth continues to be strong in the young-adult age cohort, which has a higher propensity to rent. In fact, a significant change in lifestyle has taken place and life cycle events are getting delayed. This is leading to an extension of the average age of first-time homeownership. This age cohort has also experienced a considerable part of the net job growth and is helping to grow primary renter demand.

Amid these, AvalonBay’s shares outperformed the Zacks categorized REIT and Equity Trust – Residential industry over the past three months. During this time period, shares of the company increased 7.7%, whereas the industry ascended 1.5%. Moreover, over the past 30 days, the second-quarter 2017 FFO per share estimate moved north by one cent to $2.17.



Currently, AvalonBay has a Zacks Rank #3 (Hold).

Stocks to Consider

Investors can also consider better-ranked stocks in the REIT space like Equity LifeStyle Properties, Inc. (NYSE:ELS) , Omega Healthcare Investors, Inc. (NYSE:OHI) and Prologis, Inc. (NYSE:PLD) . All the three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Equity LifeStyle Properties currently has a long-term growth rate of 4.7%.

Omega Healthcare has been a steady performer, having surpassed the Zacks Consensus Estimate over the past four trailing quarters, with an average beat of 4.26%.

Prologis’ estimates for 2017 funds from operations (“FFO”) per share moved north nearly 3.8% to $2.76, over the past 30 days.


Note: All EPS numbers presented in this write up represent funds from operations (“FFO”) per share. FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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