Is AvalonBay Communities Stock A Buy?

Is AvalonBay Communities Stock A Buy? As devastating as this year has been for many people and across several industries, the impacts of 2020 have also brought the potential to actually build wealth in the real estate investment industry thanks to falling real estate prices.

Real estate investment trusts, or REITs, are among the best performing investments in recent times. But this really isn’t surprising given some unique advantages that are available through these investment vehicles. Even if you have never invested in a single share ever, the usual “unique advantage” of real estate investing is now available to ordinary individuals.

As commercial real estate (CRE) industries continue rebounding from the impacts of COVID-19, businesses reopen, and unemployment improves, we’re finally seeing hope for industries extremely hard-hit. One sector in particular that has been experiencing tremendous uncertainty is residential real estate and housing.

Stays on eviction were extended through the end of 2020 and additional federal assistance programs could be forthcoming, but it’s hard to say how REITs will perform in the long term. That poses the question: is AvalonBay Communities (AVB) stock a good investment?

AvalonBay Targets High Income Areas

AvalonBay Communities, one of the leaders in luxury apartment homes, is also one of the largest REITs in the publicly traded market.

The company specializes in developing, acquiring, and managing luxury apartments in upscale markets throughout the US. AvalonBay has over 86,000 units in more than 20 markets.

Most of the company’s portfolio is located in the metro areas of New York, New Jersey, and southern California. The company looks for developments or acquisitions in markets where wages are considerably higher than average, allowing AvalonBay to lease to tenants with higher incomes.

Is AvalonBay Communities Stock a Buy?

By targeting high income regions, AvalonBay’s tenant base has become a core competitive advantage that cushions the company from vacancy to a greater extent than competitors thanks to higher capacity of customers to pay rents.

AvalonBay’s tenants typically earn much higher wages than most renters and hold positions that weren’t greatly affected by the current crisis. Instead of facing unemployment, most of these tenants merely transition to work-from-home arrangements.

For rental terms ending in July and August of 2020, AvalonBay collected an average of 96% of all rents due. By September 9, the company’s overall rental collection average was 95%, just a little below its usual average of nearly 98% collection.

Across all AvalonBay properties, occupancy has remained stable with a rolling average of just over 93% for July and August.

Although Q2 2020 was rather challenging for the commercial industry as a whole, AvalonBay remained nearly in line with performance for Q2 2019. Operational funds only dropped by a little over 1% and earnings per share stayed the same.

Risks of Buying AvalonBay Communities Stock

This isn’t to say that investing in AvalonBay is entirely without risk. The company saw a revenue drop of 3% by the end of Q2 2020.

This is due largely in part to lower rents for new leases and current tenant lease renewals, as well as uncollected rent from tenants in the retail sector which goes hand-in-hand with more people working from home.

The company’s greatest threat is its ability to continue performing at current standards. While occupancy has only slightly declined, further economic destruction risks a domino effect.

Another potential risk for AvalonBay Communities stock is the decision among renters to opt for less expensive rentals in markets outside of city limits, where they can enjoy more privacy, more space, and more affordability.

Certainly not everyone is moving away from metro areas, but this shift in preference could impact AVB share price over the next couple of years.

Who Competes Against AvalonBay?

AvalonBay’s closest competition is Care Property Invest and Investors Real Estate Trust (IRET). Of the three REITs, AvalonBay leads in nearly every category from company valuation to Twitter followers.

Care Property Invest (CPINV on the European Stock Exchange) has:

• 27 employees
• A valuation of €791.4 million
• A Q4, 2020 share price of €20.74
• Founded in 1995

Investors Real Estate Trust has:

• 361 employees
• A valuation of $943 million
• FY 2019 revenue of $185.1 million
• FY 2019 net income of $78.7 million
• A Q4, 2020 share price of $72.67
• Founded in 1970

AvalonBay Communities has:

• 3,122 employees
• A valuation of $23 billion
• FY 2019 revenue of $2.3 billion
• FY 2019 net income of $786.1 million
• A December 4, 2020 share price of $173.84
• Founded in 1978

Is AvalonBay Communities Stock a Buy? – The Bottom Line

It remains uncertain exactly where the real estate market is headed. The current challenges that face AvalonBay Communities could be temporary depending on how fast the economy can bounce back.

While renter preferences are currently shifting towards the rural and suburban markets, and away from luxury and metropolitan areas, the markets targeted by AVB are likely to remain in demand and its renters have high-earning potential to support high occupancy rates.

In the plus column for the share price is that AVB continues to grow. It currently has nearly 20 properties in development. These market expansions could allow the company to foray into the suburbs and introduce a new preference for tenant trends.

Performing a DCF analysis of AVB suggests that a fair price is a smidge under $75 per share. At the time of our research, fourteen analysts rated the stock a Hold while just four awarded a Buy rating. None of the analysts covering the company assigned a Sell rating.

The takeaway is that the future may not be especially bright for AvalonBay as major population migrations take place but it’s not particularly bleak either, and the company has the scale and cash reserves to adapt to changing tenant preferences.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.