AvalonBay Scales New 52-Week High - Analyst Blog

Shares of AvalonBay Communities Inc. AVB reached a new 52-week high, touching $141.95 during the trading session on May 30. The closing price of $141.84 of this residential real estate investment trust (REIT) stock reflected a strong year-to-date return of 21%. The trading volume for the session was over 1.6 million shares. The stock price gained pace following strong results in the first quarter.

Despite its strong price appreciation, this Zacks Rank #3 (Hold) stock has plenty of upside left, given the improving operating environment, strong fundamentals and its long-term expected growth rate of 10.9%.

Growth Drivers

Helped by growth in rental rates, AvalonBay reported first-quarter 2014 core funds from operations (FFO) of $1.63 per share that came well ahead of the prior-year quarter FFO per share. The results were in line with the Zacks Consensus Estimate. Improved results from its existing portfolio along with leasing from its developed communities have helped AvalonBay post encouraging quarterly results.

While harsh winters led to excess utility and snow removal costs at its properties in the first quarter and consequently lowered its same store net operating income results, we believe that solid contribution from development deliveries will drive its results in the quarters ahead.

In addition, favorable demographics along its markets keep us optimistic about its growth prospects. As per a study by the commercial real estate services firm CBRE Group, Inc. CBG, the national apartment demand is currently growing at a stronger pace (over 220,000 units or 1.6% on an annual basis) than what the market has observed historically.

Therefore, with a solid balance sheet and manageable supply level, we believe that the company remains well poised to leverage on this trend. Moreover, with solid fundamentals, we believe that the West Coast market will outperform this year.

Over the last 30 days, though the Zacks Consensus Estimate for FFO per share moved down a notch to $6.76 for 2014, for 2015, the Zacks Consensus Estimate remains unchanged at $7.30 per share. This reflects a year-over-year increase in FFO per share of 8.49% for 2014 and 7.98% for 2015. The stock now has a Zacks Rank #3 (Hold).

Other Stocks to Consider

In addition to AvalonBay, Duke Realty Corp. DRE and Host Hotels & Resorts, Inc. HST also scaled 52-week highs on May 30.

Note: 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.