Apartment-House Blues by Jacqueline Doherty
Summary: AvalonBay (AVB) is considered one of the best of the popular REIT investments. AVB owns and builds apartment buildings in tight markets like Seattle, Boston and California, has a steady, savvy management team and maintains a low debt level of 19% vs. the industry's 36%. AVB projects $4.68-$4.92 for funds from operations/share ("FFO", the P/E equivalent for REITs), 14% growth in FFO, 5-6.5% rent growth and operating EPS of about 12% or $3.66-$3.90. AVB has a $5 billion apartment pipeline that could add $40-$50 to its net asset value, a 15% stake in a building renovation fund and a housing slump to keep renters renting. But if the slump hits REIT stocks, then AVB's 340% ride to $131 in 4 years may end. AVB's stock is expensive at 27/FFO, or $4.83/share-- almost double actual FFO growth. If FFO ratios simply return to industry average, shares will lose 50%. AVB's yield (2.6%), is below the industry's average (3.3%), below T-bills (4.5%)-- and actually even lower considering AVB's dividends are taxed at higher rates. Cap rates (income divided by enterprise value minus assets and liabilities) have nearly halved to 4%, and rental rate growth should slow because the housing slump is forcing owners to convert condos back in to rentals. Barron's Bottom Line: Insider selling and slowing FFO growth may mean a correction could take AVB to $110 from its current price of about $131.
AVB 1-yr. chart: