Summary
- We are currently maintaining our hold recommendation for AvalonBay. Our fair value estimate for the stock ranges from $210.36 to $219.73.
- AVB offers a potential total return of 5.26% as compared to 5.17% for their fixed-income instrument. The 9 bps premium for the equity is insufficient compensation in our view.
- In evaluating the apartment REIT sector dividend yield as compared to single-A corporate bond effective yield, we also see signs that the sector may be overvalued.
- The spread between the apartment sector cap rates and the US 10-year Treasury paints a similar picture that the stock does not offer a margin of safety.
- Finally, our view is also corroborated by their forward equity issuance activity and closed transactions in Q3.
AvalonBay Communities – An Introduction and Previous Coverage
We previously covered AvalonBay Communities, Inc. (NYSE:AVB) in June and, in this article, we provide six reasons why we are maintaining our hold recommendation on the security. Briefly, the six reasons are: (a) an insufficient risk-reward relationship as compared to their recently traded fixed-income instrument, (b) a net asset value per share that is meaningfully below the quoted price, (c) a narrow spread between the apartment sector dividend yield and single A-rated bonds, (d) an insufficient spread between the apartment sector implied cap rates and the US 10-year Treasury, (e) the implied valuation from Q3 forward equity transactions, and (f) AvalonBay’s closed transaction cap rates for Q3 deals in the expansion markets.
In the following thesis, we add color to each of these items and submit that they form a reasonable and adequate basis to support a hold recommendation.
