AvalonBay Communities, Inc.AVBNYSE

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DCF Valuation

DCF Valuation Summary

Strong Buy

Fair Value: $240.72 per share(market-calibrated)

+35.8%

Upside to Fair Value

Current

$177.32

Pure Model

$254.15

Fair Value

$240.72

Bull Case

$306.48

Bear Case

$208.92

Market Reality Check

Model Terminal Growth

2.50%

Market-Implied Growth

0.50%

Calibrated Growth

2.00%

Fair value uses 75% model / 25% market-implied terminal growth. Pure model: $254.15.

What's Driving This Ratingfor AVB

↓

CapEx normalizing toward maintenance

Historical CapEx is 6.50% of revenue (heavy investment phase). Model fades this to 2.50% by Year 10, freeing up ~$134M in annual FCF. This is the biggest driver of long-term cash flow improvement.

✓

Premium margins already priced in

EBIT margin of 47.28% is already well above sector average. The model holds this level — there's limited room for margin expansion to drive upside. Valuation depends primarily on revenue growth.

⚠

Analyst growth decelerates sharply

Revenue growth drops from 2.51% in Year 1 to -4.55% by Year 5 (per analyst consensus). That's below the 2.50% terminal rate, so growth re-accelerates in Years 6-10 — a generous assumption. This growth deceleration is a key reason the model may undervalue the stock if growth re-accelerates.

🎯

Market pricing in lower growth than model

The market implies only 0.50% perpetual growth — 200bps below the model's 2.50%. This suggests the market sees headwinds or risks not in the model.

✓

Strong cash flow conversion

Year 10 FCF/EBITDA conversion of 83.01% indicates efficient cash generation. FCF reaches $2.1B by Year 10 (61.93% FCF margin).

Weighted Average Cost of Capital (WACC)

Cost of Equity (CAPM)

Risk-Free Rate (Rf)4.50%

Beta (β)0.74

Market Risk Premium4.50%

*Using current implied premium (4.5% per Damodaran 2026), not historical (6.5%)

Cost of Equity (Re)7.85%

Cost of Debt

Pre-tax Cost of Debt2.45%

Tax Rate21.00%

After-tax Cost of Debt1.93%

Equity Weight (E/V)72.80%

Debt Weight (D/V)27.20%

WACC Calculation

WACC = (E/V × Re) + (D/V × Rd × (1-Tc))

WACC = (72.80% × 7.85%) + (27.20% × 1.93%)

= 6.24%

10-Year Free Cash Flow Projections(showing years 1, 3, 5, 7, 10)

Year	Year 1	Year 3	Year 5	Year 7	Year 10
Revenue	$3.1B	$3.5B	$3.4B	$3.2B	$3.3B
EBIT	$1.5B	$1.6B	$1.6B	$1.5B	$1.6B
Tax	$309M	$345M	$338M	$322M	$332M
NOPAT	$1.2B	$1.3B	$1.3B	$1.2B	$1.3B
+ Depreciation	$851M	$948M	$930M	$885M	$914M
- Capex	$203M	$195M	$161M	$124M	$84M
- Δ NWC	$8M	$21M	-$16M	-$6M	$8M
Free Cash Flow	$1.8B	$2.0B	$2.1B	$2.0B	$2.1B
Discount Factor	0.941	0.834	0.739	0.654	0.546
Present Value	$1.7B	$1.7B	$1.5B	$1.3B	$1.1B

FCF Formula: Free Cash Flow = NOPAT + Depreciation - Capex - Change in Net Working Capital

Terminal Value Calculation

Perpetuity Growth Method

Year 10 FCF$2.1B

Terminal Growth Rate2.50%

WACC6.24%

TV = FCF₁₀ × (1+g) / (WACC-g)

Terminal Value$56.8B

PV of Terminal Value$31.0B

Exit Multiple Method

Year 10 EBITDA$2.5B

Exit Multiple (EV/EBITDA)22.0x

TV = EBITDA₁₀ × Exit Multiple

Terminal Value$54.9B

PV of Terminal Value$30.0B

Valuation Summary

Perpetuity Growth Method

PV of Projected FCFs$14.5B

PV of Terminal Value$31.0B

Enterprise Value$45.4B

(-) Net Debt$9.1B

Equity Value$36.3B

Shares Outstanding141M

Price per Share$257.70

Exit Multiple Method

PV of Projected FCFs$14.5B

PV of Terminal Value$30.0B

Enterprise Value$44.4B

(-) Net Debt$9.1B

Equity Value$35.3B

Shares Outstanding141M

Price per Share$250.61

Pure Model Fair Value

$254.15

Average of perpetuity growth and exit multiple methods (before market calibration)

Sensitivity AnalysisPrice per Share

WACC ↓ / Growth →	1.50%	2.00%	2.50%	3.00%	3.50%
4.24%	$356.73	$397.88	$415.30	$396.52	$378.61
5.24%	$279.53	$298.67	$324.78	$362.54	$378.61
6.24%	$230.12	$240.72	$254.15	$271.73	$295.72
7.24%	$194.55	$201.06	$208.95	$218.70	$231.04
8.24%	$167.09	$171.37	$176.40	$182.39	$189.65

How to read: This table shows how the valuation changes with different WACC (discount rate) and terminal growth rate assumptions. Green = undervalued, Red = overvalued.

Scenario Analysis

Bear Case

$208.92

17.8% vs current

• -25% vs analyst consensus
• Terminal growth: 2.0%
• Beta: 0.93

Base Case

$254.15

43.3% vs current

• Analyst consensus
• Terminal growth: 2.5%
• Beta: 0.74

Bull Case

$306.48

72.8% vs current

• +25% vs analyst consensus
• Terminal growth: 3.0%
• Beta: 0.63

Key Assumptions & Drivers✓ Using Analyst Consensus Estimates• Real Estate Sector

Growth Assumptions (Select Years)

Year 1 Revenue Growth2.51%

Year 3 Revenue Growth6.51%

Year 5 Revenue Growth-4.55%

Year 7 Revenue Growth-1.73%

Year 10 Revenue Growth2.50%

Terminal Growth Rate2.50%

Margin & Efficiency

Current EBIT Margin47.28%

Tax Rate21.00%

Historical Capex / Rev6.50%

Terminal Capex / Rev2.50%

NWC / Revenue10.00%

Key Drivers: Revenue growth, operating margin expansion, capex efficiency, and working capital management are the primary drivers of cash flow generation. Terminal value assumptions significantly impact final valuation.

Institutional-Grade Methodology

Actual Company Data: Revenue, EBIT, Capex, NWC, Tax Rate, Interest Expense, Beta

Market Assumptions: Risk-free: 4.5% (10Y), MRP: 4.5% (Damodaran 2026), Exit: 22x EV/EBITDA (Real Estate sector)

This DCF model is for informational purposes only. Projections are based on assumptions that may not materialize. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.

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