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AvalonBay Communities Inc. Delivers Value Through Investments In Premium Markets

AvalonBay Communities (NYSE:AVB) mainly invests in multifamily real estate and has its properties dispersed through the New York/New Jersey metro area, New England, the Pacific Northwest, the Mid Atlantic and California. All these regions share some common features such as high population growth and healthy jobs creation rate. The REIT currently has 292 apartment communities in 20 US markets under its management.

Source: Company website

While the REIT mainly focuses on coastal markets, it diversifies its holding in various ways. AvalonBay Communities not only invests in gardened real estate properties but also in mid-rise and high-rise units. Apart from these, it also invests in mixed use properties, allowing the REIT to benefit from different growth drivers. AvalonBay Communities divides its properties into three main brands, which are Avalon, Eaves, and Available, each serving a distinct market. Avalon is targeted at a well-heeled demography looking for high-end services, while Eaves offer value for money real estate. Available, on the other hand, is designed to serve young urban socials and commands the highest average rent of $2,635.

Sectoral Analysis

In order to fully understand the growth potential of AvalonBay Communities, let’s have a look at the broader sector the REIT operates in. Residential REIT market is mainly impacted by factors such as population growth, job prospects, and wage growth rate. While US economic growth and labor market are off the historical highs, these factors still have plenty of steam and are expected to perform well in the near future. Also, on the positive side, US consumer confidence index is close to the best in over a decade. The population is also growing, with 24 to 31-year-olds constituting the eighth most populous age segment in the United States.

Source: Company website

AvalonBay Communities stands to benefit from supply constraints in the multifamily residential sector. The supply is limited mainly on account of increase in construction costs and tighter lending by the banks. Overall, the residential REIT sector is poised to deliver superior returns on account of a supply and demand imbalance. AvalonBay Communities is well positioned in the market to exploit these opportunities using its managerial expertise and technological innovations.

The Strategy

AvalonBay Communities adopts a multi-pronged strategy for sustaining its development efforts. Its strategy includes a focus on development and redevelopment of its properties. Additionally, the REIT also focuses on regular churning of its portfolio through acquisitions and dispositions of properties. The main focus of the REIT is on delivering value through development. According to the company management, its growth strategy has added 240 basis point premium to its Core FFO per Share over the sector average since 2010. Further, the REIT’s emphasis on efficiency has ensured that its projects are completed on time and within the budget.

Further, AvalonBay Communities also has a strong development rights pipeline. Out of its development pipeline worth $4.2 billion, $2.4 billion consists of regular development rights, $0.9 billion are public-private partnership while another $0.9 billion are from asset densification. The REIT also invested in expansion markets which ensure that it is able to benefit from emerging trends in the residential REIT segment. The investment in such market is generally done through redeployment of capital earlier invested in lower growth markets. Some of the most prominent expansion markets for AvalonBay Communities are Florida and Denver. Both of these markets exhibit classic growth signs such as fast job creation rate, salary growth rate, and favorable population expansion rate.

Financial Performance

For the third quarter of this year, AvalonBay Communities reported its earnings per share for the quarter stood at $2.00, up from $1.39 per share it had reported for the corresponding quarter of the previous year. However, its diluted Funds from Operations for the quarter declined marginally from $2.26 per share to $2.24 per share. The Core FFO per share increased from $2.28 per share to $2.34 per share, indicating the robustness of its operations.

During the quarter, the REIT completed the development of AVA Esterra Park in Redmond, which consists of 323 apartment homes. This completion took the development tally for this year so far to 4, totaling to capital cost of $334 million. During the quarter, it also acquired two communities in Maryland and Florida for $43.45 million and $90 million, respectively. It also disposed of four of its wholly-owned communicates in Connecticut, Texas, and Massachusetts for $259.6 million. These transactions ensure that the REIT is constantly recycling its capital and the capital is deployed to high potential areas, leading to an improvement in overall efficiency of the REIT.

The Balance Sheet

While assessing the investment potential of a REIT, it is important to look at its debt maturity schedule. A staggered schedule is desirable since it ensures that the REIT’s liquidity will not be unduly strained. In the coming FY, AvalonBay Communities has a little $500,000 worth of debt coming due, and the trend is likely to remain flat for a couple of next years. Overall, the REIT does not have any pressing liquidity issue in the near future which may derail its balance sheet position. Such a situation is also conducive to sustained dividend payment and growth potential.

Investment Thesis

Strong dividend payment record is amongst one of the most important metrics for a REIT as investors tend to see REITs as income generating assets. AVB’s latest quarterly dividend stood at $1.52, taking its annualized payment to $6.08 per share. The REIT had paid $5.88 in annual dividend in the previous year. Its current dividend yield stands at 2.84 percent which is par for the course for residential REITs. AvalonBay Communities stock has grown over 44 percent in the past 12 months, which, combined with the dividend payments made by REIT, is an excellent investment opportunity for long-term investor.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.