In the early days of the coronavirus pandemic, investors were worried that apartments in big coastal cities would be crushed. For a time there were problems, but now they've come back to life.
And so too has AvalonBay Communities (AVB 0.74%), one of the bellwether names in the apartment real estate investment trust (REIT) sector. But before you rush to buy it, here are five things you should know.
1. It was bad, but now it's much better
AvalonBay just reported fourth-quarter and full-year 2021 earnings. The two different time periods help to show both the impact of the pandemic and the direction the business is heading. For example, full-year funds from operations (FFO) was down 4.9%, which isn't good. But in the fourth quarter, the REIT's FFO was up 12.4% versus the same quarter in 2020. Clearly, things are looking better.
That extends to rents. For the full year, rental revenue was off by 2.2%. However, in the fourth quarter, rents were up 4.7% over the same quarter in 2020 and 2% versus the third quarter of 2021. Essentially, it looks like AvalonBay has passed the nadir and is starting to see business recover. That's a good sign for investors.
2. The REIT always sticks to the playbook
One notable thing about AvalonBay through this period is that it never really faltered in its approach. Yes, it had to grant rent concessions to tenants, but that's par for the course when facing an industry downturn. It's better to keep occupancy as high as possible than to fight for a few dollars of rent and risk having to spread largely fixed operating costs over dramatically fewer rent-paying tenants.
Basically, AvalonBay went into the period with a strong coastal portfolio and stuck with it. Now it is reaping the benefits. To be fair, it has been working to shift toward more southern and suburban areas, but that was a preexisting trend and doesn't represent a massive business shift. It's simply a sign that AvalonBay is going where demand is, taking a slow, steady approach to ongoing population shifts. Today that means having a core big-city portfolio to support the construction of more suburban fare and Sun Belt locations.
3. It's active in its portfolio management
Points one and two are short-term issues. Over the long term, AvalonBay is always trying to put money to work where it will have the highest return. When it can find apartments to buy at a good price, it will buy them. When it is cheaper to build from the ground up, it will invest in construction projects. And when it has a property that is either a bit old or appears likely to fetch a premium price, it will look to sell it.
All of these pieces are in play just about all the time. For example, in 2021 AvalonBay bought $725 million worth of property, started construction of $1.2 billion of assets, and sold $865 million of assets. Notice the value of what it bought and sold, which left a little cash behind to put toward construction. And the sold properties had an average age of 26 years, while the acquisitions had an average age of three years. Basically, management improved the portfolio with its moves, which is what it always looks to do.
4. It's steadily marching higher
So there's a solid core here supporting the dividends that investors collect. But in 2021, the dividend was not increased. Given the uncertain pandemic backdrop, that makes logical sense, and it was prudent for management to hold the dividend steady.
In fact, you can argue that this move was investor-friendly, given that a large number of REITs chose to cut their dividends. It was also, like so many other things about the REIT, par for the course. While investors tend to favor Dividend Aristocrats that increase their dividend year in and year out, that's just not how AvalonBay does things. In uncertain times, in an abundance of caution, it tends to hold the dividend steady.
But that doesn't alter the REIT's longer-term trend toward higher and higher dividends. It isn't consistent, but there's a clear commitment to returning value to shareholders via a growing dividend, as show in the chart.
5. It's not cheap
AvalonBay is an apartment bellwether for a reason -- it's very well-run. That fact isn't lost on Wall Street, which currently affords it a 2.5% dividend yield. That's toward the low end of the REIT's historical yield range and near the lowest levels of the past decade.
If you are a value-conscious investor, you probably won't like this stock. Even income investors will probably have to take a step back and contemplate this one, as it might be better to put it on your wish list for the next bear market than pay up for shares at current prices. However, if you are in the market for an apartment REIT, you can't overlook it. At the very least, it provides a high-quality comparison point for other options you may be considering.