AvalonBay Communities (AVB 0.63%) is one of the largest apartment real estate investment trusts (REITs) in the United States. It offers a yield of around 2.9%, which isn't huge by REIT standards but is nothing to scoff at considering an S&P 500 Index fund will only get you about half as much yield.

But the real story here is growth. Here's how it is baked into the AvalonBay cake and why a change in market conditions probably won't matter all that much.

Not a yield play

The first thing to know about AvalonBay is that dividend investors in search of high yields should probably look elsewhere. Given the fairly modest yield, which sits toward the low side of the stock's historical range, the REIT is probably fully valued. This is really more about long-term business growth and the quality of management. 

A piggy bank with stacks of money and a hand putting water on them showing growth.

Image source: Getty Images.

AvalonBay owns apartments with a focus on population-dense regions with good job markets and high barriers to entry. Historically that has meant being in and around large U.S. cities, but the REIT is more than happy to go wherever it sees material demand.

Because housing is a basic necessity, apartments tend to be fairly resilient over time even though short leases mean that economic fluctuations can have a material near-term impact on performance. 

Management likes to make sure it owns highly desirable properties. That means keeping its portfolio fairly young and full of the most modern amenities. This is achieved through active portfolio management, with the REIT selling older properties. What it does with the cash that it raises, meanwhile, is the key to AvalonBay's long-term success.

Redevelop, buy, or build

Probably the easiest way to make a property more valuable is to upgrade it. AvalonBay has a long history of doing this via redevelopment. That can be as simple as putting in an upgraded kitchen or a new communitywide amenity. These are small investments that allow the REIT to increase rents. Higher rents means higher funds from operations (FFO) and a greater ability to increase dividends. 

That said, a quicker way to boost the top line is to buy an entire building. With a market cap of roughly $30 billion and an investment-grade balance sheet, AvalonBay has ample capacity to acquire apartments. This is a good use of cash, too, if the company adds newer assets at the right prices. That's important, since management doesn't like paying more than it would cost to build a new property.

And that brings us to the last way AvalonBay grows its portfolio: ground-up construction. It has a long history here, working closely with local governments to put up new buildings in areas that might require extra effort. Remember that it has a focus on regions with a high barrier to entry, where land is likely to cost more, regulations are likely to be more intense, and the certainty of completing a project is a third key factor. This is the company's focus today, and things are going exceptionally well.

For example, AvalonBay has five properties in "lease up" status, which means they were recently completed and are now accepting tenants. Average rents are coming in around 12% higher than expected. That has increased the expected return on these projects by around 50 basis points, which seems small but is actually a very big deal. 

That said, there's a project pipeline of around $4 billion being worked on that should support growth over the next couple of years at least. Not only is AvalonBay putting money into markets where it already has a presence, cementing what are already strong regional positions, but it is also expanding in up-and-coming areas like Southern Florida, Texas, and Denver. Given the REIT's history and focus, these projects are likely to be well positioned no matter what is happening economically at the time they open. 

Multiple levers for growth

Here's the big takeaway: AvalonBay isn't wedded to any particular growth method. If the biggest bang for the buck is redevelopment, it will pursue that. If acquisitions are most profitable, so be it. If ground-up construction is the best way to grow, as it is right now, that's what management will focus on.

The REIT's size, experience, and financial strength allow it to shift with the market around it so it can continue to grow and reward investors no matter what is happening in the economy or on Wall Street. 

If you are conservative and want to own one of the best-run apartment REITs, AvalonBay should be on your short list. That said, it is not particularly cheap today, but that's not unusual given its impressive history. Still, if you can stomach owning a great company that is fully priced, AvalonBay might be worth adding to your portfolio even at current prices.

If you have more of a value focus, however, it is a name to put on your wish list just in case a major market sell-off leaves it on the sale rack. A yield above about 4% would be quite attractive, historically speaking.