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Could AvalonBay Communities Be a Millionaire-Maker REIT?

Jun 30, 2020 by Matt Frankel, CFP

AvalonBay Communities (NYSE: AVB) is one of the largest apartment REITs in the United States and owns approximately 300 communities with another 19 under construction. While it's probably best known for its urban high-rise apartment communities (many of which are named with the Avalon brand), the company also owns suburban garden apartments and other types as well.

Since it went public in 1993, AvalonBay has produced excellent returns for its investors and also has been a great dividend stock with a 4% yield and steady dividend increases over the years. Let's take a closer look at what AvalonBay does and whether long-term REIT investors should consider it as an addition to their portfolios.

AvalonBay in a nutshell

Most of AvalonBay's properties are in six main markets -- New York City metro area; New England; Washington, D.C.; Seattle; San Francisco; and Southern California. And the company has recently started to expand into the Denver and South Florida markets, a presence which it plans to grow significantly over the next decade. These are markets that have experienced higher job and wage growth than the U.S. average and where apartment supply has generally grown at a slower pace than the job market.

The company prefers to develop its properties from the ground up, creating premier apartment communities in markets with limited competition and high barriers to entry for would-be competitors. AvalonBay actively seeks opportunities to recycle capital by selling mature assets and reinvesting the proceeds in new development opportunities.

How has AvalonBay's business been affected by the pandemic?

AvalonBay's stock price has taken quite a hit since the COVID-19 pandemic started. Even after the recent rebound, shares are still down by more than 23% in 2020.

Like most other companies that have been beaten down, the main reason is uncertainty. While AvalonBay owns top-notch properties, it does focus on markets that have either been heavily affected by the pandemic (like New York City) or that are very expensive and could be hurt if companies allow their employees to work remotely permanently (like San Francisco).

So far, AvalonBay hasn't been completely immune to the pandemic, but the effects are rather minimal. For example, in May, AvalonBay collected 95% of its typical rent collection rate (the company considers 97.9% rent collection to be a typical month). However, there are some big unanswered questions about the long-tail effects of the pandemic on the company's business.

As far as development goes, the pandemic has slowed things down a bit. Of the 19 communities under construction as of March 31, construction was temporarily suspended at six of them and had slowed down at others. But this is a delay, not a permanent problem.

Expect solid long-term returns, but not explosive performance

While there is certainly more uncertainty priced into AvalonBay's stock than there was at the beginning of 2020, I feel that a 5% decrease in collected rent and a short construction delay doesn't quite justify the large drop in share price. And while demand may dip temporarily in some of AvalonBay's markets, the reality is that younger adults still want to live in urban areas, and there's no reason to believe AvalonBay will have trouble keeping its properties full.

In a nutshell, AvalonBay has done a great job of delivering strong income and growth for its shareholders for many years, and I don't see that changing anytime soon. Over the past 20 years, AvalonBay has generated a total return of 696% (compared to 209% for the S&P 500), and the company has increased its dividend by an average of 5.2% annually since its 1993 IPO.

Going forward, I wouldn't expect AvalonBay to double or triple your money in a couple years, but investors who buy and hold for the long run (especially at today's depressed share price) could be handsomely rewarded.

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Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool recommends AvalonBay Communities. The Motley Fool has a disclosure policy.