Is AvalonBay a Buy Right Now?

Apartment real estate investment trusts (REITs) like AvalonBay (NYSE: AVB) have lived through a very complex time period. The coronavirus pandemic upended normal business patterns first to the downside and then to the upside. Today there appears to be a mismatch between the performance of AvalonBay’s business and its price, suggesting it might be worth buying for long-term investors.

The big story

Everyone needs a place to live, and that’s exactly what AvalonBay offers across its nearly 300-building-strong portfolio. While it has exposure across the country, much of what it owns is focused around important coastal cities. That has, historically, been a very strong business model, since these areas witnessed year after year of demand growth. On top of that, the REIT has a penchant for keeping its portfolio modern and up to date, which allows it to charge top-tier rents.

Image source: Getty Images.

All of this was great until the coronavirus pandemic hit in 2020, pushing people out of major cities and into suburban and rural areas. AvalonBay’s occupancy and rents fell, negatively impacting its financial results. But, almost as quickly as that happened, demand picked up again, pushing occupancy and rents higher. This trend is still ongoing. To put a number on that, by May 2022 the company was able to increase asking prices for rents by a huge 9% compared to Jan. 1 of the very same year. Occupancy, meanwhile, is a fairly solid 96.3%.

This is not a business that is struggling by any stretch of the imagination. And yet the stock has fallen over 20% from its recent peak. While a recession could lead to weaker results, it really doesn’t seem like AvalonBay is headed for a major business downturn. In fact, based on the inflation now impacting the country, the rent hikes it has pushed through are likely to be fairly resilient. In other words, it may actually be better positioned today than it was prior to the pandemic.

A mismatch

This is where things get interesting. AvalonBay’s stock is, today, below where it was at the start of 2020. The 3.2% dividend yield is also above where it was prior to the pandemic. It looks relatively cheap in this regard. Note that, as an industry bellwether, it is often provided a premium price relative to peers.

Meanwhile, the company has shifted gears to construction as management actively manages its portfolio to ensure it owns industry-leading properties. It has a $4 billion pipeline of projects to work through that gives a good deal of visibility to its growth opportunity. Not only will it strengthen its position in existing markets (like New York), but it is also expanding in up-and-coming markets like Denver, Texas, and southeast Florida. That will help to keep AvalonBay in sync with shifting consumer demand over time.

As for its dividend, it is worth highlighting that the board maintained it right through the pandemic. While it didn’t increase the payment, the company clearly understands the value investors place on the dividend. So, even in the face of another recession, there’s good reason to believe AvalonBay will do everything in its power to ensure investors get paid well for sticking around. Notably, there’s some leeway here, given that the company’s adjusted funds from operations (FFO) payout ratio is a fairly comfortable 82%. 

Not a screaming buy, but…

While it would be hard to suggest that AvalonBay is dirt cheap today, it very rarely goes on sale. And when it does, like during the early days of the coronavirus pandemic, you need a very strong stomach to jump on board. That said, given the current state of the business, its internal growth prospects, and the clear commitment to the dividend, AvalonBay looks reasonably attractive as a long-term hold. And if a recession leads to a steep decline from here, you should probably consider buying even more.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends AvalonBay Communities. The Motley Fool has a disclosure policy.

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