As the pandemic hit in 2020, investors worried that apartment owners would get hit hard by vacancies and missed rent payments. Shares of apartment real estate investment trust (REIT) bellwether AvalonBay Communities (AVB 1.16%) fell more than 45% in the early days of the global health scare. But management never wavered in its approach, and that's going to pay off big for investors as the company looks to increase shareholder value by as much as $1.2 billion.
Real concerns
The early days of 2020 were a tense, uncertain time. Occupancy levels at AvalonBay and many of its peers started to fall. For example, in the first quarter of 2020, largely before the pandemic got underway, the REIT's occupancy rose 0.4%. But that number had turned negative by the second quarter, falling 1.2%. It reached a low of -2.7% in the third quarter before the red ink started to shrink, eventually turning positive again in the second quarter of 2021, when it grew 1.6%.
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Along with the rebound in occupancy came a rebound in pricing, as rents across the country have started to skyrocket. By the third quarter of 2021, rental revenue was down by a modest 0.8% in just one of the company's eight major markets. In fact, in southeast Florida and Denver, rental revenues were up by double digits. These results come off of weak third-quarter 2020 numbers, but ultimately AvalonBay looks like it has been able to muddle through reasonably well, given the pandemic backdrop.
What's notable is that management didn't really change too much about how it operated. Sure, it cut costs and reduced rents, just like it would have done in any downturn. But it didn't stop building for the future, which is a core approach for the REIT.
The pipeline
AvalonBay tends to shift between buying properties and building them, depending on market conditions. Essentially, if it can buy below construction cost, it acquires assets. If ground-up construction is likely to produce better financial results, it builds.
Right now, the company has roughly $2.6 billion worth of construction in its capital investment plans. That's a mix of new construction and redevelopment, which should allow for higher rents or an increased rent base (in other words, more apartments).
This investment, which basically didn't stop even during the pandemic, is projected to produce $145 million in additional net operating income. Management uses a 3.8% market cap rate to estimate that this additional cash flow is worth about $3.8 billion in market cap. Subtract the $2.6 billion cost, and you get $1.2 billion worth of economic value creation for shareholders. The company believes that equates to about $9 per share in added value. This fact isn't doesn't appear lost on investors, however, as the stock price has more than made up the ground it lost during the early days of the pandemic.
That said, investors dictate the price of AvalonBay on Wall Street. The value being created via these investments really shows up on AvalonBay's balance sheet. However, over time, the price a company fetches in the market generally reacts favorably to the increasing underlying worth of the entity.
All in, AvalonBay's long-term approach, even in the face of material headwinds, looks like it is working out well for investors.
One of the best
Reacting calmly and consistently is a hallmark of AvalonBay and helps explain why it is one of the best-run apartment REITs investors can buy. The current dividend yield is a bit miserly at just 2.5%. Still, it's a good name to put on your wish list, just in case there's another big market sell-off. And if you own it, know that the company still plans to create value for investors -- to the tune of $1.2 billion.
