Summary

• AvalonBay rents apartments to professional singles and (mostly) young adults in key U.S. urban and suburban markets.
• AVB offers garden, mid-rise and high-rise communities for three distinct demographic groups.
• The company operates over 85,000 apartments in 12 states and the District of Columbia.

Our SWOT analysis is meant to serve as a baseline for doing research on companies that we might invest in at certain prices. As Warren Buffett has repeated many times, only by getting to know a company’s business, can we start to understand whether or not to invest our hard earned money.

Introduction to AvalonBay

AvalonBay Communities, Inc. (AVB) operates apartment communities primarily in New England, New York/New Jersey, the Mid-Atlantic, the Pacific Northwest and California.

This REIT focuses on areas with high wages, lower housing affordability and a vibrant quality of life. As of March 31, 2019, AVB owned or held an interest in 291 apartment communities containing 85,313 apartments in 12 states and the District of Columbia. 

The company’s three brands attract specific submarkets: (1) Avalon is their more luxurious, spacious brand for professional singles and couples looking for “effortless enjoyment” near shops, restaurants and entertainment, with club rooms, fitness centers and on-site management. (2) AVA is for active, urban Millennial young adults, designed “to impress with an understated cool,” with WiFi, U-verse, smartphone charging stations, a fitness center, common areas for socializing and bike storage to “stay fit and hassle-free.” (3) Eaves, often pet-friendly, is for the value-conscious, including families wanting “a few extra amenities, a friendly staff and a secure, comfortable place to live.” 

Strengths 

Using a conservative financial structure, AvalonBay’s seasoned management has grown the REIT through new developments and accretive acquisitions aimed at three demographics in selected urban U.S. markets. 

• AvalonBay is has a conservative balance sheet and an A- credit rating from Standard & Poor’s. At year-end 2018, net debt was 4.6x core EBITDA.
• AVB’s coast-to-coast U.S. geographic footprint includes 15 of the nation’s strongest urban markets.
• Three core brands reach a wider swath of the population: Avalon (upscale); AVA (mostly young singles in “high energy, transit-served urban” areas); and Eaves (value-oriented suburban families).

Weaknesses

AvalonBay depends on a growing job market and it is unwinding some legacy financial and acquisition issues.

• AVB leases are for one year or less and thus vulnerable to changes in the job market. AVB earnings calls provide insight into regional job markets.
• Some AVB communities are financed with tax-exempt bonds that require some apartments be available lower income households (e.g., 50% or 80% of area median income). As of December 31, 2018, 5.2% of AVB apartments were under such income limitations.
• Fourteen assets from the 2013 Archstone acquisition have agreements with varying dates of expiration protecting prior owners’ tax liability. Should AVB sell or fail to maintain secured financing, it would cost AVB up to $48.3 million. 

Opportunities

AvalonBay is well-positioned to grow with the economy, particularly among urban and suburban professional adults in the most attractive U.S. markets.

• The population growth of the Millennials and Generation Z, particularly high wage earners in urban areas, should fuel continued growth for AVB.
• AvalonBay’s recent expansion into the Denver and Southeast Florida markets expands the company’s footprint and national brand recognition.
• The company has a “match funding” strategy connecting new developments with long-term capital, allowing AVB to lock in the spread between the projected returns and the cost of capital. At year-end 2018, unencumbered assets provided 91% of net operating income.  

Threats

In addition to economic, geological or climate risks, AvalonBay has faced significant litigation and sees a growing threat of rent control efforts, particularly where apartment supply is limited and rents have escalated with a strong local economy.

• AVB has seen a recent increase in municipalities implementing, considering or being urged by advocacy groups to consider rent control or rent stabilization laws and regulations or take other actions that could limit the company’s ability to raise rents based solely on market conditions.
• AvalonBay’s Annual Report enumerates several threats that are beyond AVB’s control, such as earthquakes, severe weather, climate change and terrorism. 119 of AVB’s 269 apartment communities are in earthquake zones along the West Coast.
• AVB continues to work through legal actions following a January, 2015 fire that destroyed 240 apartments at one of two buildings in its Edgewater, New Jersey development. Most lawsuits have been settled and AVB believes the remainder will be not material to the company.

Long-Term AvalonBay Outlook

AvalonBay expects apartment demand to remain strong in their markets, driven by a healthy labor environment, favorable demographics and continued delays in family formation (e.g., marriage, children). Management expects steady same-store revenue growth of about 3.0%, and they plan to launch about $950 million in new apartment community construction in 2019.

The long-term outlook is positive, though dependent on growth in the general economy and strength among young, urban high wage earners in their markets. Read the transcripts or listen to the webcasts of their earnings calls for signs of weakness in job creation or regulatory activism in their markets.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article was written by Ted Leach (Dividend Sleuth) with input from Kirk Spano and David Zanoni. The article is for informational purposes only (not a solicitation to buy or sell stocks). Ted is not a registered investment adviser. Investors should do their own research or consult a financial adviser to determine what investments are appropriate for their individual situation. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.