Summary
- Rent collection and occupancy figures have held up well during the pandemic.
- Its A- rated balance sheet allows the company to capitalise on current undervaluation by buying back shares.
- The dividend yields 4.24% and is well-covered by a 71% FFO payout ratio.
- I initiated a position as the share price dipped below $150.
REITs are a significant part of my personal dividend portfolio. They allow me to get income from diversified real estate without the hassle of managing the properties myself.
I mainly focus on triple-net lease REITs, with some holdings outside of that space. And I recently increased my exposure to residential real estate by initiating a position in AvalonBay Communities (AVB) as the share price dropped into my buy range.
Overview
AvalonBay Communitiesis an equity REIT that focuses on developing, acquiring and leasing out high-quality apartment homes, mostly in the coastal US markets. The company has direct or indirect ownership interest in 295 apartment communities in 11 states, that contain a total of 86,380 apartments.
Its portfolio is diversified across both coasts, as seen on the graph below.
Source: Author, using data from latest earnings report
Apartment homes are located:
- 64% in suburban areas
- 36% in urban areas
AVB has delivered an impressive 13.3% annualised total shareholder returns since the IPO.
Whilst I also like Essex Property Trust (ESS) in the residential real estate sector, AVB slightly edged it for me personally due to its more geographically diversified portfolio.
COVID-19 Impact
As many people have lost their primary income source during the COVID-19 pandemic and resulting lockdowns, AVB's business was not unaffected. Occupancies slightly declined and some rent payments were unpaid. As a result, the residential rental revenues declined by 2.2% YoY in Q2.
But AVB's focus on higher-end apartments and the strict tenant screening process has helped the company to be resilient during the downturn.
| Period | Rent collected | Occupancy |
| 3 months ended June 30 | 97% | 94.6% |
| 2 months ended August 30 | 96% | 93.3% |
| September (as of 9th) | 95% | n/a |
As a result of the unpaid rent and occupancy decline, analysts expect a -4% impact to yearly FFO. The company is proving to be very resilient in this difficult situation, with a minimal impact to FFO.
AVB has a strong balance sheet to weather the storm and even take advantage of the opportunities that might come from it. Dividend investors can sleep well at night owning this one. Even factoring in the FFO decline, AVB can comfortably cover its dividend payments with the FFO payout ratio expected at 71% this year.
The company recently announced a $500 million share buyback program, which is a sign of balance sheet strength and management's confidence in the business.
