AvalonBay Communities is a real estate investment trust (‘‘REIT’’) that owns, develops, redevelops, acquires, and manages apartment communities in high barrier-to-entry U.S. markets. The company is one of the largest regional players in the Northeast, West Coast, and Mid-Atlantic markets. We believe that it is a particularly attractive time to be investing in a best-in-class apartment rental company such as AvalonBay, because the company is benefiting from several favorable trends – a reduced sentiment toward single family homes, a pricey for-sale market, limited new supply, and solid job growth. We think that the 3-5 year outlook appears encouraging principally because the ‘‘rent versus buy a home comparison’’ is largely in the company’s favor. Rental rates in AvalonBay’s key markets are the same as they were 5 years ago (2001 levels) while home prices in these markets are up 80% during this period. This ‘‘rent-buy spread’’ has boosted apartment demand at a time when new supply is largely in check, thereby leading to pricing power and a strong growth outlook.
In addition to a favorable macro backdrop, we are particularly attracted to the quality of AvalonBay’s apartment portfolio, its multi-billion dollar development pipeline, and the depth and experience of its management team. AvalonBay’s $10 billion apartment portfolio consists of over 41,000 units and is highly concentrated in highbarrier markets, with over two-thirds of its cash flow coming from California, Boston, and the Washington, D.C. area. The company’s focus on some of the least affordable housing markets in the country has led to higher than average rent per unit, rent per square foot, and occupancy relative to its apartment REIT peers. In the last 10 years, demand in AvalonBay’s markets has outstripped supply by 1.5 times versus 0.6 times for the U.S. average for non- AvalonBay markets. This demand/ supply imbalance has contributed to an average annual rental revenue growth of 4.2% versus the U.S. average of 3.2%.
We believe that AvalonBay has become one of the most prolific creators of value through development among all REITs. Over the past seven years, the company has invested nearly $2.5 billion in development, creating an estimated value of $1.7 billion ($24/share). This value creation has been almost entirely self-funded, as higher property values have allowed AvalonBay to finance development through dispositions and increased debt. Despite taking on new debt, the company’s leverage ratios have continued to be the lowest in the sector. We think that success on the development front should continue as AvalonBay enjoys a large and healthy development pipeline with plenty of embedded value, owing to the low cost basis at which it controls land. Considering the dramatic run-up in real estate values over the last few years, we think that the build-out of the company’s $4 billion development pipeline should continue to add value for shareholders.
We are particularly impressed by the CEO, Bryce Blair, and the management team that he has assembled. We believe that they are a solid, no-nonsense group that has created a well-mapped strategy of being a high-barrier operator and developer. The senior management group worked together for several years at Trammell Crow (a leading commercial real estate company), and has been with AvalonBay, on average, for 17 years. The management group has built a 100-person development staff that navigates the challenging entitlement process for its properties in the high barrier-to-entry markets. It is our view that the improvement in apartment rental fundamentals is sustainable based on our expectation of continued demand strength (high occupancy and increases in rent) and contained supply. We believe AvalonBay, with its focus on highbarrier to entry markets, its extensive development pipeline, and its top-notch management team, is the premier apartment real estate company to capitalize on this opportunity.
In addition to a favorable macro backdrop, we are particularly attracted to the quality of AvalonBay’s apartment portfolio, its multi-billion dollar development pipeline, and the depth and experience of its management team. AvalonBay’s $10 billion apartment portfolio consists of over 41,000 units and is highly concentrated in highbarrier markets, with over two-thirds of its cash flow coming from California, Boston, and the Washington, D.C. area. The company’s focus on some of the least affordable housing markets in the country has led to higher than average rent per unit, rent per square foot, and occupancy relative to its apartment REIT peers. In the last 10 years, demand in AvalonBay’s markets has outstripped supply by 1.5 times versus 0.6 times for the U.S. average for non- AvalonBay markets. This demand/ supply imbalance has contributed to an average annual rental revenue growth of 4.2% versus the U.S. average of 3.2%.
We believe that AvalonBay has become one of the most prolific creators of value through development among all REITs. Over the past seven years, the company has invested nearly $2.5 billion in development, creating an estimated value of $1.7 billion ($24/share). This value creation has been almost entirely self-funded, as higher property values have allowed AvalonBay to finance development through dispositions and increased debt. Despite taking on new debt, the company’s leverage ratios have continued to be the lowest in the sector. We think that success on the development front should continue as AvalonBay enjoys a large and healthy development pipeline with plenty of embedded value, owing to the low cost basis at which it controls land. Considering the dramatic run-up in real estate values over the last few years, we think that the build-out of the company’s $4 billion development pipeline should continue to add value for shareholders.
We are particularly impressed by the CEO, Bryce Blair, and the management team that he has assembled. We believe that they are a solid, no-nonsense group that has created a well-mapped strategy of being a high-barrier operator and developer. The senior management group worked together for several years at Trammell Crow (a leading commercial real estate company), and has been with AvalonBay, on average, for 17 years. The management group has built a 100-person development staff that navigates the challenging entitlement process for its properties in the high barrier-to-entry markets. It is our view that the improvement in apartment rental fundamentals is sustainable based on our expectation of continued demand strength (high occupancy and increases in rent) and contained supply. We believe AvalonBay, with its focus on highbarrier to entry markets, its extensive development pipeline, and its top-notch management team, is the premier apartment real estate company to capitalize on this opportunity.
