"With occupancy rates around 95%, apartment REITs appear to be the one bright spot in the REIT sector," says Asif Suria
The editor of The SINLetter notes that he has watched AvalonBay Communities (AVB, Financial) for two years, waiting for an opportunity to begin taking a position. He says, "It is now at that level."
"The company generates nearly half its net operating income from the NY/NJ metro area and New England. California represents an additional 32% of net operating income.Â
"With a management team that is well respected and leverage that is the lowest of any apartment REIT, AvalonBay has traded at a premium over the last few years and the stock was trading at nearly $150 when I first came across the company in early 2007.Â
"I continued watching the company over the last two years looking for an opportunity to start a position. With a decline of over 70% from its 2007 high and a yield of 8.1%, this apartment REIT is finally at a level that not only offers a fat yield but also the potential of price appreciation.Â
"There are some very valid concerns about investing in REITs at this time that are related to occupancy rates, the safety of the dividend and debt that is coming due this year. Let me try to address these risk factors.
"As of the end of December 2008, the occupancy rate at AvalonBay was 95.5% and is expected to be around 94.5% in 2009.
"AvalonBay benefited early in this real estate correction as the number of renters increased because housing became unaffordable, loan requirements tightened up and a wave of foreclosures hit the country.Â
"However apartment REITs are now feeling the impact of the economic meltdown because of job losses and are likely to face a tough operating environment in 2009 and potentially into 2010.Â
"Beyond the softness experienced in the fourth quarter of 2008, Avalon expects revenue to decline between 1.5% to 3.5% and net operating income to decline between 4.25% to 6.25% for 2009.Â
"However the company is not clamping down on growth and expects to complete 8 out of the 14 communities it currently has under development in 2009. Current low interest rates have been favorable for AvalonBay as the company partially used new debt to retire higher interest debt.
"The important criteria here is determining if the current dividends and yields are sustainable in a challenging rental environment. AvalonBay expects to retain $75 million in free cash in 2009 on net operating income of $550 million.Â
"Even if their net income declines an additional 10% beyond the 4.25% to 6.25% decline they have already modeled into their 2009 estimates, they would still have enough cash flow to pay the dividend on the common stock.
"Overall, I believe the dividend appears to be safe for 2009. I can certainly make peace with a 8.1% yield from a high quality company while waiting for the eventual recovery to occur."
The Stock Advisors
www.thestockadvisors.com
The editor of The SINLetter notes that he has watched AvalonBay Communities (AVB, Financial) for two years, waiting for an opportunity to begin taking a position. He says, "It is now at that level."
"The company generates nearly half its net operating income from the NY/NJ metro area and New England. California represents an additional 32% of net operating income.Â
"With a management team that is well respected and leverage that is the lowest of any apartment REIT, AvalonBay has traded at a premium over the last few years and the stock was trading at nearly $150 when I first came across the company in early 2007.Â
"I continued watching the company over the last two years looking for an opportunity to start a position. With a decline of over 70% from its 2007 high and a yield of 8.1%, this apartment REIT is finally at a level that not only offers a fat yield but also the potential of price appreciation.Â
"There are some very valid concerns about investing in REITs at this time that are related to occupancy rates, the safety of the dividend and debt that is coming due this year. Let me try to address these risk factors.
"As of the end of December 2008, the occupancy rate at AvalonBay was 95.5% and is expected to be around 94.5% in 2009.
"AvalonBay benefited early in this real estate correction as the number of renters increased because housing became unaffordable, loan requirements tightened up and a wave of foreclosures hit the country.Â
"However apartment REITs are now feeling the impact of the economic meltdown because of job losses and are likely to face a tough operating environment in 2009 and potentially into 2010.Â
"Beyond the softness experienced in the fourth quarter of 2008, Avalon expects revenue to decline between 1.5% to 3.5% and net operating income to decline between 4.25% to 6.25% for 2009.Â
"However the company is not clamping down on growth and expects to complete 8 out of the 14 communities it currently has under development in 2009. Current low interest rates have been favorable for AvalonBay as the company partially used new debt to retire higher interest debt.
"The important criteria here is determining if the current dividends and yields are sustainable in a challenging rental environment. AvalonBay expects to retain $75 million in free cash in 2009 on net operating income of $550 million.Â
"Even if their net income declines an additional 10% beyond the 4.25% to 6.25% decline they have already modeled into their 2009 estimates, they would still have enough cash flow to pay the dividend on the common stock.
"Overall, I believe the dividend appears to be safe for 2009. I can certainly make peace with a 8.1% yield from a high quality company while waiting for the eventual recovery to occur."
The Stock Advisors
www.thestockadvisors.com
