So, the pandemic hasn't had a huge effect on either business. But AvalonBay seems to be affected slightly more in terms of revenue and NOI declines.
It's also worth mentioning that a big reason for the poor stock performance is uncertainty. Simply put, nobody knows how long the recession will last or how long unemployment will remain at elevated levels. There's also a lingering fear that people will leave cities in favor of lower-cost suburban areas. While this would certainly be a negative catalyst for both of these REITs, I don't foresee any significant permanent shift away from urban markets.
Very similar businesses, but a couple of key differences
I've said before that Equity Residential and AvalonBay are about 90% the same business. Both companies focus on attractive apartment communities located in high-barrier urban and suburban markets. And the core markets for both companies are largely the same -- both have a big presence in the New York metro area, San Francisco, Washington, D.C., New England, and the Pacific Northwest.
They are even similar in size and valuation -- Equity Residential owns 304 properties with 78,410 apartments and AvalonBay owns 295 communities with 86,380 units. And the two REITs have market capitalizations of $20.9 billion and $22.2 billion, respectively.
However, there are a couple of key differences investors should be aware of:
- First, AvalonBay is far more focused on development. Equity Residential occasionally develops a new community from the ground up, but its primary growth mechanism is acquisitions. On the other hand, AvalonBay prefers to build its communities itself.
- Second, AvalonBay is actively expanding into new markets. In addition to its core markets, AvalonBay has started building portfolios in South Florida and Denver, which could provide long-tailed growth potential for the company.
Which is the better buy now?
First off, I don't think investors will go wrong with either of these companies over the long run. Despite any short-term headwinds, these are rock-solid companies with attractive properties, and neither deserves to be trading for such a steep discount to their pre-pandemic level.
Having said that, if I were to pick one right now, I'd have to go with AvalonBay. Simply put, I like that the company is looking to diversify away from its core urban markets and that it takes a more development-oriented approach, which can be a great way to create value.