Many commercial real estate industries are on the rebound from the ongoing impact of the coronavirus pandemic. As businesses start to reopen and unemployment rates improve, there are signs of hope for a lot of sectors that were initially hit hard. While many sectors have an optimistic outlook, there are some industries that still have a fair amount of uncertainty around them, including residential housing.
With eviction moratoriums extended until the end of 2020 and talk about potential federal packages underway, it's hard to know how large residential retail real estate investment trusts (REITs) will fare in the long run. This concern may lead investors to wonder if AvalonBay Communities (NYSE: AVB), one of the leading residential REITs in the market today, is still a buy. Let's take a look at where the company stands today to see if it's a buy right now.
A leader in high-end apartment housing
AvalonBay Communities is the ninth largest publicly traded REIT and specializes in the development, acquisition, and management of high-end urban and suburban apartments in top-tier markets across the United States. The company has 86,380 housing units under management in over 20 markets with the majority of their portfolio being in the New York, New Jersey metropolitan area and Southern California. A big focus for the company is developing or acquiring properties in high wage markets, which allows them to focus on leasing apartments to higher-income-earning tenants.
The company's strengths
One of AvalonBay Communities' biggest strengths, particularly in the current market, is their tenant base. Higher-income-earning tenants' wages and jobs were largely unaffected by the pandemic. Rather than losing their job or suffering from a loss of income, many just transitioned into working from home.
The company averaged a 96% collection rate for the two months ending July and August 2020 and as of September 9, 2020, had achieved a 95% collection rate for the month, which is slightly below their 12 months trailing average of 97.9% ending March 2020. Occupancy is also stable at 93.3% for the two-month average of July and August 2020. The company, despite a very challenging Q2 2020 in the commercial industry, remained fairly in line with their performance the same quarter the prior year. Funds from operation (FFO) saw just a 1.3% reduction, and earnings per share (EPS) remained the same. They are also well funded, with a relatively low debt-to-EBITDA of 4.9x and $323 million in cash and cash equivalents.
The company's vulnerabilities
Revenues were down 3% as of Q2 2020, largely from a decrease in rental rate change for new and renewing residential leases, higher amounts of uncollected rent from their retail tenants, and increased expenses as more people live and work from home. The biggest vulnerability is being able to continue to perform to their current standards. Occupancy levels are on the decline -- slightly, but still on the decline.
There is a shift in renter preference, especially in expensive metro markets for rentals outside of the city that offer more space and privacy and are often more affordable. I surely don't think all of Manhattan or Washington, D.C., plan to move to the suburbs, but this preference could have a short-term impact on their overall portfolio occupancy over the next year or two. I also think deflated rental rates are a potential for the next year or two as people navigate their preference and need for housing, particularly higher-end, high-density housing, in the current economy.
Personally, I think AvalonBay Communities is a buy in the current market, despite uncertainty as to where the residential marketplace is headed. I believe the challenges facing the company are temporary. Preference may be shifting toward more rural or suburban housing for the time being, but the markets the company operates in will always have demand and the high-earning jobs to support it.
Additionally, the company is rapidly growing with 19 communities under development, including developments in two new expansion markets: Southeast Florida and Denver. Their expanding markets may allow them to take advantage of more suburban communities in future development to help offset the new trend in tenant preferences. Share prices for the company are down 31% to February highs, which means investors can purchase shares for a nice discount while earning a return of roughly 4% with room for growth in the future.