Most retirees want to generate some supplemental income to enhance their retirement. There are many ways they can do that, including owning cash-flowing real estate like an apartment complex. While that option can help them achieve their goals, being a landlord does require some work, which many retirees might not want to do.
Because of that, a better option might be to invest in residential real estate investment trusts (REITs). These entities lease apartments to tenants to generate rental income, which they distribute to their investors. One of the leaders in that real estate subgroup is apartment-focused REIT AvalonBay Communities (NYSE: AVB). Here's a look at whether it would be a good fit in a retirement-focused portfolio.
A leading landlord
AvalonBay is the largest residential REIT by equity market capitalization. The company currently has interests in 295 apartment communities (including 19 under development) containing 86,380 apartment homes in 11 states and the District of Columbia. The REIT primarily focuses on large metropolitan areas with high wage employment growth and lower housing affordability. Those features typically enable its communities to benefit from above-average rent growth.
The REIT's apartment portfolio has held up relatively well during the COVID-19 outbreak. The company collected 97% of the rent it billed during the second quarter and has received more than 95% of its rent so far during the third quarter. Meanwhile, occupancy and lease rates have also held up reasonably well, with occupancy only dipping slightly from 94.6% at the end of June to 93.3% at the end of August while like-term effective rent has declined by less than 5%.
The company has plenty of financial flexibility to cushion that blow since its dividend payout ratio has averaged a comfortable 68% over the past year. Meanwhile, it has one of the best balance sheets in the multifamily REIT sector. On top of that, it has already pre-funded 95% of its development projects, which limits its financial risk. Because of that, its dividend -- which currently yields more than 4% -- is on rock-solid ground.
Income with upside
One of the hallmarks of AvalonBay Communities over the years has been its steady growth. The REIT has a long and successful history of developing new apartment communities to meet the growing demand for housing in large metropolitan areas. That has enabled the company to steadily increase its dividend over the years, including by 4.6% in early 2020.
That upward trend should continue despite the near-term impact of COVID-19. One factor driving that view is the company's development pipeline, where it's investing $2.6 billion into 19 communities. While the pandemic did delay some projects and negatively impact its leasing activities, these and future projects should eventually reach stabilization and bolster its bottom line. That's because long-term demographic trends favor renting. One driver is millennials, which are now the largest demographic group. While some moved back home with their parents to save money during the pandemic, they'll likely move out as the economy improves, which should boost occupancy and rental rates for multifamily properties.
The improvement in those numbers could be significant because AvalonBay and its competitors have pulled back on starting new developments because of the current economic downturn. As a result, there will likely be more renters competing for fewer available apartments in the coming years, which bodes well for AvalonBay's cash flow.
Truly passive retirement income
AvalonBay Communities is one of the largest and financially strongest multifamily REITs. Because of that, retirees can rest easy knowing they should collect a steady rent-backed income stream from the company. Add in its growth prospects, and this REIT looks like an ideal fit for a retirement portfolio since it enables them to enjoy the benefits of being a landlord without any of the hassles.