Just last week, one of the premier residential REITs raised its dividend. And income investors who buy the stock before March 31 can claim the next dividend check.
That company is AvalonBay Communities (NYSE: AVB), a Real Estate Investment Trust (REIT) with a market capitalization of $16 billion. With an 8.4% increase in its dividend, AvalonBay now offers investors a 3.8% yield.
As you know, REITs are companies that own and lease properties. While most REITs are in the commercial office space or real estate business, there are also residential REITs.
AvalonBay owns and manages almost 200 “multifamily communities in the United States.” Basically, the company owns and operates apartment buildings and townhouse complexes in 10 states and the District of Columbia.
The business model is simple: AvalonBay buys an apartment building. The company is a landlord, and rents apartments. The nice thing about this business is the regular cash flow from its 52,000 apartments. AvalonBay operates in some of the country’s most robust housing markets including Washington, D.C., New York and Boston, and boasts an occupancy rate of 96%.
Business has been good for AvalonBay thanks to a slow housing market. With home ownership rates falling since the financial crisis, demand for rental units remains high. Over the last three years, the company’s sales have grown by 73%, and they’re expected to top $1.6 billion in 2014.
Thanks to a loophole in the IRS tax code, AvalonBay is able to avoid paying federal income taxes because of its residential REIT status. As you may know, REITs are not subject to corporate taxes if they distribute at least 90% of income to shareholders as dividends. As such, almost every dollar of profit that AvalonBay earns is distributed right back to shareholders.
In the most recent earnings report covering the final three months of 2013, AvalonBay reported an increase in quarterly profit of 64%.
AvalonBay has been expanding and making big investments. In early 2013, AvalonBay partnered with its chief rival to purchase the Archstone real estate portfolio from the trustee overseeing the Lehman Brothers’ bankruptcy.
As part of the deal, AvalonBay acquired 40% of the massive portfolio, roughly 22,000 housing units. AvalonBay rival Equity Residential (NYSE: EQR) also acquired around 23,000 housing units. Both companies took on their share of Archstone’s debt and incurred significant one-time expenses as part of the deal.
While the acquisition has left a blemish on AvalonBay’s short-term financial results, the long-term benefit of this investment will be realized for years to come. AvalonBay shareholders are already beginning to benefit from the company’s recent investments.
Investors were clearly impressed by the performance of AvalonBay’s housing portfolio, the company’s high-occupancy rate and the strength of the rental markets in which this residential REIT owns property. But just as impressive as these metrics was the company’s 8.4% dividend hike. Shares of AvalonBay stock rose 6% following the earnings report.
The stock hasn’t done well over the last year. While the S&P 500 index rose 30%, AvalonBay shares were flat. But it looks like that underperformance could turn around in 2014.
Analysts expect the company’s sales to grow by 12%. And EPS are estimated to soar 33%. Shares are trading around $125, or about 18-times this year’s earnings estimate.
AvalonBay is beginning to reap the benefits of its massive Archstone acquisition, and it looks like profits will grow considerably this year.
If you’re looking for a healthy stream of investment income and the potential for capital gains, this residential REIT looks like a long-term winner.
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