Avalonbay Communities Inc. (AVB), a leading multifamily real estate investment trust (REIT), has recently expanded its portfolio with the acquisition of Yale Village Townhomes in Rockville, Maryland for $49.5 million. The purchase price for the 210 rental townhomes equates to about $235,700 per unit.
The acquired property is strategically located between the Rockville and Shady Grove Metro stations in close proximity to the Montgomery College. The townhouses, with an average unit size of 1,700 square feet, contain full-size washer and dryer units, wall to wall carpeting, and a separate dining room. In addition, a clubhouse and a gymnasium were added to the site in 2010.
The continuous acquisition binge of Avalonbay is primarily due to improving multifamily apartment fundamentals. The national homeownership rate has plummeted to 66.5% during first quarter 2011, with stringent mortgage underwriting standards, declining home prices, and continued uncertainty regarding the overall economy of the U.S. This has resulted in decline in ‘for-the-sale’ housing market, which in turn has benefited rental housing.
Furthermore, the supply of new multifamily apartments is projected to be at an all-time low with 110,000 units expected to be completed in 2011 – the lowest level of deliveries in 50 years.
Avalonbay has Class A assets located in some of the premium markets of the country, such as Washington DC, New York City, and San Francisco, where the spread between renting and owning is high. This enables the company to continually increase rents to fuel its growth engine.
In addition, Avalonbay’s assets are primarily located in infill supply-constrained areas, where there are very limited new apartment construction activities. In addition, the company mostly focuses on developing properties for higher-income clients in high barrier-to-entry regions of the U.S. This safeguards the company from any short-term volatility in the market and provides a strong upside potential.
We maintain our ‘Neutral’ recommendation on Avalonbay, which presently has a Zacks #2 Rank that translates into a short-term ‘Buy’ rating. We also have a Neutral recommendation and a Zacks #3 Rank (short-term ‘Hold’) for Apartment Investment & Management Co. (AIV), a competitor of Avalonbay.
