Avalonbay Communities Inc. (AVB), a leading multifamily real estate investment trust (REIT), has recently exchanged a portfolio of three apartment communities and a small land parcel for six apartment communities of UDR Inc. (UDR) and $26 million in cash.
The transaction was structured as a Like Kind 1031 Exchange, whereby the property owner could defer the tax gained from the subsequent sale of the asset.
The Avalonbay properties, currently valued at $263 million, included two apartment communities and a small land tract in metropolitan Boston and an apartment community in San Francisco. On the other hand, the UDR properties were valued at $237 million and were mostly concentrated in the Southern California region (metropolitan Los Angeles, Orange County and San Diego).
The swap deal was part of the long-term strategy of the company to realign its portfolio according to its portfolio allocation goals. With the mutual exchange of properties, Avalonbay reallocated capital from markets where it had a comparatively large portfolio of higher price point assets to an under-allocated region with multiple price point assets.
More specifically, the company exchanged assets in Boston and San Francisco (areas with huge development pipelines) with that of Southern California – a region which is presently in the early stages of an economic recovery.
With a continued decline in the single-family homeownership rate across the U.S. and gradual improvement in the overall economy, apartment REITs performed strongly in fiscal 2010. Furthermore, according to a report by property research firm Reis Inc., apartment vacancies in first quarter 2011 decreased 6.2% – the lowest since the recession.
We expect this sector to remain comparatively stable in the coming quarters as well, since renting has emerged as the only viable option for customers who could not get mortgage loans or are unwilling to buy a house at present. Consequently, the deal is expected to be modestly accretive to Avalonbay earnings in 2011.
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 relatively high. In addition, Avalonbay 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 future upside potential.
Furthermore, Avalonbay has a reasonably strong balance sheet with moderate near-term debt maturities and adequate liquidity. As a result, the company has the wherewithal to capitalize on potential acquisition opportunities due to distressed selling from owners and developers who cannot refinance their properties, which augurs well for its top-line growth.
We maintain our long-term Outperform rating on Avalonbay, which presently carries a Zacks #2 Rank that translates into a short-term Buy recommendation and indicates that the stock is expected to perform well above the overall U.S. equity market for the next 1–3 months.
AVALONBAY CMMTY (AVB): Free Stock Analysis Report
UDR INC (UDR): Free Stock Analysis Report
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