AvalonBay Communities’ recent Investor Day not only gave its investors and analysts insight into how good next year will likely be—the company predicted NOI growth of 5 percent to 7 percent—but it also provided a glimpse into how the Arlington, Va.-based REIT plans to tweak its portfolio going forward.
After moving out of markets such as Portland, Ore., and Minneapolis over the past decade, the company says it’s now come to a point where it can focus on its 14 core markets and specific submarkets within those areas.
“When you do that, you see that not every submarket is a place where you want to own A assets, based on the households that are there, their income levels, and also whether a submarket can and will be absorbing new supply in the future,” says Sean Breslin, senior vice president of investments at AvalonBay.
So, if AvalonBay likes a submarket and B properties make sense, that’s what it will buy. That could ultimately alter the REIT's portfolio by increasing its concentration of older assets. “Historically, we’ve been more focused on the A segment,” Breslin says. “Going forward, we’ll be a little more agnostic and more open to what’s the right product, customer, and price point in a submarket if we like the submarket.”
Breslin even discussed the possibility of selling some new developments and redeploying that capital into B product in markets where there won’t be new supply. During Investor Day, the REIT ran a model showing how a portfolio that was comprised of 75 percent versus 85 percent A properties could provide better-risk adjusted returns. However, Breslin says the company isn’t targeting a specific amount of B-level assets.
“Over time we may have [a high percentage of] B's, whether we get to that level or not, who knows?,” Breslin says. “The practical realities of the market are that assets are available where they’re available.”
But if they can add some B's, analysts won’t downgrade the firm. “A little bit more B exposure is not a bad thing,” says Haendel St. Juste, an analyst with Keefe, Bruyette & Woods (KBW), an investment banking and security brokerage firm based in New York. “Since A's tend to underperform in the early part of a down cycle, it will help them smooth out the downside a bit.”
Bill Acheson, an analyst with The Benchmark Co. in New York, says if AvalonBay could add a higher percentage of B assets, it could decrease its overall risk. “If you get into the B area, you will have higher initial yields,” he says. “In some markets, B assets actually outperform.”