Instead, AvalonBay looked for ways to create value in challenging economic times. It repurchased stock when its stock price fell to $28, selling it six months later at $36 per share. It trimmed overhead costs. This financial strategy worked: AvalonBay was one of four multifamily companies that paid its dividend through the recession.
The company also slowed its development pipeline considerably. With a shaky economy, AvalonBay decided to be conservative and build its balance sheet, not a portfolio of vacant apartments. “They basically got to the point where they ensured that they had adequate funding for any projects that they would start in their development pipeline, as opposed to doing something on a speculative basis in terms of raising additional capital,” Leupold says. “They maintained a strong balance sheet with good flexibility.”
AvalonBay also sold assets to keep its balance sheet strong. In 2003, it disposed of $450 million in assets, more than twice what it had projected. With low cap rates in many of AvalonBay’s markets, Blair received numerous offers, specifically from condo converters, that he couldn’t refuse. “We used to be emotional [about keeping properties],” he says. “We’re not emotional anymore.”
Blair recycled this equity back into AvalonBay’s development pipeline, now up to $3.1 billion in assets under construction, entitled land, and land options. This gives AvalonBay great leverage as the economy improves. “That’s a tremendous component of the company’s valuation,” Blair says. “It’s a tremendous driver of future earnings. We can regulate how much we do and whether were more aggressive or more conservative, depending on how we feel about the economy.”
Coastal Presence While AvalonBay can change direction on things like acquisitions and dispositions, it does have a long-term business strategy from which Blair will not deviate. The approach, which started under Michaux but was tweaked by Blair, revolves around the idea of wide product diversity in a select number of markets. “We want to have a greater presence in fewer markets and we want to have a broader portfolio,” Blair says. “Those are two things that drive every decision we make.”
Currently, AvalonBay operates in 16 markets, which offers a portfolio with geographic reach and economic diversity. Washington, for instance, relies on the federal government. New York has its financial base, while Chicago—AvalonBay’s only non-coastal market—focuses on manufacturing. Boston and Northern California are driven by the technology industry. “They’re very good at looking at markets,” says Peter Linneman, principal of Linneman Associates, a real estate advisory and consulting firm in Philadelphia. “And they’re very good at figuring out how to succeeded in those markets.”
Once in these markets, Blair uses demographics to dictate building decisions. “He can see some of the changing nature of the apartment industry—some of the demographic changes that are occurring and the marketplaces where people are moving, where jobs are being created, the kinds of growth areas and demographic segments that make some sense,” says Lance Primis, the lead independent director on AvalonBay’s board.
Diverse Decisions Just as demographics have changed, so has AvalonBay’s property mix. Prior to the mid-1990s, AvalonBay developed primarily three- to four-story wood-frame apartment buildings. But as opportunities arose in Boston and Washington, the company began building mid- and high-rise urban infill.
Those decisions led the Alexandria, Va.-based REIT to where it is today: an apartment company with diverse properties and price points. AvalonBay builds garden-style apartments for people who live and work in the suburbs, high-rises for those who prefer urban areas, and townhouses for families or empty-nesters who desire more space. “We are developing a broader range of products,” says AvalonBay COO Tim Naughton. “Bryce is encouraging our developers to branch out.”
With in each product type, AvalonBay offers even more diversity. For instance, a high-rise may have two top penthouse floors with Corian countertops, crown molding, and higher ceilings. Residents who live below those penthouse floors won’t get the same frills, but they may pay $100 to $200 less in monthly rent.
