03/11/2014 | by
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After 20 years as a stock exchange-listed REIT, AvalonBay Communities, Inc. (NYSE: AVB) is seeking to achieve more density and scale through a targeted strategy of development and reinvestment.

The apartment REIT, which celebrates the 20th anniversary of its initial public offering this month, focuses on apartment communities in high barrier-to-entry markets located in the Northeast, Mid-Atlantic, Pacific Northwest, and northern and southern California.

Last year was particularly busy for AvalonBay. In an interview with REIT.com, president and CEO Timothy Naughton described the 2013 closing of a deal to acquire a 40 percent stake in Archstone Enterprise LP as a “once-in-a-generation type of opportunity.” The $6.5 billion deal bolstered AvalonBay’s portfolio by adding 66 apartment communities.

While a transaction of a similar scale is not in the cards for this year, Naughton points out that the company’s activity on the development front is of equal importance. AvalonBay’s total development pipeline currently stands at about $6.6 billion, according to Naughton, consisting of $2.8 billion in projects under construction and $3.8 billion in the shadow development pipeline.

“Development continues to provide attractive economics and we believe supports aggressive investment in what we think will be a prolonged apartment cycle,” Naughton said.

At the same time, AvalonBay is investing aggressively into its existing portfolio, either to protect an asset’s existing position in its competitive submarket or to potentially reposition it, according to Naughton.

“The economics of that business continue to be quite compelling as well,” he noted. “We’re going to continue to recycle assets and prune the portfolio… and continue to look to reinvest into higher-return opportunities, whether its new development or submarkets that have a better growth profile.”

Naughton stressed that AvalonBay plans to stay within its existing geographic markets. “We’re looking to penetrate those markets more deeply through product and submarket diversification,” he said.

Apartment Outlook Bolstered by Low Housing Production

Solid market fundamentals are driving the company’s expansion and reinvestment plans, according to Naughton. He said AvalonBay expects 2014 to be marked by elevated supply matched by higher demand, resulting in a market that will be largely in equilibrium. Longer term, however, the low level of housing production that has existed over the past two to three years will work to the company’s advantage, Naughton said.

“The housing industry is going to have to ramp up production levels by 50 percent plus just to meet marginal demand growth over the next few years… I think that protects apartment fundamentals a bit further, at least for the foreseeable future,” Naughton observed.

Meanwhile, Naughton said he believes that AvalonBay has an opportunity to leverage its strong platform to attract more institutional capital flows from the private sector to the public market.

“The company has never really been stronger than we are right now,” Naughton said.

The apartment REIT sector as a whole stands to gain in the longer term, Naughton said. He noted that only about 10 percent of institutional-quality product in the apartment sector is in the hands of REITs.

“It’s clear that we’ve outperformed the private sector over the last 15 or 20 years,” Naughton observed.

“I do believe that capital will continue migrating to those who treat it best… I do think that’s a big opportunity, particularly for REITs of scale that have proven themselves in terms of being disciplined allocators of capital.”