Spotlight: REITs, COVID-19, and the Rental Affordability Act



AvalonBay Communities apartments
Courtesy AvalonBay Communities press release

The average American has probably never heard of AvalonBay Communities. Very few outside the real estate and financial industry have ever heard of the company’s CEO Timothy J. Naughton. Even so, well over 100,000 people live in one of AvalanBay’s nearly 300 apartment communities spread across 11 states. Like many of the world’s most successful companies, this massively successful REIT sits at a crossroads in a crisis. The ongoing pandemic will certainly force a new social and business landscape upon us. The question remains as to whether the best and brightest will pave a new frontier, or be paved over. 

Spotlight!

An equity REIT heavy into the business of developing, redeveloping, acquiring and managing multifamily communities primarily, AvalonBay is the 3rd largest owner of apartments in the United States. The company created by Richard Michaux, and Chuck Berman with the merger of Avalon Properties Inc. and Bay Apartment Communities Inc. back in 1998, now has over 3,000 employees and assets worth $20 billion. 

AvalonBay Communities earnings
From the AvalonBay Communities earnings announcement via Yahoo Finance

Timothy J. Naughton, who started with the company right out of Harvard Business School, runs a company that always provides stockholders with value. The first two-quarters of 2020 show, that even in the craziest economic times, shares of AVB pay-out. Q2 the stock dividend was $1.59 per share, and as of the close yesterday shares were $151.86, climbing back up from a low on May 14th. However, today’s story is not all profits and positives. Naughton’s REIT is in big PR trouble at the worst possible time.

Cook With COVID Heat

A story at City Watch by author Patrick Range McDonald tells a California horror story where the United States’ biggest apartment owners are trying to stop the expansion of rent control through the Rental Affordability Act. According to the report, AvalonBay Communities, alongside Equity Residential, Essex Property Trust, UDR, and GID are pressing hard to silence housing activists who say rent control in California must happen on account of “Californians struggling to make ends meet and pay already unfair sky-high rents.” Unfortunately, Naughton and colleagues are in a firefight at the wrong, time in the wrong place. 

The situation in California is about to go supernova. The coronavirus pandemic has unmasked a monumental inequality in not only California but across the U.S. This quote from a 2015 report by the Yale Global Health Leadership Institute is a dagger strike to the jugular of the REITs in the housing business: 

“Whether enabling access to housing, creating a supportive housing environment or simply expanding the availability of affordable housing to families in lower-poverty neighborhoods, the evidence suggests housing is critical to the health of vulnerable individuals.”

Stir!

On the side of the big boys are a Republican U.S. administration, deep pockets, and massive advertising to scare Californians about the liberal backed Rental Affordability Act. Also, the fact that AvalonBay Communities, Inc. has a long-term track record “delivering outsized, risk-adjusted returns to shareholders,” this means a lot of influential people have an interest in this mess. This brings to mind two questions. First, will their political clout be enough in this crisis? Secondly, is it even business-wise to try and fight the wrong fight?

Even if the high-dollar lobbying and advertising pay off, and the law is defeated, AvalonBay Communities, Inc. and the others involved will never live down the fact they tried to leverage big profits at a time of chaos, death, and homelessness. The reports and research won’t go away. The senior citizens strapped each month for cash won’t disappear, that is unless COVID-19 takes them all. Like I said, today’s story is not a Timothy J. Naughton cheerleading practice. AvalonBay Communities’ CEO has some out of the box thinking to do, and quick. 

New Business – Served! 

COVID-19 is ushering in what’s being labeled a “new normal” everywhere in the world. And while this new reality will mostly be held up by the renters, shop owners, and so-called “little people,” what’s tolerable and feasible for big business is going to change too. At the moment real estate Titans are fighting for a totally free market, San Diego has turned its convention center into a homeless shelter. 

The perception is that billionaires owning huge real estate businesses are now fighting against a grassroots housing revolution at the key moment when the importance of rent control as a critical tool for housing stability. And the perception this time is the reality. This whole “fairness” situation is already a gigantic political football in a presidential election year.

The good PR on the side of the Democrat-backed rents issue is also magnified by things lie REIT tax liabilities and dividend requirements, etc. This report from EY, a global leader in assurance, tax, transaction, and advisory services makes my “new business” argument for me. Authors Mark Kaspar, and Henry Stratton say REITs need four priorities stand out at a time when real estate investment trusts assess, stabilize, and reimagine their business. 

Finally, Matthew DiLallo at Motley Fool says there are certain Virus-resistant REIT sectors, and he’s right according to an analysis by BofA Securities (NYSE: BAC). I won’t go into these sectors here, but the huge residential REITs are not on the list of those that will be unaffected. My point being, Timothy J. Naughton needs to sleep at night wearing that Harvard tweaked thinking cap in these trying times.

By the way, I spotlighted AvalonBay Communities because they seem more pioneering than too many others. 

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