• AVB has compounded shareholders' wealth at a significant rate for decades.
• Multiple recent fears have pressured AVB and in particular, its share price.
• The valuation is reasonable and points to high single-digit/low double-digit total returns over the long term.
• AVB is an attractive stock in comparison to peers.

As a result of the coronavirus pandemic, the working-from-home environment and the fear of an "urban exodus," apartment REITs have experienced a sell-off this year. In the case of high-quality companies such as AvalonBay Communities (AVB), which have successfully compounded shareholders' wealth for decades, this sell-off may present a valuable opportunity. Let's dive right in.

Introduction to AvalonBay Communities

As per its corporate overview, AvalonBay Communities is an equity REIT focusing on (re)developing, acquiring and managing multifamily communities. Its properties are mainly located in Northern and Southern California (~13k homes/~17k homes), the New York/New Jersey metro area (~16k homes), the Mid-Atlantic (~14k homes), New England (~12k homes), and the Pacific Northwest (~5k homes).

AVB concentrates on properties in leading metropolitan areas in these regions that are characterized by growing employment in high wage sectors of the economy. A low housing affordability and a diverse and vibrant quality of life are also a plus. Generally, AVB owns high-quality properties, attracting young and financially successful tenants - a clientele that is less likely to suffer from economic downturns and unemployment and thus also less likely to not pay rent.

AVB has been able to achieve a 13.3% annualized return for its shareholders since its IPO in 1993. The annualized dividend growth rate during this time has been 5.2%. This means that shareholders' wealth has compounded at a very significant rate and establishes AVB as a high-quality business that is generally lucrative to own for the long term.

Recent Weakness and Fears

Despite its long-term success, AVB's share price has seen considerable weakness in 2020, in particular in comparison to the S&P 500 (of which it is a member):

Data by YCharts

The narrative that is probably mainly responsible for this price action is the idea that working from home will continue to be so prominent that a significant number of people choose to live in the countryside instead of the city (in one of AVB's apartments). Together with other factors (e.g., civil unrest), this will lead to an urban exodus, resulting in dwindling demand for AVB's properties.

Frankly put, I don't buy into this narrative. An urban exodus certainly currently makes sense, taking the pandemic into account. But the pandemic will be defeated eventually, and with vaccination progressing, probably in 2021. And then?

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