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AvalonBay to Monetize Investments in Manhattan Apartments

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Residential REIT AvalonBay Communities Inc. (AVB - Free Report) has agreed to sell 80% stake in five Manhattan apartment communities. In total, the communities include 1,301 apartment homes and around 58,000 square feet of retail space in the borough of Manhattan in New York City. The initiative is part of the company’s effort to monetize a considerable portion of investments in these properties.

Particularly, AvalonBay has struck a deal to give up fee ownership of Avalon Morningside Park, Avalon Bowery Place I and Avalon Bowery Place II along with leasehold stake in Avalon West Chelsea and AVA High Line. The interest will be contributed to a newly-created joint venture (“JV”) with an institutional client of real estate investment manager, Invesco Real Estate. AvalonBay will possess a 20% interest in it and serve as the managing member and property manager for the properties. The JV intends to make use of secured financing at a loan to value ratio of around 50%.

The deal, which is slated to close before the end 2018, is based on a total asset valuation of around $760 million. It will enable AvalonBay improve financial flexibility. In fact, with projected net proceeds of around $460 million, the company plans to fund general corporate requirements that may involve acquisition, development and redevelopment of apartment communities. In order to reflect the impact of this transaction, the company will update 2018 outlook in the upcoming earnings release.

Notably, solid job growth in recent months indicates more household formations and raises expectations of a revival of the U.S. residential real estate market fundamentals. Nonetheless, the struggle to lure renters will continue in the upcoming quarters as well, when much of new supply may come on course. Moreover, the upcoming colder months mark a seasonally slow apartment leasing period.

Therefore, landlords’ ability to command more rents is likely to be restricted and concessions might be rampant in the near term. This is expected to affect performance of residential REIT stocks like AvalonBay, Apartment Investment and Management Company (AIV - Free Report) , American Homes 4 Rent (AMH - Free Report) , and Equity Residential (EQR - Free Report) .

Nevertheless, AvalonBay already has high-quality assets located in some of the premium markets of the country. These enable the company to generate steady rental revenues. On the back of favorable demographics, household formation, recovering economy and job market growth, the company is poised to excel.

AvalonBay currently has a Zacks Rank #3 (Hold). In the past six months, the stock has returned 6.7% compared with the industry’s 5.9% rise. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.



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