Why dividend matters
REITs such as AvalonBay Communities (AVB) must pay at least 90% of their taxable income to investors as dividends. For REITs, dividends come primarily from the relatively stable stream of rents paid by the tenants who occupy the properties. Rental rates usually rise during periods of inflation as many lease rates are tied to inflation. As a result, REIT dividends are protected, to a large extent, from the long-term effects of rising prices.
As mentioned in the previous article, AvalonBay Communities’ fund-from-operations, or FFO, increased to $7.25 per share in 2014 compared to $5.05 per share in 2013, a record for the company. Bolstered by higher FFO, the company increased its dividend by 8.4% to a total of $4.64 per common share in fiscal year 2014, compared to $4.28 per share in 2013. This is the highest dividend paid by the company since its inception. With the increase in the first half of 2015 dividend to $2.5, AvalonBay Communities is now on course to pay around $5 per share this fiscal year.
FFO payout ratio
The FFO payout ratio is the dividend declared per common share, divided by the diluted FFO per common share for a given period. The FFO payout ratio provides investors with useful information as it measures the portion of FFO being declared as dividends to shareholders. AvalonBay Communities’ FFO payout ratio, which was 89.4% in 2010, dropped to 64% in 2014.
AvalonBay Communities offered the highest payout ratio in its peer group. For example, UDR (UDR) offered an FFO payout ratio of 63%, followed by Essex Property Trust (ESS) at 62.15%, then Equity Residential (EQR) at 60.7%. Finally, Apartment Investment and Management Company’s (AIV) ratio was 50.2%. The SPDR Dow Jones Wilshire REIT ETF (RWR) invests 4.76% of its portfolio in AvalonBay Communities.
We will discuss AvalonBay Communities’ debt position in the next article.