01—Abstract
Summary
Summary of the 10-K filed March 31, 1999. Cited figures are marked; the original filing is the authoritative source.
AvalonBay Communities (AVB), formerly Bay Apartment Communities, closed 1998 as a substantially larger REIT after its June 4, 1998 merger with Avalon Properties.
The company owned or held interests in 127 apartment communities with 37,910 homes at March 1, 1999, plus 14 communities under development (3,262 homes) and rights to develop 27 more (7,239 homes). Its strategy centers on institutional-quality apartments in high barrier-to-entry markets, concentrated in Northern and Southern California and expanded into the Mid-Atlantic, Northeast, Midwest, and Pacific Northwest. Full-year 1998 net income rose to $94.4 milliona from $38.9 million, and FFO rose to $144.2 million from $62.4 million, largely reflecting the merger.
Per-share figures are less comparable, with diluted net income of $1.37b versus $1.40 in 1997 because of the expanded share count. The balance sheet grew to $4.03 billion in total assets, with debt-to-total market capitalization at 35.7%. The company issued $710 million of unsecured senior notes in 1998 and $125 million of medium-term notes in January 1999, and it relies on a $600 million unsecured credit facility of which $284.3 million was available at March 1, 1999.
Management flagged a tighter capital market since late 1998, a planned disposition program for non-core assets, and a management realignment that will produce an estimated $16 millionc non-recurring charge in Q1 1999, with about $3.5 million in annual savings. Investors should also weigh softening in certain Silicon Valley-dependent Northern California submarkets since October 1998, and the risks inherent in $1.06 billion of development rights and ongoing redevelopment.
02—Key points
Key Highlights
- Portfolio of 127 communities with 37,910 apartment homes at March 1, 1999, following the June 1998 Avalon merger, with an average community age of about nine years
- FFO increased to $144.2 million in 1998 from $62.4 million in 1997, driven primarily by merger-related acquisitions
- Net income rose 142.5% to $94.4 million; diluted EPS was $1.37 versus $1.40 in 1997 due to the larger share count
- Total assets reached $4.03 billion; debt-to-total market capitalization was 35.7% at year-end 1998, with long-term floating-rate debt at only 1.4%
- Liquidity relies on a $600 million unsecured facility ($285.5 million drawn and $284.3 million available at March 1, 1999) and a January 1999 $125 million medium-term note issuance
- Disposition program sold seven communities (2,039 homes) for $126.2 million gross and two DownREIT communities (758 homes) for about $44 million, with proceeds redeployed into development and redevelopment
- Management realignment expected to generate a roughly $16 million non-recurring charge in Q1 1999, with about $3.5 million in annual recurring savings; the company also flagged softening in Silicon Valley-linked submarkets and a tighter capital markets environment
03—Questions
Frequently Asked Questions
What drove the large increase in AvalonBay's 1998 earnings and FFO?
The increase was primarily driven by the June 4, 1998 merger with Avalon Properties, which added communities and rental income. Rental income rose 178.5% to $352.0 million, with $144.2 million attributable to former Avalon communities and $76.4 million to newly completed or acquired homes. Because the merger was accounted for as a purchase, Avalon's pre-merger results are not included in the reported 1998 figures, so year-over-year comparisons overstate organic growth.
How much balance sheet capacity and liquidity does the company have?
At March 1, 1999, $285.5 million was outstanding under the $600 million Unsecured Facility, $30.2 million supported letters of credit, and $284.3 million was available. The company also issued $710 million of senior unsecured notes in 1998 and $125 million of medium-term notes in January 1999. Management believes operating cash flow covers near-term needs, but it notes that financing the remaining development pipeline may require additional debt or equity, and that capital market conditions had become less favorable.
What is the company's development and redevelopment exposure?
As of March 1, 1999, 14 Development Communities (3,262 homes) had a budgeted cost of about $532.5 million with a weighted projected EBITDA yield of 10.2% on cost. Thirteen Redevelopment Communities (4,854 homes) had a budgeted cost of about $462.5 million with a weighted projected yield of 9.2%. Management also holds 27 Development Rights (7,239 homes, $1.06 billion budgeted). The filing warns that construction and redevelopment costs have exceeded budgets for some projects and that financing for future starts may be constrained.
What risks did management highlight regarding the existing portfolio?
Management noted that Northern California submarkets dependent on Silicon Valley employment softened beginning in October 1998, reflecting Asian economic weakness, with reduced rent growth and occupancy. The company also disclosed seismic exposure, with a $113 million probable maximum damage estimate for West Coast communities against $75 million of earthquake coverage (subject to a 5% deductible). Year 2000 remediation was estimated at about $750,000 for non-IT systems, with compliance targeted for mid-1999.
What changed in management and how will it affect results?
In February 1999, the company announced departures of President and COO Charles Berman, Senior VP Jeffrey Van Horn, and Senior VP Max Gardner. Bryce Blair was promoted to COO and Robert Slater to Executive Vice President. Management expects a non-recurring charge of about $16 million in Q1 1999 for severance, contract termination, and office consolidation, with estimated recurring savings of about $3.5 million per year. The filing also notes that stock option grants that would otherwise have gone to the departing officers were excluded from the savings estimate.
04—Continue