01—Abstract
Summary
Summary of the 10-K filed March 11, 2003. Cited figures are marked; the original filing is the authoritative source.
AvalonBay Communities (AVB) reported a difficult 2002 as weakening demand in its high barrier-to-entry markets pushed rents and occupancy lower.
Total revenue rose 0.8% to $639.0 milliona, but net operating income (NOI) fell 3.8% to $438.2 million, driven by a 9.9% decline in Established Communities NOI, with Northern California (-17.5%) and Northeast (-8.5%) hit hardest. Net income available to common stockholders fell 28.1% to $155.7 million ($2.23 diluted EPS, versus $3.12 in 2001), largely because 2001 included larger gains on community sales and 2002 had fewer. Funds from Operations (FFO) declined to $258.2 million from $283.3 million.
Management characterized the company as in a downturn of the business cycle and expects weak demand to persist through most of 2003. Balance sheet and capital allocation were the other focus. Debt-to-total market capitalization was 46.1% at year-end, with $1.985 billionb of unsecured notes outstanding and $155.5 million drawn on a $500 million unsecured credit facility as of February 28, 2003.
Management is shifting capital toward dispositions and away from acquisitions and development, having authorized a $100 millionc stock repurchase program (about $77.4 million used through February 2003), redeemed Series C and I preferred stock, and announced redemption of the 8.00% Series D preferred. The company also faces a $100 million unsecured note maturity during the remainder of 2003 and a pending York Hunter construction litigation with a trial set for April 2003.
The development pipeline remains sizable: 12 communities (3,429 homes, about $645.7 milliond budgeted) under construction, two redevelopments, and 38 development rights representing 9,950 potential homes. Investors should weigh a strong asset base and conservative leverage against near-term earnings pressure from falling rents, rising insurance and bad-debt costs, and the company's reliance on asset sales to fund its plans.
02—Key points
Key Highlights
- Total revenue rose 0.8% to $638.97 million, but net operating income fell 3.8% to $438.19 million as Established Communities NOI declined 9.9%.
- Net income available to common stockholders fell 28.1% to $155.7 million; diluted EPS was $2.23 versus $3.12 in 2001, reflecting fewer gains on community sales.
- FFO declined to $258.2 million from $283.3 million (about 9% lower), and interest expense rose 17.6% to $121.4 million.
- Northern California (-17.5% NOI) and the Northeast (-8.5% NOI) were the weakest regions; average rental rates in Northern California fell 12.6%.
- Debt-to-total market capitalization was 46.1%, with $1.985 billion of unsecured notes and $155.5 million drawn on a $500 million credit facility at February 28, 2003.
- Capital allocation is shifting toward dispositions and stock repurchases (a $100 million program, about $77.4 million used through February 2003), with fewer acquisitions and development starts planned for 2003.
- The pipeline includes 12 development communities (3,429 homes, roughly $645.7 million budgeted) and 38 development rights (9,950 homes), while $100 million of unsecured notes mature during the rest of 2003.
03—Questions
Frequently Asked Questions
Why did AvalonBay's earnings decline in 2002?
Earnings fell mainly because market rents and occupancy weakened in key submarkets, reducing same-store (Established Communities) NOI by 9.9%. Net income available to common stockholders also dropped 28.1% because 2001 included $62.9 million of gains on sales of communities versus $48.9 million in 2002 (reported in discontinued operations), and interest and depreciation expense rose.
How is the balance sheet and liquidity position?
Leverage is conservative by management's measure, with debt at 46.1% of total market capitalization and only 2.0% in permanent floating-rate debt. Liquidity comes from operating cash flow of $308.1 million, a $500 million unsecured credit facility with $329 million available at February 28, 2003, and asset sales. Total assets were $4.95 billion and stockholders' equity was $2.19 billion.
What is management's outlook for 2003?
Management expects weak demand and job losses in technology, telecom, and financial services to continue for most of 2003, with any late-2003 recovery likely to lag the broader economy. It plans to decrease acquisition and development activity, increase dispositions (six communities were held for sale as of February 28, 2003), and expects higher insurance and D&O costs, with D&O premiums projected to rise about 80%.
What are the key risks to investors?
Key risks include continued rent declines in the Northern California and Northeast markets, refinancing of maturing unsecured notes (including $100 million in 2003), development cost overruns and lease-up delays, dependence on asset sales for funding, and the York Hunter construction litigation (trial set for April 2003). Earthquake exposure in California is also significant, with $75 million of California coverage carrying a 5% deductible.
What dividends and shareholder returns did AvalonBay provide?
Cash dividends declared were $2.80 per common share in 2002, up from $2.56 in 2001, paid at $0.70 per quarter. The company also repurchased shares under its $100 million program and redeemed preferred stock, including the Series C in July 2002 and the Series I shortly after, and announced the redemption of the 8.00% Series D preferred (about $81.7 million) to be funded by a new Series J issue.
04—Continue