01—Abstract
Summary
Summary of the 10-K filed March 15, 2005. Cited figures are marked; the original filing is the authoritative source.
AvalonBay Communities (AVB) closed 2004 with net income available to common stockholders of $211.0 milliona ($2.92 diluted EPS), down 19.1% from $260.8 million in 2003, which had been inflated by high disposition gains.
Net operating income rose 9.0% to $429.2 millionb, driven by newly developed and acquired communities, while Established Communities NOI was down 1.3%. FFO per diluted share was $3.36, up from $3.28 in 2003. The company owned or held interests in 138 operating communities with 40,142 apartment homes at year-end, plus 10 communities under construction (2,668 homes) and rights to develop 49 more (13,491 homes).
Management describes 2004 as a transition year and expects 2005 revenue growth of 2.0%-4.0% for Established Communities, supported by improving apartment fundamentals in its high barrier-to-entry markets. Balance sheet leverage remained moderate, with debt-to-total market capitalization of 30.4% at December 31, 2004, and total assets of $5.07 billionc. Liquidity rests on a $500 million unsecured credit facility ($181 million available at February 28, 2005) and access to capital markets, including $150 million of 5.375% notes issued in 2004 and $100 million of 4.999% notes issued in March 2005.
The company also plans a discretionary investment fund targeting up to $330 milliond of equity commitments and roughly $940 million of investment capacity, with closing expected in early 2005. Key risks include development and redevelopment cost overruns, rising interest expense expected in 2005, a California earthquake exposure, and a pending class action over security deposits. The company is a REIT that distributed a $2.80 annual dividend in 2004, with the Q1 2005 dividend raised 1.4% to $0.71 per share.
02—Key points
Key Highlights
- Net income available to common stockholders fell 19.1% to $211.0 million ($2.92 diluted EPS) from $260.8 million, mainly because 2003 included much larger gains on property sales ($160.99 million vs. $122.4 million in 2004 from discontinued operations).
- Net operating income grew 9.0% to $429.2 million, led by Development and Redevelopment Communities (+$23.1 million) and Other Stabilized Communities (+$16.8 million), while Established Communities NOI declined 0.4% in the Northeast and 5.9% in Northern California.
- FFO per diluted share increased to $3.36 in 2004 from $3.28 in 2003 (FFO total $246.2 million, including a methodology change to include land sale gains).
- Established Community economic occupancy rose to 95.3% from 93.8%, but average monthly revenue per occupied home fell 1.8% to $1,418 amid high concessions ($974 per move-in, up 15.5%).
- Development pipeline: 10 communities under construction (2,668 homes, about $546.7 million total capitalized cost) and 49 Development Rights representing 13,491 homes (about $3.0 billion estimated cost).
- Balance sheet: debt-to-total market capitalization of 30.4%; $500 million unsecured credit facility with $181.2 million available; $150 million of 5.375% notes issued in 2004 and $100 million of 4.999% notes issued in March 2005.
- 2005 guidance: Established Community revenue growth of 2.0%-4.0% and operating expense growth of 1.5%-3.5%, implying NOI growth of 2.5%-4.5%; interest expense expected to rise as rates increase and leverage grows.
03—Questions
Frequently Asked Questions
Why did net income to common stockholders decline in 2004 despite higher operating income?
The decline is mainly due to lower gains on sales of communities. Gains on sales were $122.4 million in 2004, compared with $161.0 million in 2003, when disposition activity was historically high. This was partially offset by higher NOI from newly developed and acquired communities, and lower preferred dividends ($8.7 million vs. $10.7 million).
How is the company's core operating performance trending?
Consolidated NOI grew 9.0%, but much of that came from new developments and acquisitions. Established Communities, the same-store pool, saw NOI fall 1.3% in 2004, though management reported improving momentum in the second half of the year, with year-over-year revenue growth in the fourth quarter and the first sequential rate increase since 2001.
What are the main risks to the 2005 outlook and development pipeline?
Key risks include rising construction costs, especially for Development Rights that have not started construction; the possibility that the discretionary investment fund does not close or perform as expected; higher interest expense as rates rise; and the inability to obtain financing or zoning approvals. Redevelopment costs have also run above original estimates in some cases. The company also carries uninsured risks, including earthquake exposure in California, where coverage is limited to $75 million.
How strong is the company's balance sheet and liquidity?
Leverage is moderate, with debt-to-total market capitalization of 30.4% at year-end 2004 and total assets of $5.07 billion. Liquidity is supported by $181 million of available capacity under its $500 million credit facility, $370.9 million remaining on its shelf registration, and operating cash flow of $275.7 million. The company refinanced $150 million of maturing notes in early 2005 with a new $100 million issue.
What is the discretionary investment fund and why does it matter?
The fund is a proposed vehicle with institutional investors that would acquire and operate apartment communities, mainly redevelopment opportunities. It targets up to $330 million of equity commitments, with AvalonBay contributing up to $50 million (20% of equity), and could support up to $940 million of investments with leverage of up to 65%. Management expects the fund to generate asset and property management fees in 2005, but there is no assurance it will form or perform as planned.
04—Continue