How much of 2005's earnings growth came from recurring operations versus one-time gains?

Most of the increase in net income came from gains. Gains on real estate sales were $199.8M in 2005 versus $122.4M in 2004, and including a $6.3M gain on the Rent.com investment. Recurring NOI grew $40.8M (about 10%), and FFO per share rose 12%. Because the gains are non-recurring and the 2006 disposition target is lower ($225-300M), investors should focus on NOI and FFO growth as the more durable measures.

What does management expect for apartment rents and operating costs in 2006?

For Established Communities, management expects rental revenue to grow 5.0%-6.0% and NOI to grow 6.0%-7.0% versus 2005. Operating expenses are projected to rise 3.0%-4.0%, pressured by utility, labor, and property tax costs. Management has not provided company-wide NOI guidance because development starts, dispositions, and acquisitions are hard to forecast.

How leveraged is AvalonBay and how much liquidity does it have?

Debt-to-total market capitalization was 26.1% at December 31, 2005, and long-term floating-rate debt outside the credit facility was 2.3% of market capitalization. Total debt was about $2.37B, including $1.81B of unsecured notes. At January 31, 2006, $444.5M was available under the $500M revolver after $16M of borrowings and $39.5M of letters of credit. The company has an effective shelf registration with $371M remaining and plans to expand capacity in early 2006.

What are the main legal and regulatory risks disclosed?

The main matters are Equal Rights Center v. AvalonBay (filed September 2005), alleging that communities violate Fair Housing Act and ADA accessibility requirements, with unspecified damages and possible injunctive relief; the company cannot estimate the loss. A California security-deposit class action (Ko) has been settled, subject to court approval, with payments expected around April 2006 and $1.5M accrued for related and other litigation. The company also faces a construction-related appeal against a general contractor. Management does not expect these matters to have a material adverse effect.

Why did the company increase its development activity, and what are the risks?

Management increased construction volume in 2005 in anticipation of stronger apartment fundamentals, with 15 communities (4,062 homes, about $1.03B total cost) under construction and roughly $3B of Development Rights. Risks include rising construction costs (steel, concrete, lumber), entitlement delays, financing availability, and lease-up performance. Development cost overruns and abandoned pursuits can result in write-offs, and the company cannot guarantee that market rents will offset higher costs.

AVB 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 14, 2006. Cited figures are marked; the original filing is the authoritative source.

AvalonBay Communities (AVB) closed 2005 with a strong year for its apartment portfolio.

Net income available to common stockholders rose 48.6% to $313.7 million^a ($4.21 diluted EPS), driven largely by $199.8 million of gains on asset sales, including seven community dispositions for roughly $351 million and a $6.3 million gain on the sale of its Rent.com investment. Core operating results also improved: net operating income increased 10.1% to $445.1 million, and FFO per diluted share rose to $3.77 from $3.36 in 2004. Established Community rental revenue grew 3.6%, with management citing the first meaningful rental rate increases in several years and average economic occupancy of 96.1%.

Management guides to continued improvement in 2006, projecting Established Community revenue growth of 5.0%-6.0% and NOI growth of 6.0%-7.0%, while expecting operating expenses to rise 3.0%-4.0%. The company is expanding its development pipeline: more than $1 billion^b of communities are under construction, about $3 billion of Development Rights are in hand, and 2006 development starts are planned at $700-800 million. It also expects lower disposition volume ($225-300 million) than in 2005, and the first-quarter 2006 dividend was raised 9.8% to $0.78 per share.

Balance sheet risk is moderate. Debt-to-total market capitalization was 26.1% at year-end, and the company had $444.5 million^c available under its $500 million unsecured credit facility at January 31, 2006.

Total debt of about $2.37 billion^d carries a mix of fixed and variable rates, and the company faces litigation over ADA/Fair Housing accessibility compliance and a California security-deposit class settlement. Earnings in 2005 were flattered by unusually large gains, so investors should focus on the recurring NOI and FFO trends when assessing sustainable performance.

02—Key points

Key Highlights

Net income available to common stockholders rose 48.6% to $313.7M ($4.21 diluted EPS), boosted by $199.8M in gains on asset sales.
Net operating income increased 10.1% to $445.1M; Established Community rental revenue grew 3.6% with average economic occupancy of 96.1%.
Diluted FFO per share increased to $3.77 from $3.36 in 2004 (a 12.2% increase).
2006 guidance: Established Community revenue growth of 5.0%-6.0% and NOI growth of 6.0%-7.0%, with operating expense growth of 3.0%-4.0%.
Development pipeline expanding: over $1B under construction, roughly $3B of Development Rights, and planned 2006 starts of $700-800M.
Quarterly dividend raised 9.8% to $0.78 per share for Q1 2006; 2005 dividends declared were $2.84 per share.
Debt-to-total market capitalization of 26.1%, with $444.5M available under the $500M unsecured credit facility at January 31, 2006.

03—Questions

Frequently Asked Questions

How much of 2005's earnings growth came from recurring operations versus one-time gains?
Most of the increase in net income came from gains. Gains on real estate sales were $199.8M in 2005 versus $122.4M in 2004, and including a $6.3M gain on the Rent.com investment. Recurring NOI grew $40.8M (about 10%), and FFO per share rose 12%. Because the gains are non-recurring and the 2006 disposition target is lower ($225-300M), investors should focus on NOI and FFO growth as the more durable measures.
What does management expect for apartment rents and operating costs in 2006?
For Established Communities, management expects rental revenue to grow 5.0%-6.0% and NOI to grow 6.0%-7.0% versus 2005. Operating expenses are projected to rise 3.0%-4.0%, pressured by utility, labor, and property tax costs. Management has not provided company-wide NOI guidance because development starts, dispositions, and acquisitions are hard to forecast.
How leveraged is AvalonBay and how much liquidity does it have?
Debt-to-total market capitalization was 26.1% at December 31, 2005, and long-term floating-rate debt outside the credit facility was 2.3% of market capitalization. Total debt was about $2.37B, including $1.81B of unsecured notes. At January 31, 2006, $444.5M was available under the $500M revolver after $16M of borrowings and $39.5M of letters of credit. The company has an effective shelf registration with $371M remaining and plans to expand capacity in early 2006.
What are the main legal and regulatory risks disclosed?
The main matters are Equal Rights Center v. AvalonBay (filed September 2005), alleging that communities violate Fair Housing Act and ADA accessibility requirements, with unspecified damages and possible injunctive relief; the company cannot estimate the loss. A California security-deposit class action (Ko) has been settled, subject to court approval, with payments expected around April 2006 and $1.5M accrued for related and other litigation. The company also faces a construction-related appeal against a general contractor. Management does not expect these matters to have a material adverse effect.
Why did the company increase its development activity, and what are the risks?
Management increased construction volume in 2005 in anticipation of stronger apartment fundamentals, with 15 communities (4,062 homes, about $1.03B total cost) under construction and roughly $3B of Development Rights. Risks include rising construction costs (steel, concrete, lumber), entitlement delays, financing availability, and lease-up performance. Development cost overruns and abandoned pursuits can result in write-offs, and the company cannot guarantee that market rents will offset higher costs.

04—Continue

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