01—Abstract
Summary
Summary of the 10-K filed February 29, 2008. Cited figures are marked; the original filing is the authoritative source.
AvalonBay Communities (AVB) closed 2007 with strong earnings driven largely by asset sales.
Net income available to common stockholders rose 35.5% to $349.5 milliona ($4.38 diluted EPS), but much of the increase came from $106.5 million in gains on discontinued community sales and roughly $60 million in gains from unconsolidated joint venture dispositions, so investors should weigh recurring operating performance separately. Core operations were healthy: Established Community rental revenue grew 5.5%, net operating income grew 7.2%, and average monthly revenue per occupied home rose to $1,767 from $1,610. Management guided to slower 2008 growth, with Established Community rental growth of 2.5% to 4.0% and NOI growth of 3.0% to 4.5%, citing a modest decline in new supply and continued renter demand.
The balance sheet remained conservative, with debt at 30.3% of total market capitalization and total assets of $6.74 billionb. The company is shifting toward a larger disposition program, planning $700 million to $1.0 billion of asset sales in 2008, and is slowing new development starts to $900 million to $1.1 billion, down from 2007 activity. Capital markets volatility was noted as a factor that could change funding sources, with greater use of secured debt and asset sales expected.
The company also raised its quarterly dividend 5.0% to $0.8925c per share, expanded its buyback authorization to $500 million, and faces an ongoing Fair Housing Act and ADA accessibility lawsuit covering up to 100 communities. For investors, the key takeaways are solid same-store fundamentals and a sizable development pipeline of 21 communities (6,816 homes, about $2.16 billion of projected cost), balanced against slower guided growth, reliance on asset sales and gains for earnings, and exposure to construction cost and financing conditions.
02—Key points
Key Highlights
- Net income available to common stockholders rose 35.5% to $349.5 million, or $4.38 diluted EPS, largely driven by $106.5 million in gains on community sales and roughly $60 million in joint venture disposition gains.
- Established Community rental revenue grew 5.5% and NOI grew 7.2%, with average rental rates up 5.8% while economic occupancy eased 0.3% to 96.3%.
- FFO per diluted share increased to $4.61 from $4.24 in 2006, with total FFO of $368.1 million.
- 2008 guidance calls for Established Community revenue growth of 2.5% to 4.0% and NOI growth of 3.0% to 4.5%, a slowdown from 2007.
- The development pipeline includes 21 communities under construction (6,816 homes, about $2.16 billion projected cost) and rights to 48 more communities (13,656 homes, about $3.9 billion projected cost).
- Debt-to-total market capitalization was 30.3% at year-end 2007, and the $1.0 billion unsecured credit facility had $209 million available at January 31, 2008.
- The Board raised the quarterly dividend 5.0% to $0.8925 per share and increased the share repurchase authorization to $500 million.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 29, 2008Financial Statements
| Revenue | $727.79M |
| Operating Expenses | $568.14M |
| Net Income | $358.16M |
| EPS (Basic) | $4.43 |
| EPS (Diluted) | $4.38 |
05—Questions
Frequently Asked Questions
How much of AvalonBay's 2007 earnings growth came from recurring operations versus one-time gains?
Much of the 35.5% increase in net income available to common stockholders came from non-recurring items. Gains on sale of discontinued communities rose to $106.5 million from $97.4 million, and equity in income of unconsolidated entities jumped to $59.2 million from $7.5 million, mainly from about $60 million in gains on two joint venture dispositions. Recurring NOI growth of $64.8 million, to $538.1 million, was solid but contributed less to the increase than asset sales did.
What is the outlook for apartment rents and NOI in 2008?
Management expects Established Community revenue growth of 2.5% to 4.0% and NOI growth of 3.0% to 4.5% in 2008, slower than 2007's 5.5% revenue and 7.2% NOI growth. The company cites a slower job growth rate and a decline in new rental completions as the main drivers, with expense growth expected at 2.0% to 3.0%. Boston is expected to lag the Northeast due to heavy new supply, while Northern California is expected to outperform other markets.
How is AvalonBay funding its development and acquisition activity, and what are the risks?
Funding comes from retained operating cash, borrowings under the $1.0 billion unsecured credit facility, asset sales (guided to $700 million to $1.0 billion in 2008), and secured or unsecured debt and equity issuance. The company warned that capital market volatility could shift funding toward secured debt and asset sales. Risks include construction cost increases, the possibility of abandoning development rights with write-offs of pre-development costs, and refinancing risk on maturing debt, which includes $209 million of 2008 unsecured note maturities and a $514.5 million drawn credit facility at year-end.
What legal and regulatory risks could affect AvalonBay?
The most significant known issue is the Equal Rights Center lawsuit, filed in September 2005 in federal court in Maryland, which alleges that 100 current or former communities violate Fair Housing Act and ADA accessibility requirements. Plaintiffs seek compensatory and punitive damages and injunctive relief requiring community modifications. The company has filed a motion to dismiss and states it cannot estimate potential losses. Other risks include earthquake exposure on West Coast communities, with California coverage of $75 million, and rent control, property tax increases, and Proposition 13 limits.
06—Continue