01—Abstract
Summary
Summary of the 10-K filed March 2, 2009. Cited figures are marked; the original filing is the authoritative source.
AvalonBay Communities (AVB) reported a 2008 10-K that combines strong full-year earnings with a sharp pivot toward defensive posture for 2009.
Net income available to common stockholders rose 14.8% to $401.0 milliona ($5.17 diluted EPS), but that increase was driven largely by $284.9 million of gains on asset sales (11 dispositions for $646.2 million gross) rather than core operations. Established Community NOI grew 3.6% and rental revenue rose 3.1%, yet fourth-quarter trends weakened, with Q4 Established rental revenue up only 1.7%. The company posted a fourth-quarter net loss to common of $1.8 million after a $57.9 million land impairment and a 2008 non-cash charge tied to abandoning eight land parcels.
Management guided to a sharp 2009 earnings decline of roughly 50% in diluted EPS, expecting Established Community rental revenue to fall 1.5% to 3.5% and NOI to drop 4.25% to 6.25%. The company has halted new development starts until at least the second half of 2009, planned only $100 million to $200 millionb of 2009 dispositions, and expects to increase redevelopment activity. Liquidity appears adequate: $1.0 billion revolver with $619.6 million available at January 31, 2009, $65.7 million of unrestricted cash, and a largely unencumbered balance sheet.
However, total debt rose to $3.67 billion, with secured mortgage debt up sharply to $1.55 billionc, and a 2009 maturity wall plus the 2009 and 2010 tender offers on 7.5% notes reflect refinancing pressure in a constrained credit market. Investors should weigh a portfolio of 164 operating communities (45,728 homes) concentrated in high barrier-to-entry coastal markets, a 2008 dividend policy that included a $1.8075 special dividend paid partly in stock, and the company's exposure to Fair Housing Act accessibility litigation covering roughly 100 communities. The 2008 earnings are largely non-recurring in nature, so the forward view is materially weaker than the headline results suggest.
02—Key points
Key Highlights
- Net income available to common stockholders rose 14.8% to $401.0M ($5.17 diluted EPS), but gains on sale of communities ($284.9M) drove most of the increase
- Established Community rental revenue grew 3.1% and NOI grew 3.6% in 2008, yet Q4 growth slowed to 1.7% and 2.4%, signaling deterioration
- 2009 guidance calls for roughly a 50% decline in diluted EPS, with Established Community NOI expected to fall 4.25% to 6.25%
- Recorded a $57.9M land impairment on eight parcels no longer slated for development, and Q4 2008 net income to common was a loss of $1.8M
- Development starts halted until at least 2H 2009; 14 communities under construction (4,564 homes, ~$1.58B total capitalized cost) remain in progress
- Total debt rose to $3.67B, with secured mortgage debt up to $1.55B from $750M; $619.6M undrawn on the $1.0B revolver as of January 31, 2009
- Special dividend of $1.8075/share (partly paid in stock) on top of $0.8925 regular quarterly dividend; company faces Fair Housing Act accessibility lawsuits covering ~100 communities
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed March 2, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $813.76M$727.79M | +11.8% |
| Operating Expenses | $719.25M$568.14M | +26.6% |
| Net Income | $411.49M$358.16M | +14.9% |
| EPS (Basic) | $5.21$4.43 | +17.6% |
| EPS (Diluted) | $5.17$4.38 | +18.0% |
| Shares Outstanding (Basic) | 76.78M— | — |
| Shares Outstanding (Diluted) | 77.58M— | — |
05—Questions
Frequently Asked Questions
Why did AvalonBay's 2008 net income rise if operations were weakening?
Most of the increase came from $284.9 million in gains on the sale of 11 communities, which are non-recurring. Operating performance improved modestly, with Established Community NOI up 3.6%, but this was partly offset by the $57.9 million land impairment, higher interest and depreciation expense, and increased abandoned pursuit costs.
What is the outlook for AvalonBay's earnings and operations in 2009?
Management expects diluted EPS to fall about 50% in 2009, primarily because it plans far fewer asset sales ($100M to $200M versus record 2008 dispositions). Established Community rental revenue is projected to decline 1.5% to 3.5% and NOI to fall 4.25% to 6.25%, driven by weaker employment and rental demand, particularly in New York and Northern California.
Is AvalonBay's dividend at risk?
The company declared a Q1 2009 dividend of $0.8925 per share, maintaining its regular payout. The 2008 special dividend was partly paid in stock to satisfy REIT distribution requirements. The Board retains discretion over future dividends, and the REIT 90% taxable income distribution requirement limits cash retention, so dividend policy should be watched closely given the expected earnings decline.
How is AvalonBay's liquidity and debt position?
Liquidity is adequate but tighter. As of January 31, 2009, the company had $619.6M available under its $1.0B unsecured revolver and $65.7M in unrestricted cash at year-end. Total debt rose to $3.67B, with more secured financing, and debt maturities in 2009 and 2010 total roughly $310M and $346M respectively, which the company expects to refinance or repay with asset sales and cash flow.
What legal risks does AvalonBay face?
The company faces an Equal Rights Center lawsuit alleging accessibility violations at 100 communities under the Fair Housing Act and ADA, plus a U.S. Attorney suit over Avalon Chrystie Place. Management says it cannot estimate potential losses and does not expect a material adverse effect, though the outcome is uncertain. It also has a dispute with Tetra Tech involving a counterclaim above $9 million.
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