01—Abstract
Summary
Summary of the 10-K filed March 1, 2010. Cited figures are marked; the original filing is the authoritative source.
AvalonBay Communities (AVB) enters 2010 with a large, high-quality apartment portfolio concentrated in high barrier-to-entry coastal markets, but 2009 was a year of sharp earnings decline and Management guides to further weakness in 2010.
At December 31, 2009 the company owned or held interests in 172 communities (50,364 homes including Funds and joint ventures; 165 operating communities of 47,926 homes on a consolidated basis), plus seven communities under construction (2,438 homes, ~$813Ma total capitalized cost) and rights to develop 28 more communities (7,180 homes). Net income attributable to common stockholders fell 61.2% to $155.6M ($1.93 diluted EPS) from $401.0M in 2008, driven by fewer asset sales and smaller gains, a $25.9M loss on early debt repurchases, and $21.2M of land impairments, partly offset by lower abandoned pursuit costs. Funds from Operations fell to $3.89 per diluted share from $4.07.
Net operating income for the whole portfolio rose slightly to $546.0Mb, but Established Community NOI declined 7.1% as rental revenue fell 3.7% on lower rental rates (down 3.1%) and slightly lower economic occupancy (95.6%). Looking forward, management projects 2010 diluted EPS of $1.73 and a 3.0%-4.5% decline in Established Community rental revenue, with NOI expected to fall 5.0%-7.0%, reflecting continued job losses and weak employment. The company is shifting its capital deployment toward development for a expected recovery in 2011-2012, with about $500M of 2010 disbursements planned and new starts of roughly $380M.
Liquidity appears solid: the company raised over $1.7Bc in 2009 across secured and unsecured debt, equity (via a $400M continuous equity program) and Fund II commitments; it ended the year with $316M of unrestricted cash, cash in escrow and equivalents, and a $1.0B revolving credit facility that was undrawn at January 31, 2010 (with $955M available). Debt of about $3.98B carries a weighted-average fixed-rate profile, and the company reports covenant compliance. Key risks include job-loss-driven rent pressure on short-duration (one-year or less) leases, refinancing and interest rate exposure on about $1.27B of variable rate debt, earthquake exposure on West Coast assets, and a pending Department of Justice Fair Housing Act lawsuit tied to Avalon Chrystie Place, alongside a 2009 settlement requiring remediation of up to 8,250 apartment units.
02—Key points
Key Highlights
- Net income to common stockholders fell 61.2% to $155.6M ($1.93 diluted EPS) from $401.0M in 2008, mainly because 2008 included large gains from asset sales ($284.9M) that did not recur at the same level in 2009 ($63.9M).
- Established Community rental revenue declined 3.7% and NOI fell 7.1% in 2009, as average rental rates dropped 3.1% and economic occupancy slipped to 95.6%.
- 2010 guidance calls for diluted EPS of $1.73, a rental revenue decline of 3.0%-4.5% and an Established Community NOI decline of 5.0%-7.0%.
- FFO per diluted share declined to $3.89 from $4.07, while the regular quarterly dividend held at $0.8925 ($3.57 annualized).
- Liquidity was strong at year-end: over $1.7B raised in 2009, $316M of unrestricted cash and escrow, and an undrawn $1.0B credit facility with about $955M available as of January 31, 2010.
- Development pipeline is being scaled back in 2009 and held at 7 communities (2,438 homes, ~$813M cost), with planned 2010 starts of about $380M and 28 future development rights (7,180 homes) positioned for a 2011-2012 recovery.
- Fund I and Fund II expand AvalonBay's capital reach, with Fund II at $400M total equity commitments (AVB's share $125M) and an investment capacity of about $1.1B; AVB also recorded $21.2M of land impairments and a $25.9M loss on debt repurchases in 2009.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2009filed March 1, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $829.92M$813.76M | +2.0% |
| Operating Expenses | $753.50M$719.25M | +4.8% |
| Net Income | $155.65M$411.49M | −62.2% |
| EPS (Basic) | $1.94$5.21 | −62.8% |
| EPS (Diluted) | $1.93$5.17 | −62.7% |
| Shares Outstanding (Basic) | 79.95M76.78M | +4.1% |
| Shares Outstanding (Diluted) | 80.60M77.58M | +3.9% |
05—Questions
Frequently Asked Questions
Why did AvalonBay's 2009 earnings decline so sharply compared with 2008?
The main driver was the absence of large asset sale gains. Gains on sale of communities fell to $63.9M in 2009 from $284.9M in 2008, and net income to common stockholders dropped 61.2% to $155.6M. Additional 2009 charges included a $25.9M net loss on debt extinguishment from the October 2009 tender offer and $21.2M of land impairments, which were partly offset by lower abandoned pursuit costs and lower G&A expense.
What does management expect for 2010 operating performance?
Management expects weak fundamentals to continue through at least the second quarter of 2010 because of job losses. Established Community rental revenue is projected to fall 3.0%-4.5% and NOI to decline 5.0%-7.0%, with operating expenses roughly flat and property taxes rising. Diluted EPS is guided to $1.73 versus $1.93 in 2009.
Is AvalonBay's balance sheet and liquidity position adequate for the downturn?
The company appears well positioned in the near term. It had $316M of unrestricted cash, cash equivalents and escrow at year-end, an undrawn $1.0B revolving credit facility (about $955M available at January 31, 2010), and raised over $1.7B during 2009. Debt of about $3.98B is largely long-dated, the company reports covenant compliance, and it has used its continuous equity program and unsecured notes issuance to extend maturities. Risks remain from the $1.27B of variable rate debt and from refinancing needs in later years.
How is AvalonBay positioned for an eventual apartment market recovery?
Management is maintaining a development-led growth strategy, expecting to deliver new communities into the market for a recovery it anticipates in 2011 and 2012. It plans about $380M of new development starts in 2010, is ramping redevelopment on seven wholly owned communities, and is using Fund II to acquire interests in apartment communities. Its focus is on high barrier-to-entry markets where limited new supply is expected to support rent growth.
What are the most significant legal and operational risks disclosed?
Key items include a U.S. Attorney lawsuit under the Fair Housing Act over Avalon Chrystie Place, where the outcome and any potential extension to other properties cannot be estimated; a 2009 consent decree requiring inspection and remediation of up to 8,250 apartment units over about four years; exposure to earthquake losses on many West Coast communities with coverage limits of $75M (California and Washington) and $100M elsewhere; and the short-duration nature of nearly all leases, which exposes rents to market declines more quickly.
06—Continue