01—Abstract
Summary
Summary of the 10-K filed February 23, 2011. Cited figures are marked; the original filing is the authoritative source.
AvalonBay Communities (AVB) closed 2010 with a stronger earnings and capital position, though the year was shaped by weak Western-region rents.
Net income attributable to common stockholders rose 12.6% to $175.3 milliona ($2.07 diluted EPS), mainly because 2009 included debt extinguishment losses and impairments that did not recur. Established Communities NOI fell 2.8%, with East Coast regions growing while Northern California, Southern California and the Pacific Northwest declined. Management guides to 2011 diluted EPS of $3.09 to $3.34, driven largely by expected disposition gains, and projects Established Communities NOI growth of 6.0% to 7.5% on 4.0% to 5.5% rental revenue growth.
The balance sheet remains conservative and liquid. Year-end unrestricted cash was $306.4 millionb, and the company had about $947 million of undrawn capacity on its $1 billion Credit Facility as of January 31, 2011. Total debt was about $4.07 billion, with the company reporting covenant compliance.
The company raised roughly $790 millionc in 2010 through common equity programs, unsecured notes and asset sales, and it plans to spend $600 million to $800 million in 2011 on development, redevelopment and land. Key watch items include the Credit Facility's November 2011 expiration, which management expects to refinance at higher cost, and FFO per diluted share that fell to $4.00 from $4.07 in 2008.
The risk profile is driven by the development pipeline (14 communities under construction with about $879.5 milliond of total capitalized cost), $7.3 billion of potential future development rights, exposure to West Coast earthquakes, and a REIT structure that requires at least 90% distribution of taxable income. The company also settled a Department of Justice accessibility lawsuit involving its New York City buildings, and management does not expect a material financial impact from it.
02—Key points
Key Highlights
- Net income attributable to common stockholders rose 12.6% to $175.3 million, or $2.07 diluted EPS, in 2010 versus $1.93 in 2009, mainly because 2009 debt extinguishment losses and impairments did not recur.
- Established Communities NOI declined 2.8% in 2010, with East Coast regions (Metro NY/NJ, New England, Mid-Atlantic/Midwest) stable to positive while Pacific Northwest (-11.8%) and Northern California (-6.2%) weighed on results.
- 2011 guidance calls for diluted EPS of $3.09 to $3.34 and Established Communities NOI growth of 6.0% to 7.5%, supported by 4.0% to 5.5% rental revenue growth and 0.0% to 2.0% expense growth.
- Liquidity is strong: $306.4 million of unrestricted cash at year-end and $947 million of undrawn Credit Facility capacity as of January 31, 2011, against about $4.07 billion of total debt.
- The company raised about $790 million in 2010 through common equity programs, unsecured debt issuance and asset sales, including $381 million of net common equity proceeds in 2010.
- The development pipeline includes 14 communities under construction (3,334 homes, $879.5 million total capitalized cost), with 2011 development starts planned at $800 million to $900 million.
- Dividends were held at $3.57 per share for the third consecutive year, with the Q1 2011 quarterly dividend declared at $0.8925, and FFO per diluted share was $4.00 in 2010 versus $3.89 in 2009.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 23, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $842.82M$829.92M | +1.6% |
| Operating Expenses | $751.53M$753.50M | −0.3% |
| Operating Income | $545.51M— | — |
| Net Income | $175.33M$155.65M | +12.6% |
| EPS (Basic) | $2.08$1.94 | +7.2% |
| EPS (Diluted) | $2.07$1.93 | +7.3% |
| Shares Outstanding (Basic) | 83.86M79.95M | +4.9% |
| Shares Outstanding (Diluted) | 84.63M80.60M | +5.0% |
05—Questions
Frequently Asked Questions
Why did net income rise in 2010 if property-level NOI for the established portfolio declined?
The improvement came mainly from non-recurring 2009 items. 2009 included a $25.9 million loss on early debt repurchases and $21.2 million of land impairments, and 2010 had neither. Growth in NOI from newly developed communities and other stabilized properties partly offset the 2.8% decline in Established Communities NOI.
How much of the 2011 EPS growth depends on asset sales rather than operations?
A large share. Management attributes the expected increase from $2.07 to $3.09-$3.34 primarily to gains on disposition of real estate, along with Established Communities revenue and NOI growth. The filing does not quantify the split, so investors should treat the gain component as less recurring than operating income.
What are the main refinancing and liquidity risks?
The $1 billion Credit Facility matures in November 2011, and management expects the replacement facility to cost more. About $237 million of debt matures in 2011, including $39.9 million of unsecured notes due September 2011 and $150 million of swapped unsecured notes. Liquidity is currently adequate, with $306 million of cash and about $947 million of undrawn capacity, but refinancing costs could rise.
How exposed is AvalonBay to West Coast markets and natural disasters?
Exposure is meaningful. The West Coast portfolio includes many communities near active faults such as the San Andreas and Hayward. Earthquake coverage is limited to $75 million for California and Washington, with a 5% deductible in California, and losses above insured levels could be material. Northern California, Southern California and the Pacific Northwest were the weakest regions in 2010.
Does the Department of Justice settlement pose a financial threat?
Management does not expect a material impact. The consent decree concerns accessibility at Avalon Chrystie Place and requires modifications at six other New York City communities, with retrofits expected to be capitalized. It also includes a civil penalty and an aggrieved persons fund, and a separate agreement with the architect shares some of those costs.
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