01—Abstract
Summary
Summary of the 10-K filed February 27, 2012. Cited figures are marked; the original filing is the authoritative source.
AvalonBay Communities (AVB) closed 2011 with a strong year driven by asset sales and a recovering apartment market.
Net income attributable to common stockholders rose 151.9% to $441.6 milliona ($4.87 diluted EPS), largely due to $281.1 million of gains on sale of communities (including $122.4 million from reversing straight-line ground lease rent accruals) and a $5.1 million equity income increase. Underlying operations improved: Established Communities NOI grew 8.4%, rental revenue rose 5.1%, and economic occupancy held at 96.0%. Total revenue increased 10.8% to $968.7 million, and FFO per diluted share rose to $4.57 from $4.00.
Balance sheet and liquidity strengthened materially. The company raised roughly $1.27 billionb through common equity (including an August 2011 offering of 5.9 million shares at $128.25 and CEP II sales) and asset sales, used proceeds to repay higher-cost debt, and ended the year with $617 million of unrestricted cash. Total debt fell to $3.63 billion from $4.07 billion, and an undrawn $750 million Credit Facility provides additional capacity.
Debt maturities are manageable, with $409 millionc due in 2012 (including $179 million of 5.5% notes repaid in January 2012). The company also carries an $85.5 million liability on forward-starting interest rate swaps that will be settled over the life of future debt issuances. Looking ahead, management guided 2012 diluted EPS to $4.90 to $5.20, Established Community rental revenue growth of 5.0% to 6.5%, and NOI growth of 6.0% to 8.0%, with operating expense growth of 2.5% to 3.5%.
The development pipeline stands at 19 communities (5,244 homes, about $1.46 billiond total cost) with planned 2012 development starts of $1.0 to $1.2 billion. Management also launched two new brands, AVA (urban, smaller units) and Eaves by Avalon (value-oriented suburban), and announced a 8.7% dividend increase to $0.97 per quarter. Key risks include the Midwest exit, Fannie Mae and Freddie Mac policy changes, rising insurance costs, the cost and availability of refinancing, and earthquake exposure on West Coast assets.
02—Key points
Key Highlights
- Net income attributable to common stockholders rose 151.9% to $441.6 million ($4.87 diluted EPS), driven mainly by $281.1 million in gains on sale of communities, including $122.4 million from a ground lease straight-line rent reversal.
- Established Communities NOI grew 8.4% in 2011, with rental revenue up 5.1% and economic occupancy steady at 96.0%, showing a clear operating recovery.
- FFO per diluted share increased to $4.57 from $4.00 in 2010, a 14% gain.
- Raised about $1.27 billion of capital through an August 2011 common offering (5.9M shares at $128.25), CEP II equity sales, and asset dispositions, funding development and retiring higher-cost debt.
- Total debt declined to $3.63 billion from $4.07 billion, with $617 million of cash on hand and an undrawn $750 million Credit Facility providing liquidity.
- 2012 guidance calls for diluted EPS of $4.90 to $5.20, Established NOI growth of 6.0% to 8.0%, and development starts of $1.0 to $1.2 billion; the quarterly dividend was raised 8.7% to $0.97.
- Risks to note include an $85.5 million liability on forward swaps, exit from the Midwest, Fannie Mae/Freddie Mac policy uncertainty, rising insurance costs, and earthquake exposure on West Coast assets.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 27, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $900.09M$842.82M | +6.8% |
| Operating Expenses | $778.71M$751.53M | +3.6% |
| Operating Income | $599.93M$545.51M | +10.0% |
| Interest Expense | $167.81M— | — |
| Net Income | $441.62M$175.33M | +151.9% |
| EPS (Basic) | $4.89$2.08 | +135.1% |
| EPS (Diluted) | $4.87$2.07 | +135.3% |
| Shares Outstanding (Basic) | 89.92M83.86M | +7.2% |
| Shares Outstanding (Diluted) | 90.78M84.63M | +7.3% |
05—Questions
Frequently Asked Questions
How much of 2011's earnings growth came from one-time gains versus core operations?
Most of the increase was from one-time items. Gains on sale of communities were $281.1 million in 2011 versus $74.1 million in 2010, and that alone accounts for more than the $266 million increase in net income attributable to common stockholders. Core operating improvement was real but smaller: Established Communities NOI rose 8.4%, and total NOI rose to $646 million from $565 million. Investors should treat the 2011 EPS of $4.87 as inflated relative to recurring earnings, which is why management's 2012 guidance of $4.90 to $5.20 is partly tied to expected future disposition gains.
Is AvalonBay's balance sheet and liquidity position stronger than a year ago?
Yes. Total debt fell to $3.63 billion from $4.07 billion, and unrestricted cash rose to $617 million from $304 million. The company used equity raised in 2011 to repay higher-cost unsecured and secured notes, and the $750 million undrawn Credit Facility, which runs to 2016, adds capacity. Remaining 2012 maturities are $409 million, including the $179 million unsecured note repaid in January 2012. Covenant compliance was reported at year-end.
What is the outlook for AvalonBay's core apartment portfolio in 2012?
Management expects Established Community rental revenue to grow 5.0% to 6.5% and NOI to grow 6.0% to 8.0%, supported by job and population growth, constrained new supply, and weak for-sale housing that keeps renters in apartments. Operating expenses are expected to rise 2.5% to 3.5%, though property taxes and insurance costs are likely to increase faster. Management flagged that the Mid-Atlantic region faces new supply in 2012 and 2013 and that Metro New York City should outperform suburban submarkets.
What are the main risks investors should monitor?
Key risks include: (1) development execution and cost overruns, given 19 communities under construction and substantial 2012 development starts; (2) interest rate exposure, with $548 million of variable-rate debt and an $85.5 million liability on forward-starting swaps; (3) policy changes affecting Fannie Mae and Freddie Mac, which are a source of multifamily financing; (4) rising property insurance costs after the policy renewal in May 2012; (5) earthquake exposure on many West Coast communities, with $75 million of coverage in California and Washington; and (6) risks from the Funds and joint ventures, where the company provides guarantees capped at about $7.5 million for Fund I and $8.3 million for Fund II.
Why did AvalonBay launch new brands, and what does it mean for investors?
In late 2011 AvalonBay introduced AVA, aimed at urban renters who want smaller, transit-oriented, often roommate-friendly units, and Eaves by Avalon, a value-priced suburban brand. The goal is to segment its existing markets by price and customer preference, extending its reach beyond the upscale Avalon brand. Management cautioned that these brands may not succeed or generate incremental returns that justify their development and launch costs, and corporate overhead rose 7.8% partly due to their introduction.
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