01—Abstract
Summary
Summary of the 10-K filed February 22, 2013. Cited figures are marked; the original filing is the authoritative source.
AvalonBay Communities (AVB) enters 2013 as a larger, more heavily capitalized REIT, with its 10-K dominated by the pending Archstone Acquisition, expected to close in Q1 2013.
The company will acquire roughly 40% of Archstone's assets and liabilities alongside Equity Residential (which takes about 60%). Consideration includes 14,889,706 AVB shares issued to Lehman, $669 milliona in cash, assumption of about $3.7 billion of consolidated debt (up to $1.7 billion of which AVB expects to repay at closing), and 40% of liabilities and Archstone preferred units. If the deal fails to close by March 26, 2013, AVB and Equity Residential could owe an $800 million termination fee, and the company has already prefunded much of the cash need through a $2.1 billion December 2012 equity offering.
Results shown here exclude any Archstone effects, so 2012 is a pre-transaction baseline. Standalone 2012 performance was solid. Net income attributable to common stockholders was $423.9 millionb, down 4.0% from 2011 because of lower gains on community sales, partly offset by a 14.2% rise in NOI to $708.4 million.
Established Communities NOI grew 7.6%, with rental rates up 5.6% and economic occupancy at 96.1%. FFO per diluted share rose to $5.32c from $4.57, and the company raised roughly $3.4 billion in capital during the year. Cash rose to $2.73 billion at year-end, a balance sheet position that gives the company significant liquidity but also means a large portion of it is earmarked for the Archstone closing.
Total debt was $3.85 billiond, with no borrowings on the $1.3 billion revolving credit facility. Key investor considerations are integration and leverage risk, and the company's ability to dispose of non-core Archstone assets, including German and non-core U.S. holdings in Florida, Georgia and Texas. Development is ramping, with 23 communities under construction representing about $1.83 billion of projected capitalized cost.
The dividend was raised 10.3% to $1.07 per quarter for Q1 2013. Management also flags REIT-qualification risk tied to the Archstone structure.
02—Key points
Key Highlights
- Pending Archstone Acquisition (about 40% share with Equity Residential) expected to close Q1 2013, adding roughly 66 consolidated communities (22,222 apartment homes) plus land and joint-venture interests
- Archstone consideration: 14.9 million AVB shares to Lehman, $669 million cash, about $3.7 billion of assumed consolidated debt, and 40% of other liabilities; $800 million termination fee exposure if not closed by March 26, 2013
- 2012 net income attributable to common stockholders fell 4.0% to $423.9 million, mainly due to lower gains on sales; NOI rose 14.2% to $708.4 million
- Established Communities NOI grew 7.6% in 2012, driven by 5.6% growth in revenue per occupied home to $2,092 and 96.1% economic occupancy
- FFO per diluted share increased to $5.32 from $4.57, and the quarterly dividend was raised 10.3% to $1.07 for Q1 2013
- Strong liquidity: $2.73 billion cash at year-end 2012, a $1.3 billion undrawn revolver, and a $2.1 billion December 2012 equity offering largely prefunding Archstone
- Development pipeline of 23 communities (6,599 homes, ~$1.83 billion projected cost) plus 34 development rights (9,602 homes); debt maturities are manageable, with $337 million due in 2013
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 22, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $1.00B$900.09M | +11.2% |
| Operating Expenses | $785.58M$778.71M | +0.9% |
| Operating Income | $667.93M$599.93M | +11.3% |
| Interest Expense | $136.92M$167.81M | −18.4% |
| Net Income | $423.87M$441.62M | −4.0% |
| EPS (Basic) | $4.34$4.89 | −11.2% |
| EPS (Diluted) | $4.32$4.87 | −11.3% |
| Shares Outstanding (Basic) | 97.42M89.92M | +8.3% |
| Shares Outstanding (Diluted) | 98.03M90.78M | +8.0% |
05—Questions
Frequently Asked Questions
What is the Archstone Acquisition and how is it financed?
AvalonBay and Equity Residential jointly acquire Archstone's assets and liabilities, with AVB taking about 40% and Equity Residential about 60%. AVB's share of consideration includes 14,889,706 common shares issued to Lehman, $669 million in cash, assumption of about $3.7 billion of consolidated debt (of which up to $1.7 billion may be repaid at closing), and 40% of Archstone's other liabilities. AVB prefunded much of the cash need with a December 2012 offering that raised about $2.1 billion net.
What happens if the Archstone deal does not close?
If the deal does not close by March 26, 2013, AVB and Equity Residential could jointly owe an $800 million termination fee to Lehman, with the breaching party bearing the cost if the failure is due to its own breach. AVB would also absorb its transaction costs and could see its share price fall to the extent it reflects the expected deal benefits.
How strong were AVB's 2012 operating results on a standalone basis?
Operations improved. Established Communities NOI rose 7.6%, total NOI rose 14.2% to $708 million, and FFO per diluted share grew 16% to $5.32. Reported net income fell 4.0% because 2011 included larger gains on community sales, and 2012 included about $11.4 million of expensed pursuit and acquisition costs tied to Archstone.
How leveraged is AVB, and how will Archstone change that?
At year-end 2012, AVB had $3.85 billion of debt on $11.2 billion of total assets, with $2.7 billion of cash offsetting part of that. Assuming $3.7 billion of Archstone debt will materially increase leverage and the debt-to-EBITDA ratio, although AVB expects to repay up to $1.7 billion at closing. The company was in compliance with its financial covenants at December 31, 2012.
What are the main risks to the dividend and REIT status?
Risks include integration difficulties, unknown Archstone liabilities acquired on an 'as is' basis with limited seller representations, joint-venture governance with Equity Residential, potential dispositions at depressed prices, and REIT-qualification risk from non-qualifying Archstone assets and income. Dividends are set by the board and must total at least 90% of REIT taxable income, which constrains cash available for debt service if earnings weaken.
06—Continue