01—Abstract
Summary
Summary of the 10-K filed March 3, 2014. Cited figures are marked; the original filing is the authoritative source.
AvalonBay Communities (AVB) closed 2013 as a much larger company following the February 27, 2013 Archstone Acquisition, which the company completed jointly with Equity Residential (AVB took roughly 40%a of Archstone's assets and liabilities).
Total revenue rose 46.2% to $1.46 billionb, and total real estate before depreciation climbed to $16.8 billion from $10.0 billion. Consolidated communities grew to 244 with 72,811 apartment homes at year-end, versus 180 communities and 52,792 homes a year earlier. Net income attributable to common stockholders fell 16.7% to $353.1 million, mainly because of a sharp rise in depreciation (driven by in-place lease intangibles amortized over six months), $45.1 million of expensed acquisition and pursuit costs, and a $51.0 million loss on a forward interest rate protection agreement.
Operating fundamentals were solid: Established Community NOI grew 4.7%, rental rates rose about 4.2%, and economic occupancy held near 96%. Consolidated NOI reached $997.4 millionc, up 46.3%. FFO per diluted share fell to $5.05 from $5.32, though FFO itself rose to $642.8 million.
The balance sheet expanded materially. Notes payable and unsecured notes reached $6.03 billiond, up from $3.85 billion, and the company assumed about $3.5 billion of Archstone secured debt. Unrestricted cash fell to $281.5 million from $2.73 billion as the company used the prior year's equity proceeds to fund the deal and to repay secured debt.
The $1.3 billion revolving Credit Facility was undrawn at year-end. Management also reported 29 wholly owned development communities under construction (8,708 homes, about $2.8 billion projected cost) and 46 Development Rights for 12,986 homes. The board raised the Q1 2014 quarterly dividend 8.4% to $1.16 per share, from $1.07.
Lehman Brothers sold the 14.9 million shares it received in the acquisition, and in February 2014 the company sold one community (Avalon Valley) for $53.3 million. Investors should weigh the sizable integration and leverage changes against the strong same-store growth and the Mid-Atlantic and Metro New York/New Jersey supply outlook noted by management.
02—Key points
Key Highlights
- Total revenue rose 46.2% to $1,462.9 million, driven largely by the Archstone Acquisition and new development deliveries.
- Net income attributable to common stockholders declined 16.7% to $353.1 million ($2.78 per diluted share), reflecting higher depreciation and acquisition-related expenses.
- Established Community NOI grew 4.7%, with rental rates up about 4.2% and economic occupancy near 96%; consolidated NOI rose 46.3% to $997.4 million.
- FFO per diluted share fell to $5.05 from $5.32 even though total FFO rose to $642.8 million, as share count grew significantly after the Archstone deal.
- Total unsecured and secured debt increased to $6.03 billion; the $1.3 billion Credit Facility was undrawn at year-end and the company was in covenant compliance.
- Development pipeline: 29 communities under construction (8,708 homes, roughly $2.8 billion projected cost) plus 46 Development Rights for about 12,986 homes.
- Quarterly dividend raised 8.4% to $1.16 per share for Q1 2014, up from $1.07; 2013 dividends declared totaled $4.28 per share.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2013filed March 3, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $1.46B$1.00B | +46.2% |
| Operating Expenses | $1.39B$785.58M | +77.5% |
| Operating Income | $966.06M$667.93M | +44.6% |
| Interest Expense | $172.40M$136.92M | +25.9% |
| Net Income | $353.14M$423.87M | −16.7% |
| EPS (Basic) | $2.78$4.34 | −35.9% |
| EPS (Diluted) | $2.78$4.32 | −35.6% |
| Shares Outstanding (Basic) | 126.86M97.42M | +30.2% |
| Shares Outstanding (Diluted) | 127.27M98.03M | +29.8% |
05—Questions
Frequently Asked Questions
Why did net income fall in 2013 even though revenue grew by nearly half?
Net income attributable to common stockholders fell 16.7% to $353.1 million. Depreciation expense more than doubled to $560.2 million, largely from in-place lease intangibles from the Archstone Acquisition that were depreciated over six months. The company also expensed $45.1 million of acquisition, development and pursuit costs and recorded a $51.0 million loss on a forward interest rate protection agreement that matured without the debt being issued. Gains on community sales ($278.2 million) partly offset these charges.
How did the Archstone Acquisition change AvalonBay's size and capital structure?
AvalonBay acquired roughly 40% of Archstone's assets and liabilities with Equity Residential, which took the other 60%. AvalonBay issued 14.9 million shares valued at $1.875 billion, paid about $760 million in cash, and assumed approximately $3.73 billion of consolidated debt fair value. Consolidated communities rose from 180 to 244, and total real estate grew to $16.8 billion. Net debt increased significantly, and cash on hand fell from $2.73 billion to $281.5 million.
Is the dividend safe, and how strong is the operating outlook?
The board raised the Q1 2014 dividend to $1.16 per share (an 8.4% increase), and the company intends to continue regular quarterly payments, subject to board discretion and REIT distribution requirements. Management expects continued but moderating growth in Metro New York/New Jersey and new supply pressure in Fairfield County and the Mid-Atlantic, while Northern and Southern California and New England showed the strongest recent results.
What are the main risks highlighted for investors?
Key risks include development and construction cost overruns and lease-up delays, rising interest rates given $1.0 billion of variable-rate debt (a 100 basis point rise would add about $9.7 million of annual interest), refinancing risk on $1.1 billion of debt maturing in 2014 through 2016 (including $150 million of unsecured notes in April 2014), tax protection obligations on certain Archstone assets (about $44 million if triggered), joint venture governance with Equity Residential, and earthquake exposure on West Coast communities.
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