01—Abstract
Summary
Summary of the 10-K filed February 19, 2015. Cited figures are marked; the original filing is the authoritative source.
AvalonBay Communities (AVB) closed 2014 with a strong year on the income statement, driven largely by non-recurring gains.
Net income attributable to common stockholders rose 93.6% to $683.6 milliona ($5.21 diluted EPS), versus $353.1 million in 2013. The increase was primarily due to $148.8 million of equity income from unconsolidated entities (including $58.1 million of promoted interest from CVP I and a $50.5 million gain on the Chrystie Place sale), $84.9 million of gains on community sales, and the absence of 2013's $51 million interest rate contract loss and Archstone-related acquisition costs. Underlying property performance was solid but more modest: Established Communities NOI grew 3.5%, with rental revenue up 3.9% on a 4.0% increase in average rents and a 0.1% dip in economic occupancy.
Consolidated NOI reached $1.13 billionb, up 16% from 2013, reflecting the Archstone acquisition and new development deliveries. The balance sheet and funding picture is comfortable but more levered. Total assets were $16.2 billion, with $6.4 billion of debt (about 4.5% fixed-rate mortgage cost and a 3.5% coupon on the new 2024 unsecured notes), $509 million of cash, and an undrawn $1.3 billion Credit Facility.
Development remains a major growth driver: 26 communities under construction (8,524 homes, about $3.0 billionc projected cost) and 37 Development Rights (10,384 homes). Investors should note several risk items disclosed after year-end: a January 2015 fire destroyed a 240-unit building at Avalon at Edgewater (under a $75 million mortgage whose lender has discretion over insurance proceeds), three purported class actions were filed, and the company forecasts substantial but not guaranteed insurance coverage.
Management also declared a 7.8% dividend increase to $1.25d per quarter for Q1 2015 and has a Forward equity contract for 4.5 million shares that settles by September 2015. Overall, the headline earnings jump is largely driven by one-time gains and joint venture income, so investors should focus on same-store NOI growth (solid but slowing in several regions, with the Mid-Atlantic weak), the pipeline of new supply in urban markets, and the Edgewater casualty outcome.
02—Key points
Key Highlights
- Net income attributable to common stockholders up 93.6% to $683.6M ($5.21 diluted EPS), largely from $148.8M of joint venture income and $84.9M of community sale gains rather than core operations
- Established Communities NOI grew 3.5% in 2014, with rental revenue up 3.9% driven by a 4.0% rise in average rents; Mid-Atlantic revenue declined 0.5%
- Consolidated NOI rose 16% to $1.13B, supported by the 2013 Archstone Acquisition and 17 completed developments totaling $1.13B in capitalized cost
- Development pipeline of 26 communities (8,524 homes, ~$3.0B projected cost) plus 37 Development Rights (10,384 homes) supports future growth
- Total debt of $6.4B with no Credit Facility borrowings; $1.3B facility and $509M cash provide liquidity; $300M of 3.50% unsecured notes issued in November 2014
- Quarterly dividend raised 7.8% to $1.25 per share for Q1 2015 (from $1.16); 2014 dividends declared totaled $4.64 per share
- January 2015 fire destroyed a 240-unit building at Avalon at Edgewater; three purported class actions filed, and insurance recovery is expected to be substantial but is not assured
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2014filed February 19, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $1.69B$1.46B | +15.2% |
| Operating Expenses | $1.25B$1.39B | −10.3% |
| Operating Income | $1.10B$966.06M | +13.8% |
| Interest Expense | $180.62M$172.40M | +4.8% |
| Net Income | $683.57M$353.14M | +93.6% |
| EPS (Basic) | $5.22$2.78 | +87.8% |
| EPS (Diluted) | $5.21$2.78 | +87.4% |
| Shares Outstanding (Basic) | 130.59M126.86M | +2.9% |
| Shares Outstanding (Diluted) | 131.24M127.27M | +3.1% |
05—Questions
Frequently Asked Questions
Why did net income nearly double in 2014 if property operations grew only modestly?
Most of the increase came from non-recurring or non-operating items: $148.8M of equity income from unconsolidated entities (including a $58.1M promoted interest from CVP I and a $50.5M gain on the Avalon Chrystie Place sale), $84.9M of gains on community sales, and the absence of 2013's $51M interest rate contract loss and roughly $40M of Archstone-related joint venture costs. Same-store NOI growth of 3.5% was solid but much smaller in dollar terms.
How exposed is AvalonBay to the Edgewater fire?
The fire destroyed one 240-apartment building; the second building (168 units) was reoccupied with minimal damage. The company believes direct losses and third-party liability will be substantially covered by insurance, subject to deductibles and a 12% self-insured share of the first $50M of property losses. The $75.0M Edgewater mortgage gives the lender discretion to use insurance proceeds for restoration or to repay the loan, and the company was still working with the lender on open issues at filing.
What are the main risks to future growth?
Key risks include rising new apartment supply in urban markets, particularly New York City and Seattle; weaker fundamentals in the Mid-Atlantic, where rents declined 0.2% and economic occupancy fell; development cost overruns and lease-up delays on the $3.0B pipeline; refinancing risk and rising interest costs (about $1.3B of variable-rate debt, where a 100bp rise would add about $13M of annual interest); and REIT qualification and earthquake or catastrophe exposure concentrated in California and the Northeast.
Is the dividend sustainable and how is growth being funded?
Dividends paid were $594M in 2014 against $886M of operating cash flow, and the REIT payout requirement is at least 90% of taxable income; 2014 taxable net income was estimated at $651M. Growth is funded mainly through operating cash flow, the Credit Facility, asset sales ($304M gross in 2014 plus $115.5M in January 2015), unsecured debt, and the CEP III equity program, which raised $295M in 2014. A 4.5 million-share Forward contract priced at $151.74 is pending settlement by September 2015.
06—Continue