01—Abstract
Summary
Summary of the 10-K filed February 24, 2017. Cited figures are marked; the original filing is the authoritative source.
AvalonBay Communities (AVB) closed 2016 with strong earnings and operating momentum.
Net income attributable to common stockholders rose 39.3% to $1.03 billiona ($7.52 diluted EPS), helped by $384.8 million of gains on real estate sales, mainly the sale of seven wholly-owned communities for $522.9 million. Core FFO per diluted share grew about 8.5% to $8.19 (from $7.55), and Established Communities NOI increased 4.8%, driven by 4.3% rental revenue growth and 4.4% higher average rents, partly offset by a slight dip in economic occupancy to 95.5%. The company remained a heavy developer.
It completed 8 communities (1,715 homes, $510.8 millionb) and started 9 more (2,732 homes, roughly $1.59 billion expected cost). It ended the year with 27 Development Communities (9,129 homes, about $4.05 billion projected cost) and 25 Development Rights (8,487 homes). Leverage stayed moderate: total debt was about $7.08 billion, with $214.99 million in cash, no borrowings on its $1.5 billion Credit Facility, and a 2.95% to 3.90% coupon range on the new unsecured notes issued in 2016.
Rising interest rate sensitivity is modest, at roughly $12.9 millionc of added annual interest per 100 basis points on variable-rate debt. Investors should weigh several risks alongside the growth story. Rent-control momentum in California and elsewhere is a growing concern, illustrated by the Mountain View ordinance affecting 946 homes.
The Edgewater fire litigation remains open, with class actions and subrogation suits pending. A February 2017 fire at the Maplewood development community is still being assessed.
Management also flagged possible federal tax reform and the GAAP-related change in how acquisitions are accounted for under ASU 2017-01. The Board raised the Q1 2017 dividend 5.2% to $1.42d per share.
02—Key points
Key Highlights
- Net income attributable to common stockholders rose 39.3% to $1,034.0 million ($7.52 diluted EPS), largely from $384.8 million of gains on real estate sales.
- Core FFO per diluted share increased to $8.19 from $7.55 in 2015, and FFO per diluted share rose to $8.26 from $8.05.
- Established Communities NOI grew 4.8%, with rental revenue up 4.3% on a 4.4% increase in average rents and economic occupancy near 95.5%.
- Development pipeline is large: 27 communities (9,129 homes, ~$4.05 billion projected cost) under construction plus 25 Development Rights (8,487 homes).
- Total debt was $7.08 billion at year-end with $215 million cash and an undrawn $1.5 billion Credit Facility; 2016 unsecured note issuances carried coupons between 2.90% and 3.95%.
- The Board raised the quarterly dividend 5.2% to $1.42 per share for Q1 2017, and 2016 cash dividends declared totaled $5.40 per share.
- Key risks include rent-control initiatives (e.g., Mountain View, CA affecting 946 homes), pending Edgewater fire litigation, the February 2017 Maplewood construction fire, and uncertainty around federal tax reform.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 24, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $2.05B$1.86B | +10.2% |
| Operating Expenses | $1.46B$1.31B | +11.7% |
| Operating Income | $1.31B$1.22B | +8.1% |
| Interest Expense | $187.51M$175.62M | +6.8% |
| Net Income | $1.03B$742.04M | +39.3% |
| EPS (Basic) | $7.53$5.54 | +35.9% |
| EPS (Diluted) | $7.52$5.51 | +36.5% |
| Shares Outstanding (Basic) | 136.93M133.57M | +2.5% |
| Shares Outstanding (Diluted) | 137.46M134.59M | +2.1% |
05—Questions
Frequently Asked Questions
What drove the large increase in 2016 net income?
Net income attributable to common stockholders increased $292.0 million, or 39.3%, to $1,034.0 million. The main drivers were higher NOI from newly developed, acquired and existing communities and $384.8 million in gains on real estate sales, mainly from selling seven wholly-owned communities for $522.9 million. Higher depreciation and interest expense, and a $7.1 million loss on debt extinguishment, partly offset these gains.
How strong is the company's core operating performance?
Core FFO per diluted share rose to $8.19 in 2016 from $7.55 in 2015, an increase of about 8.5%. Established Communities NOI rose 4.8%, with average rental rates up 4.4% to $2,450 per home. Rental revenue growth was strongest in Northern and Southern California, while Metro NY/NJ grew 2.9%, and the company expects continued growth in suburban New York and Southern California in 2017.
What is the company's development exposure and how is it funded?
At year-end, AvalonBay had 27 Development Communities expected to add 9,129 homes at a projected total cost of about $4.05 billion, plus 25 Development Rights for 8,487 homes. Development is largely funded with external capital, primarily unsecured notes and asset sales. The company had about $215 million in cash, no Credit Facility borrowings, and a $1.5 billion facility maturing in April 2020, with a $1 billion continuous equity program available.
What are the main risks to investors highlighted in the filing?
Key risks include rent-control laws, particularly the Mountain View, CA referendum affecting three communities with 946 homes; rising interest rates on variable-rate debt, with roughly $12.9 million of added annual interest per 100 basis points; ongoing litigation from the January 2015 Edgewater fire, including class actions; the February 2017 Maplewood fire at a development community; and potential federal tax reform affecting REIT taxation. The company also notes risks from its REIT qualification and possible future changes to tax law.
Is the dividend sustainable and how has it changed?
The Board declared a Q1 2017 dividend of $1.42 per share, a 5.2% increase over the prior $1.35 quarterly rate. Cash dividends declared rose to $5.40 per share in 2016 from $5.00 in 2015. The company must distribute at least 90% of its REIT taxable income, and its 2016 taxable net income estimate was about $800.9 million, well above the dividends paid in cash of about $726.7 million.
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