01—Abstract
Summary
Summary of the 10-K filed February 22, 2019. Cited figures are marked; the original filing is the authoritative source.
AvalonBay Communities (AVB) reported a strong 2018 in its 10-K filed February 22, 2019.
Total revenue rose 5.8% to $2.28 billiona, and net income attributable to common stockholders grew 11.1% to $974.5 million ($7.05 per diluted share), helped by $374.98 million of gains on community sales, including the contribution of five New York City communities to a joint venture in which AvalonBay retained a 20% stake. Core FFO per diluted share rose 4.5% to $9.00 from $8.62, and Established Communities NOI grew 2.3%, driven by a 2.5% rise in rental revenue and a 3.2% rise in operating expenses. The company continued its development-led growth strategy, with 21 communities under development totaling 6,609 apartment homes (about $2.38 billion projected cost) and 28 Development Rights for roughly 9,769 homes.
Balance sheet metrics look sound: total debt principal was $7.10 billionb, the $1.5 billion Credit Facility was largely undrawn ($106 million outstanding), and the company was in compliance with its covenants. Management guided to a 3.4% increase in the quarterly dividend to $1.52 per share for Q1 2019. Key risks flagged include rising rent-control activity in some municipalities, supply pressure in the Mid-Atlantic, exposure to earthquake risk on the West Coast, interest-rate sensitivity on $1.17 billion of variable-rate debt, and the Edgewater casualty-loss litigation, which management believes is largely covered by insurance.
02—Key points
Key Highlights
- Total revenue grew 5.8% to $2,284.5 million, and net income attributable to common stockholders rose 11.1% to $974.5 million ($7.05 diluted EPS).
- Core FFO per diluted share increased 4.5% to $9.00 (from $8.62), and FFO per diluted share rose to $8.81 (from $8.45).
- Established Communities NOI increased 2.3%, with average rental rates up 2.5% and economic occupancy steady at 96.1%.
- Development pipeline of 21 communities (6,609 homes, ~$2.38B projected cost) plus 28 Development Rights (~9,769 homes) supports future growth.
- Recycled capital: $883.3 million of sale proceeds in 2018, including the NYC Joint Venture transaction, which generated a $374.98M gain on sale of communities.
- Balance sheet is flexible: $7.10B of total debt principal, a $1.5B undrawn-mostly Credit Facility ($106M drawn), and covenant compliance at year-end 2018.
- Quarterly dividend raised 3.4% to $1.52 per share for Q1 2019; 2018 dividends declared totaled $5.88 per share.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 22, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $2.28B$2.16B | +5.8% |
| Operating Expenses | $1.70B$1.59B | +6.6% |
| Operating Income | $1.49B$1.40B | +6.2% |
| Interest Expense | $220.97M$199.66M | +10.7% |
| Net Income | $974.52M$876.92M | +11.1% |
| EPS (Basic) | $7.05$6.36 | +10.8% |
| EPS (Diluted) | $7.05$6.35 | +11.0% |
| Shares Outstanding (Basic) | 137.84M137.52M | +0.2% |
| Shares Outstanding (Diluted) | 138.29M138.07M | +0.2% |
05—Questions
Frequently Asked Questions
What drove the increase in net income in 2018?
The increase was primarily due to higher real estate sales gains (notably the $374.98M gain on community sales, including the NYC Joint Venture), NOI growth from newly developed and acquired communities, and lower loss on debt extinguishment. These were partly offset by lower joint venture gains and promote income, higher depreciation, and higher interest expense.
How healthy is AvalonBay's rent growth and operating performance?
Established Communities rental revenue rose 2.5% to $1.63 billion, with rental rates up 2.5% and economic occupancy steady at 96.1%. Operating expenses rose 3.2%, and property taxes rose 5.3% for Established Communities, which compressed NOI growth to 2.3%.
What are the main risks investors should monitor?
Key risks include rent-control legislation spreading across municipalities, elevated apartment supply in the Mid-Atlantic that limits rate growth, earthquake and climate exposure on the West Coast, rising interest rates on about $1.17 billion of variable-rate debt, and the ongoing Edgewater fire litigation, which management believes is substantially covered by insurance.
How is AvalonBay funding its development pipeline?
The company relies on a mix of asset sales (recycling capital from mature communities), the $1.5 billion Credit Facility, unsecured note issuances (e.g., $300 million of 4.35% notes due 2048 in March 2018), secured financing, and its CEP IV continuous equity program, which had $846.6 million of capacity remaining at year-end 2018.
Is the dividend sustainable?
Dividends declared in 2018 totaled $5.88 per share against diluted EPS of $7.05 and Core FFO of $9.00 per share, implying a comfortable payout relative to earnings and FFO. Management guided to a 3.4% increase to $1.52 per quarter for Q1 2019, though the Board retains discretion over future dividends and must distribute at least 90% of REIT taxable income.
06—Continue