01—Abstract
Summary
Summary of the 10-K filed February 21, 2020. Cited figures are marked; the original filing is the authoritative source.
AvalonBay Communities (AVB) enters 2020 with a large, high-quality apartment portfolio concentrated in supply-constrained coastal markets.
At January 31, 2020 it owned or held interests in 274 operating communities (79,636 apartment homes) across 11 states and DC, plus 22 communities under development (6,960 homes, ~$2.6 billiona projected cost) and rights to 27 more (9,587 homes). Net income attributable to common stockholders fell 19.3% to $786.0 million ($5.63 diluted EPS) in 2019, mainly because 2018 included larger gains on property sales ($166.1 million in 2019 vs. $375.0 million in 2018). The underlying operating picture was steady: Established Communities NOI rose 3.1%, driven by 2.9% rental revenue growth, and Core FFO per diluted share grew to $9.34 from $9.00 (about 3.8%).
Balance-sheet and capital activity were conservative. Total debt excluding the credit facility was about $7.36 billionb at year-end, with fixed-rate unsecured notes making up most of it. The company raised about $1.28 billion of gross capital in 2019 through unsecured notes, common equity under its CEP IV/V programs, and asset sales, and it priced a $700 million 2.30% note offering in February 2020 to pre-fund maturities.
Dividends were raised 4.6% to $1.59c per quarter for Q1 2020, an annualized $6.36. Key risks disclosed include rent control expansion in California and New York, the LIBOR-to-SOFR transition, development cost and lease-up execution, and exposure to earthquake and climate events in its West Coast markets.
02—Key points
Key Highlights
- Core FFO per diluted share rose to $9.34 in 2019 from $9.00 in 2018, while GAAP diluted EPS fell to $5.63 from $7.05 because of lower property sale gains.
- Established Communities NOI grew 3.1% in 2019, on 2.9% rental revenue growth, 3.0% average rental rate growth, and roughly flat economic occupancy of 96.0%.
- The development pipeline totals 22 communities (6,960 homes, ~$2.6 billion projected cost) plus 27 development rights (9,587 homes), with 2019 starts of 2,377 homes and 2019 completions of 2,027 homes.
- Total debt excluding the credit facility was $7.36 billion at year-end 2019, and the $1.75 billion revolver was undrawn at December 31, 2019 (with $87 million drawn by February 21, 2020).
- The February 2020 $700 million 2.30% unsecured note offering and early redemption of $650 million of 2020–2021 notes extend maturities and reduce near-term refinancing risk.
- The quarterly dividend was raised 4.6% to $1.59 per share, and 2019 dividends declared totaled $6.08 per share.
- Rent control legislation in California (statewide cap of the lesser of 10% or 5% plus local CPI) and New York (the 2019 Housing Stability and Tenant Protection Act) is a growing regulatory headwind for revenue growth in core markets.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 21, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $2.32B$2.28B | +1.8% |
| Operating Expenses | $1.70B$1.70B | −0.2% |
| Operating Income | $1.55B$1.49B | +4.5% |
| Interest Expense | $203.59M$220.97M | −7.9% |
| Net Income | $785.97M$974.52M | −19.3% |
| EPS (Basic) | $5.64$7.05 | −20.0% |
| EPS (Diluted) | $5.63$7.05 | −20.1% |
| Shares Outstanding (Basic) | 139.05M137.84M | +0.9% |
| Shares Outstanding (Diluted) | 139.57M138.29M | +0.9% |
05—Questions
Frequently Asked Questions
Why did net income fall 19.3% in 2019 if operating performance was healthy?
The decline mainly reflects lower gains on sale of communities, which were $166.1 million in 2019 versus $375.0 million in 2018, along with higher depreciation and a $13.0 million income tax expense. Core operating metrics such as NOI growth and Core FFO per share improved, so the drop is largely a timing effect of asset sales rather than weaker operations.
How strong is AvalonBay's balance sheet and liquidity position?
The company had $7.36 billion of debt excluding its credit facility at year-end 2019, with most of it fixed-rate unsecured notes. It had an undrawn $1.75 billion revolver at December 31, 2019, and was in compliance with its financial covenants. Management described its capital structure as providing flexibility, and it pre-funded upcoming maturities in February 2020.
What are the main risks to future growth that investors should monitor?
The filing highlights rent control and stabilization laws in California and New York that limit rent increases, the expiration of LIBOR and transition to SOFR, development cost overruns and delayed lease-up, and reliance on capital markets for refinancing and development funding. Earthquake, climate, and terrorism exposure in large metropolitan markets are also flagged as uninsured or partially insured risks.
How is the development pipeline expected to affect future earnings?
AvalonBay had 22 communities under development with 6,960 homes and a projected total capitalized cost of about $2.6 billion, with many scheduled to complete in 2020–2022. Stabilized returns on these projects depend on achieving expected rents and occupancy, and the company acknowledged that construction costs and lease-up timing may differ from budgets. Completed developments add NOI growth as they lease up, but they also raise near-term interest and depreciation costs.
Is the dividend sustainable at current levels?
The 2019 dividend of $6.08 per share compared with diluted FFO of $9.18 and Core FFO of $9.34, leaving a meaningful cushion above the payout. As a REIT, AvalonBay must distribute at least 90% of REIT taxable income, and 2019 taxable net income was about $698 million. Management raised the quarterly dividend to $1.59 for Q1 2020, but future dividends remain at the discretion of the Board and depend on cash flow, capital needs, and other factors.
06—Continue