01—Abstract
Summary
Summary of the 10-K filed February 25, 2022. Cited figures are marked; the original filing is the authoritative source.
AvalonBay Communities (AVB) closed 2021 with a strong earnings year driven by asset sales, while underlying residential operations softened.
Net income attributable to common stockholders rose 21.3% to $1,004.3 milliona ($7.19 diluted EPS vs. $5.89), mainly due to a $602.2 million gain on sale of communities. However, Same Store NOI fell 4.6% to $1.37 billion, as Same Store residential rental revenue declized 2.2% amid elevated concessions (average rent fell 3.6% to $2,504) in Northern California and the New York area, partly offset by occupancy gains. Core FFO per diluted share declined to $8.26 from $8.69, and FFO per share fell to $8.13 from $8.45, so investors should weigh the headline earnings growth against weaker recurring cash-flow metrics.
Development and portfolio repositioning remained central to the strategy. AvalonBay completed nine communities (2,752 homes, $1.07 billionb) and started ten more (3,010 homes, $1.25 billion), while acquiring seven communities for $724.5 million (including entry into Charlotte and Dallas) and selling nine wholly owned communities for $867.2 million. The development pipeline of 17 wholly owned communities (5,386 homes, roughly $2.14 billion projected cost) and 24 Development Rights (8,070 homes) provides a multi-year source of future NOI growth, though it also carries construction and lease-up risk.
Balance sheet and liquidity appear sound. Cash and equivalents rose to $543.8 millionc at year-end, the $1.75 billion Credit Facility was undrawn, and the company issued $1.1 billion of unsecured notes at low rates (1.90%-2.05% on new green bonds) while repaying higher-cost debt.
Total debt of $8.17 billiond carries a weighted fixed rate near 3.7% on secured notes, and management reported compliance with all financial covenants. Key risks include ongoing COVID-19 effects on collections and concessions, California and New York rent-control expansion, rising interest rates and LIBOR transition, and the 2022 dividend of $1.59 per quarter, which remains a major cash commitment.
02—Key points
Key Highlights
- Net income attributable to common stockholders up 21.3% to $1.00 billion ($7.19 diluted EPS), driven primarily by a $602.2 million gain on sale of communities
- Same Store NOI declined 4.6% to $1.37 billion, as Same Store residential rental revenue fell 2.2% due to elevated concessions and lower average rental rates (down 3.6%)
- Core FFO per diluted share decreased to $8.26 from $8.69, and FFO per diluted share fell to $8.13 from $8.45
- Active development and acquisition program: completed 9 communities (2,752 homes) and started 10 more; acquired 7 communities for $724.5 million, expanding into Charlotte, Dallas and Southeast Florida
- Strong capital markets activity: issued $1.1 billion of unsecured green notes at 1.90%-2.05% and repaid higher-cost debt; Credit Facility of $1.75 billion remained undrawn at year-end
- Balance sheet liquidity improved, with cash and equivalents of $543.8 million and continued covenant compliance; total debt of $8.17 billion
- Ongoing COVID-19 impacts (collections of 97.0%-98.8% at quarter-ends, rent relief payments of $28.3 million) and rent-control expansion in California and New York remain key risks to revenue growth
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2021filed February 25, 2022Financial Statements
FY2021 against FY2020
| Line item | FY2021FY2020 | Change |
|---|---|---|
| Revenue | $2.29B$2.30B | −0.3% |
| Operating Expenses | $1.93B$1.83B | +5.5% |
| Operating Income | $1.46B$1.47B | −1.1% |
| Interest Expense | $220.41M$214.15M | +2.9% |
| Net Income | $1.00B$827.63M | +21.3% |
| EPS (Basic) | $7.19$5.89 | +22.1% |
| EPS (Diluted) | $7.19$5.89 | +22.1% |
| Shares Outstanding (Basic) | 139.39M140.09M | −0.5% |
| Shares Outstanding (Diluted) | 139.72M140.44M | −0.5% |
05—Questions
Frequently Asked Questions
Why did net income rise 21% in 2021 if same-store operating performance declined?
The increase was driven mainly by non-recurring real estate gains. AvalonBay recognized a $602.2 million gain on the sale of nine wholly owned communities (versus $340.4 million in 2020), along with a $23.3 million share of a joint venture gain and unrealized gains on property technology investments. Same Store NOI fell 4.6%, so investors should separate the gain-driven earnings increase from core operating trends, which Core FFO captures.
What is the dividend outlook and is it covered by cash flow?
The Board declared a first-quarter 2022 dividend of $1.59 per share, consistent with prior quarters, payable April 15, 2022. Total 2021 dividends paid were $888.3 million against net cash from operations of $1.20 billion, and REIT rules require distributions of at least 90% of taxable income. Core FFO of $8.26 per share comfortably exceeds the annualized $6.36 dividend, though the dividend remains at Board discretion.
How exposed is AvalonBay to rising interest rates and refinancing?
Total debt was $8.17 billion, with fixed-rate unsecured notes making up most of it and only about $714 million in variable-rate debt; a 100 basis point rise would add roughly $7.7 million to annual interest cost. Management noted that roughly $108 million of debt matures in 2022 and that the company intends to refinance as needed. The company also entered $150 million of forward swaps to hedge expected 2022 issuance, and the LIBOR-to-SOFR transition creates some uncertainty in floating-rate costs.
What are the main risks to rental revenue in 2022 and beyond?
Key risks include elevated concessions and lower rental rates in Northern California and the New York metro, continued COVID-19 effects on collections and eviction restrictions, and state rent-control laws (California's cap of the lesser of 10% or 5% plus CPI on units older than 15 years, plus New York's rent-stabilization changes). Short-term leases of one year or less allow market rent declines to flow through quickly. Development and lease-up delays and rising construction and operating costs from inflation are additional pressures.
How large is the development pipeline and what growth does it contribute?
At year-end 2021 AvalonBay had 17 wholly owned communities under development (5,386 homes) with a projected total capitalized cost of about $2.14 billion, plus two unconsolidated developments (803 homes) and 24 Development Rights that could add roughly 8,070 homes. Management plans to fund new starts from asset sales, retained cash, Credit Facility borrowings and debt or equity issuance. Investors should note that development returns depend on achieving projected rents and occupancy during lease-up, and the company has not yet fully stabilized its recent completions.
06—Continue