10-QPeriod: Q1 FY2003

AVALONBAY COMMUNITIES INC Quarterly Report for Q1 Ended Mar 31, 2003

Filed May 14, 2003For Securities:AVB

Summary

AvalonBay Communities Inc. (AVB) reported its first quarter 2003 results, indicating a challenging operating environment characterized by weakening economic conditions and declining rental rates in key markets. Despite a 2.3% increase in total revenue, driven by rental income from new acquisitions and developments, Net Operating Income (NOI) decreased by 4.0% due to a significant decline in NOI from Established Communities. This decline is attributed to job losses in the technology, telecom, and financial services sectors, leading to softer demand and concessions. The company is strategically shifting its focus, decreasing acquisition and development activity while increasing dispositions of non-core assets. AVB completed the sale of one community for $46.7 million, generating a gain of $14.1 million. Future strategic initiatives include continued dispositions to enhance liquidity and capital allocation towards development and redevelopment projects that meet long-term investment criteria. While the company anticipates continued pressure on rental rates through 2003, it is leveraging its integrated operational capabilities and focusing on high-barrier-to-entry markets to navigate the current cycle.

Key Highlights

  • 1Total revenue increased by 2.3% to $153.96 million, primarily driven by rental income from new communities and acquisitions.
  • 2Net Operating Income (NOI) decreased by 4.0% to $103.50 million, largely due to a 9.7% decline in NOI from Established Communities, impacted by economic weakness and falling rental rates.
  • 3The company realized a significant gain of $14.07 million from the sale of one community (Avalon Westside Terrace) in Los Angeles during the quarter.
  • 4Management is proactively increasing disposition activity, selling assets that do not meet long-term investment criteria to improve liquidity and redeploy capital.
  • 5Direct property operating expenses, excluding property taxes, increased by 19.6%, influenced by severe winter weather, increased insurance costs, and bad debt expenses.
  • 6Interest expense rose by 25.7% due to the issuance of unsecured notes, partially offset by repayments and lower interest rates.
  • 7Funds From Operations (FFO) decreased by 17.5% to $57.56 million compared to the prior year period, reflecting the impact of lower NOI and a gain from a property sale being excluded.
  • 8The company has a robust development pipeline with 10 communities under construction and 39 "Development Rights" representing future growth opportunities.

Frequently Asked Questions

The primary reason for the decline in NOI is the significant decrease in NOI from 'Established Communities'. This is largely attributed to the weakened economic conditions in many of AvalonBay's submarkets, characterized by job losses in key sectors like technology, telecom, and financial services, which have led to declining market rental rates and softer demand. While occupancy has been maintained through concessions, it has impacted rental revenue.

AvalonBay is strategically adjusting its activities. They are decreasing acquisition and development activity compared to prior periods and increasing disposition activity. This involves selling assets that do not meet long-term investment criteria to realize value and enhance liquidity. The company is also focusing on its development pipeline in high-barrier-to-entry markets, believing this will lead to stronger long-term cash flow growth.

The gain on sale of communities, such as the $14.1 million gain recognized in this quarter from selling Avalon Westside Terrace, is a result of the company's strategy to actively dispose of assets that no longer align with their long-term objectives. These sales provide liquidity, realize value created, and allow the company to redeploy capital into development, redevelopment, debt repayment, or share repurchases.

Direct property operating expenses, excluding property taxes, saw a significant increase of 19.6%. This rise was influenced by factors such as severe winter weather impacting utility and snow removal costs, increased insurance premiums due to market conditions, and a rise in bad debt expenses, which is a direct consequence of the weak economy and job losses.