10-QPeriod: Q2 FY2013

AVALONBAY COMMUNITIES INC Quarterly Report for Q2 Ended Jun 30, 2013

Filed August 2, 2013For Securities:AVB

Summary

AvalonBay Communities, Inc. (AVB) reported its second-quarter and first-half 2013 financial results, significantly impacted by the substantial Archstone Acquisition completed in February 2013. While net income attributable to common stockholders decreased significantly year-over-year due to acquisition-related expenses, increased depreciation, and lower gains on property sales, the underlying operational performance showed strength. Net Operating Income (NOI) for established communities grew by 6.6% in the quarter, driven by a 5.2% increase in rental revenue and a 2.0% increase in operating expenses, indicating solid portfolio performance. The company's balance sheet expanded considerably with total assets growing from $11.16 billion at the end of 2012 to $14.97 billion as of June 30, 2013, largely due to the Archstone acquisition. Debt also increased substantially to fund this acquisition. AvalonBay continues its development activities, with 27 communities under construction, representing a significant future pipeline. Investors should focus on the integration of Archstone's portfolio, ongoing development pipeline, and the company's ability to manage its increased debt load while maintaining strong operational performance in its core markets.

Financial Highlights

32 data points
Beta

Revenue

$378.21M

Net Income

$36.22M

9.6% Net Margin

EPS (Diluted)

$0.28

Total Assets

$14.97B

Cash & Equivalents

$111.15M

Free Cash Flow

$185.82M

Financial Statements
Beta
Revenue$378.21M
Operating Expenses$377.17M
Operating Income$258.97M
Interest Expense$43.17M
Net Income$36.22M
EPS (Basic)$0.28
EPS (Diluted)$0.28
Shares Outstanding (Basic)129.18M
Shares Outstanding (Diluted)129.60M

Key Highlights

  • 1The Archstone Acquisition, completed in February 2013, significantly expanded AvalonBay's asset base and debt, with total assets growing to $14.97 billion and total liabilities increasing to $6.39 billion.
  • 2Net income attributable to common stockholders decreased by 76.9% year-over-year for the quarter, primarily due to $120.7 million in acquisition-related expenses, increased depreciation (especially from in-place lease intangibles), and lower gains on property sales.
  • 3Despite the net income decline, Net Operating Income (NOI) for Established Communities grew by 6.6% in Q2 2013, driven by a 5.2% increase in rental revenue, indicating healthy underlying operational performance.
  • 4The company had 27 communities under construction with an expected total capitalized cost of $2.21 billion, representing a significant development pipeline for future growth.
  • 5Cash used in investing activities was substantial ($884.4 million for H1 2013), reflecting significant investments in acquisitions and development, partially offset by $432.4 million in proceeds from real estate sales.
  • 6Financing activities showed significant use of cash ($2.01 billion for H1 2013), largely due to substantial debt repayments related to the Archstone Acquisition, partially offset by borrowings under the credit facility.
  • 7The company maintained compliance with its financial covenants under its credit facility and unsecured notes.

Frequently Asked Questions

The primary driver for the significant decrease in net income was the Archstone Acquisition completed in February 2013. This resulted in substantial acquisition-related expenses, increased depreciation (particularly from in-place lease intangibles being depreciated over a short period), and a decrease in gains from property sales compared to the prior year period.

The Archstone Acquisition significantly expanded AvalonBay's balance sheet. Total assets grew from $11.16 billion at the end of 2012 to $14.97 billion at June 30, 2013. This was primarily financed through an increase in debt, with total liabilities rising from $4.31 billion to $6.39 billion, including assumed mortgage notes payable and unsecured notes.

The company reported strong underlying operational performance. For established communities, NOI increased by 6.6% year-over-year in the second quarter of 2013, driven by a 5.2% increase in rental revenue and a 2.0% increase in operating expenses. Management expects continued year-over-year revenue growth for the remainder of 2013.

AvalonBay continues to focus on developing, acquiring, owning, and operating apartment communities in high barrier-to-entry markets. The company has a significant development pipeline with 27 communities under construction, representing an estimated total capitalized cost of $2.21 billion. They also actively manage their portfolio by selling underperforming assets and reinvesting in development and redevelopment.