Summary
AvalonBay Communities, Inc. (AVB) announced its intention to prepay its entire outstanding Freddie Mac secured debt pool, amounting to approximately $556.3 million, which matures in May 2019. This prepayment, expected on June 30, 2017, will incur an estimated yield maintenance penalty of $34 million. This significant event was not previously factored into the Company's financial outlook for 2017. The yield maintenance penalty is projected to reduce both second-quarter and full-year 2017 earnings per share (EPS) and Funds from Operations (FFO) per share by $0.25. Notably, this penalty will be adjusted out of the Company's Core FFO, meaning it will not impact Core FFO per share, offering a clearer view of operational performance.
Key Highlights
- 1AVB intends to prepay $556.3 million of Freddie Mac secured debt maturing in May 2019.
- 2An estimated yield maintenance penalty of $34 million is associated with the prepayment.
- 3The prepayment and penalty were not included in prior 2017 financial outlooks.
- 4The event is expected to reduce Q2 and full-year 2017 EPS by $0.25.
- 5The event is expected to reduce Q2 and full-year 2017 FFO per share by $0.25.
- 6The yield maintenance penalty will be excluded from the calculation of 2017 Core FFO per share.
Frequently Asked Questions
The filing does not explicitly state the reason for the prepayment, but it is common for real estate companies to refinance debt when market conditions allow for more favorable terms or to reduce interest expense, even if it involves a prepayment penalty. The debt pool carries a 5.86% fixed rate.
The prepayment will result in an estimated $34 million yield maintenance penalty. This charge is expected to reduce both second-quarter and full-year 2017 EPS and FFO per share by $0.25 each. However, it will not affect Core FFO per share, as it will be adjusted out.
Yes, this prepayment and its associated penalty were not contemplated in the Company's previously published financial outlooks for 2017, including those issued on February 1, 2017, and April 26, 2017. The impact on EPS and FFO has been quantified as a $0.25 reduction for both the second quarter and the full year.
Yield maintenance is a method for calculating prepayment penalties on a loan. It ensures the lender receives the same return on investment as if the loan had been held to maturity. The penalty compensates the lender for the difference between the loan's original interest rate and the current market interest rates for similar investments over the remaining term.