AvalonBay Communities, Inc. (NYSE: AVB) (the “Company”) reported
today that Net Income Attributable to Common Stockholders for the
three months ended September 30, 2019 was $279,677,000. This
resulted in an increase in Earnings per Share – diluted (“EPS”) for
the three months ended September 30, 2019 of 43.9% to $2.00 from
$1.39 for the prior year period.
Funds from Operations attributable to common stockholders -
diluted (“FFO”) per share for the three months ended September 30,
2019 decreased 0.4% to $2.25 from $2.26 for the prior year period.
Core FFO per share (as defined in this release) for the three
months ended September 30, 2019 increased 2.6% to $2.34 from $2.28
for the prior year period.
The following table compares the Company’s actual results for
EPS, FFO per share and Core FFO per share for the three months
ended September 30, 2019 to its results for the prior year
period:
Q3 2019 Results Compared to Q3
2018
Per Share (1)
EPS
FFO
Core FFO
Q3 2018 per share reported results
$
1.39
$
2.26
$
2.28
Established and Redevelopment Community
NOI
0.06
0.06
0.06
Other Stabilized and Development Community
NOI
0.08
0.08
0.08
Capital markets activity
(0.07
)
(0.07
)
(0.07
)
Income tax expense
(0.08
)
(0.08
)
—
JV income, overhead and other
—
—
(0.01
)
Gain on sale of real estate and
depreciation expense
0.62
—
—
Q3 2019 per share reported results
$
2.00
$
2.25
$
2.34
(1) For additional detail on reconciling
items between EPS, FFO and Core FFO, see Definitions and
Reconciliations, table 5.
For the nine months ended September 30, 2019, EPS increased 4.0%
to $4.43 from $4.26 for the prior year period, FFO per share
increased 2.3% to $6.80 from $6.65 for the prior year period, and
Core FFO per share increased 3.3% to $6.91 from $6.69 for the prior
year period.
The following table compares the Company’s actual results for
EPS, FFO per share and Core FFO per share for the nine months ended
September 30, 2019 to its results for the prior year period:
YTD 2019 Results
Comparison to YTD 2018
Per Share (1)
EPS
FFO
Core FFO
YTD 2018 per share reported results
$
4.26
$
6.65
$
6.69
Established and Redevelopment Community
NOI
0.24
0.24
0.24
Other Stabilized and Development Community
NOI
0.24
0.24
0.22
Capital markets activity
(0.18
)
(0.20
)
(0.20
)
Income tax expense
(0.08
)
(0.08
)
—
JV income, overhead and other
(0.05
)
(0.05
)
(0.04
)
YTD 2019 per share reported results
$
4.43
$
6.80
$
6.91
(1) For additional detail on reconciling
items between EPS, FFO and Core FFO, see Definitions and
Reconciliations, table 5.
Established Communities Operating Results for the Three
Months Ended September 30, 2019 Compared to the Prior Year Period
(a)
For Established Communities, total revenue increased
$12,181,000, or 2.7%, to $461,233,000. Operating expenses for
Established Communities increased $5,378,000, or 4.2%, to
$134,208,000. NOI for Established Communities increased $6,803,000,
or 2.1%, to $327,025,000. Rental revenue for Established
Communities increased 2.7% as a result of an increase in Average
Rental Rates of 2.9%, partially offset by a decrease in Economic
Occupancy of 0.2%.
The following table reflects the percentage changes in rental
revenue, operating expenses and NOI for Established Communities for
the three months ended September 30, 2019 compared to the three
months ended September 30, 2018:
Q3 2019 Compared to Q3
2018
Rental Revenue (1)(2)
Opex (2)(3)
NOI
% of NOI (4)
New England
3.0
%
4.0
%
2.5
%
14.5
%
Metro NY/NJ
2.2
%
6.3
%
0.5
%
22.6
%
Mid-Atlantic
3.1
%
3.6
%
2.8
%
16.0
%
Pacific NW
3.0
%
(1.7
)%
5.1
%
6.0
%
No. California
2.9
%
4.5
%
2.5
%
20.6
%
So. California
2.4
%
4.0
%
1.9
%
20.3
%
Total
2.7
%
4.2
%
2.1
%
100.0
%
(1) See full release for additional
detail.
(2) 2018 results have been adjusted to
reflect uncollectible lease revenue as an adjustment to revenue.
See Definitions and Reconciliations, table 1.
(3) See full release for discussion of
variances.
(4) Represents % of total NOI for Q3 2019
in the presented regions, including amounts related to communities
that have been sold or that are classified as held for sale.
Established Communities Operating Results for the Nine Months
Ended September 30, 2019 Compared to the Prior Year Period
(a)
For Established Communities, total revenue increased
$41,702,000, or 3.1%, to $1,369,526,000. Operating expenses for
Established Communities increased $10,713,000, or 2.8%, to
$390,884,000. NOI for Established Communities increased
$30,989,000, or 3.3%, to $978,642,000. Rental revenue for
Established Communities increased 3.1% as a result of an increase
in Average Rental Rates of 3.2%, partially offset by a decrease in
Economic Occupancy of 0.1%.
The following table reflects the percentage changes in rental
revenue, operating expenses and NOI for Established Communities for
the nine months ended September 30, 2019 compared to the nine
months ended September 30, 2018:
YTD 2019 Compared to YTD
2018
Rental Revenue (1)(2)
Opex (2)(3)
NOI
% of NOI (4)
New England
3.0
%
2.0
%
3.6
%
14.3
%
Metro NY/NJ
2.8
%
3.1
%
2.8
%
22.5
%
Mid-Atlantic
3.0
%
2.6
%
3.2
%
16.0
%
Pacific NW
4.2
%
(2.3
)%
7.1
%
5.8
%
No. California
3.2
%
3.2
%
3.2
%
20.8
%
So. California
3.1
%
4.4
%
2.6
%
20.6
%
Total
3.1
%
2.8
%
3.3
%
100.0
%
(1) See full release for additional
detail.
(2) 2018 results have been adjusted to
reflect uncollectible lease revenue as an adjustment to revenue.
See Definitions and Reconciliations, table 1.
(3) See full release for discussion of
variances.
(4) Represents % of total NOI for YTD 2019
in the presented regions, including amounts related to communities
that have been sold or that are classified as held for sale.
(a) Historically, the Company presented charges related to
uncollectible lease revenue in operating expenses. With the
Company’s adoption of ASU 2016-02, Leases, the Company is
presenting such charges as an adjustment to revenue in its
consolidated GAAP financial statements on a prospective basis,
beginning January 1, 2019. However, for reported segment financial
information, including for Established Communities, the Company has
also included such charges as an adjustment to revenue for all
prior year periods presented in order to provide comparability.
Refer to Definitions and Reconciliations, table 1, for additional
detail and a reconciliation.
Development Activity
During the three months ended September 30, 2019, the Company
completed the development of AVA Esterra Park, located in Redmond,
WA. AVA Esterra Park contains 323 apartment homes and was
constructed for a Total Capital Cost of $91,000,000.
During the nine months ended September 30, 2019, the Company
completed the development of four communities containing an
aggregate of 1,123 apartment homes for an aggregate Total Capital
Cost of $334,000,000.
At September 30, 2019 (excluding The Park Loggia, discussed
below), the Company had 20 Development Communities under
construction that in the aggregate are expected to contain 6,700
apartment homes and 94,000 square feet of retail space. Estimated
Total Capital Cost at completion for these Development Communities
is $2,500,000,000.
The Park Loggia (previously referred to as 15 West 61st Street),
located in New York, NY, is a mixed-used development with a
projected Total Capital Cost of $626,000,000 that will contain 172
for-sale residential condominiums and 67,000 square feet of retail
space upon completion. The Company intends to proceed with the sale
of the residential condominiums and expects to commence settlement
of condominium sales in the first quarter of 2020 after individual
tax lots have been established for each condominium.
With the change in timing to 2020 for the first sales of
condominiums at The Park Loggia and the disposition of certain
wholly-owned operating communities, the Company is updating its
projected EPS range for full year 2019 to $5.58 to $5.78, from the
range provided in its July 2019 outlook of $5.78 to $5.98.
The projected Total Capital Cost of Development Rights at
September 30, 2019 increased to $4.2 billion from $3.8 billion at
June 30, 2019.
Acquisition Activity
During the three months ended September 30, 2019, the Company
acquired the following two communities:
- Portico at Silver Spring Metro, located in Silver Spring, MD,
containing 151 apartment homes, for a purchase price of
$43,450,000; and
- Avalon Bonterra, located in Hialeah, FL, containing 314
apartment homes, for a purchase price of $90,000,000.
During the nine months ended September 30, 2019, the Company
acquired four communities containing an aggregate of 935 apartment
homes for an aggregate purchase price of $285,200,000.
Disposition Activity
Consolidated Apartment Communities
During the three months ended September 30, 2019, the Company
sold four wholly-owned operating communities:
- AVA Stamford, located in Stamford, CT;
- Archstone Lexington, located in Flower Mound, TX;
- Memorial Heights Villages, located in Houston, TX; and
- Avalon Orchards, located in Marlborough, MA.
In the aggregate, the four communities contain 1,002 apartment
homes and were sold for $259,600,000, resulting in a gain in
accordance with GAAP of $130,399,000 and an Economic Gain of
$59,157,000. The sales of Archstone Lexington and Memorial Heights
Villages complete the Company's exit from the Texas market.
During the nine months ended September 30, 2019, the Company
sold six wholly-owned operating communities containing an aggregate
of 1,660 apartment homes. These assets were sold for $427,600,000
and a weighted average Initial Year Market Cap Rate of 4.6%,
resulting in a gain in accordance with GAAP of $167,385,000 and an
Economic Gain of $72,152,000.
Liquidity and Capital Markets
At September 30, 2019, the Company did not have any borrowings
outstanding under its $1,750,000,000 unsecured credit facility and
had $334,754,000 in unrestricted cash and cash in escrow.
During the three months ended September 30, 2019, the Company
entered into a forward contract under its current continuous equity
program to sell 947,868 shares of common stock for approximate
proceeds of $198,000,000, net of offering fees and discounts (the
"Forward"). The forward price was established based on the stock
price during intraday trading on September 25, 2019, the contract
execution date. The final sales price and proceeds received by the
Company will be determined on the date or dates of settlement, with
adjustments during the term of the contract for the Company’s
dividends as well as for a daily interest factor that varies with
changes in the Overnight Bank Funding Rate. Settlement of the
forward contract will occur on one or more dates not later than
September 25, 2020.
During the nine months ended September 30, 2019, the Company had
the following debt activity:
- The Company issued $450,000,000 principal amount of unsecured
notes in a public offering under its existing shelf registration
statement for net proceeds of $446,877,000. The notes mature in
June 2029 and were issued with a 3.30% coupon. The effective
interest rate of the notes is 3.66%, including the impact of an
interest rate hedge and offering costs.
- The Company reduced its outstanding secured indebtedness by
$123,502,000. The Company repaid $153,752,000 principal amount of
mortgage notes secured by six operating communities, at par, of
which $140,389,000 was variable rate and $13,363,000 had a 2.99%
fixed rate. The Company utilized $47,174,000 of restricted cash
held in principal reserve funds as partial repayment of this
indebtedness. These repayments were partially offset by a 3.26%
fixed rate $30,250,000 secured mortgage that matures in August
2029, which was entered into in conjunction with the acquisition of
a community.
In addition, during the nine months ended September 30, 2019,
the Company sold 994,634 shares of common stock for net proceeds of
$196,700,000. These sales were completed under both the Company's
previous and current continuous equity programs.
The Company’s annualized Net Debt-to-Core EBITDAre (as defined
in this release) for the third quarter of 2019 was 4.7 times.
Fourth Quarter Conference Schedule
The Company is scheduled to participate in NAREIT's REITworld
Conference in Los Angeles, CA, from November 12 - 14, 2019. During
this conference, management may discuss the Company's current
operating environment; operating trends; development,
redevelopment, disposition and acquisition activity; portfolio
strategy and other business and financial matters affecting the
Company. Details on how to access related materials will be
available on the Company's website at http://www.avalonbay.com/events one business day
in advance of the conference.
Other Matters
The Company will hold a conference call on October 29, 2019 at
11:00 AM ET to review and answer questions about this release, its
third quarter 2019 results, the Attachments (described below) and
related matters. To participate on the call, dial 800-458-4121 and
use conference id: 1125707.
To hear a replay of the call, which will be available from
October 29, 2019 at 4:00 PM ET to November 5, 2019 at 4:00 PM ET,
dial 888-203-1112 and use conference id: 1125707. A webcast of the
conference call will also be available at http://www.avalonbay.com/earnings, and an on-line
playback of the webcast will be available for at least seven days
following the call.
The Company produces Earnings Release Attachments (the
"Attachments") that provide detailed information regarding
operating, development, redevelopment, disposition and acquisition
activity. These Attachments are considered a part of this earnings
release and are available in full with this earnings release via
the Company's website at http://www.avalonbay.com/earnings. To receive
future press releases via e-mail, please submit a request through
http://www.avalonbay.com/email.
In addition to the Attachments, the Company is providing a
teleconference presentation that will be available on the Company's
website at http://www.avalonbay.com/earnings subsequent to
this release and before the market opens on October 29, 2019.
About AvalonBay Communities, Inc.
As of September 30, 2019, the Company owned or held a direct or
indirect ownership interest in 292 apartment communities containing
85,647 apartment homes in 11 states and the District of Columbia,
of which 20 communities were under development and five communities
were under redevelopment. The Company is an equity REIT in the
business of developing, redeveloping, acquiring and managing
apartment communities in leading metropolitan areas primarily in
New England, the New York/New Jersey Metro area, the Mid-Atlantic,
the Pacific Northwest, and the Northern and Southern California
regions of the United States. More information may be found on the
Company’s website at http://www.avalonbay.com. For additional
information, please contact Jason Reilley, Vice President of
Investor Relations, at 703-317-4681.
Forward-Looking Statements
This release, including its Attachments, contains
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking
statements, which you can identify by the Company’s use of words
such as “expects,” “plans,” “estimates,” “anticipates,” “projects,”
“intends,” “believes,” “outlook” and similar expressions that do
not relate to historical matters, are based on the Company’s
expectations, forecasts and assumptions at the time of this
release, which may not be realized and involve risks and
uncertainties that cannot be predicted accurately or that might not
be anticipated. These could cause actual results to differ
materially from those expressed or implied by the forward-looking
statements. Risks and uncertainties that might cause such
differences include the following, among others: we may abandon
development or redevelopment opportunities for which we have
already incurred costs; adverse capital and credit market
conditions may affect our access to various sources of capital
and/or cost of capital, which may affect our business activities,
earnings and common stock price, among other things; changes in
local employment conditions, demand for apartment homes, supply of
competitive housing products, landlord-tenant laws and other
economic or regulatory conditions may result in lower than expected
occupancy and/or rental rates and adversely affect the
profitability of our communities; delays in completing development,
redevelopment and/or lease-up may result in increased financing and
construction costs and may delay and/or reduce the profitability of
a community; debt and/or equity financing for development,
redevelopment or acquisitions of communities may not be available
or may not be available on favorable terms; we may be unable to
obtain, or experience delays in obtaining, necessary governmental
permits and authorizations; expenses may result in communities that
we develop or redevelop failing to achieve expected profitability;
our assumptions concerning risks relating to our lack of control of
joint ventures and our abilities to successfully dispose of certain
assets may not be realized; our assumptions and expectations in our
financial outlook may prove to be too optimistic; the timing and
net proceeds of condominium sales may not equal our current
expectations; and the expected proceeds from settlement of the
Forward are subject to adjustment for changes in the Overnight Bank
Funding Rate and the amount of dividends we pay on our common
stock, and our receipt of settlement proceeds assumes that we will
settle the Forward by physical delivery. Additional discussions of
risks and uncertainties that could cause actual results to differ
materially from those expressed or implied by the forward-looking
statements appear in the Company’s filings with the Securities and
Exchange Commission, including the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2018 under the heading
“Risk Factors” and under the heading “Management’s Discussion and
Analysis of Financial Condition and Results of Operations -
Forward-Looking Statements” and in subsequent quarterly reports on
Form 10-Q.
The Company does not undertake a duty to update forward-looking
statements, including its expected 2019 operating results and other
financial data forecasts contained in this release. The Company
may, in its discretion, provide information in future public
announcements regarding its outlook that may be of interest to the
investment community. The format and extent of future outlooks may
be different from the format and extent of the information
contained in this release.
Definitions and Reconciliations
Non-GAAP financial measures and other capitalized terms, as used
in this earnings release, are defined, reconciled and further
explained on Attachment 13, Definitions and Reconciliations of
Non-GAAP Financial Measures and Other Terms. Attachment 13 is
included in the full earnings release available at the Company’s
website at http://www.avalonbay.com/earnings. This wire
distribution includes only the following definitions and
reconciliations.
Average Rental Rates are calculated
by the Company as rental revenue in accordance with GAAP, divided
by the weighted average number of occupied apartment homes.
Business Segment Operating Results
included in this release presents the Company’s business segment
financial information for all reporting periods on a comparable
basis, with the charge for uncollectible lease revenue included as
an adjustment to revenue. Historically for periods prior to January
1, 2019, the Company presented charges related to uncollectible
lease revenue in operating expenses. With the Company’s adoption of
ASU 2016-02, Leases, the Company is presenting such charges as an
adjustment to revenue in its consolidated GAAP financial statements
on a prospective basis, beginning January 1, 2019. However, for
reported segment financial information, including for Established
Communities, the Company has also included such charges as an
adjustment to revenue for all prior year periods presented in order
to provide comparability.
Established Communities
A reconciliation of total revenue, rental revenue and operating
expenses for Established Communities, as presented in this release,
to results prior to the adjustment for uncollectible lease revenue
is as follows (dollars in thousands):
TABLE 1
Q3 2019
Q3 2018
Q3 2019 to Q3 2018 % Change
Q2 2019
Q3 2019 to Q2 2019 % Change
YTD 2019
YTD 2018
YTD 2019 to YTD 2018 % Change
Total revenue, excluding uncollectible
lease revenue
$
463,482
$
451,296
2.7
%
$
459,453
0.9
%
$
1,376,184
$
1,336,030
3.0
%
Uncollectible lease revenue
(2,249
)
(2,244
)
0.2
%
(2,498
)
(10.0
)%
(6,658
)
(8,206
)
(18.9
)%
Total revenue, including uncollectible
lease revenue
461,233
449,052
2.7
%
456,955
0.9
%
1,369,526
1,327,824
3.1
%
Rental revenue, excluding uncollectible
lease revenue
463,098
451,086
2.7
%
458,846
0.9
%
1,374,728
1,335,378
2.9
%
Uncollectible lease revenue
(2,249
)
(2,244
)
0.2
%
(2,498
)
(10.0
)%
(6,658
)
(8,206
)
(18.9
)%
Rental revenue, including uncollectible
lease revenue
460,849
448,842
2.7
%
456,348
1.0
%
1,368,070
1,327,172
3.1
%
Operating expenses, excluding
uncollectible lease revenue
134,208
128,830
4.2
%
130,688
2.7
%
390,884
380,171
2.8
%
Uncollectible lease revenue
2,249
2,244
0.2
%
2,498
(10.0
)%
6,658
8,206
(18.9
)%
Operating expenses, including
uncollectible lease revenue
$
136,457
$
131,074
4.1
%
$
133,186
2.5
%
$
397,542
$
388,377
2.4
%
Other Reported Operating Results
A reconciliation of rental revenue and operating expenses, for
results for periods presented in this release prior to the
adjustment for uncollectible lease revenue, is as follows (dollars
in thousands):
TABLE 2
Q4 2018
Established
Other Stabilized
Redevelopment
Development
Rental revenue, excluding uncollectible
lease revenue
$
452,361
$
67,772
$
32,086
$
2,282
Uncollectible lease revenue
(2,012
)
(746
)
(147
)
(5
)
Rental revenue, including uncollectible
lease revenue
450,349
67,026
31,939
2,277
Operating expenses, excluding
uncollectible lease revenue
124,523
21,612
9,738
1,165
Uncollectible lease revenue
2,012
746
147
5
Operating expenses, including
uncollectible lease revenue
$
126,535
$
22,358
$
9,885
$
1,170
Development Communities are
communities that are either currently under construction, or were
under construction and were completed during the current year.
These communities may be partially or fully complete and
operating.
Development Rights are development
opportunities in the early phase of the development process for
which the Company either has an option to acquire land or enter
into a leasehold interest, for which the Company is the buyer under
a long-term conditional contract to purchase land, where the
Company controls the land through a ground lease or owns land to
develop a new community, or where the Company is the designated
developer in a public-private partnership. The Company capitalizes
related pre-development costs incurred in pursuit of new
developments for which the Company currently believes future
development is probable.
Economic Occupancy (“Ec Occ”) is
defined as total possible revenue less vacancy loss as a percentage
of total possible revenue. Total possible revenue (also known as
“gross potential”) is determined by valuing occupied units at
contract rates and vacant units at Market Rents. Vacancy loss is
determined by valuing vacant units at current Market Rents. By
measuring vacant apartments at their Market Rents, Economic
Occupancy takes into account the fact that apartment homes of
different sizes and locations within a community have different
economic impacts on a community’s gross revenue.
Economic Gain is calculated by the
Company as the gain on sale in accordance with GAAP, less
accumulated depreciation through the date of sale and any other
non-cash adjustments that may be required under GAAP accounting.
Management generally considers Economic Gain to be an appropriate
supplemental measure to gain on sale in accordance with GAAP
because it helps investors to understand the relationship between
the cash proceeds from a sale and the cash invested in the sold
community. The Economic Gain for disposed communities is based on
their respective final settlement statements. A reconciliation of
the aggregate Economic Gain to the aggregate gain on sale in
accordance with GAAP for the wholly-owned operating communities
disposed of during the three and nine months ended September 30,
2019 is as follows (dollars in thousands):
TABLE 3
Q3
YTD
2019
2019
GAAP Gain
$
130,399
$
167,385
Accumulated Depreciation and Other
(71,242
)
(95,233
)
Economic Gain
$
59,157
$
72,152
Established Communities are
consolidated communities in the markets where the Company has a
significant presence (New England, New York/New Jersey,
Mid-Atlantic, Pacific Northwest, and Northern and Southern
California) and where a comparison of operating results from the
prior year to the current year is meaningful, as these communities
were owned and had Stabilized Operations, as defined below, as of
the beginning of the respective prior year period. Therefore, for
2019 operating results, Established Communities are consolidated
communities that have Stabilized Operations as of January 1, 2018,
are not conducting or are not probable to conduct substantial
redevelopment activities and are not held for sale or probable for
disposition within the current year.
EBITDA, EBITDAre and Core EBITDAre
are considered by management to be supplemental measures of our
financial performance. EBITDA is defined by the Company as net
income or loss attributable to the Company before interest income
and expense, income taxes, depreciation and amortization. EBITDAre
is calculated by the Company in accordance with the definition
adopted by the Board of Governors of the National Association of
Real Estate Investment Trusts (“NAREIT”), as EBITDA plus or minus
losses and gains on the disposition of depreciated property, plus
impairment write-downs of depreciated property, with adjustments to
reflect the Company's share of EBITDAre of unconsolidated entities.
Core EBITDAre is the Company’s EBITDAre as adjusted for non-core
items outlined in the table below. By further adjusting for items
that are not considered part of the Company’s core business
operations, Core EBITDAre can help one compare the core operating
and financial performance of the Company between periods. A
reconciliation of EBITDA, EBITDAre and Core EBITDAre to net income
is as follows (dollars in thousands):
TABLE 4
Q3
2019
Net income
$
279,709
Interest expense, net, inclusive of loss
on extinguishment of debt, net
51,586
Income tax expense
11,184
Depreciation expense
165,463
EBITDA
$
507,942
Gain on sale of communities
(130,484
)
Joint venture EBITDAre adjustments (1)
3,916
EBITDAre
$
381,374
Gain on other real estate transactions
(73
)
Lost NOI from casualty losses covered by
business interruption insurance
410
Business interruption insurance
proceeds
(307
)
Severance related costs
895
Development pursuit write-offs and
expensed transaction costs, net
85
For-sale condominium marketing and
administrative costs
1,108
Legal settlements
(3,093
)
Core EBITDAre
$
380,399
(1) Includes joint venture interest,
taxes, depreciation, gain on dispositions of depreciated real
estate and impairment losses, if applicable, included in net
income.
FFO and Core FFO are considered by
management to be supplemental measures of our operating and
financial performance. FFO is calculated by the Company in
accordance with the definition adopted by NAREIT. FFO is calculated
by the Company as Net income or loss attributable to common
stockholders computed in accordance with GAAP, adjusted for gains
or losses on sales of previously depreciated operating communities,
cumulative effect of a change in accounting principle, impairment
write-downs of depreciable real estate assets, write-downs of
investments in affiliates which are driven by a decrease in the
value of depreciable real estate assets held by the affiliate and
depreciation of real estate assets, including adjustments for
unconsolidated partnerships and joint ventures. By excluding gains
or losses related to dispositions of previously depreciated
operating communities and excluding real estate depreciation (which
can vary among owners of identical assets in similar condition
based on historical cost accounting and useful life estimates), FFO
can help one compare the operating and financial performance of a
company’s real estate between periods or as compared to different
companies. Core FFO is the Company's FFO as adjusted for non-core
items outlined in the table below. By further adjusting for items
that are not considered part of our core business operations, Core
FFO can help one compare the core operating and financial
performance of the Company between periods. A reconciliation of Net
income attributable to common stockholders to FFO and to Core FFO
is as follows (dollars in thousands):
TABLE 5
Q3
Q3
YTD
YTD
2019
2018
2019
2018
Net income attributable to common
stockholders
$
279,677
$
192,486
$
618,324
$
588,791
Depreciation - real estate assets,
including joint venture adjustments
165,673
156,204
495,249
470,976
Distributions to noncontrolling
interests
11
11
34
33
Gain on sale of unconsolidated entities
holding previously depreciated real estate
—
(8,636
)
—
(8,636
)
Gain on sale of previously depreciated
real estate
(130,484
)
(27,243
)
(165,849
)
(132,444
)
FFO attributable to common
stockholders
314,877
312,822
947,758
918,720
Adjusting items:
Joint venture losses (1)
—
307
—
314
Joint venture promote (2)
—
—
—
(925
)
Casualty gain, net on real estate (3)
—
(554
)
—
(612
)
Business interruption insurance
proceeds
(307
)
—
(914
)
—
Lost NOI from casualty losses covered by
business interruption insurance (4)
410
—
410
1,730
Loss on extinguishment of consolidated
debt
93
1,678
602
2,717
Advocacy contributions
—
843
—
1,449
Severance related costs
895
80
2,267
582
Development pursuit write-offs and
expensed transaction costs, net
85
(309
)
1,689
261
For-sale condominium marketing and
administrative costs
1,108
339
2,526
497
For-sale condominium imputed carry cost
(5)
1,724
—
2,230
—
Gain on other real estate transactions
(73
)
(12
)
(374
)
(335
)
Legal settlements (6)
(3,093
)
—
(4,071
)
367
Income tax expense (7)
11,184
—
11,178
—
Core FFO attributable to common
stockholders
$
326,903
$
315,194
$
963,301
$
924,765
Average shares outstanding - diluted
139,852,674
138,323,064
139,438,064
138,230,724
Earnings per share - diluted
$
2.00
$
1.39
$
4.43
$
4.26
FFO per common share - diluted
$
2.25
$
2.26
$
6.80
$
6.65
Core FFO per common share - diluted
$
2.34
$
2.28
$
6.91
$
6.69
(1) Amounts for 2018 are
primarily composed of (i) the Company's portion of yield
maintenance charges incurred for the early repayment of debt
associated with joint venture disposition activity and (ii) the
write-off of asset management fee intangibles associated with the
disposition of a community in the U.S. Fund.
(2) Represents the Company's
promoted interest in AvalonBay Value Added Fund II, L.P.
(3) Amounts for 2018 consist
primarily of legal settlement proceeds for construction defects at
a community acquired as part of the Archstone acquisition.
(4) Amount for YTD 2018 is for
the Maplewood casualty loss, which occurred in Q1 2017, and for
which the Company recognized $3,495 in business interruption
insurance proceeds in Q3 2017.
(5) Represents the imputed carry
cost of the for-sale residential condominiums at The Park Loggia.
The Company computes this adjustment by multiplying the Total
Capital Cost of completed and unsold for-sale residential
condominiums by the Company's weighted average unsecured debt
rate.
(6) Amounts for 2019 include
$3,126 in legal settlement proceeds related to a former Development
Right.
(7) Amounts for 2019 consist of
$6,645 related to GAAP to tax basis differences at The Park Loggia
development and $4,539 related to the other activity the Company
undertook through taxable REIT subsidiaries ("TRS"), including the
disposition of two wholly-owned operating communities and expense
for deferred tax obligations related to the Company's
sustainability initiatives.
Initial Year Market Cap Rate is
defined by the Company as Projected NOI of a single community for
the first 12 months of operations (assuming no repositioning), less
estimates for non-routine allowance of approximately $300 - $500
per apartment home, divided by the gross sales price for the
community. Projected NOI, as referred to above, represents
management’s estimate of projected rental revenue minus projected
operating expenses before interest, income taxes (if any),
depreciation and amortization. For this purpose, management’s
projection of operating expenses for the community includes a
management fee of 2.5% - 3.5%. The Initial Year Market Cap Rate,
which may be determined in a different manner by others, is a
measure frequently used in the real estate industry when
determining the appropriate purchase price for a property or
estimating the value for a property. Buyers may assign different
Initial Year Market Cap Rates to different communities when
determining the appropriate value because they (i) may project
different rates of change in operating expenses and capital
expenditure estimates and (ii) may project different rates of
change in future rental revenue due to different estimates for
changes in rent and occupancy levels. The weighted average Initial
Year Market Cap Rate is weighted based on the gross sales price of
each community.
Interest Coverage is calculated by
the Company as Core EBITDAre, divided by the sum of interest
expense, net, and preferred dividends, if applicable. Interest
Coverage is presented by the Company because it provides rating
agencies and investors an additional means of comparing our ability
to service debt obligations to that of other companies. A
calculation of Interest Coverage for the three months ended
September 30, 2019 is as follows (dollars in thousands):
TABLE 6
Core EBITDAre
$
380,399
Interest expense, net
$
51,493
Interest Coverage
7.4 times
Market Rents as reported by the
Company are based on the current market rates set by the Company
based on its experience in renting apartments and publicly
available market data. Trends in market rents for a region as
reported by others could vary. Market Rents for a period are based
on the average Market Rents during that period and do not reflect
any impact for cash concessions.
Net Debt-to-Core EBITDAre is
calculated by the Company as total debt (secured and unsecured
notes and the Company's variable rate unsecured credit facility)
that is consolidated for financial reporting purposes, less
consolidated cash and cash in escrow, divided by annualized third
quarter 2019 Core EBITDAre, as adjusted. A calculation of Net
Debt-to-Core EBITDAre is as follows (dollars in thousands):
TABLE 7
Total debt principal (1)
$
7,422,232
Cash and cash in escrow
(334,754
)
Net debt
$
7,087,478
Core EBITDAre
$
380,399
Core EBITDAre, annualized
$
1,521,596
Net Debt-to-Core EBITDAre
4.7 times
(1) Balance at September 30, 2019 excludes
$8,977 of debt discount and $34,133 of deferred financing costs as
reflected in unsecured notes, net, and $14,501 of debt discount and
$3,342 of deferred financing costs as reflected in notes payable on
the Condensed Consolidated Balance Sheets.
NOI is defined by the Company as
total property revenue less direct property operating expenses
(including property taxes), and excluding corporate-level income
(including management, development and other fees), corporate-level
property management and other indirect operating expenses, expensed
transaction, development and other pursuit costs, net of
recoveries, interest expense, net, loss (gain) on extinguishment of
debt, net, general and administrative expense, joint venture
(income) loss, depreciation expense, corporate income tax expense,
casualty and impairment loss (gain), net, gain on sale of
communities, (gain) loss on other real estate transactions,
for-sale condominium marketing and administrative costs and net
operating income from real estate assets sold or held for sale. The
Company considers NOI to be an important and appropriate
supplemental performance measure to Net Income of operating
performance of a community or communities because it helps both
investors and management to understand the core operations of a
community or communities prior to the allocation of any
corporate-level property management overhead or financing-related
costs. NOI reflects the operating performance of a community, and
allows for an easier comparison of the operating performance of
individual assets or groups of assets. In addition, because
prospective buyers of real estate have different financing and
overhead structures, with varying marginal impact to overhead as a
result of acquiring real estate, NOI is considered by many in the
real estate industry to be a useful measure for determining the
value of a real estate asset or groups of assets.
A reconciliation of NOI to Net Income, as well as a breakdown of
NOI by operating segment, is as follows (dollars in thousands):
TABLE 8
Q3
Q3
Q2
Q1
YTD
YTD
2019
2018
2019
2019
2019
2018
Net income
$
279,709
$
192,407
$
168,305
$
170,418
$
618,432
$
588,540
Indirect operating expenses, net of
corporate income
20,195
19,742
23,018
19,722
62,935
58,377
Expensed transaction, development and
other pursuit costs, net of recoveries
175
523
1,766
622
2,562
2,212
Interest expense, net
51,493
54,097
50,010
47,892
149,395
165,795
Loss on extinguishment of debt, net
93
1,678
229
280
602
2,717
General and administrative expense
12,769
14,744
18,965
13,706
45,440
44,384
Joint venture (income) loss
(1,643
)
(10,031
)
(197
)
1,060
(780
)
(12,560
)
Depreciation expense
165,463
156,538
162,693
162,057
490,213
472,282
Income tax expense
11,184
29
—
(6
)
11,178
87
Casualty and impairment loss (gain),
net
—
(554
)
—
—
—
(612
)
Gain on sale of communities
(130,484
)
(27,243
)
(20,530
)
(14,835
)
(165,849
)
(132,444
)
Gain on other real estate transactions
(73
)
(12
)
(34
)
(267
)
(374
)
(335
)
For-sale condominium marketing and
administrative costs
1,108
339
945
473
2,526
497
NOI from real estate assets sold or held
for sale
(880
)
(17,876
)
(3,275
)
(4,446
)
(8,600
)
(61,623
)
NOI
$
409,109
$
384,381
$
401,895
$
396,676
$
1,207,680
$
1,127,317
Established:
New England
$
42,651
$
41,591
$
41,400
$
41,311
$
125,362
$
121,028
Metro NY/NJ
72,476
72,131
73,212
71,843
217,531
211,560
Mid-Atlantic
51,474
50,067
51,073
51,052
153,599
148,838
Pacific NW
20,683
19,679
20,605
20,210
61,498
57,445
No. California
68,000
66,362
67,384
68,239
203,623
197,308
So. California
71,741
70,392
72,593
72,695
217,029
211,474
Total Established
327,025
320,222
326,267
325,350
978,642
947,653
Other Stabilized
51,187
41,537
49,540
47,843
148,570
114,171
Redevelopment
23,106
22,256
22,587
22,040
67,733
65,653
Development
7,791
366
3,501
1,443
12,735
(160
)
NOI
$
409,109
$
384,381
$
401,895
$
396,676
$
1,207,680
$
1,127,317
NOI as reported by the Company does not include the operating
results from assets sold or classified as held for sale. A
reconciliation of NOI from communities sold or classified as held
for sale is as follows (dollars in thousands):
TABLE 9
Q3
Q3
YTD
YTD
2019
2018
2019
2018
Revenue from real estate assets sold or
held for sale
$
1,972
$
28,135
$
15,837
$
96,517
Operating expenses from real estate assets
sold or held for sale
(1,092
)
(10,259
)
(7,237
)
(34,894
)
NOI from real estate assets sold
or held for sale
$
880
$
17,876
$
8,600
$
61,623
Other Stabilized Communities are
completed consolidated communities that the Company owns, which
have Stabilized Operations as of January 1, 2019, or which we
acquired during the year ended September 30, 2019. Other Stabilized
Communities includes stabilized operating communities in the
Company's expansion markets of Denver, Colorado, and Southeast
Florida, but excludes communities that are conducting or are
probable to conduct substantial redevelopment activities.
Projected NOI, as used within this
release for certain Development Communities and in calculating the
Initial Year Market Cap Rate for dispositions, represents
management’s estimate, as of the date of this release (or as of the
date of the buyer’s valuation in the case of dispositions), of
projected stabilized rental revenue minus projected stabilized
operating expenses. For Development Communities, Projected NOI is
calculated based on the first twelve months of Stabilized
Operations following the completion of construction. In calculating
the Initial Year Market Cap Rate, Projected NOI for dispositions is
calculated for the first twelve months following the date of the
buyer’s valuation. Projected stabilized rental revenue represents
management’s estimate of projected gross potential minus projected
stabilized economic vacancy and adjusted for projected stabilized
concessions plus projected stabilized other rental revenue.
Projected stabilized operating expenses do not include interest,
income taxes (if any), depreciation or amortization, or any
allocation of corporate-level property management overhead or
general and administrative costs. In addition, projected stabilized
operating expenses for Development Communities do not include
property management fee expense. Projected gross potential for
Development Communities and dispositions is generally based on
leased rents for occupied homes and management’s best estimate of
rental levels for homes which are currently unleased, as well as
those homes which will become available for lease during the twelve
month forward period used to develop Projected NOI. The weighted
average Projected NOI as a percentage of Total Capital Cost
("Weighted Average Initial Projected Stabilized Yield") is weighted
based on the Company’s share of the Total Capital Cost of each
community, based on its percentage ownership.
Management believes that Projected NOI of the Development
Communities, on an aggregated weighted average basis, assists
investors in understanding management's estimate of the likely
impact on operations of the Development Communities when the assets
are complete and achieve stabilized occupancy (before allocation of
any corporate-level property management overhead, general and
administrative costs or interest expense). However, in this release
the Company has not given a projection of NOI on a company-wide
basis. Given the different dates and fiscal years for which NOI is
projected for these communities, the projected allocation of
corporate-level property management overhead, general and
administrative costs and interest expense to communities under
development is complex, impractical to develop, and may not be
meaningful. Projected NOI of these communities is not a projection
of the Company's overall financial performance or cash flow. There
can be no assurance that the communities under development will
achieve the Projected NOI as described in this release.
Redevelopment Communities are
consolidated communities where substantial redevelopment is in
progress or is probable to begin during the current year.
Redevelopment is considered substantial when capital invested
during the reconstruction effort is expected to exceed the lesser
of $5,000,000 or 10% of the community’s pre-redevelopment basis and
is expected to have a material impact on the operations of the
community, including occupancy levels and future rental rates.
Redevelopment Communities include five communities containing
1,818 apartment homes that are currently under active redevelopment
as of September 30, 2019, with an expected Total Capital Cost of
$95,000,000, of which $18,000,000 is remaining to invest.
Rental Revenue with Concessions on a Cash
Basis is considered by the Company to be a supplemental
measure to rental revenue in conformity with GAAP to help investors
evaluate the impact of both current and historical concessions on
GAAP-based rental revenue and to more readily enable comparisons to
revenue as reported by other companies. In addition, Rental Revenue
with Concessions on a Cash Basis allows an investor to understand
the historical trend in cash concessions.
A reconciliation of rental revenue from Established Communities
in conformity with GAAP to Rental Revenue with Concessions on a
Cash Basis is as follows (dollars in thousands):
TABLE 10
Q3
Q3
YTD
YTD
2019
2018
2019
2018
Rental revenue (GAAP basis)
$
460,849
$
448,842
$
1,368,070
$
1,327,172
Concessions amortized
228
629
616
3,411
Concessions granted
(361
)
(107
)
(756
)
(901
)
Rental Revenue with Concessions on a Cash
Basis
$
460,716
$
449,364
$
1,367,930
$
1,329,682
% change -- GAAP revenue
2.7
%
3.1
%
% change -- cash revenue
2.5
%
2.9
%
Stabilized Operations/Restabilized
Operations is defined as the earlier of (i) attainment of
95% physical occupancy or (ii) the one-year anniversary of
completion of development or redevelopment.
Total Capital Cost includes all
capitalized costs projected to be or actually incurred to develop
the respective Development or Redevelopment Community, or
Development Right, including land acquisition costs, construction
costs, real estate taxes, capitalized interest and loan fees,
permits, professional fees, allocated development overhead and
other regulatory fees, offset by proceeds from the sale of any
associated land or improvements, all as determined in accordance
with GAAP. Total Capital Cost also includes costs incurred related
to first generation retail tenants, such as tenant improvements and
leasing commissions. For Redevelopment Communities, Total Capital
Cost excludes costs incurred prior to the start of redevelopment
when indicated. With respect to communities where development or
redevelopment was completed in a prior or the current period, Total
Capital Cost reflects the actual cost incurred, plus any
contingency estimate made by management. Total Capital Cost for
communities identified as having joint venture ownership, either
during construction or upon construction completion, represents the
total projected joint venture contribution amount. For joint
ventures not in construction, Total Capital Cost is equal to gross
real estate cost.
Unencumbered NOI as calculated by
the Company represents NOI generated by real estate assets
unencumbered by outstanding secured notes payable as of September
30, 2019 as a percentage of total NOI generated by real estate
assets. The Company believes that current and prospective unsecured
creditors of the Company view Unencumbered NOI as one indication of
the borrowing capacity of the Company. Therefore, when reviewed
together with the Company’s Interest Coverage, EBITDA and cash flow
from operations, the Company believes that investors and creditors
view Unencumbered NOI as a useful supplemental measure for
determining the financial flexibility of an entity. A calculation
of Unencumbered NOI for the nine months ended September 30, 2019 is
as follows (dollars in thousands):
TABLE 11
Year to Date
NOI
NOI for Established Communities
$
978,642
NOI for Other Stabilized Communities
148,570
NOI for Redevelopment Communities
67,733
NOI for Development Communities
12,735
NOI from real estate assets sold or held
for sale
8,600
Total NOI generated by real estate
assets
1,216,280
NOI on encumbered assets
83,038
NOI on unencumbered assets
$
1,133,242
Unencumbered NOI
93
%
Copyright © 2019 AvalonBay Communities, Inc.
All Rights Reserved
View source
version on businesswire.com: https://www.businesswire.com/news/home/20191028005708/en/
Jason Reilley Vice President of Investor Relations
703-317-4681
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