Earlier this week, AvalonBay reported results on Monday. Though expectations had been lowered heading into the call, Sandler O'Neill + Partners said "The Guidance Bark Was Worse than the Earnings Bite."
Here's more from Sandler's note:San Francisco and New York remain weak spots with CT and Mid-Atlantic also a little softer than expectations. We were already expecting fundamentals to moderate further into next year and the conference call only confirmed that rather than adding additional concern. Job growth and economic deterioration would add concern, clearly. That said, despite fears of doom and gloom, the economic data point to a continuation of the existing subdued economic growth, which when coupled with supply declining following the current wave should help firm Apartments later next year."
Here's the AVB earnings release:ARLINGTON, Va.--(BUSINESS WIRE)--AvalonBay Communities, Inc. (NYSE: AVB) (the “Company”) reported Monday that Net Income Attributable to Common Stockholders for the three months ended September 30, 2016 was $356,392,000. This resulted in an increase in Earnings per Share – diluted (“EPS”) of 69.3% to $2.59 for the three months ended September 30, 2016, from $1.53 for the prior year period.
Funds from Operations attributable to common stockholders - diluted (“FFO”) per share for the three months ended September 30, 2016 increased 4.5% to $2.11 from $2.02 for the prior year period.
Core FFO per share for the three months ended September 30, 2016 increased 7.3% to $2.07 from $1.93 for the prior year period.
The changes in the Company's EPS, FFO per share and Core FFO per share were due to an increase in Net Operating Income (“NOI”) from newly developed and existing operating communities for the three months ended September 30, 2016 over the prior year period, partially offset by an increase in the average shares outstanding. The changes in EPS and FFO per share were also due to the gain on extinguishment of debt in the prior year period, as well as the current year period gain from the contribution of a land parcel to a joint venture. The change in EPS was also due to an increase in wholly-owned real estate sales and related gains, partially offset by a decrease in joint venture real estate sales and related gains and an increase in depreciation expense.
For the nine months ended September 30, 2016, EPS increased 31.2% to $5.76 from $4.39 for the prior year period. For the nine months ended September 30, 2016, FFO per share increased 1.5% to $6.17 from $6.08 for the prior year period. For the nine months ended September 30, 2016, Core FFO per share increased 9.2% to $6.07 from $5.56 for the prior year period.
Operating Results for the Three Months Ended September 30, 2016 Compared to the Prior Year Period
For the Company, total revenue increased by $40,851,000, or 8.6%, to $516,211,000. This increase is primarily due to growth in revenue from development communities and Established Communities.
For Established Communities, Average Rental Rates increased 3.9%, and were partially offset by a decrease in Economic Occupancy of 0.1%, resulting in an increase in rental revenue of 3.8%. If the Company were to include current and previously completed redevelopment communities as part of its Established Communities portfolio, the increase in Established Communities' rental revenue would have been 3.9%. Total revenue for Established Communities increased $13,819,000, or 3.7%, to $389,050,000. Operating expenses for Established Communities increased $2,561,000, or 2.2%, to $117,476,000. NOI for Established Communities increased $11,258,000, or 4.3%, to $271,574,000.
Operating Results for the Nine Months Ended September 30, 2016 Compared to the Prior Year Period
For the Company, total revenue increased by $151,828,000, or 11.0%, to $1,527,015,000. This increase is primarily due to growth in revenue from development communities and Established Communities, coupled with business interruption insurance proceeds.
For Established Communities, Average Rental Rates increased 4.9%, and were partially offset by a decrease in Economic Occupancy of 0.2%, resulting in an increase in rental revenue of 4.7%. If the Company were to include current and previously completed redevelopment communities as part of its Established Communities portfolio, the increase in Established Communities' rental revenue would have been 4.8%. Total revenue for Established Communities increased $50,811,000, or 4.6%, to $1,149,093,000. Operating expenses for Established Communities increased $8,450,000, or 2.5%, to $343,319,000. NOI for Established Communities increased $42,361,000, or 5.5%, to $805,774,000.
Development Activity
During the three months ended September 30, 2016, the Company engaged in the following development activity:
The Company completed the development of two communities:
- Avalon Dublin Station II, located in Dublin, CA; and
- Avalon Alderwood II, located in Lynnwood, WA.
These two communities contain an aggregate of 376 apartment homes and were constructed for an aggregate Total Capital Cost of $111,200,000.
The Company started the construction of Avalon Boonton, located in Boonton, NJ. Avalon Boonton will contain 350 apartment homes when completed and will be developed for an estimated Total Capital Cost of $91,200,000.
The Company added one development right which, if developed as expected, will contain 200 apartment homes and will be developed for an estimated Total Capital Cost of $95,000,000.
The projected Total Capital Cost of overall development rights decreased to $3.9 billion at September 30, 2016 from $4.0 billion at June 30, 2016.
Acquisition Activity
In September 2016, the Company acquired two communities.
- Avalon Columbia Pike, located in Arlington, VA, contains 269 apartment homes and 27,000 square feet of retail space, and was acquired for a purchase price of $102,000,000, which includes the assumption of a fixed rate mortgage loan secured by the community in the amount of $70,507,000. The mortgage loan has a 3.38% contractual interest rate and matures in November 2019.
- Studio 77, located in North Hollywood, CA, contains 156 apartment homes and 11,000 square feet of retail space, and was acquired for a purchase price of $72,100,000.
Disposition Activity
During the three months ended September 30, 2016, the Company sold three wholly-owned communities: Eaves Nanuet, located in Nanuet, NY, Avalon Shrewsbury, located in Shrewsbury, MA and Avalon at Freehold, located in Freehold, NJ. In the aggregate, the three communities contain 1,051 apartment homes and were sold for $275,500,000, resulting in a gain in accordance with GAAP of $197,840,000 and an Economic Gain of $140,148,000. These communities generated an Unleveraged IRR of 13.6% over a weighted average investment period of 15.1 years.
In October 2016, the Company sold Avalon Brandemoor I and II, located in Lynnwood, WA. The two wholly-owned communities contain an aggregate of 506 apartment homes and were sold for $132,000,000.
Liquidity and Capital Markets
At September 30, 2016, the Company had $170,000,000 in borrowings outstanding under its $1,500,000,000 unsecured credit facility, and had $232,188,000 in unrestricted cash and cash in escrow.
The Company’s annualized Net Debt-to-Core EBITDA for the third quarter of 2016 was 5.1 times.
During the three months ended September 30, 2016, the Company repaid $250,000,000 principal amount of its 5.75% coupon unsecured notes pursuant to its scheduled maturity.
In October 2016, the Company issued the following unsecured notes in public offerings under its existing shelf registration statement.
- $300,000,000 principal amount of unsecured notes were issued for net proceeds of approximately $297,117,000. The notes mature in October 2026 and were issued at a 2.90% coupon interest rate.
- $350,000,000 principal amount of unsecured notes were issued for net proceeds of approximately $345,520,000. The notes mature in October 2046 and were issued at a 3.90% coupon interest rate.
In October 2016, the Company issued a redemption notice for $250,000,000 principal amount of its 5.70% coupon unsecured notes in advance of the March 2017 scheduled maturity. The Company expects to complete the redemption of the unsecured notes in the fourth quarter of 2016.
Unconsolidated Real Estate Investments
During the three months ended September 30, 2016, the Company entered into a joint venture to develop, own and operate AVA North Point, a 265 apartment home community in Cambridge, MA, which is expected to be developed for a Total Capital Cost to the joint venture of $113,900,000. AVA North Point is the third phase of a master planned development, the other phases of which are owned through a joint venture structure that the Company acquired an interest in as part of the Archstone acquisition, as described in the Company’s first quarter 2013 earnings release dated April 30, 2013. The Company contributed the land parcel to the venture, recognizing a gain of $10,621,000. The Company owns a 55.0% interest in the venture that owns AVA North Point.
Also during the three months ended September 30, 2016, the Company and its venture partner established separate legal ownership of the residential and retail components of the mixed-use development containing Avalon Clarendon, which was acquired in May 2016. As a result the Company consolidated Avalon Clarendon and beginning in October 2016, the Company will report the operating results of the community as part of its consolidated operations. In conjunction with the consolidation of Avalon Clarendon, the Company recorded a gain of $4,322,000, included as a component of gain on sale of communities, representing the amount that the fair value of the Company's prior interest exceeded its carrying value, primarily attributable to depreciation recognized during the period the community was owned in the joint venture.
