AvalonBay Communities, Inc. (NYSE:AVB) (the “Company”) reported
today that Net Income Attributable to Common Stockholders for the
three months ended June 30, 2017 was $165,225,000. This resulted in
a decrease in Earnings per Share – diluted (“EPS”) of 16.7% to
$1.20 for the three months ended June 30, 2017, from $1.44 for the
prior year period.
Funds from Operations attributable to common stockholders -
diluted (“FFO”) per share for the three months ended June 30, 2017
decreased 4.5% to $1.90 from $1.99 for the prior year period.
Core FFO per share (as defined in this release) for the three
months ended June 30, 2017 increased 3.0% to $2.09 from $2.03 for
the prior year period.
The changes in the Company's EPS, FFO per share and Core FFO per
share reflect an increase in Net Operating Income (“NOI”) from
existing, acquired and newly developed operating communities for
the three months ended June 30, 2017 over the prior year period.
The decreases in EPS and FFO per share were due to an increase in
debt extinguishment losses, with the decrease in EPS also due to an
increase in depreciation and a decrease in joint venture real
estate sales and related gains from 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 second quarter of
2017 to its April 2017 outlook:
Second Quarter 2017 Results Comparison to
April 2017 Outlook Per Share
EPS FFO Core FFO Projected per share -
April 2017 outlook (1) $ 1.53 $ 2.21 $ 2.10 Established and
Redevelopment Community NOI 0.01 0.01 0.01 Development and other
community NOI (0.01 ) (0.01 ) — General and administrative expense
(0.01 ) (0.01 ) (0.01 ) Capital markets activity, including debt
extinguishment losses (0.26 ) (0.26 ) (0.01 ) Joint venture income
(2) (0.04 ) (0.04 ) — Gain on sale of real estate (0.02 ) —
— Q2 2017 per share reported results $ 1.20 $ 1.90
$ 2.09 (1) The mid-point of the Company's
April 2017 outlook.
(2) Represents income from the Company's
promoted interest in joint ventures, now expected in Q3 2017.
For the six months ended June 30, 2017, EPS decreased 8.2% to
$2.91 from $3.17 for the prior year period. For the six months
ended June 30, 2017, FFO per share decreased 3.0% to $3.94 from
$4.06 for the prior year period. For the six months ended June 30,
2017, Core FFO per share increased 4.5% to $4.18 from $4.00 for the
prior year period.
Operating Results for the Three Months Ended June 30,
2017 Compared to the Prior Year Period
For the Company, total revenue increased by $28,205,000, or
5.6%, to $530,512,000. This increase is primarily due to
growth in revenue from development communities and stabilized
operating communities.
For Established Communities, Average Rental Rates increased 2.5%
and Economic Occupancy remained consistent at 95.4%, resulting in
an increase in rental revenue of 2.5%. 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 2.6%. Total
revenue for Established Communities increased $9,693,000, or 2.5%,
to $394,313,000. Operating expenses for Established Communities
increased $3,966,000, or 3.5%, to $117,362,000. NOI for Established
Communities increased $5,727,000, or 2.1%, to $276,951,000.
The following table reflects the percentage changes in rental
revenue, operating expenses and NOI for Established Communities for
the three months ended June 30, 2017 compared to the three months
ended June 30, 2016:
Q2 2017 Compared to Q2 2016
Rental Revenue Avg Rent Ec % of
Rates
Occ
Opex (1)
NOI
NOI (2)
New England 2.7 % 0.2 % 5.9 % 1.3 % 14.2 % Metro NY/NJ 2.2 % (0.2
)% 4.0 % 0.9 % 23.6 % Mid-Atlantic 2.4 % (0.7 )% 5.6 % — % 15.5 %
Pacific NW 5.1 % (0.3 )% 2.1 % 5.9 % 5.5 % No. California 0.9 % 0.5
% (1.1 )% 2.3 % 20.5 % So. California 3.9 % 0.1 % 3.4 % 4.2 % 20.7
% Total 2.5 % — % 3.5 % 2.1 % 100.0 % (1) See full release
for discussion of variances.
(2) Represents each region's % of total
NOI for Q2 2017, including amounts related to communities that have
been sold or that are classified as held for sale.
Operating Results for the Six Months Ended June 30, 2017
Compared to the Prior Year Period
For the Company, total revenue increased by $42,033,000, or
4.2%, to $1,052,837,000. This increase is primarily due to
growth in revenue from stabilized operating communities and
development communities.
For Established Communities, Average Rental Rates increased 2.7%
and Economic Occupancy increased 0.1%, resulting in an increase in
rental revenue of 2.8%. 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 3.0%. Total revenue for
Established Communities increased $21,599,000, or 2.8%, to
$784,838,000. Operating expenses for Established Communities
increased $5,573,000, or 2.5%, to $230,877,000. NOI for Established
Communities increased $16,026,000, or 3.0%, to $553,961,000.
The following table reflects the percentage changes in rental
revenue, operating expenses and NOI for Established Communities for
the six months ended June 30, 2017 compared to the six months ended
June 30, 2016:
YTD 2017 Compared to YTD 2016
Rental Revenue Avg Rent Ec % of
Rates
Occ
Opex (1)
NOI
NOI (2)
New England 2.5 % 0.4 % 4.2 % 2.3 % 14.0 % Metro NY/NJ 2.5 % (0.1
)% 2.5 % 2.3 % 23.7 % Mid-Atlantic 2.3 % (0.1 )% 3.2 % 1.8 % 15.6 %
Pacific NW 5.7 % (0.2 )% 5.2 % 5.6 % 5.4 % No. California 1.5 % 0.4
% 1.0 % 2.1 % 20.5 % So. California 4.2 % (0.2 )% 0.9 % 5.2 % 20.8
% Total 2.7 % 0.1 % 2.5 % 3.0 % 100.0 %
(1) See full release for discussion of
variances.
(2) Represents each region's % of total
NOI for YTD 2017, including amounts related to communities that
have been sold or that are classified as held for sale.
Development Activity
During the three months ended June 30, 2017, the Company
completed the development of four communities:
- Avalon Esterra Park, located in
Redmond, WA;
- Avalon Quincy, located in Quincy,
MA;
- Avalon Princeton, located in Princeton,
NJ; and
- Avalon Hunt Valley, located in Hunt
Valley, MD.
These communities contain an aggregate of 1,489 apartment homes
and were constructed for an aggregate Total Capital Cost of
$400,000,000.
The Company started the construction of three communities:
- AVA Esterra Park, located in Redmond,
WA;
- Avalon at the Hingham Shipyard II,
located in Hingham, MA; and
- Avalon Piscataway, located in
Piscataway, NJ.
These three communities will contain a total of 873 apartment
homes when completed and will be developed for an aggregate
estimated Total Capital Cost of $244,300,000.
During the six months ended June 30, 2017, the Company completed
the development of seven communities, one of which is dual-branded,
containing an aggregate of 3,037 apartment homes, for an aggregate
Total Capital Cost of $1,048,800,000.
At June 30, 2017, the Company had 23 communities under
construction, which in the aggregate are expected to contain 6,965
apartment homes and be completed for an estimated Total Capital
Cost of $3,190,400,000, including the Company's share of
communities being developed through joint ventures.
The projected Total Capital Cost of development rights decreased
to $3.2 billion at June 30, 2017 from $3.4 billion at
March 31, 2017.
During the three months ended June 30, 2017, the Company
acquired two parcels of land for development for an aggregate
investment of $36,450,000. The Company anticipates starting
construction of apartment communities on this land during the next
six months.
Disposition Activity
Consolidated Apartment Communities
During the three months ended June 30, 2017, the Company sold
AVA University District, a wholly-owned operating community located
in Seattle, WA. AVA University District contains 283 apartment
homes and was sold for $112,500,000, resulting in a gain in
accordance with GAAP of $42,596,000 and an Economic Gain of
$35,159,000. AVA University District generated an Unleveraged IRR
of 15.8% over a weighted average investment period of 2.9
years.
During the six months ended June 30, 2017, the Company sold two
wholly-owned operating communities containing 733 apartment homes,
one of which included a golf course adjacent to the community.
These communities were sold for an aggregate sales price of
$252,500,000, resulting in an aggregate gain in accordance with
GAAP of $130,545,000, and an Economic Gain of $93,618,000. The two
communities yielded an Unleveraged IRR of 13.0% over a weighted
average investment period of 7.5 years.
Unconsolidated Real Estate Investments
During the six months ended June 30, 2017, AvalonBay Value Added
Fund II, L.P. ("Fund II"), a private discretionary real estate
investment vehicle in which the Company holds an equity interest of
approximately 31.3%, sold Eaves Gaithersburg containing 684
apartment homes for a sales price of $117,000,000, resulting in a
gain in accordance with GAAP for the Company of $8,697,000. In
addition, the Company recognized $6,765,000 in joint venture income
associated with its promoted interest in Fund II. In conjunction
with the disposition, Fund II repaid $63,200,000 of related secured
indebtedness at par in advance of the scheduled maturity date.
In July 2017, Fund II sold Briarwood Apartments containing 348
apartment homes for a sales price of $64,750,000. In conjunction
with the disposition, Fund II repaid $24,963,000 of related secured
indebtedness at par in advance of the scheduled maturity date.
Liquidity and Capital Markets
At June 30, 2017, the Company had $105,000,000 outstanding
under its $1,500,000,000 unsecured credit facility. In addition,
the Company had $293,153,000 in unrestricted cash and cash in
escrow, of which $112,890,000 related to proceeds from dispositions
held in escrow for planned tax deferred exchange activity.
The Company’s annualized Net Debt-to-Core EBITDA for the second
quarter of 2017 was 5.0 times.
During the three months ended June 30, 2017, the Company
borrowed the $250,000,000 available under the variable rate
unsecured term loan it entered into in February 2017, of which (i)
$100,000,000 matures in February 2022 with stated pricing of LIBOR
plus 0.90%; and (ii) $150,000,000 matures in February 2024 with
stated pricing of LIBOR plus 1.50%.
During the three months ended June 30, 2017, the Company issued
the following unsecured notes in public offerings under its
existing shelf registration statement.
- $400,000,000 principal amount of
unsecured notes were issued for net proceeds of $396,016,000. The
notes mature in May 2027 and were issued at a 3.35% coupon.
- $300,000,000 principal amount of
unsecured notes were issued for net proceeds of $297,372,000. The
notes mature in July 2047 and were issued at a 4.15% coupon.
During the three months ended June 30, 2017, the Company repaid
the following fixed rate secured indebtedness:
- $670,590,000 aggregate principal
amount, representing a majority of the Fannie Mae pool 2 secured
indebtedness assumed as part of the Archstone acquisition, which
was (i) secured by 11 wholly-owned operating communities, (ii) had
a contractual interest rate of 6.26% and an effective interest rate
of 3.36%, and (iii) had a contractual maturity date of November 1,
2017 but opened for prepayment at par on April 30, 2017. In
conjunction with the repayment, the Company recognized a gain of
$10,839,000 primarily composed of the write-off of unamortized
premium resulting from the debt assumed in the Archstone
acquisition. The Company refinanced the secured borrowings for
three of these communities for an aggregate principal amount of
$185,100,000, with a contractual interest rate of 3.61% and
maturity date of June 2027.
- $556,313,000 aggregate principal
amount, representing the remaining debt in the Company's Freddie
Mac cross-collateralized pool financing originated in 2009, which
(i) was secured by 12 wholly-owned operating communities, (ii) had
a contractual interest rate of 5.86% and a weighted average
effective interest rate of 6.00%, and (iii) a contractual maturity
date of May 1, 2019. In conjunction with the repayment, the Company
recognized a charge of $34,965,000, consisting of a yield
maintenance charge of $33,515,000 and a non-cash write-off of
deferred financing costs of $1,450,000.
Under the Company's continuous equity program, the Company sold
262,247 shares of common stock at a weighted average sales price of
$190.66 per share, for net proceeds of $49,250,000, during the
three months ended June 30, 2017. During the six months ended June
30, 2017, the Company sold 568,424 shares of common stock at a
weighted average sales price of $188.39 per share, for net proceeds
of $105,478,000.
Third Quarter and Updated Full Year 2017 Financial
Outlook
For its third quarter and full year 2017 financial outlook, the
Company expects the following:
Projected EPS, Projected FFO and Projected Core FFO
Outlook (1) Q3 2017 Full Year 2017
Low
High
Low
High
Projected EPS
$2.01
-
$2.07
$6.24 - $6.44 Projected FFO per share $2.25 - $2.31 $8.35 - $8.55
Projected Core FFO per share $2.14 - $2.20 $8.50 - $8.70
(1) See Definitions and Reconciliations of
this release for reconciliations of Projected FFO per share and
Projected Core FFO per share to Projected EPS.
The following table compares the Company's August 2017 outlook
for EPS, FFO per share and Core FFO per share for the full year
2017 to its February 2017 outlook:
August 2017 Full Year Outlook Comparison to
February 2017 Outlook
Per Share EPS FFO
Core FFO Projected per share - February 2017
outlook (1) $ 6.62 $ 8.79 $ 8.64 Established and Redevelopment
Community NOI
(0.03
)
(0.03
)
(0.02
) Development and other community NOI (0.07 ) (0.07 ) (0.05 )
Capital markets activity, including debt extinguishment losses
(0.16 ) (0.16 ) 0.04
General and administrative expense
(0.01
)
(0.01
)
(0.01
)
Joint venture income and management fees 0.01 0.01 — Business
interruption and property insurance proceeds, net of impairment
(0.08 ) (0.08 ) — Gain on sale of real estate and depreciation
expense 0.06 — —
Projected per share - August 2017 outlook (1) $ 6.34
$ 8.45 $ 8.60 (1) The
mid-point of the Company's outlook.
Further detail of the Company's full year 2017 outlook is
available in the full release.
Other Matters
The Company will hold a conference call on August 3, 2017 at
1:00 PM ET to review and answer questions about this release, its
second quarter 2017 results, the Attachments (described below) and
related matters. To participate on the call, dial 877-440-5807
domestically and 719-325-4761 internationally and use conference
id: 3994615.
To hear a replay of the call, which will be available from
August 3, 2017 at 6:00 PM ET to August 10, 2017 at 6:00 PM ET, dial
888-203-1112 domestically and 719-457-0820 internationally and use
conference id: 3994615. 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 August 3, 2017. These
supplemental materials will be available on the Company's website
for 30 days following the earnings call.
About AvalonBay Communities, Inc.
As of June 30, 2017, the Company owned or held a direct or
indirect ownership interest in 287 apartment communities containing
83,123 apartment homes in 10 states and the District of Columbia,
of which 23 communities were under development and nine 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 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, Senior
Director 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, and other economic 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; and the Company's
expectations and assumptions as of the date of this release
regarding potential uninsured loss amounts and on-going
investigations resulting from the casualty loss at Avalon at
Edgewater ("Edgewater") are subject to change and could materially
affect the Company's current expectations regarding the impact of
the casualty loss. 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, 2016 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 2017 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 and further explained on
Attachment 14, Definitions and Reconciliations of Non-GAAP
Financial Measures and Other Terms. Attachment 14 is included in
the full earnings release available at the Company’s website at
http://www.avalonbay.com/earnings.
This wire distribution includes only definitions and
reconciliations of the following non-GAAP financial measures:
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.
Economic Gain (Loss) is calculated
by the Company as the gain (loss) 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 (Loss) to
be an appropriate supplemental measure to gain (loss) 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 (Loss) for each
of the communities presented is based on their respective final
settlement statements. A reconciliation of Economic Gain (Loss) to
gain on sale in accordance with GAAP for the six months ended June
30, 2017 as well as prior years’ activities is presented in the
full release.
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.
Established Communities are
consolidated communities 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 2017 operating results, Established Communities are
consolidated communities that have Stabilized Operations as of
January 1, 2016, are not conducting or planning to conduct
substantial redevelopment activities and are not held for sale or
planned for disposition within the current year.
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 the Board of Governors of
the National Association of Real Estate Investment Trusts
(“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):
Q2 Q2 YTD YTD 2017 2016 2017 2016 Net
income attributable to common stockholders $ 165,225 $ 197,444 $
401,100 $ 435,377 Depreciation - real estate assets, including
joint venture adjustments 141,128 134,858 282,085 262,558
Distributions to noncontrolling interests 10 10 21 20 Gain on sale
of unconsolidated entities holding previously depreciated real
estate — (23,547 ) (8,697 ) (53,172 ) Gain on sale of previously
depreciated real estate (44,067 ) (30,990 ) (132,016 ) (82,420 )
Casualty and impairment (recovery) loss, net on real estate (1)(6)
— (4,195 ) — (4,195 ) FFO attributable to common
stockholders 262,296 273,580 542,493 558,168 Adjusting
items: Joint venture losses (2) 115 574 381 5,568 Joint venture
promote (3) — (3,447 ) (6,765 ) (3,447 ) Impairment loss on real
estate (4)(6) — 4,000 9,350 10,500 Casualty (gain) loss, net on
real estate (5)(6) — (1,537 ) 2,338 (10,239 ) Business interruption
insurance proceeds (7) — (10 ) — (20,344 ) Lost NOI from casualty
losses covered by business interruption insurance (8) 2,062 1,833
3,867 3,703 Loss on extinguishment of consolidated debt 24,162
2,461 24,162 2,461 Hedge ineffectiveness (753 ) — (753 ) —
Severance related costs 11 (24 ) 135 561 Development pursuit and
other write-offs 412 338 835 771 Gain on sale of other real estate
— (143 ) (366 ) (143 ) Acquisition costs — 829 — 1,929 Legal
settlements 84 — 84 — Core FFO
attributable to common stockholders $ 288,389 $ 278,454
$ 575,761 $ 549,488 Average shares
outstanding - diluted 138,173,151 137,437,733 137,853,625
137,410,387 Earnings per share - diluted $ 1.20 $
1.44 $ 2.91 $ 3.17 FFO per common share -
diluted $ 1.90 $ 1.99 $ 3.94 $ 4.06
Core FFO per common share - diluted $ 2.09 $ 2.03 $
4.18 $ 4.00 (1) In Q2 2016, the Company
received insurance proceeds, net of additional costs incurred, of
$5,732 related to the severe winter storms that occurred in the
Company’s Northeast markets in 2015. For Q2 and YTD 2016, the
Company recognized $4,195 of this recovery as an offset to the
impairment on depreciable real estate of $4,195 recognized in the
prior year period. The balance of the net insurance proceeds
received in 2016 of $1,537 is recognized as a casualty gain and is
included in the reconciliation of FFO to Core FFO. (2) Amounts for
2016 are primarily composed of the Company's portion of yield
maintenance charges incurred for the early repayment of debt
associated with joint venture disposition activity and the
write-off of asset management fee intangibles primarily associated
with the disposition of communities in the U.S. Fund. Amounts for
2017 are primarily composed of the Company's proportionate share of
operating results for joint ventures formed with Equity Residential
as part of the Archstone acquisition. (3) Amounts for 2017 and 2016
are composed of the Company's recognition of its promoted interest
in Fund II. (4) Amount for YTD 2017 includes an impairment charge
for a land parcel the Company had acquired for development and sold
in July 2017. Amounts for Q2 and YTD 2016 include impairment
charges relating to ancillary land parcels. (5) Amount for YTD 2017
includes $19,481 for the Maplewood casualty loss, partially offset
by $17,143 of expected property damage insurance proceeds, a
portion of which were received during the period. Amounts for Q2
and YTD 2016 includes $1,537 in insurance proceeds in excess of the
total recognized loss related to severe winter storms in the
Company's Northeast markets that occurred in 2015. Amount for YTD
2016 also includes $8,702 in property damage insurance proceeds for
the Edgewater casualty loss. (6) Aggregate impact of (i) Casualty
and impairment (recovery) loss, net on real estate, (ii) Impairment
loss on real estate and (iii) Casualty (gain) loss, net on real
estate, is a loss of $11,688 for YTD 2017, and gains of $1,732 and
$3,935 for Q2 and YTD 2016, respectively. (7) Amount for Q2 2016 is
primarily composed of business interruption insurance proceeds
resulting from the final insurance settlement of the Edgewater
casualty loss. (8) Amounts primarily relate to a casualty event at
Edgewater in Q1 2015, for which the Company received $20,306 in
business interruption insurance proceeds in Q1 2016. Amounts for
2017 also include $292 related to the Maplewood casualty loss in Q1
2017.
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 EBITDA 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. 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.
A reconciliation of Core EBITDA and a calculation of Interest
Coverage for the three months ended June 30, 2017 are as follows
(dollars in thousands):
Net income attributable to
common stockholders $ 165,225 Interest expense, net, inclusive of
loss on extinguishment of debt, net 74,264 Income tax expense 58
Depreciation expense 141,439 EBITDA $ 380,986
NOI from real estate assets sold or held for sale (1,038 ) Gain on
sale of communities (44,067 ) Gain on sale of other real estate —
Joint venture income (1,146 ) Consolidated EBITDA after disposition
activity $ 334,735 Lost NOI from casualty losses
covered by business interruption insurance 2,062 Severance related
costs 11 Development pursuit and other write-offs 412 Legal
settlements 84 Core EBITDA $
337,304
Interest expense, net $ 50,102 Interest
Coverage 6.7 times
Net Debt-to-Core EBITDA is
calculated by the Company as total debt that is consolidated for
financial reporting purposes, less consolidated cash and cash in
escrow, divided by annualized second quarter 2017 Core EBITDA, as
adjusted. For a calculation of Core EBITDA, see "Interest Coverage"
above. A calculation of Net Debt-to-Core EBITDA is as follows
(dollars in thousands):
Total debt principal (1)
$ 7,063,492 Cash and cash in
escrow (293,153 ) Net debt $ 6,770,339 Core EBITDA $
337,304
Core EBITDA, annualized $
1,349,216
Net Debt-to-Core EBITDA 5.0 times
(1) Balance at June 30, 2017 excludes
$9,716 of debt discount and $34,387 of deferred financing costs as
reflected inunsecured notes, net, and $16,156 of debt discount and
$11,474 of deferred financing costs as reflected in notespayable,
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,
investments and investment management expenses, expensed
acquisition, 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, depreciation expense, corporate income tax expense,
casualty and impairment (gain) loss, net, gain on sale of real
estate 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):
Q2 Q2 Q1 Q4 YTD YTD 2017
2016 2017 2016 2017 2016 Net income $ 165,194 $ 197,319 $ 235,781 $
242,183 $ 400,975 $ 435,197 Indirect operating expenses, net of
corporate income 16,423 15,477 16,297 14,443 32,720 32,015
Investments and investment management expense 1,455 1,194 1,321
1,277 2,776 2,340 Expensed acquisition, development and other
pursuit costs, net of recoveries 570 1,436 728 1,220 1,298 4,897
Interest expense, net 50,102 46,581 49,295 49,648 99,397 89,991
Loss on extinguishment of debt, net 24,162 2,461 — 4,614 24,162
2,461 General and administrative expense 14,005 12,047 13,226
10,638 27,231 23,487 Joint venture income (1,146 ) (27,151 )
(16,672 ) (10,184 ) (17,819 ) (55,120 ) Depreciation expense
141,439 132,469 140,621 140,020 282,060 259,685 Casualty and
impairment (gain) loss, net — (1,732 ) 11,688 — 11,688 (3,935 )
Gain on sale of real estate (44,067 ) (31,133 ) (88,315 ) (89,344 )
(132,382 ) (82,563 ) NOI from real estate assets sold or held for
sale (1,038 ) (9,345 ) (2,863 ) (4,317 ) (3,900 ) (19,321 ) NOI $
367,099 $ 339,623 $ 361,107 $ 360,198 $
728,206 $ 689,134 Established: New England $
37,658 $ 37,186 $ 37,816 $ 38,854 $ 75,474 $ 73,785 Metro NY/NJ
61,538 60,982 60,964 61,857 122,502 119,763 Mid-Atlantic 38,343
38,362 39,147 39,369 77,490 76,126 Pacific NW 15,017 14,182 14,815
14,674 29,832 28,262 No. California 64,587 63,142 63,717 64,237
128,304 125,637 So. California 59,808 57,370 60,551
59,570 120,359 114,362 Total
Established 276,951 271,224 277,010 278,561
553,961 537,935 Other Stabilized (1) 50,009
38,418 49,191 48,341 99,200 90,717 Development/Redevelopment 40,139
29,981 34,906 33,296 75,045
60,482 NOI $ 367,099 $ 339,623 $ 361,107
$ 360,198 $ 728,206 $ 689,134
(1) NOI for YTD 2016 Other Stabilized Communities includes $20,306
of business interruption insurance proceeds related to the
Edgewater casualty loss.
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):
Q2
Q2 YTD YTD 2017 2016 2017 2016 Revenue
from real estate assets sold or held for sale $ 1,664 $ 15,277 $
6,376 $ 31,188 Operating expenses from real estate assets sold or
held for sale (626 ) (5,932 ) (2,476 ) (11,867 ) NOI from real
estate assets sold or held for sale $ 1,038 $ 9,345 $
3,900 $ 19,321
Other Stabilized Communities are
completed consolidated communities that the Company owns, which
have Stabilized Operations as of January 1, 2017. Other
Stabilized Communities do not include communities that are
conducting or planning to conduct substantial redevelopment
activities.
Projected FFO and Projected Core
FFO, as provided within this release in the Company’s
outlook, are calculated on a basis consistent with historical FFO
and Core FFO, and are therefore considered to be appropriate
supplemental measures to projected Net Income from projected
operating performance. A reconciliation of the ranges provided
for Projected FFO per share (diluted) for the third quarter 2017 to
the ranges provided for projected EPS (diluted) and corresponding
reconciliation of the ranges for Projected FFO per share to the
ranges for Projected Core FFO per share are as follows:
Low
Range
High
Range
Projected EPS (diluted) - Q3 2017 $
2.01
$
2.07
Depreciation (real estate related)
1.03
1.07
Gain on sale of communities (0.79 ) (0.83 ) Projected FFO
per share (diluted) - Q3 2017 2.25 2.31
Joint venture promote and other income,
development pursuit and other write-offs
(0.13 ) (0.13 ) Lost NOI from casualty losses covered by business
interruption insurance 0.02 0.02 Projected
Core FFO per share (diluted) - Q3 2017 $ 2.14 $ 2.20
Projected EPS (diluted) - Full Year 2017 $ 6.24 $ 6.44
Depreciation (real estate related) 4.10 4.30 Gain on sale of
communities (1.99 ) (2.19 ) Projected FFO per share (diluted) -
Full Year 2017 8.35 8.55
Joint venture promote and other income,
development pursuit and other write-offs
(0.15 ) (0.15 ) Casualty and impairment loss, net on real estate
0.08 0.08 Lost NOI from casualty losses covered by business
interruption insurance 0.06 0.06 Hedge ineffectiveness (0.01 )
(0.01 ) Loss on extinguishment of consolidated debt 0.17
0.17 Projected Core FFO per share (diluted) - Full Year 2017
$ 8.50 $ 8.70
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 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 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.
Projected Stabilized Yield (also
expressed as “weighted average initial stabilized yield” or words
of similar meaning) means Projected NOI as a percentage of Total
Capital Cost.
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):
Q2 Q2 YTD YTD 2017 2016 2017 2016
Rental revenue (GAAP basis) $ 394,128 $ 384,441 $ 784,429 $ 762,836
Concessions amortized 466 577 945 1,508 Concessions granted (283 )
(328 ) (569 ) (579 ) Rental Revenue with Concessions on a
Cash Basis $ 394,311 $ 384,690 $ 784,805 $
763,765 % change -- GAAP revenue 2.5 % 2.8 % %
change -- cash revenue 2.5 % 2.8 %
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. 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 debt as of June 30, 2017
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 six months ended June 30, 2017 is as
follows (dollars in thousands):
Year to Date NOI NOI for
Established Communities $ 553,961 NOI for Other Stabilized
Communities 99,200 NOI for Development/Redevelopment Communities
75,045 NOI from real estate assets sold or held for sale 3,900
Total NOI generated by real estate assets 732,106 NOI on
encumbered assets 84,657 NOI on unencumbered assets $
647,449 Unencumbered NOI 88 %
Unleveraged IRR on sold communities
refers to the internal rate of return calculated by the Company
considering the timing and amounts of (i) total revenue during
the period owned by the Company and (ii) the gross sales price
net of selling costs, offset by (iii) the undepreciated
capital cost of the communities at the time of sale and
(iv) total direct operating expenses during the period owned
by the Company. Each of the items (i), (ii), (iii) and
(iv) is calculated in accordance with GAAP.
The calculation of Unleveraged IRR does not include an
adjustment for the Company’s general and administrative expense,
interest expense, or corporate-level property management and other
indirect operating expenses. Therefore, Unleveraged IRR is not a
substitute for Net Income as a measure of our performance.
Management believes that the Unleveraged IRR achieved during the
period a community is owned by the Company is useful because it is
one indication of the gross value created by the Company’s
acquisition, development or redevelopment, management and sale of a
community, before the impact of indirect expenses and Company
overhead. The Unleveraged IRR achieved on the communities as cited
in this release should not be viewed as an indication of the gross
value created with respect to other communities owned by the
Company, and the Company does not represent that it will achieve
similar Unleveraged IRRs upon the disposition of other communities.
The weighted average Unleveraged IRR for sold communities is
weighted based on all cash flows over the investment period for
each respective community, including net sales proceeds.
View source
version on businesswire.com: http://www.businesswire.com/news/home/20170802006464/en/
AvalonBay Communities, Inc.Jason Reilley, 703-317-4681Senior
Director of Investor Relations
Avalonbay Communities (NYSE:AVB)
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