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Important disclosures appear on the last page of this report.
The Henry Fund
Henry B. Tippie School of Management
Stuart Hemesath [[email protected]]
AvalonBay Communities, Inc. (AVB) November 18, 2015
Financial Services – Real Estate Investment Trusts (REITs) Stock Rating Buy
Investment Thesis Target Price $210
AvalonBay Communities is one of the largest apartment REITs in the US and is
concentrated in high growth coastal cities across the country. They own a high
quality portfolio which earn premium rates within the markets they operate
in. We recommend a buy and believe they are well positioned to maintain their
premium pricing and growth at high levels.
Drivers of Thesis
• Improving job markets and prolonged unemployment at low levels have
been catalysts for wage growth, driving the demand for high-end real
estate and maintaining premium rates at high occupancy levels.
• As an apartment REIT, the company benefits from having low lease
durations in comparison to other REIT alternatives. This allows them to
quickly adapt in a changing interest and leasing rate environment.
• The company has a robust pipeline of development starts, which we
believe exceeds $2 billion, that will fuel organic growth through 2018.
• Additionally, the company raised capital earlier this year to prefund
projects through 1Q2016 and take advantage of the low cost of capital in
anticipation of rate increases.
Risks to Thesis
• As a yield oriented investment, REITs will face pressure from investors in a
rising rate environment. Higher rates may also provide a catalyst for a
compression in real estate values, further impacting the company.
• The continued growth of REITs as an alternative asset class increases
competition for prime development opportunities, driven by a new wave
of investor cash flows.
Henry Fund DCF $212
Henry Fund DDM $210
Relative Multiple $182
Price Data
Current Price $175.16
52wk Range $156.10 – 186.89
Consensus 1yr Target $193
Key Statistics
Market Cap (B) $23.30
Shares Outstanding (M) 136.88
Institutional Ownership 99.3%
Five Year Beta 0.00
Dividend Yield 2.9%
Est. 5yr Growth 7.20%
Price/Earnings (TTM) 31.15
Price/Earnings (FY1) 20.76
Price/Book (mrq) 2.4
Price/FFO (TTM) 21.9
Profitability
Operating Margin 16.4%
Profit Margin 39.1%
Return on Assets (TTM) 2.1%
Return on Equity (TTM) 8.4%
Data Source: FactSet & Yahoo Finance
Earnings Estimates
Year 2012 2013 2014 2015E 2016E 2017E
EPS $4.34 $2.78 $5.22 $5.10 $4.83 $6.01
growth -12.21% -36.06% 87.80% -2.34% -5.13% 24.40%
12 Month Performance Company Description
AvalonBay Communities is a real estate
investment trust that develops, redevelops,
acquires, owns, and operates high-end multi-
family communities within the US, particularly in
the northeast, northwest, and California. The
company targets high wage growth cities and
often holds the highest rental rates within those
communities. As of year-end 2014, the company
owned over 250 communities and 74,000 units. -10%
-5%
0%
5%
10%
15%
20%
25%
30%
N D J F M A M J J A S O
AVB S&P 500
31.2
8.4
22.9
16.013.2
18.5
14.110.4
17.5
0
10
20
30
40
P/E ROE EV/EBITDA
AVB REITs Financials
Page 2
EXECUTIVE SUMMARY
Our recommendation for AvalonBay Communities is a buy
based on both strong economic and fundamental
outlooks. We foresee continued wage growth which will
drive demand for high-end real estate and maintain
premium pricing for the company. We believe AvalonBay
is well positioned as an apartment REIT and holds a distinct
advantage over retail and commercial REITs given its low
lease durations. Additionally, the company’s large pipeline
of development starts will drive continued growth for the
company which is seeing some of the highest growth rates
in recent history.
Our valuation models also support a buy recommendation.
Both our dividend discount and discounted cash flow
models advocate that the company is undervalued at its
current price range. Relative valuations, however, suggest
the company is overvalued. We believe this is due to the
broad set of REIT subcategories included in our peer group.
COMPANY DESCRIPTION
Real estate investment trusts, or REITs, were created in the
1960’s as a means for retail investors to own commercial
real estate. They are mandated to maintain a dividend
payout ratio of at least 90% and must have at least 75% of
their assets invested in real estate, cash, or treasuries and
must also derive at least 75% of their gross income from
real estate activities. There are three categories of REITs;
equity REITs, which invest directly in properties, mortgage
REITs, which invest in mortgages, and hybrids, which
invest in both.2
AvalonBay Communities is an equity REIT which develops,
acquires, owns, and operates multifamily residential
communities, primarily apartment complexes. The
company operates in metropolitan areas within the
northeastern and northwestern regions of the US as well
as metros within the Mid-Atlantic region and California. It
targets areas which have growing employment in high
wage sectors, lower house affordability, and high quality
of life metrics, stating these markets have the highest risk-
adjusted return on apartment communities.1
As of yearend 2014, the company operated over 250
apartment complexes in 11 states and Washington DC
consisting of over 74 thousand apartment units. There
were 26 additional complexes under construction, adding
another 8 thousand units, as well as 37 complexes with
rights to develop which contain 10 thousand units. These
properties are generally upscale within their community
and command the highest rental rates within their
perspective market. The company may pursue lower price
points based on the consumer segment in the area,
however, rates will still remain above average.1 This focus
on premium properties results in a high asset quality
balance sheet.
Regional Diversification
Source: Market Realist3
Data Source: AvalonBay Communities Annual Report1
Portfolio Branding
The company operates under three brands, Avalon, AVA
and Eaves by Avalon. Avalon is the company’s core offering
which focuses on upscale living and high end amenities.
AVA focuses on consumers who seek an urban
environment in close proximity to transportation,
entertainment, and services. These units tend to have a
33%
33%
18%
10%
6%
Revenue by Region
New York/New Jersey
Metro
California
Other Northeast
Mid-Atlantic
Pacific Northwest
Page 3
modern design with a tech focus. Lastly, the Eaves by
Avalon brand offers good quality of life, practical
amenities, and is often located in suburban settings at a
more modest price point.1 These brands allow the
company to target and market toward three distinct
consumer segments which can naturally vary based on the
metro area and offerings within each metro area.
AvalonBay Brand Targeting
Source: Market Realist3
Community Portfolio
While the company’s financial reports do not separate
brand, property types are broken out by the following four
categories:
Established Communities
Established communities include properties that have
either reached an occupancy rate of 95% or have been in
operation for at least one year following the
development/redevelopment stage. This group accounts
for the bulk of the company’s revenue and property type,
including 57% and 68%, respectively, as of yearend 2014.
Growth in these properties has been rapid over the past
two years as the company continues to take on debt to
establish new communities. Growth within the established
communities segment is a key driver for future revenue
expectations as each unit produced nearly $20,000 in
revenues last year. While we do not foresee a repeated
year of 48% growth, we do believe the next two years with
have growth rates exceeding 20% based on current
projects in the pipeline. Growth expectations following
that period return to single digits.
Established Community Forecasts
2014 2015E 2016E
Revenues 965.0 1406.2 1564.4
Properties 172 205 251
Units 49435 60805 74182
Growth 47.5% 23.0% 22.0%
Data Source: AvalonBay Communities Annual Report1
Other Stabilized Communities
This segment includes all other communities that have
reached a stable occupancy rate and do not have plans for
redevelopment in the current year. Many of these
properties are the result of acquisitions and will move into
the established communities group in the following year.
As of yearend 2014, these properties accounted for 20% of
the company’s portfolio. The average revenue per unit in
this group lagged the previous group generating roughly
$15,000 per unit. This could be due to occupancy rates,
which are not disclosed for this segment. Our forecast for
this segment is to see the total number of units, 17,737 as
of 2014, to steadily decline over the next few years as we
are not forecasting any additional acquisitions within our
investment horizon.
Data Source: AvalonBay Communities Annual Report1
Development/Redevelopment Communities
Properties included in these groups include properties
under construction, going through redevelopment, or
development has been recently completed but the
property has not met a stable occupancy. In the last year,
AvalonBay completed the development of 17 additional
communities at a cost of $1.1 billion, below the anticipated
cost of $1.3 billion. It is estimated that 2 of these
properties will generate $7.7 million in revenue in 2015 on
62%20%
10%8%
Property Portfolio by Community Type
Established
Communities
Other Stabilized
Development/
Redevelopment
Non-allocated
Page 4
their own.3 This group of properties is naturally low
revenue producing and accounted for 10% of the
company’s portfolio at yearend 2014. We expect growth
of 14% and 19% over the next two years, respectively,
before slowing as the company works through its pipeline
of new developments.
Data Source: AvalonBay Communities Annual Report1
Non-Allocated Communities
The remainder of the properties are included in the non-
allocated group and consist primarily of lease-up
communities, where construction has recently been
completed, and development rights communities, where
ground has been acquired but construction likely has not
begun. These properties accounted for 8% of the
company’s portfolio, or less than 20 communities in any
given year end, while producing less than 1% of the
company’s revenue.
Data Source: AvalonBay Communities Annual Report1
Revenues by Community Type
Revenues 2014 2015E 2016E
Established Communities 965.0 1406.2 1564.4
Other Stabilized 522.1 217.9 100.5
Development/Redevelopment 186.9 205.2 275.2
Non-allocated 11.1 23.1 38.8
Total Rental Income 1,685.1 1,854.8 1,978.9
Total Revenue Growth 15.2% 10.1% 6.7%
Data Source: AvalonBay Communities Annual Report1
RECENT DEVELOPMENTS
Recent developments have been favorable to AvalonBay,
which can be seen in their 1-year performance, up nearly
12% over a relatively flat S&P.
Third Quarter Earnings
AvalonBay released its 3Q15 earnings following market
hours on October 28th. While net operating income
increased 9.3% year-over-year, EPS fell by 16.4%. After
hours pricing fell nearly 2% but recovered most of those
losses the following day. Expectations were high as the
stock had already risen nearly 7% since the beginning of
October.
Guidance provided by the company included $1.3 billion in
additional developments external from the current
development portfolio over the next 12 months.
Additionally, capital has already been raised to fund this
growth. Over a longer horizon, the company sees $6 to $7
billion in its development pipeline. Year over year renewal
rates have increased roughly 6% but there is some concern
in maintaining that growth over the next year, particularly
in Seattle where tech wage increases have slowed.12 This
guidance continues to push our growth expectations to
come through units growth instead of increased renewal
rate growth.
Development Starts
Recent development starts have been very strong for
AvalonBay, exceeding $1 billion for 3 consecutive years.
The company is expecting to start on an additional $440
million in developments during 4Q15 which would end
2015 starts just above $1.1 billion. We estimate that this
0
2000
4000
6000
8000
10000
12000
2010 2011 2012 2013 2014
Development & Redevelopment Communities
Development Redevelopment
57%31%
11%1%
Revenues by Community Type
Established Communities
Other Stabilized
Development/Redevelopment
Non-allocated
Page 5
leaves an additional $2 billion in development starts in the
company’s portfolio over the next 3 years. While this
suggests a decline, development starts industry-wide are
following similar expectations. There is speculation that
AvalonBay may be taking on an additional project in New
York’s Upper Westside in early 2016 estimated at $300
million. If this occurs, the company will surpass our current
estimates.13
While we estimate that development starts will decline
over the next few years, the completions tell a different
story. Given the volume of starts since 2013, we will see a
growing peak of completions into 2017. Where the
company can exceed expectations is in minimizing
completion costs. We saw an example of this earlier this
year, as previously mentioned, when the completion of 17
communities came in $200 million under budget.
Data Source (Amended Estimates): ISI Evercore13
Archstone Enterprise Acquisition
While not entirely recent, AvalonBay, in partnership with
Equity Residential, acquired a 40% stake in Archstone
Enterprises in 2013, leaving the remaining 60% to the
latter company. AvalonBay’s stake was valued at $6.5
billion, their largest acquisition in the company’s history.
This acquisition added an additional 60 communities with
over 20,000 units as well as 5 communities under
construction. The communities acquired through this
acquisition were considered high quality, complementing
the company’s current holdings. The impacts from this
acquisition can be seen in the rapid growth of established
communities in 2014 as well as growth within the
development and non-allocated segments discussed
above, which will continue to work their way into the
established community portfolio.
INDUSTRY TRENDS
Rising Rent Rates and Home Values
When home values are high, renting becomes more
attractive or, in many cases, the only option. Both home
values and rental rates across major cities within the US
have far outpaced wage growth and inflation over the past
several years. This is particularly true in cities that have
already been historically high such as New York,
Washington DC, and Los Angeles; all three of which are
major cities of operation for AvalonBay. One driver for
these increasing rates is the improving job markets,
particularly for millennials, which now allows them to
enter the real estate market.9
Case-Shiller 20-City Composite Home Price Index
Source: Federal Reserve Bank of St. Louis – FRED10
Within the US, roughly 30% of median incomes is spent on
rent. This rate increases in larger cities, particularly on the
coasts, where AvalonBay is concentrated. This poses a
systemic issue within the US where rising rents make it
more difficult for those wanting to purchase a house to
save and make that home purchase. Property values,
including single family residences, continue to rise,
however, due to an increasing number of real estate
investors in an effort to capitalize on the current state of
high rental prices. This has resulted in a homeownership
rate of 63.4%, a 48 year low.
0
200
400
600
800
1000
1200
1400
2010 2011 2012 2013 2014 2015 2016 2017 2018
Development Pipeline 2005 - 2018E
Development Starts Development Starts Estimates
Page 6
Median Housing Costs as a Percentage of Median Income
Source: The Wall Street Journal9
It is unclear how this situation will play out over the long
run, but we believe demand and upward pricing pressure
will continue to be present over our investment horizon.
This increases our confidence that occupancy rates will
remain high, however, we have maintained similar rent
per unit ratios at 2015 levels as it is difficult to suggest the
growth rate within the highest rates in the most expensive
cities will persist at a strong level.
The Real Estate Cycle
The predictability of future cash flows associated with
REITs is one of the benefits to this asset class, when
compared to other sectors within the S&P. In the case of
AvalonBay, future revenue streams are reasonably
predictable given the nature of their operations. With their
consistent, long-term occupancy rate of 95%+ on their
established communities, future cash flows can be
forecasted based on the growth of total units and renewal
increases. Dividends are then derived from at least 90% of
the earnings for that year, as legally required. What’s
unknown is the future value of the underlying real estate
held by the REIT. Outside of the interest rate cycle, which
receives the most attention, we also have the real estate
cycle.
The real estate cycle is generally much longer than the
business cycle, which is primarily driven by economic data.
One reason for the longer duration of the cycle is the time
required to develop and construct properties and then find
occupants for the properties. It typically takes four years
to go from site planning to rent check within the industry.8
Looking at the Hoyt real estate market cycle, we believe
we are just entering phase two, the expansion period. We
saw phase 4, the recession, following the 2008-2009
financial crisis. We believe the years following were part of
the recovery stage, which is now ending as we enter the
expansion phase as evidenced by the recent conversations
happening within the Fed. We also see low vacancy, or
high occupancy, rates within the industry, especially with
AvalonBay which has managed vacancy rates over 95%.
For this reason, we believe there are still several more
years of growth before we see our next peak in real estate
prices.
Hoyt Real Estate Market Cycle
Source: Forbes8
M&A Activity
M&A activity over the past two years has remained steady
in the REIT industry with total public deals totaling $53.4
and $58.5 billion in 2014 and 2013, respectively. The
largest deal announced year to date was valued at nearly
$21 billion by Simon Property Group, the largest US REIT.
AvalonBay remains fairly large as an apartment REIT with
a market cap slightly above $23 billion. While it does not
appear to be a sensible takeover target, it could be the
leader on future acquisitions within the industry.
REIT M&A Transactions in 2014
*Data only includes companies listed in the S&P 1500 as buyer or seller
Source: S&P Capital IQ11
Page 7
MARKETS AND COMPETITION
Competition
Within the apartment REIT subsector, there is no one
major player that controls the industry. This is neither a
positive or negative as AvalonBay, along with Equity
Residential, are among the largest within this industry, but
still relatively small compared to other REIT giants in the
retail and commercial leasing space. AvalonBay’s niche
within the industry is high quality communities in “hot”
markets within the US. They are not alone in this
geographic targeting as peers Equity Residential (EQR) and
Essex Property Trust (ESS) have a similar geographic
strategy. Compared to other peers within this industry,
AvalonBay has a significant size advantage, with the
exception of EQR, and maintains some of the highest
rental rates within their respective community. While
natural market competition exists over prime real estate
and communities within the industry, AvalonBay and EQR
have shown a willingness to partner as demonstrated by
the 2013 acquisition mentioned previously.
Why Apartment REITs?
The REIT industry as a whole is going to face struggles over
a prolonged rising interest rate environment. To what
degree? This is still unclear and many other industries will
face similar difficulties. What separates apartment REITs is
their low lease duration which provides an ability to adapt
quickly in comparison to their retail and commercial
counterparts. A standard apartment lease duration lasts
12-18 months while a retail or commercial lease can last 7
to well over 10 years. This is a significant benefit to
apartment REITs as releasing apartments annually allows
them to better manage interest rate risk. It will also prove
beneficial if real estate prices and rental rates continue to
climb. A comparable industry would be P&C insurers to life
insurers where managing a short duration fixed income
portfolio has a much lower duration, and therefore lower
interest rate risk, than that of a typical mid to high duration
fixed income portfolio that a life insurer would manage.
Peer Comparisons
Market Div. Debt/ P/E P/
Company Cap (B) Yield Equity (ttm) Book
Tanger Factory Outlets 3.25 3.60% 48.7% 31.76 4.45
Equity Residential 26.34 3.12% 41.1% 29.24 2.45
Essex Property Trust 14.57 2.68% 83.7% 76.01 2.34
Simon Property Group 56.75 3.10% 38.9% 38.21 12.50
General Growth Props 22.58 2.89% 61.9% 17.28 2.74
Host Hotels & Resorts 13.08 4.51% 31.0% 18.60 1.82
Boston Properties Inc. 18.08 2.28% 55.6% 32.62 3.08
Vornado Realty Trust 17.15 2.84% 57.7% 19.26 3.13
CBRE Group, Inc. 11.09 - 22.5% 21.09 4.42
Average 20.32 3.13% 49.0% 26.01 3.05
AvalonBay Communities 23.81 3.60% 48.7% 31.15 2.41
Data Source: FactSet6 and Yahoo Finance7
Market Cap
While near average in comparison to this peer group,
AvalonBay is the second largest apartment REIT next to
Equity Residential. With a market cap of $23.8 billion,
AvalonBay and EQR are significantly larger that the next
largest apartment REIT, Essex Property with a market cap
of $14.6 billion. This size is an advantage at it allows the
company to spread management and maintenance
resources and expenses across its portfolio of over 300
communities. It also benefits the company if large
acquisition targets become attractive as we saw with the
Archstone acquisition in 2013.
Dividend Yield
At 3.6%, AvalonBay has a comparable dividend yield to its
peer group. Since the company’s first dividend payment in
1998, the company has maintained or increased its
quarterly dividend. This feat is particularly impressive
when considering the duress throughout the financial
crisis. We believe this longevity and consistency
demonstrates fiscal responsibility by the company’s
leadership. Their dividend yield does however outperform
the pair of apartment REITs included in the peer group.
Debt Leverage Ratio (D/E)
AvalonBay is again in line with its peers when assessing is
debt to equity, or leverage ratio. This is worth noting given
the increase in the company’s debt level over the past few
Page 8
years as it acquired debt through the 2013 acquisition and
has continued to take on debt recently to expand its
development efforts. Like most peers in this group, its debt
level has been partially offset by rising property values
since the financial crisis.
Price to Earnings (P/E) and Price to Book (P/B)
These two relative metrics, while widely used within the
financial sector, do not hold quite as strong when
assessing REIT valuations. Based on trailing P/E ratios
within this peer group, AvalonBay trades at nearly a 20%
premium. The premium is less when compared to Equity
Residential, but not comparable to outlier Essex Property
which represents an outlier following recent volatility.
Price to book is currently 2.41, below the peer average of
3.05 representing a discount of 26%. This puts them in
between both apartment REITs which currently trade at
comparable price to book ratios.
Funds from Operations (FFO) & Adjusted FFO (AFFO)
Ticker Company Price P/FFO P/AFFO
SKT Tanger Factory Outlets $32.47 14.8 16.4
EQR Equity Residential $72.36 22.3 25.0
ESS Essex Property Trust $220.66 20.7 22.7
SPG Simon Property Group $183.42 18.0 20.3
GGP General Growth Props $24.48 17.2 21.6
HST Host Hotels & Resorts $17.41 10.5 10.5
BXP Boston Properties Inc. $117.72 21.8 30.8
VNO Vornado Realty Trust $90.99 18.3 30.3
Average 18.0 22.2
AVB AvalonBay Communities $172.95 23.7 25.4
Data Source: FactSet6
The two key industry metrics for comparing REITs are
funds from operations (FFO) and adjusted funds from
operations (AFFO). FFO is calculated by adding
depreciation back to net income, removing any gains or
losses from the sales of any properties as well as the gains
or losses from sales on any unconsolidated partnerships
and joint ventures. AFFO goes a step further and adjusts
for capital expenditures, or expenses related to the
upkeep of managed properties. Accounting for the
additional cash outflow, AFFO is used as a better predictor
for a REITs ability to pay future dividends. These are
converted to relative multiples, similar to the P/E multiple,
by adding the company’s current trading price as the
numerator.
Looking at the same set of comparables, we can see that
AvalonBay trades at an FFO multiple premium of 32% and
AFFO premium of 14% to this sample set. This premium is
much lower when compared to the two apartment REITs
within this peer group. We believe this premium, along
with the other apartment REITs, is to be expected given
the low duration of their leases which allows them to be
more flexible and adaptable in a changing interest rate and
residential market environment. We will revisit FFO and
AFFO in our relative valuation discussion.
FFO Payout Ratio
The FFO payout ratio is similar to the standard payout
ratio, but uses FFO per share as a base instead of EPS.
While not included on the above chart, it is worth looking
at AvalonBay’s FFO payout in comparison to other
apartment REITs. At 64.0%, AvalonBay had the highest
payout ratio in this subsector in 2014 compared to smaller
peers UDR (63.0%), Essex Property Trust (62.2%), AIV
(60.7%) and closest comparable Equity Residential
(60.7%).
ECONOMIC OUTLOOK
REITs are largely driven by macroeconomic factors in the
marketplace including the interest rate environment and
the overall growth of the local economies they operate in.
Unemployment Rate
At 5.1%, unemployment is at its lowest level since early
2008. This drop, from 5.3% in July, reflects employment
conditions before the financial crisis. Rates of
unemployment at this level may be a concern for some
who believe we may run the risk of creating an overheating
economy if rates fell much below 5%, a mark often
considered to be full employment. October jobs data
released this month suggests the economy produced
270,000 new jobs in October, well above some of the
highest analyst’s expectations. Job creation at this rate will
keep unemployment low as well as drive increases in
hourly wages.4 Increased wages for professionals and
higher earners will continue to drive higher revenues for
Page 9
AvalonBay as this will in turn increase the demand, and
prices, for their high-end apartments.
We believe that unemployment will continue to remain at
a near 5% level over the next 6 months, but slowly increase
to 5.3% over the next two years, still a favorable level.
Wage growth has been relatively positive with the
employment cost index increasing 2.8% in the first quarter
of 2015 and recent jobs data should only increase that
rate. We also see consumer confidence levels neutral to
increasing over both the short and intermediate terms.
Source: USA Today4
A healthy economy has both positive and negative impacts
to AvalonBay as an apartment REIT. Wage growth and
consumer confidence levels are both favorable as the
company seeks in increase rental rates year over year for
those renewing. However, as the economy strengthens,
the likelihood that the Federal Reserve makes moves to
increase interest rates also increases which impacts
AvalonBay’s cost of capital for future projects.
Interest Rate Environment
With favorable unemployment and job creation data, the
debate to increase rates when the Fed meets in mid-
December has sharpened, especially after Janet Yellen
suggested a December rate hike was a “live possibility”
earlier this month.4 There are counterarguments,
however, suggesting the Fed should delay any rate hikes.
Some Fed officials have suggested that the decisions
should be more risk-adverse and delay an immediate rate
increase due to the recent market volatility both
domestically and globally. The Greek debt crisis and
growth disappointments in China we saw over the summer
has shown us the fragility of global markets and analysts
believe emerging markets, which have struggled in recent
years, are too sensitive to handle any global increases in
rates. This has prompted the IMF to raise concern about a
potential global crisis if the fed were to increase interest
rates during a time of uncertainty and volatility.
Regardless, the market has been on a prolonged bull run
which is believed to be fed by cheap money. The
immobility of the near zero rates have now created a
scenario where, we believe, markets will create an initial
overreaction to whatever decision is made by the Fed.
REITs, as well as other financial firms tied to interest rates,
will likewise see an overreaction in their stock prices which
could lead to a brief decline in AvalonBay’s value. Once the
Fed decides to raise the federal funds rate, the increase is
likely to be small, presumably a quarter point at most. Our
consensus is that the Fed will increase the Fed funds rate
by at least 0.25% in the next 6 months, starting with a .25%
hike in December or 1Q 2016, and continue to 1.0% over
the next two years. This will represent the first Fed funds
rate increase since 2006.
The Fed funds rate and accompanying monetary policy are
key drivers for domestic lending rates. The 10 year
treasury yield has remained relatively steady, currently at
2.33%, an increase from 12 month lows of 1.64% in
February but still short of 12 month highs of 2.50% in
June.5 Many REITs, including AvalonBay, are sensitive
toward higher rates as it will inherently increase the cost
of capital for future operations. In the case of AvalonBay,
the internal rate of return for future developments will be
directly impacted. However, given the company’s recent
growth and debt raising, we do not see a need for
additional debt raising in the immediate future. Likewise,
the company’s debt schedule is heavily weighted with
recent activity which will not pressure the company
financially over the near-term. We believe the company
can weather a slow and steady rising rate environment,
but if rates rise quickly we should expect to see a pullback
in value. Our consensus is to see the 10 year treasury rate
rise to 2.70% over the next 6 months and continue toward
3.45% over the next two years.
Page 10
US 10 Year Treasury Yield
Source: MarketWatch5
CATALYSTS FOR GROWTH
The company’s strong development starts in recent years,
as well as the estimated development starts within the
pipeline, will continue to drive organic growth over the
next 3 to 4 years. The company has also acquired options
on land that could result in new developments beyond our
forecasted growth, although primarily in suburban areas
rather than urban cores.
There are also key economic indicators favorable to the
company’s end consumers, specifically unemployment
and wage growth as discussed in the economic outlook.
Wage growth has been particularly strong within large,
coastal cities which the company has a significant
presence. The growth in wages has been long overdue and
we believe the continued rate of low unemployment will
continue to put pressure on future wage growth.
Lastly, real estate prices and rental rates continue to
remain strong, and growing, within major cities of
operation. Because of this, we do not see the current
rental rates declining throughout our investment horizon.
Additionally, the demand for renting, driven by millennials,
continues to increase. This helps maintain the company’s
high occupancy rates.
INVESTMENT POSITIVES
• The company is well diversified across numerous
major metropolis areas within the US, particularly
cities with high wage and rental rate growth.
Additionally, the company commands premium
pricing on its portfolio of high-end communities.
• AvalonBay, as an apartment REIT, benefits from
having low lease durations in comparison to other
commercial and retail REIT alternatives. This allows
them to more quickly adapt to a changing interest
and leasing rate environment.
• Continued wage growth and unemployment,
especially within major cities of operation, remains
very favorable. This drives the demand for high-end
real estate as maintains occupancy rates within the
company’s communities.
• The company raised additional capital beyond its
needs earlier this year to prefund development
projects throughout 2015 and into early 2016. This
move was made in an effort to capitalize on cheap
capital and we estimate the company has an
additional $600 million which has yet to be allocated.
• Since the company paid its first dividend in 1998, the
company has continued to maintain or grow its
dividend. This is particularly noteworthy while REITs
and other companies struggled to get through the
financial crises.
• At $280 million, the company has a relatively low
amount of maturities due through 2016. This relieves
the company of capital stress throughout this period
of high growth.
INVESTMENT NEGATIVES
• The growing potential of increased interest rates
continues to pressure REITs as future capital raising
becomes costlier and investors seek high yielding
investment options.
Page 11
• The emergence of REITs as an asset class continues to
gain steam for investors seeking real estate exposure.
This has resulted in increased competition for land in
prime development areas regardless of property
purpose. If this threat continues it could hamper
future growth expectations for the company.
• AvalonBay operates in some of the most competitive
real estate markets in the US and also prices rates at
a premium within these markets. Any oversaturation
within key markets, such as New York, Los Angeles,
and Washington DC, could put negative pricing
pressure on the company’s premium rates.
VALUATION
Based on our industry and company research, we looked
at several valuation models as well as relative
performance metrics.
Dividend Discount Model (DDM)
The dividend discount model is essential in REIT valuation
as dividends represent a substantial portion of the total
return a REIT delivers. Our valuation of future dividend
payments have 2015 and 2016 payouts increasing roughly
16% and 5%, respectively, before picking up to nearly 10%
as the company sees strong earnings from its completed
developments in 2017. At these dividend rates, the
company’s payout ratio will remain near 102% over our
investment horizon with a low of 98% in 2015 and a peak
of 109% in 2016. REITs are able to payout dividends in
excess of GAAP earnings due to the addback of
depreciation.
2014 2015E 2016E 2017E 2018E 2019E
Dividend $4.28 $5.00 $5.27 $5.77 $6.05 $6.41
Growth Rate 10.3% 16.8% 5.4% 9.6% 4.7% 6.1%
These payout expectations, accompanied with a
continuous growth expectation of 3%, derive a DDM value
of $210. This represents a premium of 21% beyond the
company’s current trading price. Adjustments to our cost
of equity and return on equity within reason of our current
values give us a range of $170 on the low end and $358 on
the high end. Further sensitivity analysis can be found in
the financial analysis following the report.
Relative Price to FFO & AFFO
Ticker Company Price P/FFO P/AFFO
SKT Tanger Factory Outlets $32.47 14.8 16.4
EQR Equity Residential $72.36 22.3 25.0
ESS Essex Property Trust $220.66 20.7 22.7
SPG Simon Property Group $183.42 18.0 20.3
GGP General Growth Props $24.48 17.2 21.6
HST Host Hotels & Resorts $17.41 10.5 10.5
BXP Boston Properties Inc. $117.72 21.8 30.8
VNO Vornado Realty Trust $90.99 18.3 30.3
Average 18.0 22.2
AVB AvalonBay Communities $172.95 23.7 25.4
Data Source: FactSet6
Implied Value:
Relative Price/FFO $130.73
Relative Price/AFFO $151.32
Blended Relative FFO/AFFO $144.45
As mentioned previously, Price to FFO and AFFO are the
industry standard when using multiples to derive relative
valuations. Using the same peer group from our
competitive analysis discussion, we can assess a relative
valuation using these key industry metrics to their peers.
The average FFO and AFFO, ttm, using these peers yields
industry multiples of 18.0 and 22.2, respectively. Applying
these multiples to AvalonBay’s current trading price we
see relative values of $131 using FFO and $151 using AFFO.
To derive a single valuation, we used a blend of the two
metrics, placing a two-thirds weight on AFFO. This yielded
an FFO/AFFO relative value of $144, a discount of 16% to
the company’s trading price. We believe the company
trades at higher FFO/AFFO multiples compared to this
peer group given its low lease duration which is a clear
advantage over several peers in this group, particularly the
retail and commercial REITs.
AvalonBay’s Recent FFO, AFFO, and EPS
Source: Market Realist3
Page 12
Equity Discounted Cash Flow (DCF) &
Economic Profit (EP) Models
While equity discounted cash flow (DCF) and economic
profit (EP) models can be useful when assessing a financial
institution, we believe they are less effective when valuing
REITs. One reason for this is that the industry is forecasting
payout expectations, either through dividends or share
repurchases, and less focused on the company’s actual
earnings. We are not, however, disregarding these
valuation results.
Our results from both of these traditional models resulted
in positive findings. Our equity DCF model derived a value
of $211, a 23% premium on its current trading price and
our equity EP model derived a value of $212, representing
a 22% premium. Both valuation methods align with our
buy recommendation. Our sensitivity analysis following
the report tested continuous growth rates, continuous
ROE, beta, cost of equity, and the impact of increasing
revenue estimates by varying percentages each year
throughout our horizon. The results, within an interval
adjustment, were found to be within range of our targeted
values.
Price to Earnings (P/E)
EPS EPS P/E P/E
Company Price 2015E 2016E 2015 2016
Tanger Factory Outlets $32.47 $2.19 $2.34 14.8 13.9
Equity Residential $72.36 $3.44 $3.73 21.0 19.4
Essex Property Trust $220.66 $9.68 $10.82 22.8 20.4
Simon Property Group $183.42 $10.07 $10.73 18.2 17.1
General Growth Props $24.48 $1.43 $1.58 17.1 15.5
Host Hotels & Resorts $17.41 $1.54 $1.71 11.3 10.2
Boston Properties Inc. $117.72 $5.42 $5.82 21.7 20.2
Vornado Realty Trust $90.99 $5.18 $5.21 17.6 17.5
CBRE Group, Inc. $31.79 $1.97 $2.28 16.1 13.9
Average 17.9 16.5
AvalonBay Communities $172.95 $5.10 $4.83 33.9 35.8
Data Source: FactSet6
Implied Value:
Relative P/E (EPS ’15): $90.99
Relative P/E (EPS ’16): $79.53
Blended Forward P/E: $85.26
While P/E ratios remain an equity valuation standard, this
metric is often avoided in REIT valuation. We used forward
P/E’s for our peer group with earnings estimates from
FactSet. Our relative valuation model did not yield positive
results, deriving values at roughly half the company’s
trading price. Given the REIT industry’s lack of use for this
metric, we did not include its results in our relative
valuation model, instead sticking with FFO and AFFO
metrics.
Asset Class Correlation
S&P 500 10 Year Note REIT Index
1 Year 0.536 -0.094 0.912
2 Year 0.451 -0.068 0.851
3 Year 0.444 -0.125 0.801
5 Year 0.585 0.112 0.846
Data Source: Bloomberg15
When adding REITs to a portfolio, we should also
understand its correlation, or lack thereof, to our
benchmark. The chart above shows AvalonBay’s
correlation to the S&P 500, 10 year T-note, and Vanguard’s
Total REIT Index using daily returns over the provided time
horizons. While naturally the strongest correlation in this
set is the REIT index, AvalonBay, as well as most REITs, has
an inverse correlation to interest rates. That is to say as
rates rise, we should observe a decline in the company’s
valuation, all else equal. We can also see how weak the
correlation has been to the S&P 500. The inverse
correlation to interest rates is much weaker than others in
its peer group, particularly Tanger Factory Outlets, our
current REIT holding which has a 2 year correlation to the
10 year T-note of -.665.
Summary
To derive a target price, we assed all valuation metrics and
emphasized those we felt best represented the industry
and how analysts would price REIT securities. With that,
our strongest valuation model was the DDM at a price of
$210. This valuation method also focuses on cash flows to
the end investor, a main focal point for REIT analysts. Our
relative valuation included our blended P/FFO, P/AFFO,
P/B and P/TB multiples, while removing P/E and P/E/G,
which did not produce consistent results within the peer
group and are not well regarded multiples within the
industry. Our relative valuation derived a price of $182,
representing only a 5% premium. Our second tier of
Page 13
valuations included our equity DCF and equity EP models.
While generally focused on earnings growth, these models
derived prices of $212 and $212, respectively, providing
premiums of roughly 22%. Assessing our valuation models
and the relevance to the company and industry, we
derived a price target of $210 for AvalonBay.
KEYS TO MONITOR
Systemically, the interest rate environment will play the
largest role in directing AvalonBay’s equity valuation.
While strong growth factors will foreseeably drive
AvalonBay to outperform within the sector, any event that
drives interest rates higher at a rapid pace will ultimately
lead this sector to underperform broader markets. Keys to
monitor include economic data driving Fed decisions (ie:
GDP, unemployment, wage growth, inflation) and
announcements directly or indirectly providing guidance
on future rate expectations.
Within the firm, the company’s growth through 2018 is
driven by the communities currently under development
and development starts over the next two years. We do
not see any setbacks in occupancy or declining lease rates,
so overall unit growth will remain essential to the
company’s outperformance.
REFERENCES
1. AvalonBay Communities, Inc. Annual Report (10-K),
EDGAR SEC, February 24, 2015
2. “Industry Overview: Real Estate Investment Trusts,”
S&P Capital IQ, July 2015
3. “AvalonBay Communities: Everything Investors Need to
Know,” Market Realist, October 2, 2015,
http://marketrealist.com/2015/10/investing-
avalonbay-communities-must-know-company-
overview/
4. “Digesting the Implications of Higher Rates,” BlackRock,
November 9, 2015,
http://www.blackrock.com/investing/insights/weekly-
commentary?c=eki&cmp=russk_em&chn=emc&cid=e
mc:russk_em:eki:eki
5. “U.S. 10 Year Treasury Note,” MarketWatch, November
11, 2015,
http://www.marketwatch.com/investing/bond/tmub
musd10y?countrycode=bx
6. FactSet
7. Yahoo Finance
8. “Predicting REIT Profits That Help You Sleep Well At
Night,” Forbes, August 31, 2015,
http://www.forbes.com/sites/bradthomas/2015/08/3
1/predicting-reit-profits-that-help-you-sleep-well-at-
night/2/
9. “Rising Rents Outpace Wages in Wide Swarth of the
US,” Wall Street Journal, July 28, 2015,
http://www.wsj.com/articles/rising-rents-outpace-
wages-in-wide-swaths-of-the-u-s-1438117026
10. Federal Reserve Bank of St. Louis, Economic Research,
FRED
11. “Industry Overview: Real Estate Investment Trusts,”
S&P Capital IQ, July 2015
12. “Transcript of AVB earnings conference call or
presentation,” Thompson Reuters StreetEvents,
October 27, 2015,
http://finance.yahoo.com/news/edited-transcript-
avb-earnings-conference-184539222.html
13. “AvalonBay Communities: 3Q15 Earnings Note,”
Evercore ISI, October 26, 2015
14. “AvalonBay Communities: Takeaways From Non-Deal
Roadshow,” Jeffries, October 5, 2015
15. Bloomberg
IMPORTANT DISCLAIMER
Henry Fund reports are created by student enrolled in the
Applied Securities Management (Henry Fund) program at
the University of Iowa’s Tippie School of Management.
These reports are intended to provide potential employers
and other interested parties an example of the analytical
skills, investment knowledge, and communication abilities
of Henry Fund students. Henry Fund analysts are not
registered investment advisors, brokers or officially
licensed financial professionals. The investment opinion
contained in this report does not represent an offer or
solicitation to buy or sell any of the aforementioned
securities. Unless otherwise noted, facts and figures
included in this report are from publicly available sources.
This report is not a complete compilation of data, and its
accuracy is not guaranteed. From time to time, the
University of Iowa, its faculty, staff, students, or the Henry
Fund may hold a financial interest in the companies
mentioned in this report.
AvalonBay Communities, Inc.
Key Assumptions of Valuation Model
Ticker Symbol AVB
Current Share Price $172.95
Current Model Date 11/18/2015
Fiscal Year End Dec. 31
Pre-Tax Cost of Debt 4.80%
Cost of Equity (CAPM) 5.02%
Beta 0.476
Risk-Free Rate 2.71%
Equity Risk Premium 4.85%
CV Growth 3.00%
CV ROE 9.08%
Current Dividend Yield 2.82%
Beta:
1y 2y 5y Average
Daily 0.661 0.561 0.775 0.666
Weekly 0.436 0.360 0.665 0.487
Monthly 0.041 0.172 0.617 0.277
Average 0.379 0.364 0.686 0.476
Average Units per Community Average Revenue per Unit
Established Communities 296.1 Established Communities $2,109
Other Stabilized 286.7 Other Stabilized $760
Development Communities 335.7 Development Communities $1,770
Lease-up/Redevelopment 264.3 Lease-up/Redevelopment $288
Weighted Average 292.7 Weighted Average $1,769
2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Forecast Assumptions
Number of Units
Established Communities 9.9% 2.8% 2.2% 6.0% 47.5% 23.0% 22.0% 14.0% 10.6% 7.9%
Other Stabilized 3.8% 19.2% -1.8% 86.4% -50.8% -19.0% -8.0% -4.0% -2.0% 3.0%
Development/Redevelopment - - 25.8% 49.0% 16.6% 14.0% 19.0% 13.0% 9.0% 4.0%
Lease-up/Redevelopment 0.1% -42.8% -31.1% 15.5% 83.6% 13.0% 15.0% -7.0% -4.0% 2.0%
Total Number of Units 6.9% 14.2% 1.5% 37.3% 1.2% 12.3% 16.4% 10.5% 8.4% 6.7%
Operating Expenses
Property Operating Expenses 0.3% 1.3% 5.1% 51.0% 5.3% 9.5% 6.0% 3.5% 5.5% 2.5%
General & Administrative -6.6% 9.4% 16.1% 16.0% 4.7% 11.6% 10.1% 8.6% 6.5% 5.8%
Depreciation & Amortization 8.9% 4.9% 1.9% 129.9% -21.0% -1.3% 3.6% 5.6% 6.8% 4.3%
Total Operating Expenses 3.0% 3.0% 4.4% 78.9% -7.5% 5.1% 5.2% 4.5% 6.0% 3.3%
Operating Income 2.0% 16.1% 11.7% -13.4% 100.4% 18.3% 9.3% 23.2% 4.4% 12.0%
Non-Operating Expenses
Interest Expense (% of ttl debt) 13.3% -1.5% -18.4% 25.9% 4.8% 4.2% 4.2% 4.2% 4.2% 4.2%
Loss (Gain) from Affiliates -47.1% 571.9% 585.7% -131.8% -1433.7% -104.0% -93.2% -235.4% -235.4% -372.2%
Sale Of Property -100.0% - -98.0% -14.3% 35489.6% -90.0% -67.4% -57.2% -40.9% -78.7%
Total Non-Operating Expenses 17.7% -3.9% -36.8% 127.5% -122.9% -464.3% 4.9% 5.1% 1.5% 1.8%
Balance Sheet
Assets
Net Real Estate Property
Gross Real Estate Property Grows with total number of units 12.3% 16.4% 10.5% 8.4% 6.7%
Accumulated Depreciation Accumulation of depreciation & amortization
Liabilities & Shareholders' Equity
Accounts Payable -29.2% 46.6% 3.0% 24.8% 4.8% 9.8% 13.1% 8.4% 6.7% 5.3%
Security Deposits -0.2% 7.1% 3.0% 20.4% 11.0% 9.8% 13.1% 8.4% 6.7% 5.3%
Secured/Unsecured Debt 0.0% -9.4% 7.0% 59.3% 6.4% 27.0% 20.0% 12.0% 8.0% 6.0%
Payout Ratio 173.2% 72.1% 82.2% 139.7% 82.0% 98.1% 109.0% 96.0% 102.0% 104.0%
Share Capital & APIC 12.3% 29.5% 52.3% 26.8% 4.1% 5.0% 3.7% 10.3% 6.4% 9.2%
AvalonBay Communities, Inc.
Revenue Decomposition (in millions)
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Revenue
Established Communities 725.4 673.2 965.0 1,406.2 1,564.4 1,783.4 1,873.9 2,021.9
Other Stabilized 135.2 343.1 522.1 217.9 100.5 96.4 94.5 97.4
Development/Redevelopment 129.8 117.9 186.9 205.2 275.2 311.0 339.0 352.6
Non-allocated 10.3 328.8 11.1 23.1 38.8 26.3 27.7 29.7
Total Rental Income 1,000.6 1,462.9 1,685.1 1,854.8 1,978.9 2,217.2 2,335.1 2,501.5
Total Revenue Growth 6.9% 46.2% 15.2% 10.1% 6.7% 12.0% 5.3% 7.1%
Number of Properties
Established Communities 103 115 172 205 251 286 316 341
Other Stabilized 70 119 56 50 46 44 43 45
Development Communities 23 29 26 39 46 52 57 59
Lease-up/Redevelopment 7 10 23 16 19 18 17 17
Total Number of Properties 203 273 277 311 362 400 433 462
1.5% 34.5% 1.5% 12.2% 16.4% 10.5% 8.4% 6.7%
Number of Units
Established Communities 31,625 33,519 49,435 60,805 74,182 84,568 93,532 100,921
Other Stabilized 19,349 36,067 17,737 14,367 13,218 12,689 12,435 12,808
Development/Redevelopment 6,599 9,834 11,462 13,067 15,549 17,571 19,152 19,918
Lease-up/Redevelopment 1,818 2,099 3,853 4,354 5,007 4,656 4,470 4,560
Total Number of Units 59,391 81,519 82,487 92,593 107,956 119,484 129,589 138,207
Total Units Growth 1.5% 37.3% 1.2% 12.3% 16.6% 10.7% 8.5% 6.6%
AvalonBay Communities, Inc.
Revenue Decomposition (in millions)
Fiscal Years Ending Dec. 31 1Q12 2Q12 3Q12 4Q12 2012 1Q13 2Q13 3Q13 4Q13 2013 1Q14 2Q14 3Q14 4Q14 2014 1Q15 2Q15
Revenue
Established Communities 179.6 188.6 189.1 203.6 725.4 205.8 325.0 214.9 390.9 673.2 235.1 329.8 336.0 437.9 965.0 341.9 346.6
Other Stabilized 30.3 31.6 34.5 37.2 135.2 80.9 43.5 142.8 0.0 343.1 132.3 44.9 43.9 0.0 522.1 52.3 54.2
Development/Redevelopment 33.7 29.6 35.3 17.7 129.8 23.2 24.6 142.8 3.3 117.9 29.6 31.7 44.3 2.8 186.9 42.8 50.5
Non-allocated 2.5 2.8 2.5 3.0 10.3 2.3 -14.8 3.0 0.0 328.8 3.1 7.3 6.4 0.0 11.1 5.3 6.2
Total Rental Income 246.0 252.4 261.3 261.6 1,000.6 312.1 378.2 503.6 394.2 1,462.9 400.1 413.8 430.5 440.7 1,685.1 442.3 457.5
Total Revenue Growth 6.9% 46.2% 15.2%
Number of Properties
Established Communities 102 104 104 103 103 116 117 117 115 115 133 177 177 172 172 181 180
Other Stabilized 65 62 66 70 70 121 117 119 119 119 104 56 53 56 56 58 61
Development Communities 20 21 22 23 23 25 27 28 29 29 31 32 29 26 26 25 30
Lease-up/Redevelopment 12 15 13 7 7 8 6 11 7 10 3 4 9 15 23 8 12
Total Number of Properties 199 202 205 203 203 270 267 275 270 273 271 269 268 269 277 272 283
1.5% 34.5% 1.5%
Number of Units
Established Communities 30,788 31,734 31,734 31,625 31,625 33,679 34,243 34,243 33,519 33,519 36,636 51,524 51,524 49,435 49,435 52,122 51,794
Other Stabilized 19,756 17,802 18,727 19,349 19,349 36,673 35,528 36,402 36,067 36,067 33,423 17,974 7,443 17,737 17,737 16,993 17,268
Development/Redevelopment 5,583 5,922 6,260 6,599 6,599 7,267 7,935 8,885 9,834 9,834 9,179 9,581 11,818 11,462 11,462 7,428 8,117
Lease-up/Redevelopment 2,771 3,608 3,026 1,818 1,818 3,125 1,545 3,239 2,099 2,099 888 1,175 2,514 3,853 3,853 2,329 3,008
Total Number of Units 58,898 59,066 59,747 59,391 59,391 80,744 79,251 82,769 81,519 81,519 80,126 80,254 73,299 82,487 82,487 78,872 80,187
Total Units Growth 1.5% 37.3% 1.2%
Fiscal Years Ending 1Q15 2Q15 3Q15 4Q15E 2015E 1Q16E 2Q16E 3Q16E 4Q16E 2016E 1Q17E 2Q17E 3Q17E 4Q17E 2017E 2018E 2019E
Revenue
Established Communities 341.9 346.6 355.5 362.3 1,406.2 350.9 380.9 433.6 399.1 1,564.4 400.0 434.3 494.3 454.9 1,783.4 1,873.9 2,021.9
Other Stabilized 52.3 54.2 55.2 56.1 217.9 22.5 24.5 27.8 25.6 100.5 21.6 23.5 26.7 24.6 96.4 94.5 97.4
Development/Redevelopment 42.8 50.5 59.1 52.9 205.2 61.7 67.0 76.3 70.2 275.2 69.8 75.7 86.2 79.3 311.0 339.0 352.6
Non-allocated 5.3 6.2 5.6 6.0 23.1 8.7 9.4 10.8 9.9 38.8 5.9 6.4 7.3 6.7 26.3 27.7 29.7
Total Rental Income 442.3 457.5 475.4 479.6 1,854.8 443.8 481.9 548.4 504.8 1,978.9 497.3 539.9 614.5 565.6 2,217.2 2,335.1 2,501.5
Total Revenue Growth 10.1% 6.7% 12.0% 5.3% 7.1%
Number of Properties
Established Communities 181 180 180 193 205 56 61 69 64 251 64 70 79 73 286 316 341
Other Stabilized 58 61 58 54 50 10 11 13 12 46 10 11 12 11 44 43 45
Development Communities 25 30 29 34 39 10 11 13 12 46 12 13 15 13 52 57 59
Lease-up/Redevelopment 8 12 15 16 16 4 5 5 5 19 4 4 5 4 18 17 17
Total Number of Properties 272 283 282 296 311 81 88 100 92 362 90 97 111 102 400 433 462
12.2% 16.4% 10.5% 8.4% 6.7%
Number of Units
Established Communities 52,122 51,794 51,794 60,805 60,805 64,149 67,494 70,838 74,182 74,182 76,779 79,375 81,971 84,568 84,568 93,532 100,921
Other Stabilized 16,993 17,268 8,999 14,367 14,367 14,080 13,792 13,505 13,218 13,218 13,085 12,953 12,821 12,689 12,689 12,435 12,808
Development/Redevelopment 7,428 8,117 11,911 13,067 13,067 13,687 14,308 14,929 15,549 15,549 16,055 16,560 17,065 17,571 17,571 19,152 19,918
Lease-up/Redevelopment 2,329 3,008 6,149 4,354 4,354 4,517 4,680 4,844 5,007 5,007 4,919 4,832 4,744 4,656 4,656 4,470 4,560
Total Number of Units 78,872 80,187 78,853 92,593 92,593 96,433 100,274 104,115 107,956 107,956 110,838 113,720 116,602 119,484 119,484 129,589 138,207
Total Units Growth 12.3% 16.6% 10.7% 8.5% 6.6%
AvalonBay Communities, Inc.
Income Statement (in millions)
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Revenue
Rental Income 990.4 1,451.4 1,674.0 1,829.4 1,940.1 2,190.9 2,307.4 2,471.8
Income from Real Estate Owned 10.3 11.5 11.1 23.1 38.8 26.3 27.7 29.7
Total Revenue 1,000.6 1,462.9 1,685.1 1,852.5 1,978.9 2,217.2 2,335.1 2,501.5
Operating Expenses
Property Operating Expenses 368.3 556.1 585.6 641.2 679.7 703.5 742.2 760.7
General & Administrative 34.1 39.6 41.4 46.2 50.9 55.3 58.8 62.3
Depreciation & Amortization 243.7 560.2 442.7 436.9 452.6 478.0 510.5 532.5
Total Operating Expenses 646.0 1,155.9 1,069.7 1,124.3 1,183.2 1,236.7 1,311.5 1,355.5
Operating Income 354.6 307.1 615.4 728.2 795.7 980.5 1,023.5 1,146.0
Non-Operating Expenses
Interest Expense 136.9 172.4 180.6 188.2 196.1 204.3 212.9 221.9
Loss (Gain) from Affiliates -35.1 11.2 -148.8 6.0 0.4 -0.6 0.7 -2.0
Sale Of Property -0.3 -0.2 -85.4 -8.5 -2.8 -1.2 -0.7 -0.1
Other Non-Op Loss (Income) 1.4 51.0 0.0 9.5 10.9 12.4 5.3 2.5
Total Non-Operating Expenses 103.0 234.3 -53.6 195.1 204.6 215.0 218.3 222.2
Pretax Income (Loss) 251.6 72.7 668.9 533.0 591.1 765.4 805.2 923.8
Abnormal Losses (Gains) 1.2 14.9 0.4 6.5 7.8 6.2 7.2 5.6
Adjusted Pretax Income (Loss) 250.4 57.8 668.5 526.5 583.3 759.3 798.1 918.2
Net Extraordinary Gains 173.1 294.9 38.2 173.1 116.2 159.1 156.3 128.6
Income (Loss) Before Minority Int. 423.6 352.8 706.7 699.6 699.5 918.4 954.4 1,046.8
Minority Interest -0.3 -0.4 13.8 2.3 3.0 3.7 4.5 5.5
Net Income 423.3 352.4 720.5 702.0 702.6 922.1 958.9 1,052.2
Funds from Operations (FFO)
Net Income 423.3 352.4 720.5 702.0 702.6 922.1 958.9 1,052.2
Depreciation and amortization 243.7 560.2 442.7 436.9 452.6 478.0 510.5 532.5
Minority interest and affiliates -35.4 10.8 -135.0 8.3 3.4 3.1 5.2 3.4
Other Adjustments -110.5 -280.6 -77.1 -155.0 -173.9 -159.4 -169.2 -146.9
Funds from Operations 521.0 642.8 951.0 992.2 984.8 1,243.8 1,305.4 1,441.2
Adjustments for AFFO 11.3 150.1 -61.0 21.3 25.6 29.5 33.1 9.7
Adj. Funds from Operations (AFFO) 532.3 792.9 890.1 1,013.5 1,010.4 1,273.3 1,338.6 1,450.9
Basic Weighted Avg Shares 97.42 126.86 130.59 137.8 145.3 153.3 161.8 170.7
Basic Earnigns Per Share (EPS) 4.34 2.78 5.22 5.10 4.83 6.01 5.93 6.17
Funds from Operations per Share (FFO) 5.35 5.07 7.28 7.20 6.78 8.11 8.07 8.44
Adj. Funds from Oper. per Share (AFFO) 5.46 6.25 6.82 7.36 6.95 8.30 8.27 8.50
Dividends Per Share 3.57 3.88 4.28 5.00 5.28 5.76 6.05 6.41
AvalonBay Communities, Inc.
Income Statement (in millions)
Fiscal Years Ending Dec. 31 1Q12 2Q12 3Q12 4Q12 2012 1Q13 2Q13 3Q13 4Q13 2013 1Q14 2Q14 3Q14 4Q14 2014 1Q15 2Q15
Revenue
Rental Income 243.5 249.7 258.8 259.2 990.4 299.1 375.3 386.2 390.9 1,451.4 397.0 411.1 428.0 437.9 1,674.0 439.8 454.5
Income from Real Estate Owned 2.5 2.8 2.5 2.4 10.3 2.3 2.9 3.0 3.3 11.5 3.1 2.7 2.5 2.8 11.1 2.6 2.9
Total Revenue 246.0 252.4 261.3 261.6 1,000.6 301.4 378.2 389.2 394.2 1,462.9 400.1 413.8 430.5 440.7 1,685.1 442.4 457.5
Operating Expenses
Property Operating Expenses 88.4 92.2 93.6 100.6 368.3 143.8 132.7 141.2 138.4 556.1 143.7 145.5 150.6 155.1 585.6 161.0 158.7
General & Administrative 9.7 8.3 8.4 7.7 34.1 10.0 11.3 9.9 8.3 39.6 9.2 10.2 11.3 10.7 41.4 10.6 11.6
Depreciation & Amortization 61.6 63.2 62.8 62.5 243.7 105.6 190.0 159.9 104.8 560.2 106.4 110.4 111.8 114.1 442.7 116.9 118.6
Total Operating Expenses 159.7 163.7 164.7 170.8 646.0 259.4 334.0 311.0 251.5 1,155.9 259.3 266.1 273.7 279.9 1,069.7 288.5 288.9
Operating Income 86.3 88.7 96.6 90.8 354.6 42.0 44.2 78.2 142.7 307.1 140.7 147.7 156.8 160.8 615.4 153.9 168.5
Non-Operating Expenses
Interest Expense 33.6 33.2 34.0 36.1 136.9 38.2 43.2 43.9 44.6 172.4 42.5 43.7 46.4 48.0 180.6 45.6 44.6
Loss (Gain) from Affiliates -2.2 -2.1 -19.7 -11.1 -35.1 18.6 0.7 -3.3 -5.1 11.2 -5.2 -7.7 -130.6 -5.2 -148.8
Sale Of Property 0.0 -0.3 0.0 0.0 -0.3 0.0 0.0 0.0 0.0 -0.2 0.0 -60.9 0.0 -24.5 -85.4
Other Non-Op Loss (Income) 0.0 0.0 0.0 1.4 1.4 0.0 0.0 53.5 0.0 51.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Total Non-Operating Expenses 31.5 30.8 14.2 26.5 103.0 56.7 43.9 94.2 39.5 234.3 37.3 -24.9 -84.2 18.3 -53.6 21.2
Pretax Income (Loss) 54.9 57.9 82.4 64.4 251.6 -14.8 0.3 -15.9 103.1 72.7 103.4 172.6 241.0 142.5 668.9 213.8 147.4
Abnormal Losses (Gains) 1.2 0.0 0.0 0.0 1.2 0.0 0.0 0.0 14.9 14.9 0.0 0.4 0.0 0.0 0.4 5.8
Adjusted Pretax Income (Loss) 53.7 57.9 82.4 64.4 250.4 -14.8 0.3 -15.9 88.2 57.8 103.4 172.2 241.0 142.5 668.5 208.1 172.3
Net Extraordinary Gains 3.9 98.9 4.3 58.0 173.1 90.2 35.8 5.1 163.9 294.9 38.2 0.0 0.0 0.0 38.2 38.8 42.2
Income (Loss) Before Minority Int. 57.6 156.8 86.7 122.4 423.6 75.5 36.1 -10.9 252.1 352.8 141.6 172.2 241.0 142.5 706.7 246.9 214.4
Minority Interest -0.1 -0.1 -0.1 0.0 -0.3 0.0 -0.1 -0.2 -0.1 -0.4 -0.1 14.1 -0.1 -0.1 13.8 0.5 0.6
Net Income 57.5 156.7 86.7 122.4 423.3 75.5 36.0 -11.1 252.0 352.4 141.5 186.3 240.9 142.4 720.5 247.4 215.0
Fiscal Years Ending 1Q15 2Q15 3Q15 4Q15E 2015E 1Q16 2Q16 3Q16 4Q16E 2016E 1Q15 2Q15 3Q15 4Q15E 2017E 2018E 2019E
Revenue
Rental Income 439.8 454.5 473.2 461.9 1,829.4 435.1 472.4 537.7 494.9 1,940.1 491.4 533.5 607.2 558.9 2,190.9 2,307.4 2,471.8
Income from Real Estate Owned 2.6 2.9 2.2 15.4 23.1 8.7 9.4 10.8 9.9 38.8 5.9 6.4 7.3 6.7 26.3 27.7 29.7
Total Revenue 442.4 457.5 475.4 477.3 1,852.5 443.8 481.9 548.4 504.8 1,978.9 497.3 539.9 614.5 565.6 2,217.2 2,335.1 2,501.5
Operating Expenses
Property Operating Expenses 161.0 158.7 169.5 152.0 641.2 152.4 165.5 188.4 173.4 679.7 157.8 171.3 195.0 179.4 703.5 742.2 760.7
General & Administrative 10.6 11.6 10.5 13.5 46.2 11.4 12.4 14.1 13.0 50.9 12.4 13.5 15.3 14.1 55.3 58.8 62.3
Depreciation & Amortization 116.9 118.6 120.2 81.2 436.9 101.5 110.2 125.4 115.5 452.6 107.2 116.4 132.5 121.9 478.0 510.5 532.5
Total Operating Expenses 288.5 288.9 300.1 246.8 1,124.3 265.4 288.1 327.9 301.8 1,183.2 277.4 301.2 342.8 315.5 1,236.7 1,311.5 1,355.5
Operating Income 153.9 168.5 175.2 230.5 728.2 178.5 193.8 220.5 203.0 795.7 219.9 238.7 271.7 250.1 980.5 1,023.5 1,146.0
Non-Operating Expenses
Interest Expense 45.6 44.6 43.2 54.8 188.2 44.0 47.8 54.3 50.0 196.1 45.8 49.8 56.6 52.1 204.3 212.9 221.9
Loss (Gain) from Affiliates -34.6 -13.8 -20.6 74.9 6.0 0.1 0.1 0.1 0.1 0.4 -0.1 -0.1 -0.2 -0.1 -0.6 0.7 -2.0
Sale Of Property -71.0 -9.6 -35.2 107.3 -8.5 -0.6 -0.7 -0.8 -0.7 -2.8 -0.3 -0.3 -0.3 -0.3 -1.2 -0.7 -0.1
Other Non-Op Loss (Income) 0.0 0.0 0.0 9.5 9.5 2.4 2.6 3.0 2.8 10.9 2.8 3.0 3.4 3.2 12.4 5.3 2.5
Total Non-Operating Expenses -60.0 21.2 -12.5 246.4 195.1 45.9 49.8 56.7 52.2 204.6 48.2 52.4 59.6 54.8 215.0 218.3 222.2
Pretax Income (Loss) 213.8 147.4 187.7 -15.9 533.0 132.6 143.9 163.8 150.8 591.1 171.7 186.4 212.1 195.3 765.4 805.2 923.8
Abnormal Losses (Gains) 5.8 -24.9 -18.3 43.9 6.5 1.7 1.9 2.2 2.0 7.8 1.4 1.5 1.7 1.6 6.2 7.2 5.6
Adjusted Pretax Income (Loss) 208.1 172.3 206.1 -59.8 526.5 130.8 142.0 161.7 148.8 583.3 170.3 184.9 210.4 193.7 759.3 798.1 918.2
Net Extraordinary Gains 38.8 42.2 48.0 44.2 173.1 26.1 28.3 32.2 29.6 116.2 35.7 38.7 44.1 40.6 159.1 156.3 128.6
Income (Loss) Before Minority Int. 246.9 214.4 254.1 -15.7 699.6 156.9 170.3 193.9 178.4 699.5 206.0 223.6 254.5 234.3 918.4 954.4 1,046.8
Minority Interest 0.5 0.6 0.6 0.6 2.3 0.7 0.7 0.8 0.8 3.0 0.8 0.9 1.0 0.9 3.7 4.5 5.5
Net Income 247.4 215.0 254.7 -15.1 702.0 157.6 171.1 194.7 179.2 702.6 206.8 224.5 255.5 235.2 922.1 958.9 1,052.2
AvalonBay Communities, Inc.
Balance Sheet (in millions)
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Assets
Real Estate Held for Sale 338.6 258.4 42.2 202.8 210.5 178.5 158.5 187.6
Real Estate Equity Interests 129.4 367.9 298.3 235.0 257.6 289.7 270.2 263.1
Net Real Estate Property
Gross Real Estate Property 9,621.8 16,481.6 17,784.8 19,963.7 23,241.1 25,676.7 27,821.3 29,675.7
Accumulated Depreciation -1,945.3 -2,455.8 -2,891.3 -3,328.1 -3,780.8 -4,258.8 -4,769.3 -5,301.8
Net Real Estate Property 7,676.5 14,025.8 14,893.6 16,635.5 19,460.3 21,417.9 23,052.0 24,373.9
Total Real Estate Investments 8,144.5 14,652.1 15,234.1 17,073.4 19,928.5 21,886.1 23,480.6 24,824.6
Cash & Near Cash Items 2,733.6 281.4 509.5 870.8 140.7 353.9 345.5 754.6
Other Assets 232.0 296.1 337.6 426.8 498.2 547.2 587.0 620.6
Restricted Assets 50.0 98.6 95.6 98.2 83.1 85.1 92.1 90.8
Total Assets 11,160.1 15,328.1 16,176.7 18,469.2 20,650.5 22,872.2 24,505.3 26,290.7
Liabilities & Shareholders' Equity
Accounts Payable 413.7 516.3 541.3 594.3 672.4 728.8 777.5 818.9
Security Deposits 37.0 44.6 49.5 54.4 61.5 66.6 71.1 74.9
Unsecured Debt 1,945.8 2,594.7 2,993.3 3,813.4 4,576.1 5,125.2 5,535.3 5,867.4
Secured Debt 1,905.2 3,539.6 3,532.6 4,486.4 5,383.7 6,029.7 6,512.1 6,902.8
Other Long-Term Liabilities 17.5 33.2 0.9 23.9 18.9 19.2 15.7 19.4
Total Liabilities 4,319.3 6,728.4 7,117.6 8,972.4 10,712.5 11,969.6 12,911.6 13,683.4
Minority Interest 3.6 3.6 12.8 9.3 7.3 7.3 8.0 8.9
Share Capital & APIC 7,087.6 8,990.0 9,356.0 9,823.8 10,187.3 11,236.6 11,955.7 13,055.6
Retained Earnings & Other Equity -250.3 -393.9 -309.6 -336.2 -256.6 -341.2 -370.1 -457.3
Total Equity 6,840.8 8,599.7 9,059.2 9,496.9 9,938.0 10,902.6 11,593.6 12,607.3
Total Liabilities & Equity 11,160.1 15,328.1 16,176.7 18,469.2 20,650.5 22,872.2 24,505.3 26,290.7
AvalonBay Communities, Inc.
Cash Flow Statement (in millions)
Fiscal Years Ending Dec. 31 2012 2013 2014
Cash From Operating Activities
Net Income 423.9 353.1 683.6
Depreciation & Amortization 256.0 575.4 456.6
Other Non-Cash Adjustments -139.3 -180.9 -257.1
Changes in Non-Cash Capital 0.2 -23.3 3.6
Cash From Operating Activities 540.8 724.3 886.6
Cash From Investing Activities
Disposal of Fixed Assets 274.0 919.7 297.5
Property Additions -911.1 -2,125.2 -1,288.8
Property Improvements -26.5 -26.6 -52.8
Change in Notes 0.0 0.0 21.7
Change in Real Estate Interest 6.6 -26.8 -5.7
Other Investing Activities 33.7 77.7 211.3
Cash from Investing Activities -623.4 -1,181.2 -816.8
Cash from Financing Activities
Dividends Paid -365.6 -526.1 -593.6
Preferred Dividends Other Distributions -0.3 -0.3 -0.3
Change in Unsecured Debt 319.0 650.0 400.0
Change in Secured Debt -110.0 -2,025.4 20.1
Increase in Capital Stocks 2,430.2 4.7 346.1
Decrease in Capital Stocks 0.0 -37.2 -6.3
Other Financing Activities -73.9 -61.1 -7.8
Cash from Financing Activities 2,199.3 -1,995.4 158.2
Net Changes in Cash 2,116.8 -2,452.3 228.1
AvalonBay Communities, Inc.
Cash Flow Statement (in millions)
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E
Cash Flows from Operating Activities
Net income (loss) 702.0 702.6 922.1 958.9 1,052.2
Increase (decrease) in Accounts Payable 53.1 78.1 56.4 48.7 41.5
Increase (decrease) in Security Deposits 4.9 7.1 5.2 4.5 3.8
Increase (decrease) in Accumulated Depreciation 436.9 452.6 478.0 510.5 532.5
Net cash provided by operating activities 1,196.7 1,488.5 1,753.9 1,522.5 1,630.0
Cash Flows from Investing Activities
(Increase) decrease in Gross Real Estate Property -1,743.1 -3,277.4 -1,704.9 -1,501.2 -1,390.8
(Increase) decrease in Real Estate Held for Sale -160.7 -7.7 32.0 20.0 -29.1
(Increase) decrease in Real Estate Equity Interests 63.3 -22.6 -32.1 19.5 7.0
(Increase) decrease in Minority Interest 3.5 2.0 -0.0 -0.7 -0.9
(Increase) decrease in Restricted Assets -2.6 15.0 -1.9 -7.0 1.3
(Increase) decrease in Other Assets/Liabilities -66.3 -76.4 -48.6 -43.4 -29.9
Net cash used for investing activities -1,905.8 -3,367.1 -1,755.5 -1,512.8 -1,442.4
Cash Flows from Financing Activities
Proceeds from issuing Long-Term Debt 2,128.8 1,992.0 1,434.2 1,338.6 1,156.5
Payment of Dividends -688.8 -767.2 -706.9 -684.6 -766.0
(Increase) decrease in Share Capital & APIC -467.8 -363.5 -1,049.3 -503.4 -769.9
Net cash provided by financing activities 1,070.4 948.4 -385.2 181.9 -378.4
Net increase (decrease) in cash 361.4 -730.1 213.2 -8.4 409.2
Cash, beginning of year 509.5 870.8 140.7 353.9 345.5
Cash, end of year 870.8 140.7 353.9 345.5 754.6
AvalonBay Communities, Inc.
Common Size Income Statement as a Percentage of Assets (in millions)
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Revenue
Rental Income 8.9% 2.0% 2.3% 2.1% 1.9% 6.3% 1.6% 1.6%
Income from REO 0.1% 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% 0.0%
Total Revenue 9.0% 2.0% 2.3% 2.1% 1.9% 6.4% 1.6% 1.6%
Operating Expenses
Property Operating Expenses 3.3% 0.9% 0.8% 0.8% 0.7% 2.4% 0.6% 0.6%
General & Administrative 0.3% 0.1% 0.1% 0.1% 0.0% 0.2% 0.0% 0.0%
Depreciation & Amortization 2.2% 0.7% 1.2% 0.9% 0.5% 2.4% 0.4% 0.4%
Total Operating Expenses 5.8% 1.7% 2.1% 1.7% 1.2% 5.1% 1.1% 1.0%
Operating Income 3.2% 0.3% 0.3% 0.4% 0.7% 1.3% 0.6% 0.6%
Non-Operating Expenses
Interest Expense 1.2% 0.2% 0.3% 0.2% 0.2% 0.8% 0.2% 0.2%
Loss (Gain) from Affiliates -0.3% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Sale Of Property 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -0.2%
Other Non-Op Loss (Income) 0.0% 0.0% 0.0% 0.3% 0.0% 0.2% 0.0% 0.0%
Total Non-Operating Expenses 0.9% 0.4% 0.3% 0.5% 0.2% 1.0% 0.2% -0.1%
Pretax Income (Loss) 2.3% -0.1% 0.0% -0.1% 0.5% 0.3% 0.4% 0.7%
Abnormal Losses (Gains) 0.0% 0.0% 0.0% 0.0% 0.1% 0.1% 0.0% 0.0%
Adjusted Pretax Income (Loss) 2.2% -0.1% 0.0% -0.1% 0.4% 0.3% 0.4% 0.7%
Net Extraordinary Gains 1.6% 0.6% 0.2% 0.0% 0.8% 1.3% 0.2% 0.0%
Income (Loss) Before Minority Int. 3.8% 0.5% 0.2% -0.1% 1.2% 1.5% 0.6% 0.7%
Minority Interest 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.1%
Net Income 3.8% 0.5% 0.2% -0.1% 1.2% 1.5% 0.6% 0.7%
Funds from Operations (FFO)
Net Income 3.8% 0.5% 0.2% -0.1% 1.2% 1.5% 0.6% 0.7%
Depreciation and amortization 2.2% 0.7% 1.2% 0.9% 0.5% 2.4% 0.4% 0.4%
Minority interest and affiliates -0.3% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Other Adjustments -1.0% -0.7% -0.2% 0.0% -0.8% -1.2% -0.1% -0.3%
Funds from Operations 4.7% 0.6% 1.2% 0.8% 0.9% 2.8% 0.9% 0.8%
Adjustments for AFFO 0.1% 0.5% 0.1% 0.3% 0.1% 0.7% 0.0% 0.0%
Adj. Funds from Operations (AFFO) 4.8% 1.1% 1.3% 1.1% 1.0% 3.5% 0.9% 0.8%
AvalonBay Communities, Inc.
Common Size Balance Sheet as a Percentage of Assets (in millions)
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Assets
Real Estate Held for Sale 3.03% 1.69% 0.26% 1.10% 1.02% 0.78% 0.65% 0.71%
Real Estate Equity Interests 1.16% 2.40% 1.84% 1.27% 1.25% 1.27% 1.10% 1.00%
Net Real Estate Property
Gross Real Estate Property 86.22% 107.53% 109.94% 108.09% 112.54% 112.26% 113.53% 112.88%
Accumulated Depreciation -17.43% -16.02% -17.87% -18.02% -18.31% -18.62% -19.46% -20.17%
Net Real Estate Property 68.79% 91.50% 92.07% 90.07% 94.24% 93.64% 94.07% 92.71%
Total Real Estate Investments 72.98% 95.59% 94.17% 92.44% 96.50% 95.69% 95.82% 94.42%
Cash & Near Cash Items 24.49% 1.84% 3.15% 4.72% 0.68% 1.55% 1.41% 2.87%
Other Assets 2.08% 1.93% 2.09% 2.31% 2.41% 2.39% 2.40% 2.36%
Restricted Assets 0.45% 0.64% 0.59% 0.53% 0.40% 0.37% 0.38% 0.35%
Total Assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Liabilities & Shareholders' Equity
Accounts Payable 3.71% 3.37% 3.35% 3.22% 3.26% 3.19% 3.17% 3.11%
Security Deposits 0.33% 0.29% 0.31% 0.29% 0.30% 0.29% 0.29% 0.28%
Unsecured Debt 17.44% 16.93% 18.50% 20.65% 22.16% 22.41% 22.59% 22.32%
Secured Debt 17.07% 23.09% 21.84% 24.29% 26.07% 26.36% 26.57% 26.26%
Other Long-Term Liabilities 0.16% 0.22% 0.01% 0.13% 0.09% 0.08% 0.06% 0.07%
Total Liabilities 38.70% 43.90% 44.00% 48.58% 51.88% 52.33% 52.69% 52.05%
Minority Interest 0.03% 0.02% 0.08% 0.05% 0.04% 0.03% 0.03% 0.03%
Share Capital & APIC 63.51% 58.65% 57.84% 53.19% 49.33% 49.13% 48.79% 49.66%
Retained Earnings & Other Equity -2.24% -2.57% -1.91% -1.82% -1.24% -1.49% -1.51% -1.74%
Total Equity 61.30% 56.10% 56.00% 51.42% 48.12% 47.67% 47.31% 47.95%
Total Liabilities & Equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
AvalonBay Communities, Inc.
Value Driver Estimation
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Net Income 423.3 352.4 720.5 702.0 702.6 922.1 958.9 1,052.2
Total Shareholder's Equity 6,840.8 8,599.7 9,059.2 9,496.9 9,938.0 10,902.6 11,593.6 12,607.3
Return on Equity (ROE) 9.62% 5.15% 8.38% 7.75% 7.40% 9.28% 8.79% 9.08%
Equity Economic Profit (EEP) 202.2 8.9 288.7 247.1 225.7 423.1 411.5 470.1
Free Cash Flow to Equity (FCFE) - Easy
Net income 423.3 352.4 720.5 702.0 702.6 922.1 958.9 1,052.2
Change in total assets 2,677.7 4,168.1 848.6 2,292.5 2,181.3 2,221.7 1,633.0 1,785.5
Change in total liabilities 238.8 2,409.1 389.1 1,854.8 1,740.2 1,257.0 942.1 771.8
Free Cash Flow to Equity -2,015.6 -1,406.5 261.0 264.3 261.4 -42.6 267.9 38.6
Free Cash Flow to Equity (FCFE) - Formal
Cash from operations
Net income 423.3 352.4 720.5 702.0 702.6 922.1 958.9 1,052.2
- Minority interest 0.6 0.6 0.6 2.3 3.0 3.7 4.5 5.5
Cash from operations 423.8 353.0 721.0 704.3 705.6 925.8 963.4 1,057.7
Sources of Cash
Increase in unsecured debt 316.6 648.9 398.6 820.2 762.7 549.1 410.0 332.1
+ Increase in secured debt -64.8 1,634.4 -7.1 953.8 897.3 646.0 482.4 390.7
+ Increase in accounts payable 12.2 102.6 25.0 53.1 78.1 56.4 48.7 41.5
+ Increase in security deposits 1.1 7.5 4.9 4.9 7.1 5.2 4.5 3.8
+ Increase in other liabilities -26.3 15.7 -32.3 22.9 -5.0 0.3 -3.5 3.7
Sources of Cash 238.8 2,409.1 389.1 1,854.8 1,740.2 1,257.0 942.1 771.8
Uses of Cash
Increase in net real estate property 423.6 6,349.3 867.7 1,742.0 2,824.8 1,957.6 1,634.1 1,322.0
+ Increase in real estate equity interest -15.2 238.5 -69.6 -63.3 22.6 32.1 -19.5 -7.0
+ Increase in real estate held for sale 166.5 -80.2 -216.2 160.7 7.7 -32.0 -20.0 29.1
+ Increase in cash and equivalents 2,116.8 -2,452.3 228.1 361.4 -730.1 213.2 -8.4 409.2
+ Increase in restricted assets -23.5 48.6 -2.9 2.6 -15.0 1.9 7.0 -1.3
+ Increase in other assets 9.5 64.1 41.4 89.3 71.4 48.9 39.9 33.6
Uses of cash 2,677.7 4,168.1 848.6 2,292.5 2,181.3 2,221.7 1,633.0 1,785.5
Free Cash Flow to Equity -2,015.1 -1,405.9 261.6 266.6 264.5 -38.9 272.4 44.0
AvalonBay Communities, Inc.
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
CV Growth 3.00%
CV ROE 9.08%
Cost of Equity 5.02%
Beta 0.476
Risk Free 2.71%
Equity Risk Premium 4.85%
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E
Equity DCF Model
Free Cash Flow to Equity 266.6 264.5 -38.9 272.4 44.0
Terminal Value 34,859.6
Discount Factor* 1.01 1.06 1.11 1.17 1.22
Discounted FCFE 265.1 250.3 -35.1 233.8
Discounted Terminal Value 28487.7
Equity DCF Value 29201.8
- ESOP 16.9
Net Value 29184.9
Shares Outstanding 137.8
Value per Share 211.84
Equity EP Model
Equity Economic Profit 247.1 225.7 423.1 411.5 470.1
Terminal Value 23,266.0
Discount Factor* 1.01 1.06 1.11 1.17 1.22
Discounted EEP 245.7 213.7 381.4 353.2
Discounted Terminal Value 19013.3
Equity EP Value 20207.2
+ Beg. TSE 9059.2
- ESOP 16.9
Net Value 29249.5
Shares Outstanding 137.8
Value per Share 212.31
*Discount factors include partial year adjustments
AvalonBay Communities, Inc.
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E
Key Assumptions
CV growth 3.00%
CV ROE 9.08%
Cost of Equity 5.02%
Beta 0.476
Risk Free 2.71%
Equity Risk Premium 4.85%
Future Cash Flows
Dividends Per Share 5.00 5.28 5.76 6.05
Forward P/E 34.49
Continuous Value 221.18
Discount Factor* 1.01 1.06 1.11 1.17 1.17
Discounted Dividends 4.97 5.00 5.19 5.19
Discounted Terminal Value 189.82
Present Value DDM 210.17
*Discount factors include partial year adjustments
AvalonBay Communities, Inc.
Relative Valuation Models
EPS EPS Est. 5yr
Ticker Company Price 2015E 2016E P/E '15 P/E '16 EPS gr. PEG 15 PEG 16 P/FFO P/AFFO P/TBV P/Book
SKT Tanger Factory Outlets $32.47 $2.19 $2.34 14.8 13.9 7.9 1.88 1.76 14.8 16.4 6.27 4.45
EQR Equity Residential $72.36 $3.44 $3.73 21.0 19.4 8.1 2.61 2.40 22.3 25.0 2.52 2.45
ESS Essex Property Trust, Inc. $220.66 $9.68 $10.82 22.8 20.4 8.7 2.64 2.36 20.7 22.7 2.34 2.34
SPG Simon Property Group Inc. $183.42 $10.07 $10.73 18.2 17.1 8.3 2.20 2.07 18.0 20.3 - -
GGP General Growth Properties $24.48 $1.43 $1.58 17.1 15.5 8.7 1.96 1.77 17.2 21.6 2.66 2.74
HST Host Hotels & Resorts, Inc. $17.41 $1.54 $1.71 11.3 10.2 5.7 1.98 1.79 10.5 10.5 1.81 1.82
BXP Boston Properties Inc. $117.72 $5.42 $5.82 21.7 20.2 6.7 3.23 3.01 21.8 30.8 3.23 3.08
VNO Vornado Realty Trust $90.99 $5.18 $5.21 17.6 17.5 4.3 4.13 4.11 18.3 30.3 3.42 3.13 CBG CBRE Group, Inc. $31.79 $1.97 $2.28 16.1 13.9 14.0 1.15 1.00 - - - 4.42
Average 17.9 16.5 2.42 2.25 18.0 22.20 3.18 3.05
AVB AvalonBay Communities, Inc. $172.95 $5.10 $4.83 33.9 35.8 3.9 8.73 9.21 23.7 25.37 2.41 2.41
Implied Value:
Relative P/E (EPS15) $ 90.99
Relative P/E (EPS16) 79.53$
Relative Price/FFO $ 130.73
Relative Price/AFFO $ 151.32
Relative Price/Tangible Book $ 228.25
Relative Price/Book 219.30
Relative Value $ 182.40
Relative FFO/AFFO Value $ 144.45
P/BV Source: Ycharts
P/TBV Source: GuruFocus
AvalonBay Communities, Inc.
Key Management Ratios
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Liquidity Ratios
Cash & Cash Equivalents 2,733.6 281.4 509.5 870.8 140.7 353.9 345.5 754.6
Current Liabilities 941.5 1,083.0 1,254.8 1,445.5 1,626.3 1,759.2 1,870.2 893.8
Cash Ratio 290.4% 26.0% 40.6% 60.2% 8.7% 20.1% 18.5% 84.4%
Activity or Asset-Management Ratios
Net Income 423.3 352.4 720.5 702.0 702.6 922.1 958.9 1,052.2
Average Total Assets 9,821.2 13,244.1 15,752.4 17,323.0 19,559.9 21,761.4 23,688.7 25,398.0
Return on Assets 4.3% 2.7% 4.6% 4.1% 3.6% 4.2% 4.0% 4.1%
Net Income 423.3 352.4 720.5 702.0 702.6 922.1 958.9 1,052.2
Beg. Shareholders Equity 4,401.9 6,840.8 8,599.7 9,059.2 9,496.9 9,938.0 10,902.6 11,593.6
Return on Equity 9.6% 5.2% 8.4% 7.7% 7.4% 9.3% 8.8% 9.1%
Financial Leverage Ratios
Total Debt 3,851.0 6,134.4 6,525.9 8,299.8 9,959.8 11,154.9 12,047.3 12,770.2
Total Assets 11,160.1 15,328.1 16,176.7 18,469.2 20,650.5 22,872.2 24,505.3 26,290.7
Debt Ratio 34.5% 40.0% 40.3% 44.9% 48.2% 48.8% 49.2% 48.6%
Total Liabilities 4,319.3 6,728.4 7,117.6 8,972.4 10,712.5 11,969.6 12,911.6 13,683.4
Shareholders' Equity 6,840.8 8,599.7 9,059.2 9,496.9 9,938.0 10,902.6 11,593.6 12,607.3
Debt-to-Equity Ratio 0.63 0.78 0.79 0.94 1.08 1.10 1.11 1.09
Long-Term Debt 3,543.0 5,643.6 6,003.8 7,635.8 9,163.0 10,262.6 11,083.6 11,748.6
Long-Term Debt & TSE 10,383.7 14,243.3 15,063.0 17,132.7 19,101.0 21,165.2 22,677.2 24,355.9
Capitalization Ratio 34.1% 39.6% 39.9% 44.6% 48.0% 48.5% 48.9% 48.2%
Profitability Ratios
Price (appreciated at CV growth) 34.35 32.02 36.96 38.07 39.21 40.39 41.60 42.85
Funds from Operations/Share 5.35 5.07 7.28 7.20 6.78 8.11 8.07 8.44
Price/FFO 6.4 6.3 5.1 5.3 5.8 5.0 5.2 5.1
Payout Policy Ratios
Dividends per Share 3.57 3.88 4.28 5.00 5.28 5.76 6.05 6.41
Earnings per Share 4.34 2.78 5.22 5.10 4.83 6.01 5.93 6.17
Dividend Payout Ratio 82.2% 139.7% 82.0% 98.1% 109.2% 95.8% 102.0% 104.0%
Dividends per Share 3.57 3.88 4.28 5.00 5.28 5.76 6.05 6.41
Earnings per Share 4.34 2.78 5.22 5.10 4.83 6.01 5.93 6.17
Retention Ratio 17.8% -39.7% 18.0% 1.9% -9.2% 4.2% -2.0% -4.0%
DuPont Analysis
Net Income 423.3 352.4 720.5 702.0 702.6 922.1 958.9 1,052.2
Gross Revenue 1,000.6 1,462.9 1,685.1 1,852.5 1,978.9 2,217.2 2,335.1 2,501.5
Profit Margin 42.3% 24.1% 42.8% 37.9% 35.5% 41.6% 41.1% 42.1%
Gross Revenue 1,000.6 1,462.9 1,685.1 1,852.5 1,978.9 2,217.2 2,335.1 2,501.5
Total Assets 11,160.1 15,328.1 16,176.7 18,469.2 20,650.5 22,872.2 24,505.3 26,290.7
Total Asset Turnover 9.0% 9.5% 10.4% 10.0% 9.6% 9.7% 9.5% 9.5%
Total Assets 11,160.1 15,328.1 16,176.7 18,469.2 20,650.5 22,872.2 24,505.3 26,290.7
Shareholders Equity 6,840.8 8,599.7 9,059.2 9,496.9 9,938.0 10,902.6 11,593.6 12,607.3
Equity Multiplier 1.63 1.78 1.79 1.94 2.08 2.10 2.11 2.09
Profit Margin 42.3% 24.1% 42.8% 37.9% 35.5% 41.6% 41.1% 42.1%
x Total Asset Turnover 9.0% 9.5% 10.4% 10.0% 9.6% 9.7% 9.5% 9.5%
x Equity Multiplier 1.63 1.78 1.79 1.94 2.08 2.10 2.11 2.09
Return on Equity (alternative) 6.19% 4.10% 7.95% 7.39% 7.07% 8.46% 8.27% 8.35%
Tanger Factory Outlet Centers
Sensitivity and Scenario Analysis
CV Growth Rate
Impact on Equity DCF Value 211.84$ 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5%
0.350 188.67 212.17 247.98 309.23 437.97 882.66 -3480.09
0.400 172.91 191.41 218.52 262.05 343.43 550.01 2133.84
0.450 159.42 174.15 195.05 226.98 281.84 398.17 810.88
Beta 0.476 153.15 166.28 184.63 212.08 257.59 347.79 611.93
0.500 147.74 159.58 175.91 199.89 238.54 311.24 498.42
0.550 137.54 147.12 160.02 178.35 206.45 254.94 358.69
0.600 128.55 136.33 146.61 160.81 181.71 215.51 279.49
CV Return on Equity
Impact on Dividend Discount Model 210.17$ 15.0% 17.0% 19.0% 9.1% 21.0% 23.0% 25.0%
3.50% 1117.84 1150.11 1175.58 939.04 1196.20 1213.23 1227.54
4.00% 514.01 528.52 539.97 433.60 549.25 556.91 563.34
4.50% 335.39 344.65 351.96 284.07 357.88 362.77 366.88
Cost of Equity 5.02% 247.18 253.85 259.12 210.21 263.39 266.91 269.87
5.50% 199.55 204.82 208.99 170.32 212.36 215.14 217.48
6.00% 166.51 170.81 174.21 142.63 176.97 179.24 181.15
6.50% 143.12 146.74 149.60 123.03 151.92 153.83 155.44
Average Revenue per Unit (Established Communities)
Impact on Equity EP Value 211.84$ 1.0% 1.5% 2.0% 2.1% 2.5% 3.0% 3.5%
14.0% -133.09 3.90 140.89 170.72 277.87 414.86 551.85
17.0% -127.38 13.22 153.81 184.43 294.40 434.99 575.59
20.0% -121.66 22.53 166.73 198.14 310.93 455.12 599.32
2015 Established Communities 23.0% -115.95 31.85 179.65 211.84 327.45 475.26 623.06
Growth Rate 26.0% -110.24 41.17 192.57 225.55 343.98 495.39 646.79
29.0% -104.53 50.48 205.50 239.26 360.51 515.52 670.53
32.0% -98.82 59.80 218.42 252.96 377.03 535.65 694.27
Risk Free Rate
Impact on Equity EP Value 212.31$ 0.02 0.02 0.03 0.03 0.03 0.03 0.03
3.35% 638.13 493.06 400.96 334.63 290.69 255.07 226.99
3.85% 472.41 387.06 327.32 281.26 249.21 222.29 200.42
4.35% 374.07 317.89 276.01 242.17 217.77 196.70 179.20
Equity Risk Premium 4.85% 308.97 269.19 238.22 212.31 193.11 176.19 161.86
5.35% 262.70 233.07 209.23 188.76 173.27 159.37 147.43
5.85% 228.12 205.20 186.30 169.72 156.95 145.34 135.23
6.35% 201.32 183.06 167.70 154.00 143.30 133.45 124.79
Weight of DDM
Impact on Target Price 205.57$ 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%
5.00% 185.37 188.14 190.92 193.70 196.48 199.25 202.03
10.00% 188.33 191.11 193.89 196.67 199.44 202.22 205.00
15.00% 191.30 194.08 196.86 199.63 202.41 205.19 207.97
Weight of Equity EP and DCF 20.00% 194.27 197.05 199.82 202.60 205.38 208.16 210.93
25.00% 197.24 200.01 202.79 205.57 208.35 211.12 -
30.00% 200.20 202.98 205.76 208.54 211.31 - -
35.00% 203.17 205.95 208.73 211.50 - - -