Bulletin
Investor Alert

Aug. 3, 2022, 3:36 p.m. EDT

10-Q: AVALONBAY COMMUNITIES INC

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

or Cancel Already have a watchlist? Log In

(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help provide an understanding of our business, financial condition and results of operations. This MD&A should be read in conjunction with our Condensed Consolidated Financial Statements and the accompanying Notes to Condensed Consolidated Financial Statements included elsewhere in this report. This report, including the following MD&A, contains forward-looking statements regarding future events or trends that should be read in conjunction with the factors described under "Forward-Looking Statements" included in this report. Actual results or developments could differ materially from those projected in such statements as a result of the factors described under "Forward-Looking Statements" as well as the risk factors described in Part I, Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2021 (the "Form 10-K") and in Part II, Item 1A. "Risk Factors" in this report.

Capitalized terms used without definition have the meanings provided elsewhere in this Form 10-Q.

Executive Overview

Business Description

We develop, redevelop, acquire, own and operate multifamily apartment communities in New England, the New York/New Jersey metro area, the Mid-Atlantic, the Pacific Northwest, and Northern and Southern California, as well as in our expansion markets of Raleigh-Durham and Charlotte, North Carolina, Southeast Florida, Dallas and Austin, Texas, and Denver, Colorado. We focus on leading metropolitan areas that we believe historically have been characterized by growing employment in high wage sectors of the economy, higher home ownership cost and a diverse and vibrant quality of life. We believe these market characteristics have offered and will continue to offer the opportunity for superior long-term risk-adjusted returns on apartment community investments relative to other markets that do not have these characteristics. We seek to create long-term shareholder value by accessing cost effective capital; deploying that capital to develop, redevelop and acquire apartment communities in our markets; leveraging our scale and competencies in technology and data science to operate apartment communities; and selling communities when they no longer meet our long-term investment strategy or when pricing is attractive.

Our strategic vision is to be the leading apartment company in select U.S. markets, providing a range of distinctive living experiences that customers value. We pursue this vision by targeting what we believe are among the best markets and submarkets, leveraging our strategic capabilities in market research and consumer insight with disciplined capital allocation and balance sheet management. Our communities are predominately upscale and generally command among the highest rents in their markets. However, we also pursue the ownership and operation of apartment communities that target a variety of customer segments and price points, consistent with our goal of offering a broad range of products and services. We regularly evaluate the market allocation of our investments by current market value and share of total revenue and NOI, as well as relative asset value and submarket positioning.

Second Quarter 2022 Operating Highlights

Net income attributable to common stockholders for the three months ended June 30, 2022 was $138,691,000, a decrease of $309,262,000, or 69.0%, from the prior year period. The decrease is primarily due to decreases in real estate sales and related gains, partially offset by an increase in NOI from communities, over the prior year period.

Same Store NOI attributable to our apartment rental operations, including parking and other ancillary residential revenue ("Residential"), for the three months ended June 30, 2022 was $391,626,000, an increase of $56,763,000, or 17.0%, over the prior year period. The increase over the prior year period was due to an increase in Residential rental revenues of $64,397,000, or 12.9%, partially offset by an increase in Residential property operating expenses of $7,760,000, or 4.8%.

Table of Contents

The impact on our consolidated results of operations from the Pandemic for future periods will depend, among other factors, on (i) the effect of the Pandemic on the multifamily industry and the general economy, including from measures taken by businesses and the government, such as governmental limitations on the ability of multifamily owners to evict residents who are delinquent in the payment of their rent, and (ii) the preferences of consumers and businesses for living and working arrangements both during and after the Pandemic.

Second Quarter 2022 Development Highlights

At June 30, 2022, we owned or held a direct or indirect interest in:

16 wholly-owned communities under construction, which are expected to contain 4,919 apartment homes with a projected total capitalized cost of $2,069,000,000, and one unconsolidated community under construction, which is expected to contain 475 apartment homes with a projected total capitalized cost of $276,000,000.

Land or rights to land on which we expect to develop an additional 32 apartment communities that, if developed as expected, will contain 10,913 apartment homes and will be developed for an aggregate projected total capitalized cost of $4,717,000,000.

Second Quarter 2022 Real Estate Transaction Highlights

During the three months ended June 30, 2022, we sold 13 residential condominiums at The Park Loggia for gross proceeds of $41,002,000, resulting in a gain in accordance with GAAP of $467,000.

During the three months ended June 30, 2022, we acquired Waterford Court, located in Addison, TX, which contains 196 apartment homes for a purchase price of $69,500,000.

In addition, in July 2022 we had the following activity:

We sold Avalon Green I, Avalon Green II and Avalon Green III, three wholly-owned communities, located in Elmsford, NY. These communities contain an aggregate of 617 apartment homes and were sold for $306,000,000; and

We acquired Avalon Miramar Park Place, located in Miramar, FL, which contains 650 apartment homes for a purchase price of $295,000,000.

Communities Overview

Our real estate investments consist primarily of current operating apartment communities ("Current Communities"), consolidated and unconsolidated communities in various stages of development ("Development" communities and "Unconsolidated Development" communities) and Development Rights (as defined below). Our Current Communities are further classified as Same Store communities, Other Stabilized communities, Lease-Up communities, Redevelopment communities and Unconsolidated communities. While we generally establish the classification of communities on an annual basis, we update the classification of communities during the calendar year to the extent that our plans with regard to the disposition or redevelopment of a community change. The following is a description of each category:

Current Communities are categorized as Same Store, Other Stabilized, Lease-Up, Redevelopment, or Unconsolidated according to the following attributes:

Same Store is composed of 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 occupancy as of the beginning of the respective prior year period. For the six month periods ended June 30, 2022 and 2021, Same Store communities are consolidated for financial reporting purposes, had stabilized occupancy as of January 1, 2021, are not conducting or are not probable to conduct substantial redevelopment activities and are not held for sale as of June 30, 2022 or probable for disposition to unrelated third parties within the current year. A community is considered to have stabilized occupancy at the earlier of (i) attainment of 90% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment. Table of Contents

Other Stabilized is composed of completed consolidated communities that we own and that are not Same Store but that had stabilized occupancy, as defined above, as of January 1, 2022, or which were acquired subsequent to January 1, 2021. Other Stabilized includes stabilized wholly-owned communities in Charlotte, North Carolina and Dallas, Texas, the two new expansion markets we entered in 2021, but excludes communities that are conducting or are probable to conduct substantial redevelopment activities within the current year, as defined below.

Lease-Up is composed of consolidated communities where construction has been complete for less than one year and that do not have stabilized occupancy.

Redevelopment is composed of consolidated communities where substantial redevelopment is in progress or is probable to begin during the current year. Redevelopment is considered substantial when (i) capital invested during the reconstruction effort is expected to exceed the lesser of $5,000,000 or 10% of the community's pre-redevelopment basis and (ii) physical occupancy is below or is expected to be below 90% during, or as a result of, the redevelopment activity.

Unconsolidated is composed of communities that we have an indirect ownership interest in through our investment interest in an unconsolidated joint venture.

Development is composed of consolidated communities that are either currently under construction, or were under construction and were completed during the current year. These communities may be partially or fully complete and operating.

Unconsolidated Development is composed of communities that are either currently under construction, or were under construction and were completed during the current year, in which we have an indirect ownership interest through our investment interest in an unconsolidated joint venture. These communities may be partially or fully complete and operating.

Development Rights are development opportunities in the early phase of the development process where we either have an option to acquire land or enter into a leasehold interest, where we are the buyer under a long-term conditional contract to purchase land, where we control the land through a ground lease or own land to develop a new community, or where we are the designated developer in a public-private partnership. We capitalize related pre-development costs incurred in pursuit of new developments for which we currently believe future development is probable.

We currently lease our corporate headquarters located in Arlington, Virginia, as well as our other regional and administrative offices, under operating leases.

Table of Contents







                                          Number of           Number of
                                         communities       apartment homes
        Current Communities
        Same Store:
        New England                           38               9,774
        Metro NY/NJ                           39              11,641
        Mid-Atlantic                          38              12,931
        Southeast Florida                      4               1,214
        Denver, CO                             4               1,086
        Pacific Northwest                     18               4,807
        Northern California                   40              12,126
        Southern California                   57              16,768
        Total Same Store                     238              70,347
        Other Stabilized:
        New England                            3                 253
        Metro NY/NJ                            6               1,971
        Mid-Atlantic                           3                 993
        North Carolina                         3                 500
        Southeast Florida                      3                 973
        Texas                                  2                 621
        Denver, CO                             1                 207
        Pacific Northwest                      2                 667
        Northern California                    1                 200
        Southern California                    2                 849
        Total Other Stabilized                26               7,234
        Lease-Up                               5               2,086
        Redevelopment                          2               1,058
        Unconsolidated (1)                    11               2,918
        Total Current                        282              83,643
        Development                           16               4,919
        Unconsolidated Development             1                 475
        Total Communities                    299              89,037
        Development Rights                    32              10,913
        _________________________
        


(1)In July 2022, the U.S. Fund sold Avalon Grosvenor Tower. Refer to Note 12, "Subsequent Events," of the Condensed Consolidated Financial Statements included elsewhere in this report.

Table of Contents

Our year-over-year operating performance is primarily affected by both overall and individual geographic market conditions and apartment fundamentals and is reflected in changes in Same Store NOI; NOI derived from acquisitions, development completions and development under construction and in lease-up; loss of NOI related to disposed communities; and capital market and financing activity. As discussed above under "Executive Overview - COVID-19 Pandemic" and elsewhere in this report, the Pandemic continues to affect our business, and may continue to do so. See also Part II, Item 1A. "Risk Factors." A comparison of our operating results for the three and six months ended June 30, 2022 and 2021 follows (unaudited, dollars in thousands).







                                                                       For the three months ended                                                         For the six months ended
                                                 6/30/2022          6/30/2021           $ Change             % Change             6/30/2022            6/30/2021            $ Change             % Change
        Revenue:
        Rental and other income                 $ 643,655          $ 560,935          $   82,720                  14.7  %       $ 1,256,830          $ 1,111,194          $  145,636                  13.1  %
        Management, development and other fees        904                808                  96                  11.9  %             1,656                1,685                 (29)                 (1.7) %
        Total revenue                             644,559            561,743              82,816                  14.7  %         1,258,486            1,112,879             145,607                  13.1  %
        Expenses:
        Direct property operating expenses,
        excluding property taxes                  124,848            116,506               8,342                   7.2  %           247,309              231,214              16,095                   7.0  %
        Property taxes                             70,865             70,776                  89                   0.1  %           141,603              140,186               1,417                   1.0  %
        Total community operating expenses        195,713            187,282               8,431                   4.5  %           388,912              371,400              17,512                   4.7  %
        Corporate-level property management and
        other indirect operating expenses         (31,541)           (25,116)             (6,425)                 25.6  %           (60,392)             (50,459)             (9,933)                 19.7  %
        Expensed transaction, development and
        other pursuit costs, net of recoveries     (2,364)            (1,653)               (711)                 43.0  %            (3,351)              (1,483)             (1,868)                126.0  %
        Interest expense, net                     (58,797)           (56,104)             (2,693)                  4.8  %          (115,323)            (108,717)             (6,606)                  6.1  %
        Gain on extinguishment of debt, net             -                  -                   -                     -  %                 -                  122                (122)               (100.0) %
        Depreciation expense                     (199,302)          (184,472)            (14,830)                  8.0  %          (401,088)            (367,769)            (33,319)                  9.1  %
        General and administrative expense        (21,291)           (18,465)             (2,826)                 15.3  %           (38,712)             (35,817)             (2,895)                  8.1  %
        Casualty and impairment loss                    -             (1,177)              1,177                 100.0  %                 -               (1,177)              1,177                 100.0  %
        Income from investments in
        unconsolidated entities                     2,480             26,559             (24,079)                (90.7) %             2,797               26,092             (23,295)                (89.3) %
        Gain on sale of communities                   404            334,569            (334,165)                (99.9) %           149,204              388,296            (239,092)                (61.6) %
        Gain on other real estate transactions,
        net                                            43                 32                  11                  34.4  %                80                  459                (379)                (82.6) %
        Net for-sale condominium activity             (71)              (647)                576                 (89.0) %               165               (1,560)              1,725                  N/A (1)
        Income before income taxes                138,407            447,987            (309,580)                (69.1) %           402,954              589,466            (186,512)                (31.6) %
        Income tax benefit (expense)                  159                (10)                169                  N/A (1)            (2,312)                 745              (3,057)                 N/A (1)
        Net income                                138,566            447,977            (309,411)                (69.1) %           400,642              590,211            (189,569)                (32.1) %
        Net loss (income) attributable to
        noncontrolling interests                      125                (24)                149                  N/A (1)                93                  (35)                128                  N/A (1)
        Net income attributable to common
        stockholders                            $ 138,691          $ 447,953          $ (309,262)                (69.0) %       $   400,735          $   590,176          $ (189,441)                (32.1) %
        _________________________
        


(1)Percent change is not meaningful.

Net income attributable to common stockholders decreased $309,262,000, or 69.0%, to $138,691,000 and $189,441,000, or 32.1%, to $400,735,000 for the three and six months ended June 30, 2022, respectively, as compared to the prior year periods. The decreases for the three and six months ended June 30, 2022 are primarily due to decreases in real estate sales and related gains, partially offset by increases in NOI from communities, over the prior year periods.

Table of Contents

NOI does not represent cash generated from operating activities in accordance with GAAP, and NOI should not be considered an alternative to net income as an indication of our performance. NOI should also not be considered an alternative to net cash flow from operating activities, as determined by GAAP, as a measure of liquidity, nor is NOI indicative of cash available to fund cash needs. Residential NOI represents results attributable to our apartment rental operations, including parking and other ancillary residential revenue. Reconciliations of NOI and Residential NOI for the three and six months ended June 30, 2022 and 2021 to net income for each period are as follows (unaudited, dollars in thousands):







                                                                   For the three months ended                    For the six months ended
                                                                  6/30/2022            6/30/2021               6/30/2022              6/30/2021
        Net income                                            $      138,566          $ 447,977          $     400,642               $ 590,211
        Property management and other indirect operating
        expenses, net of corporate income                             30,632             24,318                 58,745                  48,788
        Expensed transaction, development and other pursuit
        costs, net of recoveries                                       2,364              1,653                  3,351                   1,483
        Interest expense, net                                         58,797             56,104                115,323                 108,717
        Gain on extinguishment of debt, net                                -                  -                      -                    (122)
        General and administrative expense                            21,291             18,465                 38,712                  35,817
        Income from investments in unconsolidated entities            (2,480)           (26,559)                (2,797)                (26,092)
        Depreciation expense                                         199,302            184,472                401,088                 367,769
        Income tax (benefit) expense                                    (159)                10                  2,312                    (745)
        Casualty and impairment loss                                       -              1,177                      -                   1,177
        Gain on sale of communities                                     (404)          (334,569)              (149,204)               (388,296)
        Gain on other real estate transactions, net                      (43)               (32)                   (80)                   (459)
        Net for-sale condominium activity                                 71                647                   (165)                  1,560
        Net operating income from real estate assets sold or
        held for sale                                                 (3,650)           (13,893)                (8,916)                (28,472)
        NOI                                                          444,287            359,770                859,011                 711,336
        Commercial NOI (1)                                            (7,763)            (5,620)               (16,083)                (10,931)
        Residential NOI                                       $      436,524          $ 354,150          $     842,928               $ 700,405
        _________________________
        


The Residential NOI changes for the three and six months ended June 30, 2022 as compared to the three and six months ended June 30, 2021 consist of changes in the following categories (unaudited, dollars in thousands):







                                       For the three months ended       For the six months ended
                                                6/30/2022                       6/30/2022
        Same Store                    $                    56,763      $                  91,211
        Other Stabilized                                   16,257                         33,292
        Development / Redevelopment                         9,354                         18,020
        Total                         $                    82,374      $                 142,523
        


Table of Contents

The increase in our Same Store Residential NOI for the three and six months ended June 30, 2022 is due to increases in Residential rental revenue of $64,397,000, or 12.9%, and $106,366,000, or 10.7%, respectively, partially offset by increases in Residential property operating expenses of $7,760,000, or 4.8%, and $15,294,000, or 4.7%, over the three and six months ended June 30, 2021, respectively.

Rental and other income increased $82,720,000, or 14.7%, and $145,636,000, or 13.1%, for the three and six months ended June 30, 2022, respectively, compared to the prior year periods, primarily due to the increased rental revenue from our stabilized wholly-owned communities, discussed below.

The Pandemic, and direct and indirect related economic, regulatory and operating impacts, may adversely affect our rental revenue in future periods. If the financial condition of our residents and commercial tenants deteriorates, and/or regulations that limit our ability to evict residents and tenants continue or are adopted, that may result in higher than normal uncollectible lease revenue. The Pandemic may also depress consumer demand for our apartments for a variety of reasons, including (i) if consumers decide to live in markets that are less costly than ours for one or more reasons, such as a decline in their income, remote working arrangements, or if they cannot freely access neighborhood amenities like restaurants, gyms and entertainment venues; (ii) that consumers who would otherwise rent may seek home ownership; and (iii) ongoing downward pressures on demand for certain types of housing (e.g., corporate apartment homes) or by certain consumers (e.g., students or consumers who require seasonal job-related demand such as in the entertainment industry).

Consolidated Communities - The weighted average number of occupied apartment homes for consolidated communities increased to 77,225 apartment homes for the six months ended June 30, 2022, compared to 74,999 homes for the prior year period. The weighted average monthly rental revenue per occupied apartment home increased to $2,709 for the six months ended June 30, 2022 compared to $2,466 in the prior year period.

Same Store rental revenue increased $65,838,000, or 13.1%, and $109,121,000, or 10.9% for the three and six months ended June 30, 2022, respectively, compared to the prior year periods.

. . .

Aug 03, 2022

COMTEX_411517551/2041/2022-08-03T15:36:15

Is there a problem with this press release? Contact the source provider Comtex at editorial@comtex.com. You can also contact MarketWatch Customer Service via our Customer Center.

(c) 1995-2022 Cybernet Data Systems, Inc. All Rights Reserved

This Story has 0 Comments
Be the first to comment

Story Conversation

Commenting FAQs »

Partner Center

Link to MarketWatch's Slice.