AvalonBay Communities, Inc. Announces Third Quarter 2009 Operating Results
ALEXANDRIA, Va.--(BUSINESS WIRE)-- AvalonBay Communities, Inc. (NYSE:AVB) reported today that Net Income Attributable to Common Stockholders ("Net Income") for the quarter ended September 30, 2009 was $58,154,000. This resulted in Earnings per Share - diluted ("EPS") of $0.72 for the quarter ended September 30, 2009, compared to EPS of $2.98 for the comparable period of 2008, a decrease of 75.8%. For the nine months ended September 30, 2009, EPS was $1.54 compared to $5.20 for the comparable period of 2008, a per share decrease of 70.4%. These decreases are primarily attributable to the reduced number of communities sold and amount of gains related to these sales in 2009 as compared with the prior year periods. Year to date 2009 results also include impairment and other charges associated with the Company's reduction in planned development activity recognized in the second quarter of 2009.
Funds from Operations attributable to common stockholders - diluted ("FFO") for the quarter ended September 30, 2009 decreased 14.8% to $1.09 per share from $1.28 per share for the comparable period of 2008. FFO per share for the nine months ended September 30, 2009 decreased by 14.0% to $3.25 from $3.78 for the comparable period of 2008.
FFO and Net Income per share amounts for the nine months ended September 30, 2009, and for the three and nine months ended September 30, 2008 include certain non-routine items that are detailed in Attachment 14.
Adjusting for these non-routine items, FFO per share for the three and nine months ended September 30, 2009 would have decreased by 16.2% and 9.0%, respectively from the prior year periods.
There were no significant non-routine items in the current quarter.
Operating Results for the Quarter Ended September 30, 2009 Compared to the Prior Year Period
For the Company, including discontinued operations, total revenue increased by $759,000, or 0.3% to $224,192,000. For Established Communities, rental revenue decreased 4.8% due to a decrease in Economic Occupancy of 0.2% and a decrease in Average Rental Rates of 4.6%. As a result, total revenue for Established Communities decreased $7,546,000 to $153,223,000. Operating expenses for Established Communities increased $1,680,000, or 3.2% to $54,318,000. Accordingly, Net Operating Income ("NOI") for Established Communities decreased by $9,226,000, or 8.5% to $98,905,000.
The following table reflects the percentage changes in rental revenue, operating expenses and NOI for Established Communities from the third quarter of 2008 to the third quarter of 2009:
3Q 09 Compared to 3Q 08
Rental Operating % of
Revenue Expenses NOI NOI(1)
New England (4.7 %) 1.5 % (8.0 %) 20.6 %
Metro NY/NJ (5.7 %) 4.0 % (9.9 %) 28.1 %
Mid-Atlantic/Midwest (0.7 %) 0.9 % (1.7 %) 16.2 %
Pacific NW (7.0 %) (1.9 %) (9.0 %) 4.6 %
No. California (7.0 %) 6.5 % (11.6 %) 19.6 %
So. California (6.1 %) 9.0 % (12.3 %) 10.9 %
Total (4.8 %) 3.2 % (8.5 %) 100.0 %
(1) Total represents each region's % of total NOI from the Company, including
discontinued operations.
Operating Results for the Nine Months Ended September 30, 2009 Compared to the Prior Year Period
For the Company, including discontinued operations, total revenue increased by $4,579,000, or 0.7% to $666,015,000. For Established Communities, rental revenue decreased 2.8% due to a decrease in Economic Occupancy of 0.7% and a decrease in Average Rental Rates of 2.1%. As a result, total revenue for Established Communities decreased $13,092,000 to $465,646,000. Operating expenses for Established Communities increased $4,521,000, or 3.0% to $157,263,000. Accordingly, NOI for Established Communities decreased by $17,612,000, or 5.4% to $308,383,000.
The following table reflects the percentage changes in rental revenue, operating expenses and NOI for Established Communities for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008:
YTD 2009 Compared to YTD 2008
Rental Operating % of
Revenue Expenses NOI NOI(1)
New England (3.4 %) 2.3 % (6.4 %) 20.0 %
Metro NY/NJ (3.5 %) 2.1 % (5.9 %) 27.5 %
Mid-Atlantic/Midwest (0.3 %) 2.7 % (2.1 %) 16.5 %
Pacific NW (3.1 %) 2.1 % (5.2 %) 4.7 %
No. California (2.8 %) 4.1 % (5.1 %) 20.4 %
So. California (4.4 %) 6.8 % (8.8 %) 10.9 %
Total (2.8 %) 3.0 % (5.4 %) 100.0 %
(1) Total represents each region's % of total NOI from the Company, including
discontinued operations.
Cash concessions are recognized in accordance with generally accepted accounting principles ("GAAP") and are amortized over the approximate lease term, which is generally one year. The following table reflects the percentage changes in rental revenue with concessions on a GAAP basis and Rental Revenue with Concessions on a Cash Basis for our Established Communities:
YTD 09
3Q 09 vs 3Q 08
vs YTD 08
Rental Revenue Change with (4.8 %) (2.8 %)
Concessions on a GAAP Basis
Rental Revenue Change with
Concessions on a Cash Basis (4.1 %) (2.5 %)
Development Activity
The Company completed the development of three communities in the third quarter of 2009: Avalon Anaheim Stadium located in Anaheim, CA, Avalon Charles Pond, located in Coram, NY, and Avalon Northborough I, located in Northborough, MA. These communities contain an aggregate 614 apartment homes and were completed for an aggregate Total Capital Cost of $173,000,000.
At September 30, 2009, the Company had nine communities under construction with a Total Capital Cost of $1,218,900,000, down from 15 communities with a Total Capital Cost of $1,608,500,000 at September 30, 2008. The Company has not started any new development activity through September 30, 2009.
During the fourth quarter of 2009, the Company expects to commence the development of two communities containing an aggregate 399 apartment homes, with an expected Total Capital Cost of $66,400,000. The Company expects to complete the development of four communities during the fourth quarter of 2009. The anticipated completions contain an aggregate of 1,382 apartment homes and are expected to be completed for a Total Capital Cost of $470,500,000.
At December 31, 2009, the Company anticipates that it will have seven communities under development, with a Total Capital Cost of $814,800,000, down from the 14 communities with a Total Capital Cost of $1,583,800,000 at December 31, 2008.
Redevelopment Activity
During the third quarter of 2009, the Company completed the redevelopment of Avalon Symphony Woods I and II, located in Columbia, MD. These two communities contain an aggregate of 392 apartment homes and redevelopment was completed for a Total Capital Cost of $10,100,000, excluding costs incurred prior to redevelopment.
During the third quarter of 2009, the Company commenced the redevelopment of one community: Avalon at Cedar Ridge located in Daly City, CA. This community contains an aggregate of 195 apartment homes and will be redeveloped for an estimated Total Capital Cost of $6,600,000, excluding costs incurred prior to redevelopment.
Disposition Activity
During the third quarter of 2009, the Company sold two communities: Avalon at River Oaks, located in San Jose, CA and Avalon at Faxon Park, located in Quincy, MA. These two communities contain an aggregate of 397 apartment homes and were sold for an aggregate sales price of $69,500,000. These dispositions resulted in a gain in accordance with GAAP of $26,670,000 and an Economic Gain of approximately $22,670,000. The weighted average Initial Year Market Cap Rate for these two communities was 6.8% and the Unleveraged IRR over a 12 year holding period was 14.6%.
In October 2009, the Company sold Avalon Parkside, a 192 apartment home community, located in Sunnyvale, CA for $43,800,000.
Investment Management Fund Activity
The Company currently has investments in and serves as the manager for two private, discretionary investment management vehicles. There was no acquisition or disposition activity by either investment fund during the current quarter.
Financing, Liquidity and Balance Sheet Statistics
At September 30, 2009, the Company had no amounts outstanding under its $1,000,000,000 unsecured credit facility and the Company had $777,456,000 in unrestricted cash and cash in escrow. The cash in escrow is available for development activity and includes $93,440,000 in bond proceeds related to an existing Development Right that the Company expects to develop in the future. Unencumbered NOI as a percentage of total NOI generated by real estate assets for the nine months ended September 30, 2009 was 64.8%. Interest Coverage for the third quarter of 2009 was 3.1 times.
New Financing Activity
In August 2009, the Company commenced a continuous equity offering program, under which the Company can issue up to $400 million common stock until September 2012. The Company may sell common stock in amounts and at times to be determined by the Company. During the third quarter of 2009, the Company sold 1,467,000 Shares at an average price of approximately $70 per share, for gross proceeds of $102,000,000.
In September 2009, the Company issued $500,000,000 of unsecured notes under its existing shelf registration statement. The offering consisted of two separate $250,000,000 tranches with effective interest rates of 5.72% and 6.12%, maturing in 2017 and 2020, respectively.
Debt Repayment Activity
In August 2009, the Company repaid $102,562,000 of unsecured notes with an annual interest rate of 7.50% pursuant to their scheduled maturity.
Also in August 2009, the Company repaid $112,200,000 in unsecured debt, representing the second tranche of its $330,000,000 unsecured variable rate term loan (the "Term Loan"), in advance of the scheduled maturity in January 2010.
In October 2009, the Company completed a cash tender offer commenced in September 2009. The Company purchased $300,000,000 principal amount of its unsecured notes at a weighted average purchase price of 108% of par. Also in October 2009, the Company purchased an additional $10,100,000 principal amount of its unsecured notes at a price of 107% of par. The Company will recognize a charge for the purchase premium and the accelerated recognition of certain deferred issuance costs of approximately $26,000,000 in the fourth quarter of 2009. All of the notes purchased by the Company were cancelled.
Also in October 2009, the Company repaid the final $112,200,000 outstanding of its Term Loan in advance of the scheduled maturity in January 2011.
Fourth Quarter and Full Year 2009 Financial Outlook
The Company anticipates that revenues from Established Communities will decline by 5.75% to 6.25%, and NOI from Established Communities will decline by 11.0% to 12.0% for the fourth quarter 2009 as compared to the prior year period. For the full year 2009, Established Community revenue and NOI are anticipated to decline 3.50% to 3.75% and 6.50% to 7.50%, respectively. These ranges are consistent with the previous financial outlook provided in July 2009.
For the fourth quarter of 2009, the Company expects EPS to be in the range of $0.53 to $0.57. The Company expects EPS for the full year 2009 to be in the range of $2.07 to $2.11.
The Company expects Projected FFO per share to be in the range of $0.61 to $0.65 for the fourth quarter of 2009 and Projected FFO per share for the full year 2009 to be in the range of $3.86 to $3.90.
The Company's expected fourth quarter and full year 2009 results include approximately $26,000,000 related to the tender offer the Company completed in October 2009. The Company's fourth quarter and full year 2008 and 2009 results also include the non-routine items detailed in Attachment 14. Adjusting for these non-routine items in both years, the Company expects fourth quarter and full year 2009 Projected FFO per share to decline by 20% and 12%, respectively, from the prior year periods.
An analysis of the revised full year 2009 financial outlook compared to financial outlook provided in July 2009 follows:
Full Year 2009 Outlook
As of September 2009
Changes From July 2009
Per
Share
FFO (July 2009 Outlook) $ 4.22
NOI & other income 0.05
Interest expense, new unsecured debt (0.04 )
Impairments & abandoned pursuits (0.01 )
Gain / (loss) on medium term note repurchase (0.33 )
Impact of shares issued during quarter (0.01 )
FFO (September 2009 Outlook) 3.88
Fourth Quarter 2009 Conference/Event Schedule
The Company expects to release its fourth quarter 2009 earnings on February 3, 2010 after the market closes. The Company expects to hold a conference call on February 4, 2010 at 1:00 PM EST to discuss the fourth quarter and full year 2009 results.
The Company is tentatively scheduled to participate in the following conferences during the fourth quarter of 2009:
4Q 2009 Conference Schedule Event/Conference Date NAREIT Annual Convention Nov 11-13 Goldman Sachs Real Estate Symposium Dec 4 Barclays Real Estate Conference Dec 8 Wells Fargo Conference Dec 9
Management may discuss the Company's current operating environment; operating trends; development, redevelopment, disposition and acquisition activity; financial outlook and other business and financial matters affecting the Company. Details on each conference and access to any related materials will be available beginning November 2, 2009 on the Company's website at http://www.avalonbay.com/events.
Other Matters
The Company will hold a conference call on October 29, 2009 at 1:00 PM EDT to review and answer questions about this release, its third quarter results, the Attachments (described below) and related matters. To participate on the call, dial 1-877-510-2397 domestically and 1-763-416-6924 internationally.
To hear a replay of the call, which will be available from October 29, 2009 at 3:00 PM EDT to November 29, 2009 at 11:59 PM EST, dial 1-800-642-1687 domestically and 1-706-645-9291 internationally, and use Access Code: 33681043.
A webcast of the conference call will also be available at http://www.avalonbay.com/earnings, and an on-line playback of the webcast will be available for at least 30 days following the call.
The Company produces Earnings Release Attachments (the "Attachments") that provide detailed information regarding operating, development, redevelopment, disposition and acquisition activity. These Attachments are considered a part of this earnings release and are available in full with this earnings release via the Company's website at http://www.avalonbay.com/earnings. To receive future press releases via e-mail, please submit a request through http://www.avalonbay.com/email.
About AvalonBay Communities, Inc.
As of September 30, 2009, the Company owned or held a direct or indirect ownership interest in 172 apartment communities containing 50,114 apartment homes in ten states and the District of Columbia, of which nine communities were under construction and six communities were under reconstruction. The Company is an equity REIT in the business of developing, redeveloping, acquiring and managing apartment communities in high barrier to entry markets of the United States. More information may be found on the Company's website at http://www.avalonbay.com. For additional information, please contact John Christie, Senior Director of Investor Relations and Research at 1-703-317-4747 or Thomas J. Sargeant, Chief Financial Officer at 1-703-317-4635.
Forward-Looking Statements
This release, including its Attachments, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify these forward-looking statements by the Company's use of words such as "expects," "plans," "estimates," "projects," "intends," "believes," "outlook" and similar expressions that do not relate to historical matters. Actual results may differ materially from those expressed or implied by the forward-looking statements as a result of risks and uncertainties, which include the following: we may abandon development or redevelopment opportunities for which we have already incurred costs; adverse capital and credit market conditions may affect our access to various sources of capital and/or cost of capital, which may affect our business activities, earnings and common stock price, among other things; changes in local employment conditions, demand for apartment homes, supply of competitive housing products, and other economic conditions may result in lower than expected occupancy and/or rental rates and adversely affect the profitability of our communities; increases in costs of materials, labor or other expenses may result in communities that we develop or redevelop failing to achieve expected profitability; delays in completing development, redevelopment and/or lease-up may result in increased financing and construction costs and may delay and/or reduce the profitability of a community; debt and/or equity financing for development, redevelopment or acquisitions of communities may not be available or may not be available on favorable terms; we may be unable to obtain, or experience delays in obtaining, necessary governmental permits and authorizations; increases in costs of materials, labor or other expenses may result in communities that we develop or redevelop failing to achieve expected profitability; or delays in completing development, redevelopment and/or lease-up may result in increased financing and construction costs and may delay and/or reduce the profitability of a community. Additional discussions of risks and uncertainties appear in the Company's filings with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008 under the headings "Risk Factors" and under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Statements" and in subsequent quarterly reports on Form 10-Q.
The Company does not undertake a duty to update forward-looking statements, including its expected operating results for the fourth quarter and full year 2009. The Company may, in its discretion, provide information in future public announcements regarding its outlook that may be of interest to the investment community. The format and extent of future outlooks may be different from the format and extent of the information contained in this release.
Definitions and Reconciliations
Non-GAAP financial measures and other capitalized terms, as used in this earnings release, are defined and further explained on Attachment 14, "Definitions and Reconciliations of Non-GAAP Financial Measures and Other Terms." Attachment 14 is included in the full earnings release available at the Company's website at http://www.avalonbay.com/earnings. This wire distribution includes only definitions and reconciliations of the following Non-GAAP financial measures:
FFO is determined based on a definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT"). FFO is calculated by the Company as Net Income or loss computed in accordance with GAAP, adjusted for gains or losses on sales of previously depreciated operating communities, extraordinary gains or losses (as defined by GAAP), cumulative effect of a change in accounting principle and depreciation of real estate assets, including adjustments for unconsolidated partnerships and joint ventures. Management generally considers FFO to be an appropriate supplemental measure of operating performance because, by excluding gains or losses related to dispositions of previously depreciated operating communities and excluding real estate depreciation (which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates), FFO can help one compare the operating performance of a company's real estate between periods or as compared to different companies. A reconciliation of FFO to Net Income is as follows (dollars in thousands):
Q3 Q3 YTD YTD
2009 2008 2009 2008
Net income
attributable to $ 58,154 $ 233,581 $ 123,253 $ 409,364
the Company
Dividends
attributable to -- (2,175 ) -- (6,525 )
preferred stock
Depreciation -
real estate
assets,
including 56,239 51,263 163,891 151,307
discontinued
operations and
joint venture
adjustments
Distributions to
noncontrolling
interests, 14 57 52 171
including
discontinued
operations
Gain on sale of
unconsolidated
entities holding -- -- -- (3,483 )
previously
depreciated real
estate assets
Gain on sale of
previously (26,670 ) (183,711 ) (26,670 ) (257,850 )
depreciated real
estate assets
FFO attributable
to common $ 87,737 $ 99,015 $ 260,526 $ 292,984
stockholders
Average shares
outstanding - 80,609,277 77,580,847 80,170,093 77,516,222
diluted
Earnings per $ 0.72 $ 2.98 $ 1.54 $ 5.20
share - diluted
FFO per common $ 1.09 $ 1.28 $ 3.25 $ 3.78
share - diluted
Projected FFO, as provided within this release in the Company's outlook, is calculated on a basis consistent with historical FFO, and is therefore considered to be an appropriate supplemental measure to projected net income from projected operating performance. A reconciliation of the range provided for Projected FFO per share (diluted) for the fourth quarter and full year 2009 to the range provided for Projected EPS (diluted) is as follows:
Low High
range range
Projected EPS (diluted) - Q4 09 $ 0.53 $ 0.57
Projected depreciation (real estate related) 0.71 0.75
Projected gain on sale of operating communities (0.63 ) (0.67 )
Projected FFO per share (diluted) - Q4 09 $ 0.61 $ 0.65
Projected EPS (diluted) - Full Year 2009 $ 2.07 $ 2.11
Projected depreciation (real estate related) 2.76 2.80
Projected gain on sale of operating communities (0.97 ) (1.01 )
Projected FFO per share (diluted) - Full Year 2009 $ 3.86 $ 3.90
The Company's results for the nine months ended September 30, 2009, the Company's outlook for the quarter and year ended December 31, 2009, and the comparable prior year periods include the non-routine items outlined in the following table:
Non-Routine Items
Decrease (Increase) in Net Income and FFO
(dollars in thousands)
YTD Full Year YTD Full Year
Q3 08 Q4 08 2008 Q3 09 Q4 09 (1) 2009 (1)
Land $ - $ 57,899 $ 57,899 $ 20,302 $ - $ 20,302
impairments
Abandoned - 6,611 6,611 1,139 - 1,139
pursuits (2)
Severance and - 3,400 3,400 2,000 - 2,000
related costs
Federal excise - 3,200 3,200 (485 ) 2,900 2,415
tax
Loss/(Gain) on
medium term - (1,839 ) (1,839 ) (1,062 ) 26,271 25,208
notes
repurchase
Gain on sale - - - (241 ) - (241 )
of land
Promoted
interest in - - - (3,894 ) - (3,894 )
joint venture
Legal
settlement - - - (1,100 ) - (1,100 )
proceeds, net
Preferred
stock deferred - 3,566 3,566 - - -
offering
expenses
Fund II
organizational 1,209 - 1,209 - - -
costs
Total
non-routine $ 1,209 $ 72,837 $ 74,046 $ 16,659 $ 29,171 $ 45,829
items
Weighted
Average
Dilutive
Shares 77,516,222 77,734,587 77,578,852 80,170,093 81,903,599 80,586,863
Outstanding
(1) Amounts shown are projected results.
(2) Abandoned pursuits includes costs expensed by the Company for individual
pursuits in excess of $1,000 in a given quarter.
NOI is defined by the Company as total property revenue less direct property operating expenses (including property taxes), and excludes corporate-level income (including management, development and other fees), corporate-level property management and other indirect operating expenses, investments and investment management expenses, expensed development and other pursuit costs, net interest expense, general and administrative expense, joint venture income, net income or expense attributable to noncontrolling interests, depreciation expense, gain on sale of real estate assets and income from discontinued operations. The Company considers NOI to be an appropriate supplemental measure to net income of operating performance of a community or communities because it helps both investors and management to understand the core operations of a community or communities prior to the allocation of corporate-level property management overhead or general and administrative costs. This is more reflective of the operating performance of a community, and allows for an easier comparison of the operating performance of single assets or groups of assets. In addition, because prospective buyers of real estate have different overhead structures, with varying marginal impact to overhead by acquiring real estate, NOI is considered by many in the real estate industry to be a useful measure for determining the value of a real estate asset or groups of assets.
A reconciliation of NOI (from continuing operations) to Net Income, as well as a breakdown of NOI by operating segment, is as follows (dollars in thousands):
Q3 Q3 YTD YTD
2009 2008 2009 2008
Net income $ 58,101 $ 232,886 $ 121,924 $ 408,880
Indirect operating
expenses, net of corporate 6,987 7,821 22,922 25,171
income
Investments and investment 976 1,229 2,799 3,643
management expense
Expensed development and 1,721 715 5,096 3,044
other pursuit costs
Interest expense, net 41,208 28,363 107,836 85,620
General and administrative 5,750 9,318 18,388 26,821
expense
Joint venture income (190 ) (495 ) (4,139 ) (4,329 )
Depreciation expense 54,960 48,698 159,935 140,885
Impairment loss - land -- -- 20,302 --
holdings
Gain on sale of real (26,911 ) (183,711 ) (26,911 ) (257,850 )
estate assets
Income from discontinued (1,132 ) (3,176 ) (3,998 ) (16,163 )
operations
NOI from continuing $ 141,470 $ 141,648 $ 424,154 $ 415,722
operations
Established:
New England $ 19,993 $ 21,732 $ 60,986 $ 65,159
Metro NY/NJ 27,147 30,143 84,417 89,692
Mid-Atlantic/Midwest 19,713 20,060 60,914 62,203
Pacific NW 4,768 5,238 14,941 15,754
No. California 16,988 19,222 54,577 57,502
So. California 10,296 11,736 32,548 35,685
Total Established 98,905 108,131 308,383 325,995
Other Stabilized 21,185 19,794 61,296 46,087
Development/Redevelopment 21,380 13,723 54,475 43,640
NOI from continuing $ 141,470 $ 141,648 $ 424,154 $ 415,722
operations
NOI as reported by the Company does not include the operating results from discontinued operations (i.e., assets sold during the period January 1, 2008 through September 30, 2009). A reconciliation of NOI from communities sold or classified as discontinued operations to net income for these communities is as follows (dollars in thousands):
Q3 Q3 YTD YTD
2009 2008 2009 2008
Income from discontinued operations $ 1,132 $ 3,176 $ 3,998 $ 16,163
Interest expense, net -- 237 -- 1,314
Depreciation expense 354 1,657 1,758 7,612
NOI from discontinued operations $ 1,486 $ 5,070 $ 5,756 $ 25,089
NOI from assets sold $ 758 $ 4,239 $ 3,379 $ 22,617
NOI from assets held for sale 728 831 2,377 2,472
NOI from discontinued operations $ 1,486 $ 5,070 $ 5,756 $ 25,089
Projected NOI, as used within this release for certain development and redevelopment communities and in calculating the Initial Year Market Cap Rate for dispositions, represents management's estimate, as of the date of this release (or as of the date of the buyer's valuation in the case of dispositions), of projected stabilized rental revenue minus projected stabilized operating expenses. For development and redevelopment communities, Projected NOI is calculated based on the first year of Stabilized Operations, as defined below, following the completion of construction. In calculating the Initial Year Market Cap Rate, Projected NOI for dispositions is calculated for the first twelve months following the date of the buyer's valuation. Projected stabilized rental revenue represents management's estimate of projected gross potential (based on leased rents for occupied homes and market rents for vacant homes) minus projected economic vacancy and adjusted for concessions. Projected stabilized operating expenses do not include interest, income taxes (if any), depreciation or amortization, or any allocation of corporate-level property management overhead or general and administrative costs. The weighted average Projected NOI as a percentage of Total Capital Cost is weighted based on the Company's share of the Total Capital Cost of each community, based on its percentage ownership.
Management believes that Projected NOI of the development and redevelopment communities, on an aggregated weighted average basis, assists investors in understanding management's estimate of the likely impact on operations of the development and redevelopment communities when the assets are complete and achieve stabilized occupancy (before allocation of any corporate-level property management overhead, general and administrative costs or interest expense). However, in this release the Company has not given a projection of NOI on a company-wide basis. Given the different dates and fiscal years for which NOI is projected for these communities, the projected allocation of corporate-level property management overhead, general and administrative costs and interest expense to communities under development or redevelopment is complex, impractical to develop, and may not be meaningful. Projected NOI of these communities is not a projection of the Company's overall financial performance or cash flow. There can be no assurance that the communities under development or redevelopment will achieve the Projected NOI as described in this release.
Rental Revenue with Concessions on a Cash Basis is considered by the Company to be a supplemental measure to rental revenue in conformity with GAAP to help investors evaluate the impact of both current and historical concessions on GAAP based rental revenue and to more readily enable comparisons to revenue as reported by other companies. In addition, rental revenue (with concessions on a cash basis) allows an investor to understand the historical trend in cash concessions.
A reconciliation of rental revenue from Established Communities in conformity with GAAP to rental revenue (with concessions on a cash basis) is as follows (dollars in thousands):
Q3 Q3 YTD YTD
2009 2008 2009 2008
Rental revenue (GAAP $ 153,030 $ 160,698 $ 465,235 $ 478,525
basis)
Concessions amortized 2,094 1,740 6,437 5,015
Concessions granted (1,701 ) (2,435 ) (5,761 ) (5,893 )
Rental revenue (with
concessions on a cash $ 153,423 $ 160,003 $ 465,911 $ 477,647
basis)
% change -- GAAP revenue (4.8 %) (2.8 %)
% change -- cash revenue (4.1 %) (2.5 %)
Economic Gain is calculated by the Company as the gain on sale in accordance with GAAP, less accumulated depreciation through the date of sale and any other non-cash adjustments that may be required under GAAP accounting. Management generally considers Economic Gain to be an appropriate supplemental measure to gain on sale in accordance with GAAP because it helps investors to understand the relationship between the cash proceeds from a sale and the cash invested in the sold community. The Economic Gain for each of the communities presented is estimated based on their respective final settlement statements. A reconciliation of Economic Gain to gain on sale in accordance with GAAP for both the nine months ended September 30, 2009 as well as prior years' activities is presented in the full earnings release.
Interest Coverage is calculated by the Company as EBITDA from continuing operations, excluding land gains and gain on the sale of investments in real estate joint ventures, divided by the sum of interest expense, net, and preferred dividends. Interest Coverage is presented by the Company because it provides rating agencies and investors an additional means of comparing our ability to service debt obligations to that of other companies. EBITDA is defined by the Company as net income attributable to the Company before interest income and expense, income taxes, depreciation and amortization.
A reconciliation of EBITDA and a calculation of Interest Coverage for the third quarter of 2009 are as follows (dollars in thousands):
Net income attributable to the Company $ 58,154 Interest expense, net 41,208 Interest expense (discontinued operations) -- Depreciation expense 54,960 Depreciation expense (discontinued operations) 354 EBITDA $ 154,676 EBITDA from continuing operations $ 126,520 EBITDA from discontinued operations 28,156 EBITDA $ 154,676 EBITDA $ 126,520 Land gains (241 ) EBITDA from continuing operations, excluding land gains $ 126,279 Interest expense, net 41,208 Interest charges 41,208 Interest coverage 3.1
Total Capital Cost includes all capitalized costs projected to be or actually incurred to develop the respective development or redevelopment community, or development right, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees, all as determined in accordance with GAAP. For redevelopment communities, Total Capital Cost excludes costs incurred prior to the start of redevelopment when indicated. With respect to communities where development or redevelopment was completed in a prior or the current period, Total Capital Cost reflects the actual cost incurred, plus any contingency estimate made by management. Total Capital Cost for communities identified as having joint venture ownership, either during construction or upon construction completion, represents the total projected joint venture contribution amount. For joint ventures not in construction as presented in the full earnings release, Total Capital Cost is equal to gross real estate cost.
Initial Year Market Cap Rate is defined by the Company as Projected NOI of a single community for the first 12 months of operations (assuming no repositioning), less estimates for non-routine allowance of approximately $200 - $300 per apartment home, divided by the gross sales price for the community. Projected NOI, as referred to above, represents management's estimate of projected rental revenue minus projected operating expenses before interest, income taxes (if any), depreciation, amortization and extraordinary items. For this purpose, management's projection of operating expenses for the community includes a management fee of 3.0% - 3.5%. The Initial Year Market Cap Rate, which may be determined in a different manner by others, is a measure frequently used in the real estate industry when determining the appropriate purchase price for a property or estimating the value for a property. Buyers may assign different Initial Year Market Cap Rates to different communities when determining the appropriate value because they (i) may project different rates of change in operating expenses and capital expenditure estimates and (ii) may project different rates of change in future rental revenue due to different estimates for changes in rent and occupancy levels. The weighted average Initial Year Market Cap Rate is weighted based on the gross sales price of each community.
Unleveraged IRR on sold communities refers to the internal rate of return calculated by the Company considering the timing and amounts of (i) total revenue during the period owned by the Company and (ii) the gross sales price net of selling costs, offset by (iii) the undepreciated capital cost of the communities at the time of sale and (iv) total direct operating expenses during the period owned by the Company. Each of the items (i), (ii), (iii) and (iv) are calculated in accordance with GAAP.
The calculation of Unleveraged IRR does not include an adjustment for the Company's general and administrative expense, interest expense, or corporate-level property management and other indirect operating expenses. Therefore, Unleveraged IRR is not a substitute for net income as a measure of our performance. Management believes that the Unleveraged IRR achieved during the period a community is owned by the Company is useful because it is one indication of the gross value created by the Company's acquisition, development or redevelopment, management and sale of a community, before the impact of indirect expenses and Company overhead. The Unleveraged IRR achieved on the communities as cited in this release should not be viewed as an indication of the gross value created with respect to other communities owned by the Company, and the Company does not represent that it will achieve similar Unleveraged IRRs upon the disposition of other communities. The weighted average Unleveraged IRR for sold communities is weighted based on all cash flows over the holding period for each respective community, including net sales proceeds.
Unencumbered NOI as calculated by the Company represents NOI generated by real estate assets unencumbered by either outstanding secured debt or land leases (excluding land leases with purchase options that were put in place for governmental incentives or tax abatements) as a percentage of total NOI generated by real estate assets. The Company believes that current and prospective unsecured creditors of the Company view Unencumbered NOI as one indication of the borrowing capacity of the Company. Therefore, when reviewed together with the Company's Interest Coverage, EBITDA and cash flow from operations, the Company believes that investors and creditors view Unencumbered NOI as a useful supplemental measure for determining the financial flexibility of an entity. A calculation of Unencumbered NOI for the nine months ended September 30, 2009 is as follows (dollars in thousands):
NOI for Established Communities $ 308,383 NOI for Other Stabilized Communities 61,296 NOI for Development/Redevelopment Communities 54,475 Total NOI generated by real estate assets 424,154 NOI on encumbered assets 149,369 NOI on unencumbered assets 274,785 Unencumbered NOI 64.8 %
Established Communities are identified by the Company as communities where a comparison of operating results from the prior year to the current year is meaningful, as these communities were owned and had Stabilized Operations, as defined below, as of the beginning of the prior year. Therefore, for 2009, Established Communities are consolidated communities that have Stabilized Operations as of January 1, 2008 and are not conducting or planning to conduct substantial redevelopment activities within the current year. Established Communities do not include communities that are currently held for sale or planned for disposition during the current year.
Economic Occupancy is defined as total possible revenue less vacancy loss as a percentage of total possible revenue. Total possible revenue is determined by valuing occupied units at contract rates and vacant units at market rents. Vacancy loss is determined by valuing vacant units at current market rents. By measuring vacant apartments at their market rents, Economic Occupancy takes into account the fact that apartment homes of different sizes and locations within a community have different economic impacts on a community's gross revenue.
Stabilized/Restabilized Operations is defined as the earlier of (i) attainment of 95% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment.
Source: AvalonBay Communities, Inc.
Released October 28, 2009