AvalonBay Communities, Inc. (NYSE:AVB) (the Company) reported today that Net Income Attributable to Common Stockholders for the three months ended March 31, 2019 was $170,366,000. This resulted in an increase in Earnings per Share “ diluted (EPS) for the three months ended March 31, 2019 of 19.4% to $1.23 from $1.03 for the prior year period.
Funds from Operations attributable to common stockholders – diluted (FFO) per share for the three months ended March 31, 2019 increased 6.5% to $2.31 from $2.17 for the prior year period. Core FFO per share (as defined in this release) for the three months ended March 31, 2019 increased 5.5% to $2.30 from $2.18 for the prior year period.
The following table compares the Companys actual results for EPS, FFO per share and Core FFO per share for the three months ended March 31, 2019 to its results for the prior year period:
|Q1 2019 Results Compared to Q1 2018|
|Per Share (1)|
|Q1 2018 per share reported results||$||1.03||$||2.17||$||2.18|
|Established and Redevelopment Community NOI||0.12||0.12||0.12|
|Development and Other Stabilized Community NOI||0.08||0.08||0.07|
|Capital markets activity||(0.06||)||(0.06||)||(0.06||)|
|Overhead expense and other||(0.02||)|
|Joint venture income||0.01|
|Gain on sale of real estate and depreciation expense||0.06|
|Q1 2019 per share reported results||$||1.23||$||2.31||$||2.30|
(1) For additional detail on reconciling items between EPS, FFO and Core FFO, see Definitions and Reconciliations, table 5.
Established Communities Operating Results for the Three Months Ended March 31, 2019 Compared to the Prior Year Period (a)
For Established Communities, total revenue increased $15,593,000, or 3.5%, to $460,273,000. Operating expenses for Established Communities increased $228,000, or 0.2%, to $128,820,000. NOI for Established Communities increased $15,365,000, or 4.9%, to $331,453,000. Rental revenue for Established Communities increased 3.4% as a result of an increase in Average Rental Rates of 3.5%, partially offset by a decrease in Economic Occupancy of 0.1%.
The following table reflects the percentage changes in rental revenue, operating expenses and NOI for Established Communities for the three months ended March 31, 2019 compared to the three months ended March 31, 2018:
|Q1 2019 Compared to Q1 2018|
Rental Revenue (1)(2)
% of NOI (4)
|(1) See full release for additional detail.|
(2) 2018 results have been adjusted to reflect uncollectible lease revenue as an adjustment to revenue. See Definitions and Reconciliations, table 1.
|(3) See full release for discussion of variances.|
(4) Represents % of total NOI for Q1 2019 in the presented regions, including amounts related to communities that have been sold or that are classified as held for sale.
Historically, the Company presented charges related to uncollectible lease revenue in operating expenses. With the Companys adoption of ASU 2016-02, Leases, the Company is presenting such charges as an adjustment to revenue in its consolidated GAAP financial statements on a prospective basis, beginning with the three months ended March 31, 2019. However, for reported segment financial information, including for Established Communities, the Company has also included such charges as an adjustment to revenue for all prior year periods presented in order to provide comparability. Refer to Attachment 12, table 1, for additional detail and a reconciliation.
During the three months ended March 31, 2019, the Company completed the development of two communities:
- Avalon at the Hingham Shipyard II, located in Hingham, MA; and
- Avalon Sudbury, located in Sudbury, MA.
These communities contain an aggregate of 440 apartment homes and were constructed for an aggregate Total Capital Cost of $152,000,000.
At March 31, 2019 (excluding 15 West 61st Street, which is expected to be developed for a Total Capital Cost of $620,000,000), the Company had 19 Development Communities under construction that in the aggregate are expected to contain 6,170 apartment homes and 87,000 square feet of retail space. Estimated Total Capital Cost at completion for these Development Communities is $2,233,000,000.
The projected Total Capital Cost of Development Rights at March 31, 2019 increased to $4.2 billion from $4.1 billion at December 31, 2018.
During the three months ended March 31, 2019, the Company acquired the Ridge at Wheatlands, located in Aurora, CO, containing 338 apartment homes for a purchase price of $91,250,000.
During the three months ended March 31, 2019, the Company sold Oakwood Arlington, a wholly-owned operating community, located in Arlington, VA. Oakwood Arlington contains 184 apartment homes and was sold for $70,000,000, resulting in a gain in accordance with GAAP of $16,382,000 and an Economic Gain of $6,183,000.
In April 2019, the Company sold Archstone Toscano, located in Houston, TX. Archstone Toscano contains 474 apartment homes and was sold for $98,000,000.
Liquidity and Capital Markets
In February 2019, the Company amended and restated its unsecured revolving credit facility to increase its borrowing capacity from $1,500,000,000 to $1,750,000,000. In addition, the term of the credit facility was extended from April 2020 to February 2024. As part of the amendment and restatement, the Company decreased its current borrowing spread over LIBOR to 0.775% from 0.825%, and maintained its annual facility fee at 0.125%.
At March 31, 2019, the Company did not have any borrowings outstanding under its $1,750,000,000 unsecured credit facility, and had $195,207,000 in unrestricted cash and cash in escrow.
During the three months ended March 31, 2019, the Company amended and restated its $250,000,000 variable rate unsecured term loan that it originally entered into in February 2017, which consists of two tranches. The first tranche of $100,000,000 matures in February 2022, with stated pricing of LIBOR plus 0.90%, which did not change. The second tranche of $150,000,000 matures in February 2024, with stated pricing of LIBOR plus 0.85%, which decreased from LIBOR plus 1.50%.
In addition, during the three months ended March 31, 2019, the Company sold 755,054 shares of common stock at an average sales price of $198.26 per share, for net proceeds of $147,450,000 under the current continuous equity program established in December 2015.
The Companys annualized Net Debt-to-Core EBITDAre (as defined in this release) for the first quarter of 2019 was 4.6 times.
Second Quarter Conference Schedule
The Company is scheduled to participate in NAREIT’s REITWeek Conference in New York, NY, from June 4 – 6, 2019. During this conference, management may discuss the Company’s current operating environment; operating trends; development, redevelopment, disposition and acquisition activity; portfolio strategy and other business and financial matters affecting the Company. Details on how to access related materials will be available beginning June 3, 2019 on the Company’s website at http:// www.avalonbay.com/events.
The Company will hold a conference call on April 25, 2019 at 1:00 PM ET to review and answer questions about this release, its first quarter 2019 results, the Attachments (described below) and related matters. To participate on the call, dial 888-256-1007 and use conference id: 7961532.
To hear a replay of the call, which will be available from April 25, 2019 at 6:00 PM ET to May 2, 2019 at 6:00 PM ET, dial 888-203-1112 and use conference id: 7961532. A webcast of the conference call will also be available at http://www.avalonbay.com/earnings, and an on-line playback of the webcast will be available for at least seven days following the call.
The Company produces Earnings Release Attachments (the “Attachments”) that provide detailed information regarding operating, development, redevelopment, disposition and acquisition activity. These Attachments are considered a part of this earnings release and are available in full with this earnings release via the Company’s website at http://www.avalonbay.com/earnings. To receive future press releases via e-mail, please submit a request through http://www.avalonbay.com/email.
In addition to the Attachments, the Company is providing a teleconference presentation that will be available on the Company’s website at http://www.avalonbay.com/earnings subsequent to this release and before the market opens on April 25, 2019. These supplemental materials will be available on the Company’s website for 30 days following the earnings call.
About AvalonBay Communities, Inc.
As of March 31, 2019, the Company owned or held a direct or indirect ownership interest in 291 apartment communities containing 85,313 apartment homes in 12 states and the District of Columbia, of which 19 communities were under development and nine communities were under redevelopment. The Company is an equity REIT in the business of developing, redeveloping, acquiring and managing apartment communities in leading metropolitan areas primarily in New England, the New York/New Jersey Metro area, the Mid-Atlantic, the Pacific Northwest, and the Northern and Southern California regions of the United States. More information may be found on the Companys website at http://www.avalonbay.com. For additional information, please contact Jason Reilley, Vice President of Investor Relations, at 703-317-4681.
This release, including its Attachments, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements, which you can identify by the Companys use of words such as expects, plans, estimates, anticipates, projects, intends, believes, outlook and similar expressions that do not relate to historical matters, are based on the Companys expectations, forecasts and assumptions at the time of this release, which may not be realized and involve risks and uncertainties that cannot be predicted accurately or that might not be anticipated. These could cause actual results to differ materially from those expressed or implied by the forward-looking statements. Risks and uncertainties that might cause such differences include the following, among others: we may abandon development or redevelopment opportunities for which we have already incurred costs; adverse capital and credit market conditions may affect our access to various sources of capital and/or cost of capital, which may affect our business activities, earnings and common stock price, among other things; changes in local employment conditions, demand for apartment homes, supply of competitive housing products, and other economic conditions may result in lower than expected occupancy and/or rental rates and adversely affect the profitability of our communities; delays in completing development, redevelopment and/or lease-up may result in increased financing and construction costs and may delay and/or reduce the profitability of a community; debt and/or equity financing for development, redevelopment or acquisitions of communities may not be available or may not be available on favorable terms; we may be unable to obtain, or experience delays in obtaining, necessary governmental permits and authorizations; expenses may result in communities that we develop or redevelop failing to achieve expected profitability; our assumptions concerning risks relating to our lack of control of joint ventures and our abilities to successfully dispose of certain assets may not be realized; and our assumptions and expectations in our financial outlook may prove to be too optimistic. Additional discussions of risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the forward-looking statements appear in the Companys filings with the Securities and Exchange Commission, including the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2018 under the heading Risk Factors and under the heading Managements 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 2019 operating results and other financial data forecasts contained in this release. The Company may, in its discretion, provide information in future public announcements regarding its outlook that may be of interest to the investment community. The format and extent of future outlooks may be different from the format and extent of the information contained in this release.
Definitions and Reconciliations
Non-GAAP financial measures and other capitalized terms, as used in this earnings release, are defined, reconciled and further explained on Attachment 12, Definitions and Reconciliations of Non-GAAP Financial Measures and Other Terms. Attachment 12 is included in the full earnings release available at the Companys website at http://www.avalonbay.com/earnings. This wire distribution includes only the following definitions and reconciliations:
Average Rental Rates are calculated by the Company as rental revenue in accordance with GAAP, divided by the weighted average number of occupied apartment homes.
Business Segment Operating Results included in this release presents the Companys business segment financial information for all reporting periods on a comparable basis, with the charge for uncollectible lease revenue included as an adjustment to revenue. Historically for periods prior to January 1, 2019, the Company presented charges related to uncollectible lease revenue in operating expenses. With the Companys adoption of ASU 2016-02, Leases, the Company is presenting such charges as an adjustment to revenue in its consolidated GAAP financial statements on a prospective basis, beginning with the three months ended March 31, 2019. However, for reported segment financial information, including for Established Communities, the Company has also included such charges as an adjustment to revenue for all prior year periods presented in order to provide comparability.
A reconciliation of total revenue, rental revenue and operating expenses for Established Communities, as presented in this release, to results prior to the adjustment for uncollectible lease revenue is as follows (dollars in thousands):
|2019||2018||% Change||2018||% Change|
|Total revenue, excluding uncollectible lease revenue||$||462,180||$||448,008||3.2||%||$||461,600||0.1||%|
|Uncollectible lease revenue||(1,907||)||(3,328||)||(42.7||)%||(2,052||)||(7.1||)%|
|Total revenue, including uncollectible lease revenue||460,273||444,680||3.5||%||459,548||0.2||%|
|Rental revenue, excluding uncollectible lease revenue||461,713||447,823||3.1||%||461,267||0.1||%|
|Uncollectible lease revenue||(1,907||)||(3,328||)||(42.7||)%||(2,052||)||(7.1||)%|
|Rental revenue, including uncollectible lease revenue||459,806||444,495||3.4||%||459,215||0.1||%|
|Operating expenses, excluding uncollectible lease revenue||128,820||128,592||0.2||%||127,342||1.2||%|
|Uncollectible lease revenue||1,907||3,328||(42.7||)%||2,052||(7.1||)%|
|Operating expenses, including uncollectible lease revenue||$||130,727||$||131,920||(0.9||)%||$||129,394||1.0||%|
Other Business Segments
A reconciliation of rental revenue and operating expenses for other business segments, as presented in this release, to results prior to the adjustment for uncollectible lease revenue is as follows (dollars in thousands):
|Rental revenue, excluding uncollectible lease revenue||$||64,461||$||32,086||$||2,282|
|Uncollectible lease revenue||(734||)||(147||)||(5||)|
|Rental revenue, including uncollectible lease revenue||63,727||31,939||2,277|
|Operating expenses, excluding uncollectible lease revenue||21,213||9,738||1,165|
|Uncollectible lease revenue||734||147||5|
|Operating expenses, including uncollectible lease revenue||$||21,947||$||9,885||$||1,170|
Development Communities are 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.
Development Rights are development opportunities in the early phase of the development process for which the Company either has an option to acquire land or enter into a leasehold interest, for which the Company is the buyer under a long-term conditional contract to purchase land, where the Company controls the land through a ground lease or owns land to develop a new community, or where the Company is the designated developer in a public-private partnership. The Company capitalizes related pre-development costs incurred in pursuit of new developments for which the Company currently believes future development is probable.
Economic Occupancy (Ec Occ) is defined as total possible revenue less vacancy loss as a percentage of total possible revenue. Total possible revenue (also known as gross potential) is determined by valuing occupied units at contract rates and vacant units at Market Rents. Vacancy loss is determined by valuing vacant units at current Market Rents. By measuring vacant apartments at their Market Rents, Economic Occupancy takes into account the fact that apartment homes of different sizes and locations within a community have different economic impacts on a communitys gross revenue.
Economic Gain (Loss) is calculated by the Company as the gain (loss) on sale in accordance with GAAP, less accumulated depreciation through the date of sale and any other non-cash adjustments that may be required under GAAP accounting. Management generally considers Economic Gain (Loss) to be an appropriate supplemental measure to gain (loss) on sale in accordance with GAAP because it helps investors to understand the relationship between the cash proceeds from a sale and the cash invested in the sold community. The Economic Gain (Loss) for disposed communities is based on their respective final settlement statements. A reconciliation of the Economic Gain (Loss) to the gain on sale in accordance with GAAP for the wholly-owned operating community disposed during the three months ended March 31, 2019 is as follows (dollars in thousands):
|Accumulated Depreciation and Other||(10,199||)|
|Economic Gain (Loss)||$||6,183|
Established Communities are consolidated communities in the markets where the Company has a significant presence (New England, New York/New Jersey, Mid-Atlantic, Pacific Northwest, and Northern and Southern California) and where a comparison of operating results from the prior year to the current year is meaningful, as these communities were owned and had Stabilized Operations, as defined below, as of the beginning of the respective prior year period. Therefore, for 2019 operating results, Established Communities are consolidated communities that have Stabilized Operations as of January 1, 2018, are not conducting or are not probable to conduct substantial redevelopment activities and are not held for sale or probable for disposition within the current year.
EBITDA, EBITDAre and Core EBITDAre are considered by management to be supplemental measures of our financial performance. EBITDA is defined by the Company as net income or loss attributable to the Company before interest income and expense, income taxes, depreciation and amortization. EBITDAre is calculated by the Company in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (NAREIT), as EBITDA plus or minus losses and gains on the disposition of depreciated property, plus impairment write-downs of depreciated property, with adjustments to reflect the Company’s share of EBITDAre of unconsolidated entities. Core EBITDAre is the Companys EBITDAre as adjusted for non-core items outlined in the table below. By further adjusting for items that are not considered part of the Companys core business operations, Core EBITDAre can help one compare the core operating and financial performance of the Company between periods. A reconciliation of EBITDA, EBITDAre and Core EBITDAre to net income is as follows (dollars in thousands):
|Interest expense, net, inclusive of loss on extinguishment of debt, net||48,172|
|Income tax expense||12|
|Gain on sale of communities||(14,835||)|
|Joint venture EBITDAre adjustments (1)||6,839|
|Gain on other real estate transactions||(267||)|
|Business interruption insurance proceeds||(172||)|
|Severance related costs||19|
|Development pursuit write-offs and expensed transaction costs, net||277|
|Residential for-sale condo activity||473|
(1) Includes joint venture interest, taxes, depreciation, gain on dispositions of depreciated real estate and impairment losses, if applicable, included in net income.
FFO and Core FFO are considered by management to be supplemental measures of our operating and financial performance. FFO is calculated by the Company in accordance with the definition adopted by NAREIT. FFO is calculated by the Company as Net income or loss attributable to common stockholders computed in accordance with GAAP, adjusted for gains or losses on sales of previously depreciated operating communities, cumulative effect of a change in accounting principle, impairment write-downs of depreciable real estate assets, write-downs of investments in affiliates which are driven by a decrease in the value of depreciable real estate assets held by the affiliate and depreciation of real estate assets, including adjustments for unconsolidated partnerships and joint ventures. By excluding gains or losses related to dispositions of previously depreciated operating communities and excluding real estate depreciation (which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates), FFO can help one compare the operating and financial performance of a companys real estate between periods or as compared to different companies. Core FFO is the Company’s FFO as adjusted for non-core items outlined in the table below. By further adjusting for items that are not considered part of our core business operations, Core FFO can help one compare the core operating and financial performance of the Company between periods. A reconciliation of Net income attributable to common stockholders to FFO and to Core FFO is as follows (dollars in thousands):
|Net income attributable to common stockholders||$||170,366||$||141,643|
|Depreciation – real estate assets, including joint venture adjustments||164,746||158,483|
|Distributions to noncontrolling interests||11||11|
|Gain on sale of previously depreciated real estate||(14,835||)|
|FFO attributable to common stockholders||320,288||300,137|
|Joint venture promote (1)||(925||)|
|Casualty gain, net on real estate||(58||)|
|Business interruption insurance proceeds||(172||)|
|Lost NOI from casualty losses covered by business interruption insurance (2)||898|
|Loss on extinguishment of consolidated debt||280||397|
|Severance related costs||19||370|
|Development pursuit write-offs and expensed transaction costs, net||277||327|
|Residential for-sale condo activity||473|
|(Gain) loss on other real estate transactions||(267||)||47|
|Core FFO attributable to common stockholders||$||319,876||$||301,796|
|Average shares outstanding – diluted||138,832,201||138,153,170|
|Earnings per share – diluted||$||1.23||$||1.03|
|FFO per common share – diluted||$||2.31||$||2.17|
|Core FFO per common share – diluted||$||2.30||$||2.18|
|(1) Represents the Company’s promoted interest in AvalonBay Value Added Fund II, L.P.|
(2) Amount for 2018 is for the Maplewood casualty loss, which occurred in Q1 2017, and for which the Company recognized $3,495 in business interruption insurance proceeds in Q3 2017.
Initial Year Market Cap Rate is defined by the Company as Projected NOI of a single community for the first 12 months of operations (assuming no repositioning), less estimates for non-routine allowance of approximately $300 – $500 per apartment home, divided by the gross sales price for the community. Projected NOI, as referred to above, represents managements estimate of projected rental revenue minus projected operating expenses before interest, income taxes (if any), depreciation and amortization. For this purpose, managements projection of operating expenses for the community includes a management fee of 2.5% – 3.5%. The Initial Year Market Cap Rate, which may be determined in a different manner by others, is a measure frequently used in the real estate industry when determining the appropriate purchase price for a property or estimating the value for a property. Buyers may assign different Initial Year Market Cap Rates to different communities when determining the appropriate value because they (i) may project different rates of change in operating expenses and capital expenditure estimates and (ii) may project different rates of change in future rental revenue due to different estimates for changes in rent and occupancy levels. The weighted average Initial Year Market Cap Rate is weighted based on the gross sales price of each community.
Interest Coverage is calculated by the Company as Core EBITDAre, divided by the sum of interest expense, net, and preferred dividends, if applicable. Interest Coverage is presented by the Company because it provides rating agencies and investors an additional means of comparing our ability to service debt obligations to that of other companies. A calculation of Interest Coverage for the three months ended March 31, 2019 is as follows (dollars in thousands):
|Interest expense, net||$||47,892|
|Interest Coverage||7.8 times|
Market Rents as reported by the Company are based on the current market rates set by the Company based on its experience in renting apartments and publicly available market data. Trends in market rents for a region as reported by others could vary. Market Rents for a period are based on the average Market Rents during that period and do not reflect any impact for cash concessions.
Net Debt-to-Core EBITDAre is calculated by the Company as total debt (secured and unsecured notes and the Company’s variable rate unsecured credit facility) that is consolidated for financial reporting purposes, less consolidated cash and cash in escrow, divided by annualized first quarter 2019 Core EBITDAre, as adjusted. A calculation of Net Debt-to-Core EBITDAre is as follows (dollars in thousands):
|Total debt principal (1)||$||7,100,685|
|Cash and cash in escrow||(195,207||)|
|Core EBITDAre, annualized||$||1,487,908|
|Net Debt-to-Core EBITDAre||4.6 times|
(1) Balance at March 31, 2019 excludes $9,515 of debt discount and $33,158 of deferred financing costs as reflected in unsecured notes, net, and $14,559 of debt discount and $3,386 of deferred financing costs as reflected in notes payable on the Condensed Consolidated Balance Sheets.
NOI is defined by the Company as total property revenue less direct property operating expenses (including property taxes), and excluding corporate-level income (including management, development and other fees), corporate-level property management and other indirect operating expenses, investments and investment management expenses, expensed transaction, development and other pursuit costs, net of recoveries, interest expense, net, loss (gain) on extinguishment of debt, net, general and administrative expense, joint venture income, depreciation expense, corporate income tax expense, casualty and impairment loss (gain), net, gain on sale of communities, loss (gain) on other real estate transactions and net operating income from real estate assets sold or held for sale. The Company considers NOI to be an important and appropriate supplemental performance measure to Net Income of operating performance of a community or communities because it helps both investors and management to understand the core operations of a community or communities prior to the allocation of any corporate-level property management overhead or financing-related costs. NOI reflects the operating performance of a community, and allows for an easier comparison of the operating performance of individual assets or groups of assets. In addition, because prospective buyers of real estate have different financing and overhead structures, with varying marginal impact to overhead as a result of acquiring real estate, NOI is considered by many in the real estate industry to be a useful measure for determining the value of a real estate asset or groups of assets.
A reconciliation of NOI to Net Income, as well as a breakdown of NOI by operating segment, is as follows (dollars in thousands):
|Indirect operating expenses, net of corporate income||19,722||18,958||21,849|
|Expensed transaction, development and other pursuit costs, net of recoveries||1,095||800||1,599|
|Interest expense, net||47,892||55,113||55,180|
|Loss on extinguishment of debt, net||280||397||14,775|
|General and administrative expense||13,700||14,431||15,738|
|Joint venture loss (income)||1,060||(1,740||)||(2,710||)|
|Casualty and impairment (gain) loss, net||(58||)||826|
|Gain on sale of communities||(14,835||)||(242,532||)|
|(Gain) loss on other real estate transactions||(267||)||47||(9||)|
|NOI from real estate assets sold or held for sale||(1,238||)||(19,311||)||(11,148||)|
NOI as reported by the Company does not include the operating results from assets sold or classified as held for sale. A reconciliation of NOI from communities sold or classified as held for sale is as follows (dollars in thousands):
|Revenue from real estate assets sold or held for sale||$||2,394||$||29,647|
|Operating expenses from real estate assets sold or held for sale||(1,156||)||(10,336||)|
|NOI from real estate assets sold or held for sale||$||1,238||$||19,311|
Other Stabilized Communities are completed consolidated communities that the Company owns, which have Stabilized Operations as of January 1, 2019, or which we acquired during the year ended March 31, 2019. Other Stabilized Communities includes stabilized operating communities in the Company’s expansion markets of Denver, Colorado, and Southeast Florida, but excludes communities that are conducting or are probable to conduct substantial redevelopment activities.
Projected NOI, as used within this release for certain Development Communities and in calculating the Initial Year Market Cap Rate for dispositions, represents managements estimate, as of the date of this release (or as of the date of the buyers valuation in the case of dispositions), of projected stabilized rental revenue minus projected stabilized operating expenses. For Development Communities, Projected NOI is calculated based on the first twelve months of Stabilized Operations following the completion of construction. In calculating the Initial Year Market Cap Rate, Projected NOI for dispositions is calculated for the first twelve months following the date of the buyers valuation. Projected stabilized rental revenue represents managements estimate of projected gross potential minus projected stabilized economic vacancy and adjusted for projected stabilized concessions plus projected stabilized other rental revenue. Projected stabilized operating expenses do not include interest, income taxes (if any), depreciation or amortization, or any allocation of corporate-level property management overhead or general and administrative costs. In addition, projected stabilized operating expenses for Development Communities do not include property management fee expense. Projected gross potential for Development Communities and dispositions is generally based on leased rents for occupied homes and managements best estimate of rental levels for homes which are currently unleased, as well as those homes which will become available for lease during the twelve month forward period used to develop Projected NOI. The weighted average Projected NOI as a percentage of Total Capital Cost (“Weighted Average Initial Projected Stabilized Yield”) is weighted based on the Companys share of the Total Capital Cost of each community, based on its percentage ownership.
Management believes that Projected NOI of the Development Communities, on an aggregated weighted average basis, assists investors in understanding management’s estimate of the likely impact on operations of the Development Communities when the assets are complete and achieve stabilized occupancy (before allocation of any corporate-level property management overhead, general and administrative costs or interest expense). However, in this release the Company has not given a projection of NOI on a company-wide basis. Given the different dates and fiscal years for which NOI is projected for these communities, the projected allocation of corporate-level property management overhead, general and administrative costs and interest expense to communities under development is complex, impractical to develop, and may not be meaningful. Projected NOI of these communities is not a projection of the Company’s overall financial performance or cash flow. There can be no assurance that the communities under development will achieve the Projected NOI as described in this release.
Redevelopment Communities are consolidated communities where substantial redevelopment is in progress or is probable to begin during the current year. Redevelopment is considered substantial when capital invested during the reconstruction effort is expected to exceed the lesser of $5,000,000 or 10% of the communitys pre-redevelopment basis and is expected to have a material impact on the operations of the community, including occupancy levels and future rental rates.
Redevelopment Communities include nine communities containing 3,396 apartment homes that are currently under active redevelopment as of March 31, 2019, with an expected Total Capital Cost of $159,000,000, of which $73,000,000 is remaining to invest.
Rental Revenue with Concessions on a Cash Basis is considered by the Company to be a supplemental measure to rental revenue in conformity with GAAP to help investors evaluate the impact of both current and historical concessions on GAAP-based rental revenue and to more readily enable comparisons to revenue as reported by other companies. In addition, Rental Revenue with Concessions on a Cash Basis allows an investor to understand the historical trend in cash concessions.
A reconciliation of rental revenue from Established Communities in conformity with GAAP to Rental Revenue with Concessions on a Cash Basis is as follows (dollars in thousands):
|Rental revenue (GAAP basis)||$||459,806||$||444,495|
|Rental Revenue with Concessions|
|on a Cash Basis||$||459,740||$||445,422|
|% change — GAAP revenue||3.4||%|
|% change — cash revenue||3.2||%|
Stabilized Operations/Restabilized Operations is defined as the earlier of (i) attainment of 95% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment.
Total Capital Cost includes all capitalized costs projected to be or actually incurred to develop the respective Development or Redevelopment Community, or Development Right, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees, offset by proceeds from the sale of any associated land or improvements, all as determined in accordance with GAAP. Total Capital Cost also includes costs incurred related to first generation retail tenants, such as tenant improvements and leasing commissions. For Redevelopment Communities, Total Capital Cost excludes costs incurred prior to the start of redevelopment when indicated. With respect to communities where development or redevelopment was completed in a prior or the current period, Total Capital Cost reflects the actual cost incurred, plus any contingency estimate made by management. Total Capital Cost for communities identified as having joint venture ownership, either during construction or upon construction completion, represents the total projected joint venture contribution amount. For joint ventures not in construction, Total Capital Cost is equal to gross real estate cost.
Unencumbered NOI as calculated by the Company represents NOI generated by real estate assets unencumbered by outstanding secured notes payable as of March 31, 2019 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 Companys 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 three months ended March 31, 2019 is as follows (dollars in thousands):
|NOI for Established Communities||$||331,453|
|NOI for Other Stabilized Communities||44,948|
|NOI for Redevelopment Communities||22,040|
|NOI for Development Communities||1,443|
|NOI from real estate assets sold or held for sale||1,238|
|Total NOI generated by real estate assets||401,122|
|NOI on encumbered assets||36,157|
|NOI on unencumbered assets||$||364,965|
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Vice President of Investor Relations