AvalonBay Communities
Annual Report 2012

Plain-text annual report

2012 ANNUAL REPORT AvalonBay Communities, Inc. An equity REIT primarily engaged in developing, redeveloping, acquiring and managing upscale apartment communities in high barrier-to-entry coastal markets within the United States. TOTAL SHAREHOLDER RETURN (1) % 9 . 1 2 % 9 . 0 2 % 2 . 8 1 % 2 . 2 1 % 8 . 6 % 9 . 6 e t a R t h w o r G l a u n n A d n u o p m o C 25% 20% 15% 10% 5% 0% 1 Year 3 Year 10 Year AVB Multifamily Sector Average Source: SNL Financial LONG-TERM OUTPERFORMANCE (2) e t a R t h w o r G l a u n n A d n u o p m o C r a e Y 0 1 - 20% 15% 10% 5% 0% % 7 . 1 1 % 1 . 8 % 1 . 4 % 6 . 0 FFO NAV AVB Multifamily Sector Average Source: SNL Financial, Green Street Advisors These strategic capabilities enhance our long-standing competencies in development, construction, acquisitions, redevelopment and property management. Our capability led strategy sets us apart and positions us well to continue our long track record of delivering targeted growth and outsized long-term returns to our shareholders. AVALON GREEN–ELMSFORD, NY AVALONBAY COMMUNITIES, INC. 1 LETTER TO SHAREHOLDERS 2012 was another outstanding year for AvalonBay. Our same-store portfolio continued to contribute exceptional performance, as same-store NOI grew by 7.6% and FFO growth reached a record 16.4%. On the heels of our 14.3% FFO growth in 2011, this equated to a two-year total growth rate of 33.0%, marking an exceptionally strong rebound from the depths of the downturn. We declared a 10.3% increase in our dividend for 2013 on top of an 8.7% increase in 2012. With just nine quarters of sequential year-over-year NOI growth behind us so far, we are confident we are still in the early stages of this cycle, as documented demographic and consumer trends are expected to continue to drive strong demand in our high barrier-to-entry coastal markets throughout the course of this decade. Each of our growth platforms contributed to accretive investment returns in 2012. Our development efforts ramped up, with total development under construction growing to $1.8 billion by year end. We invested an additional $76 million in capital to redevelop some of our existing communities.(3) And in the fourth quarter, we announced the largest portfolio acquisition in the Company’s history, as we teamed with Equity Residential to contract for the purchase of Archstone from the Lehman Brothers bankruptcy estate. Our record-setting pace of investment activity was matched with capital markets activity that also set records for the Company. Immediately after announcing the Archstone acquisition, we completed the largest follow-on public equity offering in U.S. REIT history and issued 10-year unsecured debt at an interest rate that was, at the time, the lowest rate ever achieved by a REIT. We finished the year with liquidity and balance sheet capacity to spare, even after considering the closing of the Archstone transaction in the first quarter of 2013. Capability Led Since our founding as a public company in the early 1990s, we have always been a fully integrated enterprise, with strong competencies in development, construction and property management. These establish the framework for outsized returns and value creation. Over time, we have also developed competencies in acquisitions and redevelopment, which we use to shape and position the portfolio. Informing all of our investment decisions are strategic capabilities we developed in market research, customer insight, design and capital management. Over the past few years, we have increased our investment in these areas and built stronger connections between these central corporate functions and our regional offices, which drive our growth platforms. These capabilities help us extend our competitive advantage and make us better developers, acquirers and redevelopers. Let’s take a closer look at each one. 2 AVALONBAY COMMUNITIES, INC. Market Research Most large real estate investment platforms have some level of market research function that tracks demand and supply fundamentals. However, we believe that our market research group has taken the standard real estate research approach to a whole new level. We combine third-party data on market rents with internal supply pipeline estimates to generate a proprietary rent-growth model which provides unique, asset-class-specific projected rental growth rates for each submarket across our footprint. Customer Insight & Design While we interact with our customers thousands of times every day, it takes a focused effort to ensure that the voice of the customer finds its way into our strategic thinking on an ongoing basis. Our customer insight and branding group works with all of the different functional groups across the Company to gather data on customer preferences and use that data to inform the product and service decisions we make every day. Our design department works closely with each regional office on the design of new developments, redevelopments and major remerchandising and capital expense projects across our portfolio. They help to ensure adherence to our brand standards, and along with our sector-leading development team, work with local architects and design professionals to maximize the potential of each community. Capital Management Real estate is a capital intensive business. To support our objective of achieving attractive, risk-adjusted returns on investment activity, we seek to match fund new investments with long-term capital, which is generally sourced at the same time that we make an investment commitment. We refer to this as integrated capital management. This approach to capital management allows us to lock in the spread between the projected investment return and our cost of capital and mitigate risk arising from any future adverse change in the capital markets. With a wide array of cost-effective capital sources available to us, we developed a proprietary set of capital market monitors and analytical tools that we use to assess our current cost of capital in the equity and debt markets. Each quarter, we update these analytical tools, discuss our capital-sourcing alternatives, and compare current pricing against historical pricing and projected returns on new investments. This process allows us to access different funding sources based on their relative attractiveness at any particular point in time. Putting it All Together–The Archstone Acquisition As we evaluated the Archstone transaction, including which assets to select and how to structure the acquisition, we were able to leverage our strategic capabilities to great advantage. In-depth market and submarket analysis from our market research group informed our strategy on specific asset selection. Our multi-brand platform, led by our customer insight group, allowed us to identify a long-term branding strategy that will help unlock future growth potential through remerchandising and redeveloping some of the Archstone assets we are acquiring. And our integrated capital management discipline drove our financing strategy for the transaction, as we match funded our commitment with long-term capital put in place rapidly after announcing the transaction. Our Path to Targeted Growth We have come a long way from our early days as a regional developer building walk-up garden apartments in the Northeast and Mid-Atlantic. Our increasing strategic capabilities in market research, customer insight, design and capital management are helping us better execute on our long-standing competencies in development, construction, acquisitions, redevelopment and property management. As our sector and our industry continue to mature, our capability led strategy sets us apart and positions us well to continue our long-term track record of delivering outsized risk-adjusted returns to shareholders. TIMOTHY NAUGHTON, CEO & PRESIDENT AVALONBAY COMMUNITIES, INC. 3 By investing in the best data available and carefully studying their dynamics from submarkets all the way down to zip-code and census block, we confidently project what a market needs from our apartment homes and how these homes are likely to perform now and in the future. SUBMARKET ANNUAL NEW SUPPLY AS SHARE OF APARTMENT STOCK 5% 4% 3% 2% 1% 0% s i s y l a n A e l p m a x E % 4 % 3 % 1 % 1 Last 10 Years Next 10 Years (projected) Submarket rental revenue Annual new supply as share of apartment stock NEIGHBORHOOD DEMOGRAPHICS 10% 8% 13% 9% 22% 38% Couple w/wo children Single dad Male alone Single mom Female alone Roommates RESIDENT LOUNGE AT AVALON WEST LONG BRANCH–NJ 4 AVALONBAY COMMUNITIES, INC. AVALON FORT GREENE–BROOKLYN, NY Data driven. Deep market knowledge. Our market research team combines the best third-party and publicly available data with internal company metrics to develop actionable information for decision-making. The market research team identifies the best submarkets for growth and provides recommendations for product type, unit mix and pricing. Our proprietary revenue model generates growth rates for over 200 submarkets, which are embedded into our underwriting of new investments, helping us maximize portfolio performance. Often challenging conventional wisdom, the data-driven insights from our market research capability guide us to smart, targeted growth. AVALONBAY COMMUNITIES, INC. 5 Open kitchens with ample storage. Islands for eating, working and entertaining. Built-in utility stations for recharging electronic devices and recycling. Unique sliding doors and walls to maximize living space in urban apartment homes. Top-of-the-line fitness centers. Pet-friendly amenities. Bike parking. These are just some of the customer- centric design features found in our communities. PICTURED TOP TO BOTTOM: KITCHEN AT AVALON PARK CREST–VA, FITNESS CENTER AT AVALON NORTH BERGEN–NJ AND UNIQUE ONE BEDROOM AT AVA H STREET–DC. 6 AVALONBAY COMMUNITIES, INC. Customer focused. Thoughtful design. At AvalonBay, the voice of the customer is at the center of decision-making. Through on-line discussion forums, focus groups, regular customer surveys and social media conversations, we constantly listen to customers. Our design team translates customer needs to create distinctive living environments and design standards. Together, our customer insight and design capabilities drive our brand offerings– Avalon, AVA and eaves by Avalon–allowing us to more deeply penetrate our core markets, reach new customers and better serve existing residents. AVALONBAY COMMUNITIES, INC. 7 Our 2013 dividend increase is supported by the performance of our core portfolio, future growth prospects from our development pipeline and the Archstone acquisition. LONG-TERM DIVIDEND GROWTH e g n a h C d n e d i v i D r a e Y 0 1 - e t a R t h w o r G l a u n n A d n u o p m o C 5% 4% 3% 2% 1% 0% -1% -2% -3% % 3 . 4 AVB % 4 . 1 - Multifamily Sector Avg. Source: SNL Financial LOW DEBT-TO-MARKET CAPITALIZATION RATIO Floating Debt 2% Fixed Debt 18% Equity 80% As of 12/31/12 8 AVALONBAY COMMUNITIES, INC. AVALON WEST CHELSEA/AVA HIGH LINE–NEW YORK CITY, NY (UNDER DEVELOPMENT) Balance sheet strength. Financial flexibility. We are active in the capital markets with access to a wide variety of cost-effective capital sources to fund our investment activity, including unsecured bond offerings, secured mortgage loans, common and preferred equity, investment fund vehicles, one-off joint ventures, and asset sales. Our integrated capital management approach, marked by proprietary capital market monitors and analytical tools, allows us to access the most effective source of capital at any given point in time and position our balance sheet to best support growth from new investment. AVALONBAY COMMUNITIES, INC. 9 The Archstone transaction adds an attractive collection of assets, which complements our portfolio on three important dimensions: geographic allocation, submarket positioning, and price point. The addition of these communities and future developments provides important scale benefits for market presence, brand penetration and G&A leverage, which we believe will strengthen our competitive position over time. INCREASED MARKET PENETRATION FOR AVALONBAY +21% +39% +73% +11% +12% +68% % increase in apartment homes post Archstone acquisition 10 AVALONBAY COMMUNITIES, INC. ARCHSTONE FIRST AND M–WASHINGTON, DC In November 2012, we announced that we would acquire approximately 40% of the assets of Archstone. This sizable transaction accelerates our growth, consistent with our long-stated strategy of more deeply penetrating our core coastal markets. AVALONBAY COMMUNITIES, INC. 11 AVA H STREET LOBBY–WASHINGTON, DC Notes 1. Total Shareholder Return: The change in value over the period stated with all dividends reinvested. Total Shareholder Return is sometimes presented as the compound annual growth rate. The Total Shareholder Return for each year within the timeframe presented may vary. 2. NAV per Share Growth: The estimated compound annual growth rate of Net Asset Value (NAV) per Share as estimated by Green Street Advisors, Inc. during the periods indicated. NAV per Share Growth for each year within the timeframe presented may vary. 3. Redevelopment investment is shown excluding dollars invested prior to start of redevelopment. Table Of Contents Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Consolidated Financial Statements Form 10-K Page 46 47 50 75 76 F-3 Definitions And Reconciliations Of Non-GAAP Financial Measures And Other Terms This Annual Report contains certain non-GAAP financial measures and other terms. The definition and calculation of these non- GAAP financial measures and other terms may differ from the definitions and methodologies used by other REITs and, accordingly, may not be comparable. The non-GAAP financial measures referred to below should not be considered an alternative to net income as an indication of our performance. In addition, these non-GAAP financial measures do not represent cash generated from operating activities in accordance with GAAP and therefore should not be considered as an alternative measure of liquidity or as indicative of cash available to fund cash needs. The definitions of non-GAAP financial measures and other terms not included below (Funds from Operations, Net Operating Income, Established/Same Store Communities) are contained in our Annual Report on Form 10-K which is distributed with and a part of this Annual Report. The Multifamily Sector Average is a weighted average based on Total Market Capitalization per SNL Financial. The weighted average for “Total Shareholder Return”, “FFO” and “Long-Term Dividend Growth” includes AIV, BRE, CPT, EQR, ESS, HME, and UDR. The weighted average for “NAV per Share Growth” includes all companies under Green Street Advisors, Inc.’s coverage for which data is available during each of the time periods presented and includes AEC, BRE, CPT, EQR, PPS and UDR. The Stock Performance Graph provides a comparison, from December 2007 through December 2012, of the cumulative total shareholder return (assuming reinvestment of dividends) among the Company, the Standard & Poor’s 500 Index, and a peer group index (the FTSE NAREIT Apartment REIT Index) composed of 15 publicly-traded apartment REITs, including the Company based on an initial purchase price of $100. The FTSE NAREIT Apartment REIT Index includes only REITs that invest directly or indirectly primarily in the equity ownership of multifamily residential apartment communities. Upon written request to the Company’s Secretary, the Company will provide any stockholder with a list of REITs included in the FTSE NAREIT Apartment REIT Index. The historical information set forth below is not necessarily indicative of future performance. Data for the FTSE NAREIT Apartment REIT Index and the S&P 500 Index were provided to the Company by NAREIT. AVALONBAY COMMUNITIES, INC. 13 STOCK PERFORMANCE l e u a V x e d n I $200 $175 $150 $125 $100 $75 $50 $25 Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12 AVB FTSE NAREIT Apartment REIT Index S&P 500 Period Ending Index Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12 AvalonBay Communities, Inc. FTSE NAREIT Apartment REIT Index S&P 500 100 100 100 70 75 63 100 98 80 142 144 92 170 165 94 181 177 109 Ten Year FFO Reconciliation to Net Income For the Year Ended (dollars in thousands) 12/31/12 12/31/11 12/31/10 12/31/09 12/31/08 12/31/07 12/31/06 12/31/05 12/31/04 12/31/03 Net income $ 423,869 $ 441,622 $ 175,331 $ 155,647 $ 411,487 $ 358,160 $ 266,546 $ 310,468 $ 207,779 $ 262,503 Dividends attributable to preferred stock Depreciation—real estate assets, including discontinued operations and joint venture adjustments Distributions to noncontrol- ling interests, including discontinued operations Cumulative effect of change in accounting principle Gain on acquisition of unconsolidated entities Gain on sale of unconsolidated entities Gain on sale of operating communities Funds from Operations attributable to common stockholders Weighted average common shares outstanding—diluted 28 — (14,194) — — — — (10,454) (8,700) (8,700) (8,700) (8,700) (10,744) 265,627 256,986 237,041 221,415 203,082 184,731 165,982 163,252 159,221 129,207 27 55 66 216 280 391 1,363 3,048 1,263 — — — — — — — — — — — — — — (3,483) (59,927) (6,609) — — — (4,547) — — — — — (7,972) (3,063) (146,311) (281,090) (74,074) (63,887) (284,901) (106,487) (97,411) (195,287) (121,287) (159,756) $ 521,047 $ 414,482 $ 338,353 $ 313,241 $ 315,947 $ 368,057 $ 320,199 $ 271,096 $ 235,514 $ 222,473 98,025,152 90,777,462 84,632,869 80,599,657 77,578,852 79,856,927 75,586,898 74,759,318 73,354,956 70,203,467 EPS—diluted $ 4.32 $ 4.87 $ 2.07 $ 1.93 $ 5.17 $ 4.38 $ 3.42 $ 4.05 $ 2.75 $ 3.60 FFO per common share—diluted $ 5.32 $ 4.57 $ 4.00 $ 3.89 $ 4.07 $ 4.61 $ 4.24 $ 3.63 $ 3.21 $ 3.17 14 AVALONBAY COMMUNITIES, INC. AvalonBay Corporate Information Board of Directors Bryce Blair (4) Chairman of the Board AvalonBay Communities, Inc. Alan B. Buckelew (2, 4) CEO and President Princess Cruises, Inc. A global cruise line Bruce A. Choate (4, 5) President and CEO Watson Land Company A real estate investment trust John J. Healy, Jr. (2, 5) Private Investor Timothy J. Naughton (4) Chief Executive Officer and President AvalonBay Communities, Inc. Lance R. Primis (1,3,5) Managing Partner Lance R. Primis and Partners, LLC A management consulting firm Peter S. Rummell (3,4) Private Investor H. Jay Sarles (2, 3) Private Investor W. Edward Walter (2, 4) President and CEO Host Hotels & Resorts, Inc. A real estate investment trust 1 Lead Independent Director 2 Audit Committee 3 Compensation Committee 4 Investment and Finance Committee 5 Nominating and Corporate Governance Committee Officers Timothy J. Naughton Chief Executive Officer and President Thomas J. Sargeant Chief Financial Officer Leo S. Horey III Chief Administrative Officer Matthew H. Birenbaum Executive Vice President Corporate Strategy Sean J. Breslin Executive Vice President Investments, Asset Management & Property Operations William M. McLaughlin Executive Vice President Development & Construction– Northeast Kevin P. O’Shea Executive Vice President Capital Markets Edward M. Schulman Executive Vice President General Counsel & Secretary Stephen W. Wilson Executive Vice President Development & Construction– West Coast/Mid-Atlantic David W. Bellman Senior Vice President Construction–East Coast Kurt D. Conway Senior Vice President Brand Strategy Deborah A. Coombs Senior Vice President Property Operations– West Coast Jonathan B. Cox Senior Vice President Development–Mid-Atlantic Scott W. Dale Senior Vice President Development–MA Suzanne Jakstavich Senior Vice President Human Resources Ronald S. Ladell Senior Vice President Development–NJ Joanne M. Lockridge Senior Vice President Finance J. Richard Morris Senior Vice President Construction Christopher L. Payne Senior Vice President Development–Southern CA Martin Piazzola Senior Vice President Development–NY Matthew T. Smith Senior Vice President Property Operations–East Coast Matthew B. Whalen Senior Vice President Development– CT/Long Island/Westchester Danyell D. Alders Vice President Property Operations– Southern CA Lisa B. Bongardt Vice President Property Operations– Mid-Atlantic Jonathan R. Busch-Vogel Vice President Development–NY Randall Caraway Vice President Property Operations– Southern CA Duane W. Carlson Vice President Construction– Northern CA/Pacific NW Jong M. Chung Vice President Design Sean M. Clark Vice President Redevelopment & Asset Management–West Coast Heather J. Duffy Vice President Property Operations– Northern CA Linda Early Vice President Property Operations–NY Stephen M. Fabian Vice President Customer Care Center Brian E. Fritz Vice President Development – Pacific NW Patrick Gniadek Vice President Investments–East Coast Christopher B. Helsabeck Vice President Development–Mid-Atlantic Kurt R. Hesser Vice President Finance Karen A. Hollinger Vice President Information Services David A. Hutchins Vice President Internal Audit Mark Janda Vice President Development–Southern CA Scott R. Kinter Vice President Construction – Northeast Lyn C. Lansdale Vice President Strategic Business Services David Lewis Vice President Engineering Sarah K. Mathewson Vice President Property Operations– CT/MA/NJ/RI Michael J. Roberts Vice President Development–MA Robert S. Salkovitz Vice President Construction–Southern CA Brian Schley Vice President Risk Management Keri A. Shea Vice President Finance & Treasurer Elizabeth A. Smith Vice President Redevelopment & Asset Management–East Coast Margaret A. Spriggs Vice President Development–Northern CA Mona R. Stahling Vice President Operations Craig F. Thomas Vice President Market Research Alaine Walsh Vice President Corporate and Investment Services Timothy M. Walters Vice President Investments –West Coast Catherine T. White Vice President Associate General Counsel Sean Willson Vice President Corporate Controller AVALONBAY COMMUNITIES, INC. 15 AvalonBay Corporate Information San Jose, CA 400 Race Street Suite 200 San Jose, CA 95126 Phone 408.983.1500 Fax 408.287.9167 Seattle, WA 11808 Northup Way Suite W311 Bellevue, WA 98005 Phone 425.576.2100 Fax 425.576.8447 Virginia Beach, VA 2901 Sabre Street Suite 100 Virginia Beach, VA 23452 Phone 757.631.5000 Fax 757.486.1063 Woodbridge, NJ Woodbridge Place 517 Route One South Suite 5500 Iselin, NJ 08830 Phone 732.404.4800 Fax 732.283.9105 Investor Relations Investor Relations AvalonBay Communities, Inc. Ballston Tower 671 N. Glebe Road Suite 800 Arlington, VA 22203 Phone 703.329.6300 ext. 4681 ir@avalonbay.com Website www.avalonbay.com Transfer Agent Computershare P.O. Box 358015 Pittsburgh, PA 15252-8015 Phone 866.230.0668 www.cpushareownerservices. com/cpuportal/index.jsp Independent Auditors Ernst & Young, LLP 8484 Westpark Drive McLean, VA 22102 Phone 703.747.1000 Form 10-K A copy of the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission is being distributed with this Annual Report and also may be obtained without charge by contacting Investor Relations. Stock Listings NYSE–AVB Forward-Looking Statements This Annual Report contains “forward-looking statements” within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Please see our discussion titled “Forward-Looking Statements” on page 69 of our Annual Report on Form 10-K for a discussion regarding risks associated with these statements. Headquarters Washington, DC Ballston Tower 671 N. Glebe Road Suite 800 Arlington, VA 22203 Phone 703.329.6300 Fax 703.329.9130 Regional Offices Boston, MA 51 Sleeper Street Suite 750 Boston, MA 02210 Phone 617.654.9500 Fax 617.426.1610 Fairfield, CT 1499 Post Road Second Floor Fairfield, CT 06824 Phone 203.926.2300 Fax 203.926.9744 Long Island, NY 135 Pinelawn Road Suite 130 South Melville, NY 11747 Phone 631.843.0736 Fax 631.843.0737 Los Angeles, CA 16255 Ventura Boulevard Suite 950 Encino, CA 91436 Phone 818.784.2800 Fax 818.784.2810 Newport Beach, CA 4440 Von Karman Avenue Suite 300 Newport Beach, CA 92660 Phone 949.955.6200 Fax 949.724.9208 New York, NY 275 Seventh Avenue 25th Floor New York, NY 10001 Phone 212.370.9269 Fax 212.370.1415 San Francisco, CA 455 Market Street Suite 1650 San Francisco, CA 94105 Phone 415.284.9080 Fax 415.546.4138 16 AVALONBAY COMMUNITIES, INC. I O C S C N A R F N A S , . C N I , I G A R C & Y E N E H I : I N G S E D Ballston Tower 671 N. Glebe Road, Suite 800 Arlington, VA 22203 703.329.6300 www.avalonbay.com AVALON IRVINE II–IRVINE, CA 

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