Avalonbay Communities' CEO Discusses Q4 2011 Results - Earnings Call Transcript

AvalonBay Communities (AVB)

Q4 2011 Earnings Call

February 02, 2012 1:00 pm ET

Executives

John Christie - Senior Director of Investor Relations & Research

Timothy J. Naughton - Chief Executive Officer, President, Director and Member of Investment & Finance Committee

Thomas J. Sargeant - Chief Financial Officer and Executive Vice President

Leo S. Horey - Executive Vice President of Operations

Analysts

Robert Stevenson - Macquarie Research

Jana Galan - BofA Merrill Lynch, Research Division

David Bragg - Zelman & Associates, Research Division

Eric Wolfe - Citigroup Inc, Research Division

Derek Bower - UBS Investment Bank, Research Division

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Andrew McCulloch - Green Street Advisors, Inc., Research Division

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

Unknown Analyst

Paula J. Poskon - Robert W. Baird & Co. Incorporated, Research Division

Jason Ren - Morningstar Inc., Research Division

Richard C. Anderson - BMO Capital Markets U.S.

Presentation

Operator

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Good afternoon, ladies and gentlemen, and welcome to AvalonBay Communities Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference call, Mr. John Christie, Director of Investor Relations. Mr. Christie, you may begin your conference.

John Christie

Thank you, Amanda, and welcome to AvalonBay Communities Fourth Quarter 2011 Earnings Conference Call. Before we begin, please note that forward-looking statements may be made during this discussion. And there are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release, as well as in the company's Form 10-K and Form 10-Q filed with the SEC.

As usual, the press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion. The attachment is available on our website at www.avalonbay.com/earnings, and we encourage you to refer to this information during your review of our operating results and financial performance.

And with that, I'll turn the call over to Tim Naughton, CEO and President of AvalonBay Communities. Tim?

Timothy J. Naughton

Thanks, John. Welcome to our fourth quarter call. Joining me today are Tom Sargeant, our Chief Financial Officer; and Leo Horey, EVP of Property Operations. Tom and I have some prepared remarks, and then the 3 of us will be available for Q&A afterwards.

I'll start by touching on some of the operating and investment highlights from last quarter and an overview of 2011. In addition, I'll provide a few comments about our outlook for the economy and our partner markets for the coming year. Tom will then discuss some of the financial highlights for the quarter and review our financial outlook for 2012. Lastly, I'll come back to provide some color on the press release we issued in December in which we announced the launch of 2 new apartment brands.

Last night, we reported FFO per share of $1.19, which was up 18% over the prior year. In addition, we announced an increase in the quarterly dividend of 9% for 2012 based upon this continued strong performance and our outlook for 2012. Results in Q4 were driven primarily by strong same-store NOI growth atop 10% for the quarter, driven by same-store revenue growth of 6.2% and a decline of same-store expenses of 1.8%.

Same-store NOI growth was particularly strong in California, which posted growth greater than 15% in both Northern and Southern California. Northern California continued to be our strongest region, while Southern California is still relatively early in its recovery, with Orange County and Los Angeles leading the way in that region.

In Q4, we continue to be very active across the board in the area of investments. We started 4 new developments, totaling almost $500 million, and now have $1.5 billion underway. Two of the new starts were AVA communities, which is one of the 2 brands we formally launched last quarter. This brand, which is targeted at a youthful urban-minded demographic that craves the energy in the neighborhood, is ideally suited for the 2 neighborhoods where we began construction this past quarter, West Chelsea in Manhattan and the H Street Corridor in Northeast D.C.

We also continue to replenish the pipeline in Q4, adding another 7 deals totaling $500 million in new development rights. Most of these deals are located on the West Coast, where fundamentals are showing the most momentum. We expect that we will continue to add to the pipeline over the next couple of quarters as we have another several $100 million dollars worth of development rights under contract and in due diligence.

The economics of development remain attractive as the average projected yield for the $1.5 billion under construction is close to 7% or around 200 basis points over prevailing cap rates. In addition, the deals in our development right pipeline, as well as those currently in due diligence, add projected yields consistent with those under construction in the 6.5% to 7% range based upon current rents and current construction costs. As a result, we expect that development will continue to be an important driver of growth and value creation over the next few years.

We continue to shape and reposition the portfolio in Q4 through transaction activity and redevelopment. Last quarter we sold 5 assets, 3 that were wholly owned and 2 that were owned by our First Investment Management Fund. Two of the wholly owned assets that were sold, Cameron Court and Rock Spring, are in the D.C. market and were sold for $220 million and an economic gain of over $120 million.

Given the growing permitting activity and the uncertain impact of potential fiscal reform on the D.C. area over the next 2 to 3 years, we thought it was a good time to harvest value. Despite our recent actions, D.C. remains an important target market for us. And over the long term, we expect to increase our exposure in this market.

Finally, during the quarter, we started the redevelopment of 6 existing stabilized communities, including 2 under the AVA brand and one under the Eaves by Avalon brand, which is a brand targeted to a more value-oriented and cost-conscious consumer. We currently have 12 communities under redevelopment that represent a broad mix of assets, containing all 3 brands, including 5 Avalon, 3 AVA and 4 Eaves communities.

For the year, FFO per share was up over 14% and adjusting for non-routine items was up by around 16.5%. This was the strongest growth in FFO per share since 2000. We enjoyed this strong growth despite an economy that didn't live up to expectations as the year began. The corporate sector, now flushed with cash and restored balance sheets, was expected to lead the economy to recovery in 2011 but failed to do so, as companies became reluctant to expand their businesses as confidence faltered. As a result, growth in GDP of under 2% came in below expectations. The economy created only 1.5 million jobs or about half of what was expected at the beginning of the year and not enough to make a meaningful impact on the unemployment rate.

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