AvalonBay Communities, Inc. (AVB) November 18, 2015tippie.biz.uiowa.edu/henry/reports15/AVB_fa15.pdf · Five Year Beta 0.00 ... the northeast, northwest, and California. ... AvalonBay

Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie School of Management

Stuart Hemesath [[email protected]]

AvalonBay Communities, Inc. (AVB) November 18, 2015

Financial Services – Real Estate Investment Trusts (REITs) Stock Rating Buy

Investment Thesis Target Price $210

AvalonBay Communities is one of the largest apartment REITs in the US and is

concentrated in high growth coastal cities across the country. They own a high

quality portfolio which earn premium rates within the markets they operate

in. We recommend a buy and believe they are well positioned to maintain their

premium pricing and growth at high levels.

Drivers of Thesis

• Improving job markets and prolonged unemployment at low levels have

been catalysts for wage growth, driving the demand for high-end real

estate and maintaining premium rates at high occupancy levels.

• As an apartment REIT, the company benefits from having low lease

durations in comparison to other REIT alternatives. This allows them to

quickly adapt in a changing interest and leasing rate environment.

• The company has a robust pipeline of development starts, which we

believe exceeds $2 billion, that will fuel organic growth through 2018.

• Additionally, the company raised capital earlier this year to prefund

projects through 1Q2016 and take advantage of the low cost of capital in

anticipation of rate increases.

Risks to Thesis

• As a yield oriented investment, REITs will face pressure from investors in a

rising rate environment. Higher rates may also provide a catalyst for a

compression in real estate values, further impacting the company.

• The continued growth of REITs as an alternative asset class increases

competition for prime development opportunities, driven by a new wave

of investor cash flows.

Henry Fund DCF $212

Henry Fund DDM $210

Relative Multiple $182

Price Data

Current Price $175.16

52wk Range $156.10 – 186.89

Consensus 1yr Target $193

Key Statistics

Market Cap (B) $23.30

Shares Outstanding (M) 136.88

Institutional Ownership 99.3%

Five Year Beta 0.00

Dividend Yield 2.9%

Est. 5yr Growth 7.20%

Price/Earnings (TTM) 31.15

Price/Earnings (FY1) 20.76

Price/Book (mrq) 2.4

Price/FFO (TTM) 21.9

Profitability

Operating Margin 16.4%

Profit Margin 39.1%

Return on Assets (TTM) 2.1%

Return on Equity (TTM) 8.4%

Data Source: FactSet & Yahoo Finance

Earnings Estimates

Year 2012 2013 2014 2015E 2016E 2017E

EPS $4.34 $2.78 $5.22 $5.10 $4.83 $6.01

growth -12.21% -36.06% 87.80% -2.34% -5.13% 24.40%

12 Month Performance Company Description

AvalonBay Communities is a real estate

investment trust that develops, redevelops,

acquires, owns, and operates high-end multi-

family communities within the US, particularly in

the northeast, northwest, and California. The

company targets high wage growth cities and

often holds the highest rental rates within those

communities. As of year-end 2014, the company

owned over 250 communities and 74,000 units. -10%

-5%

0%

5%

10%

15%

20%

25%

30%

N D J F M A M J J A S O

AVB S&P 500

31.2

8.4

22.9

16.013.2

18.5

14.110.4

17.5

0

10

20

30

40

P/E ROE EV/EBITDA

AVB REITs Financials

Page 2

EXECUTIVE SUMMARY

Our recommendation for AvalonBay Communities is a buy

based on both strong economic and fundamental

outlooks. We foresee continued wage growth which will

drive demand for high-end real estate and maintain

premium pricing for the company. We believe AvalonBay

is well positioned as an apartment REIT and holds a distinct

advantage over retail and commercial REITs given its low

lease durations. Additionally, the company’s large pipeline

of development starts will drive continued growth for the

company which is seeing some of the highest growth rates

in recent history.

Our valuation models also support a buy recommendation.

Both our dividend discount and discounted cash flow

models advocate that the company is undervalued at its

current price range. Relative valuations, however, suggest

the company is overvalued. We believe this is due to the

broad set of REIT subcategories included in our peer group.

COMPANY DESCRIPTION

Real estate investment trusts, or REITs, were created in the

1960’s as a means for retail investors to own commercial

real estate. They are mandated to maintain a dividend

payout ratio of at least 90% and must have at least 75% of

their assets invested in real estate, cash, or treasuries and

must also derive at least 75% of their gross income from

real estate activities. There are three categories of REITs;

equity REITs, which invest directly in properties, mortgage

REITs, which invest in mortgages, and hybrids, which

invest in both.2

AvalonBay Communities is an equity REIT which develops,

acquires, owns, and operates multifamily residential

communities, primarily apartment complexes. The

company operates in metropolitan areas within the

northeastern and northwestern regions of the US as well

as metros within the Mid-Atlantic region and California. It

targets areas which have growing employment in high

wage sectors, lower house affordability, and high quality

of life metrics, stating these markets have the highest risk-

adjusted return on apartment communities.1

As of yearend 2014, the company operated over 250

apartment complexes in 11 states and Washington DC

consisting of over 74 thousand apartment units. There

were 26 additional complexes under construction, adding

another 8 thousand units, as well as 37 complexes with

rights to develop which contain 10 thousand units. These

properties are generally upscale within their community

and command the highest rental rates within their

perspective market. The company may pursue lower price

points based on the consumer segment in the area,

however, rates will still remain above average.1 This focus

on premium properties results in a high asset quality

balance sheet.

Regional Diversification

Source: Market Realist3

Data Source: AvalonBay Communities Annual Report1

Portfolio Branding

The company operates under three brands, Avalon, AVA

and Eaves by Avalon. Avalon is the company’s core offering

which focuses on upscale living and high end amenities.

AVA focuses on consumers who seek an urban

environment in close proximity to transportation,

entertainment, and services. These units tend to have a

33%

33%

18%

10%

6%

Revenue by Region

New York/New Jersey

Metro

California

Other Northeast

Mid-Atlantic

Pacific Northwest

Page 3

modern design with a tech focus. Lastly, the Eaves by

Avalon brand offers good quality of life, practical

amenities, and is often located in suburban settings at a

more modest price point.1 These brands allow the

company to target and market toward three distinct

consumer segments which can naturally vary based on the

metro area and offerings within each metro area.

AvalonBay Brand Targeting


Community Portfolio

While the company’s financial reports do not separate

brand, property types are broken out by the following four

categories:

Established Communities

Established communities include properties that have

either reached an occupancy rate of 95% or have been in

operation for at least one year following the

development/redevelopment stage. This group accounts

for the bulk of the company’s revenue and property type,

including 57% and 68%, respectively, as of yearend 2014.

Growth in these properties has been rapid over the past

two years as the company continues to take on debt to

establish new communities. Growth within the established

communities segment is a key driver for future revenue

expectations as each unit produced nearly $20,000 in

revenues last year. While we do not foresee a repeated

year of 48% growth, we do believe the next two years with

have growth rates exceeding 20% based on current

projects in the pipeline. Growth expectations following

that period return to single digits.

Established Community Forecasts

2014 2015E 2016E

Revenues 965.0 1406.2 1564.4

Properties 172 205 251

Units 49435 60805 74182

Growth 47.5% 23.0% 22.0%


Other Stabilized Communities

This segment includes all other communities that have

reached a stable occupancy rate and do not have plans for

redevelopment in the current year. Many of these

properties are the result of acquisitions and will move into

the established communities group in the following year.

As of yearend 2014, these properties accounted for 20% of

the company’s portfolio. The average revenue per unit in

this group lagged the previous group generating roughly

$15,000 per unit. This could be due to occupancy rates,

which are not disclosed for this segment. Our forecast for

this segment is to see the total number of units, 17,737 as

of 2014, to steadily decline over the next few years as we

are not forecasting any additional acquisitions within our

investment horizon.


Development/Redevelopment Communities

Properties included in these groups include properties

under construction, going through redevelopment, or

development has been recently completed but the

property has not met a stable occupancy. In the last year,

AvalonBay completed the development of 17 additional

communities at a cost of $1.1 billion, below the anticipated

cost of $1.3 billion. It is estimated that 2 of these

properties will generate $7.7 million in revenue in 2015 on

62%20%

10%8%

Property Portfolio by Community Type

Established

Communities

Other Stabilized

Development/

Redevelopment

Non-allocated

Page 4

their own.3 This group of properties is naturally low

revenue producing and accounted for 10% of the

company’s portfolio at yearend 2014. We expect growth

of 14% and 19% over the next two years, respectively,

before slowing as the company works through its pipeline

of new developments.


Non-Allocated Communities

The remainder of the properties are included in the non-

allocated group and consist primarily of lease-up

communities, where construction has recently been

completed, and development rights communities, where

ground has been acquired but construction likely has not

begun. These properties accounted for 8% of the

company’s portfolio, or less than 20 communities in any

given year end, while producing less than 1% of the

company’s revenue.


Revenues by Community Type

Revenues 2014 2015E 2016E

Established Communities 965.0 1406.2 1564.4

Other Stabilized 522.1 217.9 100.5

Development/Redevelopment 186.9 205.2 275.2

Non-allocated 11.1 23.1 38.8

Total Rental Income 1,685.1 1,854.8 1,978.9

Total Revenue Growth 15.2% 10.1% 6.7%


RECENT DEVELOPMENTS

Recent developments have been favorable to AvalonBay,

which can be seen in their 1-year performance, up nearly

12% over a relatively flat S&P.

Third Quarter Earnings

AvalonBay released its 3Q15 earnings following market

hours on October 28th. While net operating income

increased 9.3% year-over-year, EPS fell by 16.4%. After

hours pricing fell nearly 2% but recovered most of those

losses the following day. Expectations were high as the

stock had already risen nearly 7% since the beginning of

October.

Guidance provided by the company included $1.3 billion in

additional developments external from the current

development portfolio over the next 12 months.

Additionally, capital has already been raised to fund this

growth. Over a longer horizon, the company sees $6 to $7

billion in its development pipeline. Year over year renewal

rates have increased roughly 6% but there is some concern

in maintaining that growth over the next year, particularly

in Seattle where tech wage increases have slowed.12 This

guidance continues to push our growth expectations to

come through units growth instead of increased renewal

rate growth.

Development Starts

Recent development starts have been very strong for

AvalonBay, exceeding $1 billion for 3 consecutive years.

The company is expecting to start on an additional $440

million in developments during 4Q15 which would end

2015 starts just above $1.1 billion. We estimate that this

0

2000

4000

6000

8000

10000

12000

2010 2011 2012 2013 2014

Development & Redevelopment Communities

Development Redevelopment

57%31%

11%1%

Revenues by Community Type

Established Communities

Other Stabilized

Development/Redevelopment

Non-allocated

Page 5

leaves an additional $2 billion in development starts in the

company’s portfolio over the next 3 years. While this

suggests a decline, development starts industry-wide are

following similar expectations. There is speculation that

AvalonBay may be taking on an additional project in New

York’s Upper Westside in early 2016 estimated at $300

million. If this occurs, the company will surpass our current

estimates.13

While we estimate that development starts will decline

over the next few years, the completions tell a different

story. Given the volume of starts since 2013, we will see a

growing peak of completions into 2017. Where the

company can exceed expectations is in minimizing

completion costs. We saw an example of this earlier this

year, as previously mentioned, when the completion of 17

communities came in $200 million under budget.

Data Source (Amended Estimates): ISI Evercore13

Archstone Enterprise Acquisition

While not entirely recent, AvalonBay, in partnership with

Equity Residential, acquired a 40% stake in Archstone

Enterprises in 2013, leaving the remaining 60% to the

latter company. AvalonBay’s stake was valued at $6.5

billion, their largest acquisition in the company’s history.

This acquisition added an additional 60 communities with

over 20,000 units as well as 5 communities under

construction. The communities acquired through this

acquisition were considered high quality, complementing

the company’s current holdings. The impacts from this

acquisition can be seen in the rapid growth of established

communities in 2014 as well as growth within the

development and non-allocated segments discussed

above, which will continue to work their way into the

established community portfolio.

INDUSTRY TRENDS

Rising Rent Rates and Home Values

When home values are high, renting becomes more

attractive or, in many cases, the only option. Both home

values and rental rates across major cities within the US

have far outpaced wage growth and inflation over the past

several years. This is particularly true in cities that have

already been historically high such as New York,

Washington DC, and Los Angeles; all three of which are

major cities of operation for AvalonBay. One driver for

these increasing rates is the improving job markets,

particularly for millennials, which now allows them to

enter the real estate market.9

Case-Shiller 20-City Composite Home Price Index

Source: Federal Reserve Bank of St. Louis – FRED10

Within the US, roughly 30% of median incomes is spent on

rent. This rate increases in larger cities, particularly on the

coasts, where AvalonBay is concentrated. This poses a

systemic issue within the US where rising rents make it

more difficult for those wanting to purchase a house to

save and make that home purchase. Property values,

including single family residences, continue to rise,

however, due to an increasing number of real estate

investors in an effort to capitalize on the current state of

high rental prices. This has resulted in a homeownership

rate of 63.4%, a 48 year low.

0

200

400

600

800

1000

1200

1400

2010 2011 2012 2013 2014 2015 2016 2017 2018

Development Pipeline 2005 - 2018E

Development Starts Development Starts Estimates

Page 6

Median Housing Costs as a Percentage of Median Income

Source: The Wall Street Journal9

It is unclear how this situation will play out over the long

run, but we believe demand and upward pricing pressure

will continue to be present over our investment horizon.

This increases our confidence that occupancy rates will

remain high, however, we have maintained similar rent

per unit ratios at 2015 levels as it is difficult to suggest the

growth rate within the highest rates in the most expensive

cities will persist at a strong level.

The Real Estate Cycle

The predictability of future cash flows associated with

REITs is one of the benefits to this asset class, when

compared to other sectors within the S&P. In the case of

AvalonBay, future revenue streams are reasonably

predictable given the nature of their operations. With their

consistent, long-term occupancy rate of 95%+ on their

established communities, future cash flows can be

forecasted based on the growth of total units and renewal

increases. Dividends are then derived from at least 90% of

the earnings for that year, as legally required. What’s

unknown is the future value of the underlying real estate

held by the REIT. Outside of the interest rate cycle, which

receives the most attention, we also have the real estate

cycle.

The real estate cycle is generally much longer than the

business cycle, which is primarily driven by economic data.

One reason for the longer duration of the cycle is the time

required to develop and construct properties and then find

occupants for the properties. It typically takes four years

to go from site planning to rent check within the industry.8

Looking at the Hoyt real estate market cycle, we believe

we are just entering phase two, the expansion period. We

saw phase 4, the recession, following the 2008-2009

financial crisis. We believe the years following were part of

the recovery stage, which is now ending as we enter the

expansion phase as evidenced by the recent conversations

happening within the Fed. We also see low vacancy, or

high occupancy, rates within the industry, especially with

AvalonBay which has managed vacancy rates over 95%.

For this reason, we believe there are still several more

years of growth before we see our next peak in real estate

prices.

Hoyt Real Estate Market Cycle

Source: Forbes8

M&A Activity

M&A activity over the past two years has remained steady

in the REIT industry with total public deals totaling $53.4

and $58.5 billion in 2014 and 2013, respectively. The

largest deal announced year to date was valued at nearly

$21 billion by Simon Property Group, the largest US REIT.

AvalonBay remains fairly large as an apartment REIT with

a market cap slightly above $23 billion. While it does not

appear to be a sensible takeover target, it could be the

leader on future acquisitions within the industry.

REIT M&A Transactions in 2014

*Data only includes companies listed in the S&P 1500 as buyer or seller

Source: S&P Capital IQ11

Page 7

MARKETS AND COMPETITION

Competition

Within the apartment REIT subsector, there is no one

major player that controls the industry. This is neither a

positive or negative as AvalonBay, along with Equity

Residential, are among the largest within this industry, but

still relatively small compared to other REIT giants in the

retail and commercial leasing space. AvalonBay’s niche

within the industry is high quality communities in “hot”

markets within the US. They are not alone in this

geographic targeting as peers Equity Residential (EQR) and

Essex Property Trust (ESS) have a similar geographic

strategy. Compared to other peers within this industry,

AvalonBay has a significant size advantage, with the

exception of EQR, and maintains some of the highest

rental rates within their respective community. While

natural market competition exists over prime real estate

and communities within the industry, AvalonBay and EQR

have shown a willingness to partner as demonstrated by

the 2013 acquisition mentioned previously.

Why Apartment REITs?

The REIT industry as a whole is going to face struggles over

a prolonged rising interest rate environment. To what

degree? This is still unclear and many other industries will

face similar difficulties. What separates apartment REITs is

their low lease duration which provides an ability to adapt

quickly in comparison to their retail and commercial

counterparts. A standard apartment lease duration lasts

12-18 months while a retail or commercial lease can last 7

to well over 10 years. This is a significant benefit to

apartment REITs as releasing apartments annually allows

them to better manage interest rate risk. It will also prove

beneficial if real estate prices and rental rates continue to

climb. A comparable industry would be P&C insurers to life

insurers where managing a short duration fixed income

portfolio has a much lower duration, and therefore lower

interest rate risk, than that of a typical mid to high duration

fixed income portfolio that a life insurer would manage.

Peer Comparisons

Market Div. Debt/ P/E P/

Company Cap (B) Yield Equity (ttm) Book

Tanger Factory Outlets 3.25 3.60% 48.7% 31.76 4.45

Equity Residential 26.34 3.12% 41.1% 29.24 2.45

Essex Property Trust 14.57 2.68% 83.7% 76.01 2.34

Simon Property Group 56.75 3.10% 38.9% 38.21 12.50

General Growth Props 22.58 2.89% 61.9% 17.28 2.74

Host Hotels & Resorts 13.08 4.51% 31.0% 18.60 1.82

Boston Properties Inc. 18.08 2.28% 55.6% 32.62 3.08

Vornado Realty Trust 17.15 2.84% 57.7% 19.26 3.13

CBRE Group, Inc. 11.09 - 22.5% 21.09 4.42

Average 20.32 3.13% 49.0% 26.01 3.05

AvalonBay Communities 23.81 3.60% 48.7% 31.15 2.41

Data Source: FactSet6 and Yahoo Finance7

Market Cap

While near average in comparison to this peer group,

AvalonBay is the second largest apartment REIT next to

Equity Residential. With a market cap of $23.8 billion,

AvalonBay and EQR are significantly larger that the next

largest apartment REIT, Essex Property with a market cap

of $14.6 billion. This size is an advantage at it allows the

company to spread management and maintenance

resources and expenses across its portfolio of over 300

communities. It also benefits the company if large

acquisition targets become attractive as we saw with the

Archstone acquisition in 2013.

Dividend Yield

At 3.6%, AvalonBay has a comparable dividend yield to its

peer group. Since the company’s first dividend payment in

1998, the company has maintained or increased its

quarterly dividend. This feat is particularly impressive

when considering the duress throughout the financial

crisis. We believe this longevity and consistency

demonstrates fiscal responsibility by the company’s

leadership. Their dividend yield does however outperform

the pair of apartment REITs included in the peer group.

Debt Leverage Ratio (D/E)

AvalonBay is again in line with its peers when assessing is

debt to equity, or leverage ratio. This is worth noting given

the increase in the company’s debt level over the past few

Page 8

years as it acquired debt through the 2013 acquisition and

has continued to take on debt recently to expand its

development efforts. Like most peers in this group, its debt

level has been partially offset by rising property values

since the financial crisis.

Price to Earnings (P/E) and Price to Book (P/B)

These two relative metrics, while widely used within the

financial sector, do not hold quite as strong when

assessing REIT valuations. Based on trailing P/E ratios

within this peer group, AvalonBay trades at nearly a 20%

premium. The premium is less when compared to Equity

Residential, but not comparable to outlier Essex Property

which represents an outlier following recent volatility.

Price to book is currently 2.41, below the peer average of

3.05 representing a discount of 26%. This puts them in

between both apartment REITs which currently trade at

comparable price to book ratios.

Funds from Operations (FFO) & Adjusted FFO (AFFO)

Ticker Company Price P/FFO P/AFFO

SKT Tanger Factory Outlets $32.47 14.8 16.4

EQR Equity Residential $72.36 22.3 25.0

ESS Essex Property Trust $220.66 20.7 22.7

SPG Simon Property Group $183.42 18.0 20.3

GGP General Growth Props $24.48 17.2 21.6

HST Host Hotels & Resorts $17.41 10.5 10.5

BXP Boston Properties Inc. $117.72 21.8 30.8

VNO Vornado Realty Trust $90.99 18.3 30.3

Average 18.0 22.2

AVB AvalonBay Communities $172.95 23.7 25.4

Data Source: FactSet6

The two key industry metrics for comparing REITs are

funds from operations (FFO) and adjusted funds from

operations (AFFO). FFO is calculated by adding

depreciation back to net income, removing any gains or

losses from the sales of any properties as well as the gains

or losses from sales on any unconsolidated partnerships

and joint ventures. AFFO goes a step further and adjusts

for capital expenditures, or expenses related to the

upkeep of managed properties. Accounting for the

additional cash outflow, AFFO is used as a better predictor

for a REITs ability to pay future dividends. These are

converted to relative multiples, similar to the P/E multiple,

by adding the company’s current trading price as the

numerator.

Looking at the same set of comparables, we can see that

AvalonBay trades at an FFO multiple premium of 32% and

AFFO premium of 14% to this sample set. This premium is

much lower when compared to the two apartment REITs

within this peer group. We believe this premium, along

with the other apartment REITs, is to be expected given

the low duration of their leases which allows them to be

more flexible and adaptable in a changing interest rate and

residential market environment. We will revisit FFO and

AFFO in our relative valuation discussion.

FFO Payout Ratio

The FFO payout ratio is similar to the standard payout

ratio, but uses FFO per share as a base instead of EPS.

While not included on the above chart, it is worth looking

at AvalonBay’s FFO payout in comparison to other

apartment REITs. At 64.0%, AvalonBay had the highest

payout ratio in this subsector in 2014 compared to smaller

peers UDR (63.0%), Essex Property Trust (62.2%), AIV

(60.7%) and closest comparable Equity Residential

(60.7%).

ECONOMIC OUTLOOK

REITs are largely driven by macroeconomic factors in the

marketplace including the interest rate environment and

the overall growth of the local economies they operate in.

Unemployment Rate

At 5.1%, unemployment is at its lowest level since early

2008. This drop, from 5.3% in July, reflects employment

conditions before the financial crisis. Rates of

unemployment at this level may be a concern for some

who believe we may run the risk of creating an overheating

economy if rates fell much below 5%, a mark often

considered to be full employment. October jobs data

released this month suggests the economy produced

270,000 new jobs in October, well above some of the

highest analyst’s expectations. Job creation at this rate will

keep unemployment low as well as drive increases in

hourly wages.4 Increased wages for professionals and

higher earners will continue to drive higher revenues for

Page 9

AvalonBay as this will in turn increase the demand, and

prices, for their high-end apartments.

We believe that unemployment will continue to remain at

a near 5% level over the next 6 months, but slowly increase

to 5.3% over the next two years, still a favorable level.

Wage growth has been relatively positive with the

employment cost index increasing 2.8% in the first quarter

of 2015 and recent jobs data should only increase that

rate. We also see consumer confidence levels neutral to

increasing over both the short and intermediate terms.

Source: USA Today4

A healthy economy has both positive and negative impacts

to AvalonBay as an apartment REIT. Wage growth and

consumer confidence levels are both favorable as the

company seeks in increase rental rates year over year for

those renewing. However, as the economy strengthens,

the likelihood that the Federal Reserve makes moves to

increase interest rates also increases which impacts

AvalonBay’s cost of capital for future projects.

Interest Rate Environment

With favorable unemployment and job creation data, the

debate to increase rates when the Fed meets in mid-

December has sharpened, especially after Janet Yellen

suggested a December rate hike was a “live possibility”

earlier this month.4 There are counterarguments,

however, suggesting the Fed should delay any rate hikes.

Some Fed officials have suggested that the decisions

should be more risk-adverse and delay an immediate rate

increase due to the recent market volatility both

domestically and globally. The Greek debt crisis and

growth disappointments in China we saw over the summer

has shown us the fragility of global markets and analysts

believe emerging markets, which have struggled in recent

years, are too sensitive to handle any global increases in

rates. This has prompted the IMF to raise concern about a

potential global crisis if the fed were to increase interest

rates during a time of uncertainty and volatility.

Regardless, the market has been on a prolonged bull run

which is believed to be fed by cheap money. The

immobility of the near zero rates have now created a

scenario where, we believe, markets will create an initial

overreaction to whatever decision is made by the Fed.

REITs, as well as other financial firms tied to interest rates,

will likewise see an overreaction in their stock prices which

could lead to a brief decline in AvalonBay’s value. Once the

Fed decides to raise the federal funds rate, the increase is

likely to be small, presumably a quarter point at most. Our

consensus is that the Fed will increase the Fed funds rate

by at least 0.25% in the next 6 months, starting with a .25%

hike in December or 1Q 2016, and continue to 1.0% over

the next two years. This will represent the first Fed funds

rate increase since 2006.

The Fed funds rate and accompanying monetary policy are

key drivers for domestic lending rates. The 10 year

treasury yield has remained relatively steady, currently at

2.33%, an increase from 12 month lows of 1.64% in

February but still short of 12 month highs of 2.50% in

June.5 Many REITs, including AvalonBay, are sensitive

toward higher rates as it will inherently increase the cost

of capital for future operations. In the case of AvalonBay,

the internal rate of return for future developments will be

directly impacted. However, given the company’s recent

growth and debt raising, we do not see a need for

additional debt raising in the immediate future. Likewise,

the company’s debt schedule is heavily weighted with

recent activity which will not pressure the company

financially over the near-term. We believe the company

can weather a slow and steady rising rate environment,

but if rates rise quickly we should expect to see a pullback

in value. Our consensus is to see the 10 year treasury rate

rise to 2.70% over the next 6 months and continue toward

3.45% over the next two years.

Page 10

US 10 Year Treasury Yield

Source: MarketWatch5

CATALYSTS FOR GROWTH

The company’s strong development starts in recent years,

as well as the estimated development starts within the

pipeline, will continue to drive organic growth over the

next 3 to 4 years. The company has also acquired options

on land that could result in new developments beyond our

forecasted growth, although primarily in suburban areas

rather than urban cores.

There are also key economic indicators favorable to the

company’s end consumers, specifically unemployment

and wage growth as discussed in the economic outlook.

Wage growth has been particularly strong within large,

coastal cities which the company has a significant

presence. The growth in wages has been long overdue and

we believe the continued rate of low unemployment will

continue to put pressure on future wage growth.

Lastly, real estate prices and rental rates continue to

remain strong, and growing, within major cities of

operation. Because of this, we do not see the current

rental rates declining throughout our investment horizon.

Additionally, the demand for renting, driven by millennials,

continues to increase. This helps maintain the company’s

high occupancy rates.

INVESTMENT POSITIVES

• The company is well diversified across numerous

major metropolis areas within the US, particularly

cities with high wage and rental rate growth.

Additionally, the company commands premium

pricing on its portfolio of high-end communities.

• AvalonBay, as an apartment REIT, benefits from

having low lease durations in comparison to other

commercial and retail REIT alternatives. This allows

them to more quickly adapt to a changing interest

and leasing rate environment.

• Continued wage growth and unemployment,

especially within major cities of operation, remains

very favorable. This drives the demand for high-end

real estate as maintains occupancy rates within the

company’s communities.

• The company raised additional capital beyond its

needs earlier this year to prefund development

projects throughout 2015 and into early 2016. This

move was made in an effort to capitalize on cheap

capital and we estimate the company has an

additional $600 million which has yet to be allocated.

• Since the company paid its first dividend in 1998, the

company has continued to maintain or grow its

dividend. This is particularly noteworthy while REITs

and other companies struggled to get through the

financial crises.

• At $280 million, the company has a relatively low

amount of maturities due through 2016. This relieves

the company of capital stress throughout this period

of high growth.

INVESTMENT NEGATIVES

• The growing potential of increased interest rates

continues to pressure REITs as future capital raising

becomes costlier and investors seek high yielding

investment options.

Page 11

• The emergence of REITs as an asset class continues to

gain steam for investors seeking real estate exposure.

This has resulted in increased competition for land in

prime development areas regardless of property

purpose. If this threat continues it could hamper

future growth expectations for the company.

• AvalonBay operates in some of the most competitive

real estate markets in the US and also prices rates at

a premium within these markets. Any oversaturation

within key markets, such as New York, Los Angeles,

and Washington DC, could put negative pricing

pressure on the company’s premium rates.

VALUATION

Based on our industry and company research, we looked

at several valuation models as well as relative

performance metrics.

Dividend Discount Model (DDM)

The dividend discount model is essential in REIT valuation

as dividends represent a substantial portion of the total

return a REIT delivers. Our valuation of future dividend

payments have 2015 and 2016 payouts increasing roughly

16% and 5%, respectively, before picking up to nearly 10%

as the company sees strong earnings from its completed

developments in 2017. At these dividend rates, the

company’s payout ratio will remain near 102% over our

investment horizon with a low of 98% in 2015 and a peak

of 109% in 2016. REITs are able to payout dividends in

excess of GAAP earnings due to the addback of

depreciation.

2014 2015E 2016E 2017E 2018E 2019E

Dividend $4.28 $5.00 $5.27 $5.77 $6.05 $6.41

Growth Rate 10.3% 16.8% 5.4% 9.6% 4.7% 6.1%

These payout expectations, accompanied with a

continuous growth expectation of 3%, derive a DDM value

of $210. This represents a premium of 21% beyond the

company’s current trading price. Adjustments to our cost

of equity and return on equity within reason of our current

values give us a range of $170 on the low end and $358 on

the high end. Further sensitivity analysis can be found in

the financial analysis following the report.

Relative Price to FFO & AFFO

Ticker Company Price P/FFO P/AFFO

SKT Tanger Factory Outlets $32.47 14.8 16.4

EQR Equity Residential $72.36 22.3 25.0

ESS Essex Property Trust $220.66 20.7 22.7

SPG Simon Property Group $183.42 18.0 20.3

GGP General Growth Props $24.48 17.2 21.6

HST Host Hotels & Resorts $17.41 10.5 10.5

BXP Boston Properties Inc. $117.72 21.8 30.8

VNO Vornado Realty Trust $90.99 18.3 30.3

Average 18.0 22.2

AVB AvalonBay Communities $172.95 23.7 25.4


Implied Value:

Relative Price/FFO $130.73

Relative Price/AFFO $151.32

Blended Relative FFO/AFFO $144.45

As mentioned previously, Price to FFO and AFFO are the

industry standard when using multiples to derive relative

valuations. Using the same peer group from our

competitive analysis discussion, we can assess a relative

valuation using these key industry metrics to their peers.

The average FFO and AFFO, ttm, using these peers yields

industry multiples of 18.0 and 22.2, respectively. Applying

these multiples to AvalonBay’s current trading price we

see relative values of $131 using FFO and $151 using AFFO.

To derive a single valuation, we used a blend of the two

metrics, placing a two-thirds weight on AFFO. This yielded

an FFO/AFFO relative value of $144, a discount of 16% to

the company’s trading price. We believe the company

trades at higher FFO/AFFO multiples compared to this

peer group given its low lease duration which is a clear

advantage over several peers in this group, particularly the

retail and commercial REITs.

AvalonBay’s Recent FFO, AFFO, and EPS


Page 12

Equity Discounted Cash Flow (DCF) &

Economic Profit (EP) Models

While equity discounted cash flow (DCF) and economic

profit (EP) models can be useful when assessing a financial

institution, we believe they are less effective when valuing

REITs. One reason for this is that the industry is forecasting

payout expectations, either through dividends or share

repurchases, and less focused on the company’s actual

earnings. We are not, however, disregarding these

valuation results.

Our results from both of these traditional models resulted

in positive findings. Our equity DCF model derived a value

of $211, a 23% premium on its current trading price and

our equity EP model derived a value of $212, representing

a 22% premium. Both valuation methods align with our

buy recommendation. Our sensitivity analysis following

the report tested continuous growth rates, continuous

ROE, beta, cost of equity, and the impact of increasing

revenue estimates by varying percentages each year

throughout our horizon. The results, within an interval

adjustment, were found to be within range of our targeted

values.

Price to Earnings (P/E)

EPS EPS P/E P/E

Company Price 2015E 2016E 2015 2016

Tanger Factory Outlets $32.47 $2.19 $2.34 14.8 13.9

Equity Residential $72.36 $3.44 $3.73 21.0 19.4

Essex Property Trust $220.66 $9.68 $10.82 22.8 20.4

Simon Property Group $183.42 $10.07 $10.73 18.2 17.1

General Growth Props $24.48 $1.43 $1.58 17.1 15.5

Host Hotels & Resorts $17.41 $1.54 $1.71 11.3 10.2

Boston Properties Inc. $117.72 $5.42 $5.82 21.7 20.2

Vornado Realty Trust $90.99 $5.18 $5.21 17.6 17.5

CBRE Group, Inc. $31.79 $1.97 $2.28 16.1 13.9

Average 17.9 16.5

AvalonBay Communities $172.95 $5.10 $4.83 33.9 35.8


Implied Value:

Relative P/E (EPS ’15): $90.99

Relative P/E (EPS ’16): $79.53

Blended Forward P/E: $85.26

While P/E ratios remain an equity valuation standard, this

metric is often avoided in REIT valuation. We used forward

P/E’s for our peer group with earnings estimates from

FactSet. Our relative valuation model did not yield positive

results, deriving values at roughly half the company’s

trading price. Given the REIT industry’s lack of use for this

metric, we did not include its results in our relative

valuation model, instead sticking with FFO and AFFO

metrics.

Asset Class Correlation

S&P 500 10 Year Note REIT Index

1 Year 0.536 -0.094 0.912

2 Year 0.451 -0.068 0.851

3 Year 0.444 -0.125 0.801

5 Year 0.585 0.112 0.846

Data Source: Bloomberg15

When adding REITs to a portfolio, we should also

understand its correlation, or lack thereof, to our

benchmark. The chart above shows AvalonBay’s

correlation to the S&P 500, 10 year T-note, and Vanguard’s

Total REIT Index using daily returns over the provided time

horizons. While naturally the strongest correlation in this

set is the REIT index, AvalonBay, as well as most REITs, has

an inverse correlation to interest rates. That is to say as

rates rise, we should observe a decline in the company’s

valuation, all else equal. We can also see how weak the

correlation has been to the S&P 500. The inverse

correlation to interest rates is much weaker than others in

its peer group, particularly Tanger Factory Outlets, our

current REIT holding which has a 2 year correlation to the

10 year T-note of -.665.

Summary

To derive a target price, we assed all valuation metrics and

emphasized those we felt best represented the industry

and how analysts would price REIT securities. With that,

our strongest valuation model was the DDM at a price of

$210. This valuation method also focuses on cash flows to

the end investor, a main focal point for REIT analysts. Our

relative valuation included our blended P/FFO, P/AFFO,

P/B and P/TB multiples, while removing P/E and P/E/G,

which did not produce consistent results within the peer

group and are not well regarded multiples within the

industry. Our relative valuation derived a price of $182,

representing only a 5% premium. Our second tier of

Page 13

valuations included our equity DCF and equity EP models.

While generally focused on earnings growth, these models

derived prices of $212 and $212, respectively, providing

premiums of roughly 22%. Assessing our valuation models

and the relevance to the company and industry, we

derived a price target of $210 for AvalonBay.

KEYS TO MONITOR

Systemically, the interest rate environment will play the

largest role in directing AvalonBay’s equity valuation.

While strong growth factors will foreseeably drive

AvalonBay to outperform within the sector, any event that

drives interest rates higher at a rapid pace will ultimately

lead this sector to underperform broader markets. Keys to

monitor include economic data driving Fed decisions (ie:

GDP, unemployment, wage growth, inflation) and

announcements directly or indirectly providing guidance

on future rate expectations.

Within the firm, the company’s growth through 2018 is

driven by the communities currently under development

and development starts over the next two years. We do

not see any setbacks in occupancy or declining lease rates,

so overall unit growth will remain essential to the

company’s outperformance.

REFERENCES

1. AvalonBay Communities, Inc. Annual Report (10-K),

EDGAR SEC, February 24, 2015

2. “Industry Overview: Real Estate Investment Trusts,”

S&P Capital IQ, July 2015

3. “AvalonBay Communities: Everything Investors Need to

Know,” Market Realist, October 2, 2015,

http://marketrealist.com/2015/10/investing-

avalonbay-communities-must-know-company-

overview/

4. “Digesting the Implications of Higher Rates,” BlackRock,

November 9, 2015,

http://www.blackrock.com/investing/insights/weekly-

commentary?c=eki&cmp=russk_em&chn=emc&cid=e

mc:russk_em:eki:eki

5. “U.S. 10 Year Treasury Note,” MarketWatch, November

11, 2015,

http://www.marketwatch.com/investing/bond/tmub

musd10y?countrycode=bx

6. FactSet

7. Yahoo Finance

8. “Predicting REIT Profits That Help You Sleep Well At

Night,” Forbes, August 31, 2015,

http://www.forbes.com/sites/bradthomas/2015/08/3

1/predicting-reit-profits-that-help-you-sleep-well-at-

night/2/

9. “Rising Rents Outpace Wages in Wide Swarth of the

US,” Wall Street Journal, July 28, 2015,

http://www.wsj.com/articles/rising-rents-outpace-

wages-in-wide-swaths-of-the-u-s-1438117026

10. Federal Reserve Bank of St. Louis, Economic Research,

FRED

11. “Industry Overview: Real Estate Investment Trusts,”

S&P Capital IQ, July 2015

12. “Transcript of AVB earnings conference call or

presentation,” Thompson Reuters StreetEvents,

October 27, 2015,

http://finance.yahoo.com/news/edited-transcript-

avb-earnings-conference-184539222.html

13. “AvalonBay Communities: 3Q15 Earnings Note,”

Evercore ISI, October 26, 2015

14. “AvalonBay Communities: Takeaways From Non-Deal

Roadshow,” Jeffries, October 5, 2015

15. Bloomberg

IMPORTANT DISCLAIMER

Henry Fund reports are created by student enrolled in the

Applied Securities Management (Henry Fund) program at

the University of Iowa’s Tippie School of Management.

These reports are intended to provide potential employers

and other interested parties an example of the analytical

skills, investment knowledge, and communication abilities

of Henry Fund students. Henry Fund analysts are not

registered investment advisors, brokers or officially

licensed financial professionals. The investment opinion

contained in this report does not represent an offer or

solicitation to buy or sell any of the aforementioned

securities. Unless otherwise noted, facts and figures

included in this report are from publicly available sources.

This report is not a complete compilation of data, and its

accuracy is not guaranteed. From time to time, the

University of Iowa, its faculty, staff, students, or the Henry

Fund may hold a financial interest in the companies

mentioned in this report.

AvalonBay Communities, Inc.

Key Assumptions of Valuation Model

Ticker Symbol AVB

Current Share Price $172.95

Current Model Date 11/18/2015

Fiscal Year End Dec. 31

Pre-Tax Cost of Debt 4.80%

Cost of Equity (CAPM) 5.02%

Beta 0.476

Risk-Free Rate 2.71%

Equity Risk Premium 4.85%

CV Growth 3.00%

CV ROE 9.08%

Current Dividend Yield 2.82%

Beta:

1y 2y 5y Average

Daily 0.661 0.561 0.775 0.666

Weekly 0.436 0.360 0.665 0.487

Monthly 0.041 0.172 0.617 0.277

Average 0.379 0.364 0.686 0.476

Average Units per Community Average Revenue per Unit

Established Communities 296.1 Established Communities $2,109

Other Stabilized 286.7 Other Stabilized $760

Development Communities 335.7 Development Communities $1,770

Lease-up/Redevelopment 264.3 Lease-up/Redevelopment $288

Weighted Average 292.7 Weighted Average $1,769

2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Forecast Assumptions

Number of Units

Established Communities 9.9% 2.8% 2.2% 6.0% 47.5% 23.0% 22.0% 14.0% 10.6% 7.9%

Other Stabilized 3.8% 19.2% -1.8% 86.4% -50.8% -19.0% -8.0% -4.0% -2.0% 3.0%

Development/Redevelopment - - 25.8% 49.0% 16.6% 14.0% 19.0% 13.0% 9.0% 4.0%

Lease-up/Redevelopment 0.1% -42.8% -31.1% 15.5% 83.6% 13.0% 15.0% -7.0% -4.0% 2.0%

Total Number of Units 6.9% 14.2% 1.5% 37.3% 1.2% 12.3% 16.4% 10.5% 8.4% 6.7%

Operating Expenses

Property Operating Expenses 0.3% 1.3% 5.1% 51.0% 5.3% 9.5% 6.0% 3.5% 5.5% 2.5%

General & Administrative -6.6% 9.4% 16.1% 16.0% 4.7% 11.6% 10.1% 8.6% 6.5% 5.8%

Depreciation & Amortization 8.9% 4.9% 1.9% 129.9% -21.0% -1.3% 3.6% 5.6% 6.8% 4.3%

Total Operating Expenses 3.0% 3.0% 4.4% 78.9% -7.5% 5.1% 5.2% 4.5% 6.0% 3.3%

Operating Income 2.0% 16.1% 11.7% -13.4% 100.4% 18.3% 9.3% 23.2% 4.4% 12.0%

Non-Operating Expenses

Interest Expense (% of ttl debt) 13.3% -1.5% -18.4% 25.9% 4.8% 4.2% 4.2% 4.2% 4.2% 4.2%

Loss (Gain) from Affiliates -47.1% 571.9% 585.7% -131.8% -1433.7% -104.0% -93.2% -235.4% -235.4% -372.2%

Sale Of Property -100.0% - -98.0% -14.3% 35489.6% -90.0% -67.4% -57.2% -40.9% -78.7%

Total Non-Operating Expenses 17.7% -3.9% -36.8% 127.5% -122.9% -464.3% 4.9% 5.1% 1.5% 1.8%

Balance Sheet

Assets

Net Real Estate Property

Gross Real Estate Property Grows with total number of units 12.3% 16.4% 10.5% 8.4% 6.7%

Accumulated Depreciation Accumulation of depreciation & amortization

Liabilities & Shareholders' Equity

Accounts Payable -29.2% 46.6% 3.0% 24.8% 4.8% 9.8% 13.1% 8.4% 6.7% 5.3%

Security Deposits -0.2% 7.1% 3.0% 20.4% 11.0% 9.8% 13.1% 8.4% 6.7% 5.3%

Secured/Unsecured Debt 0.0% -9.4% 7.0% 59.3% 6.4% 27.0% 20.0% 12.0% 8.0% 6.0%

Payout Ratio 173.2% 72.1% 82.2% 139.7% 82.0% 98.1% 109.0% 96.0% 102.0% 104.0%

Share Capital & APIC 12.3% 29.5% 52.3% 26.8% 4.1% 5.0% 3.7% 10.3% 6.4% 9.2%


Revenue Decomposition (in millions)

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Revenue

Established Communities 725.4 673.2 965.0 1,406.2 1,564.4 1,783.4 1,873.9 2,021.9

Other Stabilized 135.2 343.1 522.1 217.9 100.5 96.4 94.5 97.4

Development/Redevelopment 129.8 117.9 186.9 205.2 275.2 311.0 339.0 352.6

Non-allocated 10.3 328.8 11.1 23.1 38.8 26.3 27.7 29.7

Total Rental Income 1,000.6 1,462.9 1,685.1 1,854.8 1,978.9 2,217.2 2,335.1 2,501.5

Total Revenue Growth 6.9% 46.2% 15.2% 10.1% 6.7% 12.0% 5.3% 7.1%

Number of Properties

Established Communities 103 115 172 205 251 286 316 341

Other Stabilized 70 119 56 50 46 44 43 45

Development Communities 23 29 26 39 46 52 57 59

Lease-up/Redevelopment 7 10 23 16 19 18 17 17

Total Number of Properties 203 273 277 311 362 400 433 462

1.5% 34.5% 1.5% 12.2% 16.4% 10.5% 8.4% 6.7%

Number of Units

Established Communities 31,625 33,519 49,435 60,805 74,182 84,568 93,532 100,921

Other Stabilized 19,349 36,067 17,737 14,367 13,218 12,689 12,435 12,808

Development/Redevelopment 6,599 9,834 11,462 13,067 15,549 17,571 19,152 19,918

Lease-up/Redevelopment 1,818 2,099 3,853 4,354 5,007 4,656 4,470 4,560

Total Number of Units 59,391 81,519 82,487 92,593 107,956 119,484 129,589 138,207

Total Units Growth 1.5% 37.3% 1.2% 12.3% 16.6% 10.7% 8.5% 6.6%


Revenue Decomposition (in millions)

Fiscal Years Ending Dec. 31 1Q12 2Q12 3Q12 4Q12 2012 1Q13 2Q13 3Q13 4Q13 2013 1Q14 2Q14 3Q14 4Q14 2014 1Q15 2Q15

Revenue

Established Communities 179.6 188.6 189.1 203.6 725.4 205.8 325.0 214.9 390.9 673.2 235.1 329.8 336.0 437.9 965.0 341.9 346.6

Other Stabilized 30.3 31.6 34.5 37.2 135.2 80.9 43.5 142.8 0.0 343.1 132.3 44.9 43.9 0.0 522.1 52.3 54.2

Development/Redevelopment 33.7 29.6 35.3 17.7 129.8 23.2 24.6 142.8 3.3 117.9 29.6 31.7 44.3 2.8 186.9 42.8 50.5

Non-allocated 2.5 2.8 2.5 3.0 10.3 2.3 -14.8 3.0 0.0 328.8 3.1 7.3 6.4 0.0 11.1 5.3 6.2

Total Rental Income 246.0 252.4 261.3 261.6 1,000.6 312.1 378.2 503.6 394.2 1,462.9 400.1 413.8 430.5 440.7 1,685.1 442.3 457.5

Total Revenue Growth 6.9% 46.2% 15.2%


Established Communities 102 104 104 103 103 116 117 117 115 115 133 177 177 172 172 181 180

Other Stabilized 65 62 66 70 70 121 117 119 119 119 104 56 53 56 56 58 61

Development Communities 20 21 22 23 23 25 27 28 29 29 31 32 29 26 26 25 30

Lease-up/Redevelopment 12 15 13 7 7 8 6 11 7 10 3 4 9 15 23 8 12

Total Number of Properties 199 202 205 203 203 270 267 275 270 273 271 269 268 269 277 272 283

1.5% 34.5% 1.5%

Number of Units

Established Communities 30,788 31,734 31,734 31,625 31,625 33,679 34,243 34,243 33,519 33,519 36,636 51,524 51,524 49,435 49,435 52,122 51,794

Other Stabilized 19,756 17,802 18,727 19,349 19,349 36,673 35,528 36,402 36,067 36,067 33,423 17,974 7,443 17,737 17,737 16,993 17,268

Development/Redevelopment 5,583 5,922 6,260 6,599 6,599 7,267 7,935 8,885 9,834 9,834 9,179 9,581 11,818 11,462 11,462 7,428 8,117

Lease-up/Redevelopment 2,771 3,608 3,026 1,818 1,818 3,125 1,545 3,239 2,099 2,099 888 1,175 2,514 3,853 3,853 2,329 3,008

Total Number of Units 58,898 59,066 59,747 59,391 59,391 80,744 79,251 82,769 81,519 81,519 80,126 80,254 73,299 82,487 82,487 78,872 80,187

Total Units Growth 1.5% 37.3% 1.2%

Fiscal Years Ending 1Q15 2Q15 3Q15 4Q15E 2015E 1Q16E 2Q16E 3Q16E 4Q16E 2016E 1Q17E 2Q17E 3Q17E 4Q17E 2017E 2018E 2019E

Revenue

Established Communities 341.9 346.6 355.5 362.3 1,406.2 350.9 380.9 433.6 399.1 1,564.4 400.0 434.3 494.3 454.9 1,783.4 1,873.9 2,021.9

Other Stabilized 52.3 54.2 55.2 56.1 217.9 22.5 24.5 27.8 25.6 100.5 21.6 23.5 26.7 24.6 96.4 94.5 97.4

Development/Redevelopment 42.8 50.5 59.1 52.9 205.2 61.7 67.0 76.3 70.2 275.2 69.8 75.7 86.2 79.3 311.0 339.0 352.6

Non-allocated 5.3 6.2 5.6 6.0 23.1 8.7 9.4 10.8 9.9 38.8 5.9 6.4 7.3 6.7 26.3 27.7 29.7

Total Rental Income 442.3 457.5 475.4 479.6 1,854.8 443.8 481.9 548.4 504.8 1,978.9 497.3 539.9 614.5 565.6 2,217.2 2,335.1 2,501.5

Total Revenue Growth 10.1% 6.7% 12.0% 5.3% 7.1%


Established Communities 181 180 180 193 205 56 61 69 64 251 64 70 79 73 286 316 341

Other Stabilized 58 61 58 54 50 10 11 13 12 46 10 11 12 11 44 43 45

Development Communities 25 30 29 34 39 10 11 13 12 46 12 13 15 13 52 57 59

Lease-up/Redevelopment 8 12 15 16 16 4 5 5 5 19 4 4 5 4 18 17 17

Total Number of Properties 272 283 282 296 311 81 88 100 92 362 90 97 111 102 400 433 462

12.2% 16.4% 10.5% 8.4% 6.7%

Number of Units

Established Communities 52,122 51,794 51,794 60,805 60,805 64,149 67,494 70,838 74,182 74,182 76,779 79,375 81,971 84,568 84,568 93,532 100,921

Other Stabilized 16,993 17,268 8,999 14,367 14,367 14,080 13,792 13,505 13,218 13,218 13,085 12,953 12,821 12,689 12,689 12,435 12,808

Development/Redevelopment 7,428 8,117 11,911 13,067 13,067 13,687 14,308 14,929 15,549 15,549 16,055 16,560 17,065 17,571 17,571 19,152 19,918

Lease-up/Redevelopment 2,329 3,008 6,149 4,354 4,354 4,517 4,680 4,844 5,007 5,007 4,919 4,832 4,744 4,656 4,656 4,470 4,560

Total Number of Units 78,872 80,187 78,853 92,593 92,593 96,433 100,274 104,115 107,956 107,956 110,838 113,720 116,602 119,484 119,484 129,589 138,207

Total Units Growth 12.3% 16.6% 10.7% 8.5% 6.6%


Income Statement (in millions)


Revenue

Rental Income 990.4 1,451.4 1,674.0 1,829.4 1,940.1 2,190.9 2,307.4 2,471.8

Income from Real Estate Owned 10.3 11.5 11.1 23.1 38.8 26.3 27.7 29.7

Total Revenue 1,000.6 1,462.9 1,685.1 1,852.5 1,978.9 2,217.2 2,335.1 2,501.5

Operating Expenses

Property Operating Expenses 368.3 556.1 585.6 641.2 679.7 703.5 742.2 760.7

General & Administrative 34.1 39.6 41.4 46.2 50.9 55.3 58.8 62.3

Depreciation & Amortization 243.7 560.2 442.7 436.9 452.6 478.0 510.5 532.5

Total Operating Expenses 646.0 1,155.9 1,069.7 1,124.3 1,183.2 1,236.7 1,311.5 1,355.5

Operating Income 354.6 307.1 615.4 728.2 795.7 980.5 1,023.5 1,146.0


Interest Expense 136.9 172.4 180.6 188.2 196.1 204.3 212.9 221.9

Loss (Gain) from Affiliates -35.1 11.2 -148.8 6.0 0.4 -0.6 0.7 -2.0

Sale Of Property -0.3 -0.2 -85.4 -8.5 -2.8 -1.2 -0.7 -0.1

Other Non-Op Loss (Income) 1.4 51.0 0.0 9.5 10.9 12.4 5.3 2.5

Total Non-Operating Expenses 103.0 234.3 -53.6 195.1 204.6 215.0 218.3 222.2

Pretax Income (Loss) 251.6 72.7 668.9 533.0 591.1 765.4 805.2 923.8

Abnormal Losses (Gains) 1.2 14.9 0.4 6.5 7.8 6.2 7.2 5.6

Adjusted Pretax Income (Loss) 250.4 57.8 668.5 526.5 583.3 759.3 798.1 918.2

Net Extraordinary Gains 173.1 294.9 38.2 173.1 116.2 159.1 156.3 128.6

Income (Loss) Before Minority Int. 423.6 352.8 706.7 699.6 699.5 918.4 954.4 1,046.8

Minority Interest -0.3 -0.4 13.8 2.3 3.0 3.7 4.5 5.5

Net Income 423.3 352.4 720.5 702.0 702.6 922.1 958.9 1,052.2

Funds from Operations (FFO)

Net Income 423.3 352.4 720.5 702.0 702.6 922.1 958.9 1,052.2

Depreciation and amortization 243.7 560.2 442.7 436.9 452.6 478.0 510.5 532.5

Minority interest and affiliates -35.4 10.8 -135.0 8.3 3.4 3.1 5.2 3.4

Other Adjustments -110.5 -280.6 -77.1 -155.0 -173.9 -159.4 -169.2 -146.9

Funds from Operations 521.0 642.8 951.0 992.2 984.8 1,243.8 1,305.4 1,441.2

Adjustments for AFFO 11.3 150.1 -61.0 21.3 25.6 29.5 33.1 9.7

Adj. Funds from Operations (AFFO) 532.3 792.9 890.1 1,013.5 1,010.4 1,273.3 1,338.6 1,450.9

Basic Weighted Avg Shares 97.42 126.86 130.59 137.8 145.3 153.3 161.8 170.7

Basic Earnigns Per Share (EPS) 4.34 2.78 5.22 5.10 4.83 6.01 5.93 6.17

Funds from Operations per Share (FFO) 5.35 5.07 7.28 7.20 6.78 8.11 8.07 8.44

Adj. Funds from Oper. per Share (AFFO) 5.46 6.25 6.82 7.36 6.95 8.30 8.27 8.50

Dividends Per Share 3.57 3.88 4.28 5.00 5.28 5.76 6.05 6.41


Income Statement (in millions)

Fiscal Years Ending Dec. 31 1Q12 2Q12 3Q12 4Q12 2012 1Q13 2Q13 3Q13 4Q13 2013 1Q14 2Q14 3Q14 4Q14 2014 1Q15 2Q15

Revenue

Rental Income 243.5 249.7 258.8 259.2 990.4 299.1 375.3 386.2 390.9 1,451.4 397.0 411.1 428.0 437.9 1,674.0 439.8 454.5

Income from Real Estate Owned 2.5 2.8 2.5 2.4 10.3 2.3 2.9 3.0 3.3 11.5 3.1 2.7 2.5 2.8 11.1 2.6 2.9

Total Revenue 246.0 252.4 261.3 261.6 1,000.6 301.4 378.2 389.2 394.2 1,462.9 400.1 413.8 430.5 440.7 1,685.1 442.4 457.5

Operating Expenses

Property Operating Expenses 88.4 92.2 93.6 100.6 368.3 143.8 132.7 141.2 138.4 556.1 143.7 145.5 150.6 155.1 585.6 161.0 158.7

General & Administrative 9.7 8.3 8.4 7.7 34.1 10.0 11.3 9.9 8.3 39.6 9.2 10.2 11.3 10.7 41.4 10.6 11.6

Depreciation & Amortization 61.6 63.2 62.8 62.5 243.7 105.6 190.0 159.9 104.8 560.2 106.4 110.4 111.8 114.1 442.7 116.9 118.6

Total Operating Expenses 159.7 163.7 164.7 170.8 646.0 259.4 334.0 311.0 251.5 1,155.9 259.3 266.1 273.7 279.9 1,069.7 288.5 288.9

Operating Income 86.3 88.7 96.6 90.8 354.6 42.0 44.2 78.2 142.7 307.1 140.7 147.7 156.8 160.8 615.4 153.9 168.5


Interest Expense 33.6 33.2 34.0 36.1 136.9 38.2 43.2 43.9 44.6 172.4 42.5 43.7 46.4 48.0 180.6 45.6 44.6

Loss (Gain) from Affiliates -2.2 -2.1 -19.7 -11.1 -35.1 18.6 0.7 -3.3 -5.1 11.2 -5.2 -7.7 -130.6 -5.2 -148.8

Sale Of Property 0.0 -0.3 0.0 0.0 -0.3 0.0 0.0 0.0 0.0 -0.2 0.0 -60.9 0.0 -24.5 -85.4

Other Non-Op Loss (Income) 0.0 0.0 0.0 1.4 1.4 0.0 0.0 53.5 0.0 51.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Non-Operating Expenses 31.5 30.8 14.2 26.5 103.0 56.7 43.9 94.2 39.5 234.3 37.3 -24.9 -84.2 18.3 -53.6 21.2

Pretax Income (Loss) 54.9 57.9 82.4 64.4 251.6 -14.8 0.3 -15.9 103.1 72.7 103.4 172.6 241.0 142.5 668.9 213.8 147.4

Abnormal Losses (Gains) 1.2 0.0 0.0 0.0 1.2 0.0 0.0 0.0 14.9 14.9 0.0 0.4 0.0 0.0 0.4 5.8

Adjusted Pretax Income (Loss) 53.7 57.9 82.4 64.4 250.4 -14.8 0.3 -15.9 88.2 57.8 103.4 172.2 241.0 142.5 668.5 208.1 172.3

Net Extraordinary Gains 3.9 98.9 4.3 58.0 173.1 90.2 35.8 5.1 163.9 294.9 38.2 0.0 0.0 0.0 38.2 38.8 42.2

Income (Loss) Before Minority Int. 57.6 156.8 86.7 122.4 423.6 75.5 36.1 -10.9 252.1 352.8 141.6 172.2 241.0 142.5 706.7 246.9 214.4

Minority Interest -0.1 -0.1 -0.1 0.0 -0.3 0.0 -0.1 -0.2 -0.1 -0.4 -0.1 14.1 -0.1 -0.1 13.8 0.5 0.6

Net Income 57.5 156.7 86.7 122.4 423.3 75.5 36.0 -11.1 252.0 352.4 141.5 186.3 240.9 142.4 720.5 247.4 215.0

Fiscal Years Ending 1Q15 2Q15 3Q15 4Q15E 2015E 1Q16 2Q16 3Q16 4Q16E 2016E 1Q15 2Q15 3Q15 4Q15E 2017E 2018E 2019E

Revenue

Rental Income 439.8 454.5 473.2 461.9 1,829.4 435.1 472.4 537.7 494.9 1,940.1 491.4 533.5 607.2 558.9 2,190.9 2,307.4 2,471.8

Income from Real Estate Owned 2.6 2.9 2.2 15.4 23.1 8.7 9.4 10.8 9.9 38.8 5.9 6.4 7.3 6.7 26.3 27.7 29.7

Total Revenue 442.4 457.5 475.4 477.3 1,852.5 443.8 481.9 548.4 504.8 1,978.9 497.3 539.9 614.5 565.6 2,217.2 2,335.1 2,501.5

Operating Expenses

Property Operating Expenses 161.0 158.7 169.5 152.0 641.2 152.4 165.5 188.4 173.4 679.7 157.8 171.3 195.0 179.4 703.5 742.2 760.7

General & Administrative 10.6 11.6 10.5 13.5 46.2 11.4 12.4 14.1 13.0 50.9 12.4 13.5 15.3 14.1 55.3 58.8 62.3

Depreciation & Amortization 116.9 118.6 120.2 81.2 436.9 101.5 110.2 125.4 115.5 452.6 107.2 116.4 132.5 121.9 478.0 510.5 532.5

Total Operating Expenses 288.5 288.9 300.1 246.8 1,124.3 265.4 288.1 327.9 301.8 1,183.2 277.4 301.2 342.8 315.5 1,236.7 1,311.5 1,355.5

Operating Income 153.9 168.5 175.2 230.5 728.2 178.5 193.8 220.5 203.0 795.7 219.9 238.7 271.7 250.1 980.5 1,023.5 1,146.0


Interest Expense 45.6 44.6 43.2 54.8 188.2 44.0 47.8 54.3 50.0 196.1 45.8 49.8 56.6 52.1 204.3 212.9 221.9

Loss (Gain) from Affiliates -34.6 -13.8 -20.6 74.9 6.0 0.1 0.1 0.1 0.1 0.4 -0.1 -0.1 -0.2 -0.1 -0.6 0.7 -2.0

Sale Of Property -71.0 -9.6 -35.2 107.3 -8.5 -0.6 -0.7 -0.8 -0.7 -2.8 -0.3 -0.3 -0.3 -0.3 -1.2 -0.7 -0.1

Other Non-Op Loss (Income) 0.0 0.0 0.0 9.5 9.5 2.4 2.6 3.0 2.8 10.9 2.8 3.0 3.4 3.2 12.4 5.3 2.5

Total Non-Operating Expenses -60.0 21.2 -12.5 246.4 195.1 45.9 49.8 56.7 52.2 204.6 48.2 52.4 59.6 54.8 215.0 218.3 222.2

Pretax Income (Loss) 213.8 147.4 187.7 -15.9 533.0 132.6 143.9 163.8 150.8 591.1 171.7 186.4 212.1 195.3 765.4 805.2 923.8

Abnormal Losses (Gains) 5.8 -24.9 -18.3 43.9 6.5 1.7 1.9 2.2 2.0 7.8 1.4 1.5 1.7 1.6 6.2 7.2 5.6

Adjusted Pretax Income (Loss) 208.1 172.3 206.1 -59.8 526.5 130.8 142.0 161.7 148.8 583.3 170.3 184.9 210.4 193.7 759.3 798.1 918.2

Net Extraordinary Gains 38.8 42.2 48.0 44.2 173.1 26.1 28.3 32.2 29.6 116.2 35.7 38.7 44.1 40.6 159.1 156.3 128.6

Income (Loss) Before Minority Int. 246.9 214.4 254.1 -15.7 699.6 156.9 170.3 193.9 178.4 699.5 206.0 223.6 254.5 234.3 918.4 954.4 1,046.8

Minority Interest 0.5 0.6 0.6 0.6 2.3 0.7 0.7 0.8 0.8 3.0 0.8 0.9 1.0 0.9 3.7 4.5 5.5

Net Income 247.4 215.0 254.7 -15.1 702.0 157.6 171.1 194.7 179.2 702.6 206.8 224.5 255.5 235.2 922.1 958.9 1,052.2


Balance Sheet (in millions)


Assets

Real Estate Held for Sale 338.6 258.4 42.2 202.8 210.5 178.5 158.5 187.6

Real Estate Equity Interests 129.4 367.9 298.3 235.0 257.6 289.7 270.2 263.1


Gross Real Estate Property 9,621.8 16,481.6 17,784.8 19,963.7 23,241.1 25,676.7 27,821.3 29,675.7

Accumulated Depreciation -1,945.3 -2,455.8 -2,891.3 -3,328.1 -3,780.8 -4,258.8 -4,769.3 -5,301.8

Net Real Estate Property 7,676.5 14,025.8 14,893.6 16,635.5 19,460.3 21,417.9 23,052.0 24,373.9

Total Real Estate Investments 8,144.5 14,652.1 15,234.1 17,073.4 19,928.5 21,886.1 23,480.6 24,824.6

Cash & Near Cash Items 2,733.6 281.4 509.5 870.8 140.7 353.9 345.5 754.6

Other Assets 232.0 296.1 337.6 426.8 498.2 547.2 587.0 620.6

Restricted Assets 50.0 98.6 95.6 98.2 83.1 85.1 92.1 90.8

Total Assets 11,160.1 15,328.1 16,176.7 18,469.2 20,650.5 22,872.2 24,505.3 26,290.7


Accounts Payable 413.7 516.3 541.3 594.3 672.4 728.8 777.5 818.9

Security Deposits 37.0 44.6 49.5 54.4 61.5 66.6 71.1 74.9

Unsecured Debt 1,945.8 2,594.7 2,993.3 3,813.4 4,576.1 5,125.2 5,535.3 5,867.4

Secured Debt 1,905.2 3,539.6 3,532.6 4,486.4 5,383.7 6,029.7 6,512.1 6,902.8

Other Long-Term Liabilities 17.5 33.2 0.9 23.9 18.9 19.2 15.7 19.4

Total Liabilities 4,319.3 6,728.4 7,117.6 8,972.4 10,712.5 11,969.6 12,911.6 13,683.4

Minority Interest 3.6 3.6 12.8 9.3 7.3 7.3 8.0 8.9

Share Capital & APIC 7,087.6 8,990.0 9,356.0 9,823.8 10,187.3 11,236.6 11,955.7 13,055.6

Retained Earnings & Other Equity -250.3 -393.9 -309.6 -336.2 -256.6 -341.2 -370.1 -457.3

Total Equity 6,840.8 8,599.7 9,059.2 9,496.9 9,938.0 10,902.6 11,593.6 12,607.3

Total Liabilities & Equity 11,160.1 15,328.1 16,176.7 18,469.2 20,650.5 22,872.2 24,505.3 26,290.7


Cash Flow Statement (in millions)

Fiscal Years Ending Dec. 31 2012 2013 2014

Cash From Operating Activities

Net Income 423.9 353.1 683.6

Depreciation & Amortization 256.0 575.4 456.6

Other Non-Cash Adjustments -139.3 -180.9 -257.1

Changes in Non-Cash Capital 0.2 -23.3 3.6

Cash From Operating Activities 540.8 724.3 886.6

Cash From Investing Activities

Disposal of Fixed Assets 274.0 919.7 297.5

Property Additions -911.1 -2,125.2 -1,288.8

Property Improvements -26.5 -26.6 -52.8

Change in Notes 0.0 0.0 21.7

Change in Real Estate Interest 6.6 -26.8 -5.7

Other Investing Activities 33.7 77.7 211.3

Cash from Investing Activities -623.4 -1,181.2 -816.8

Cash from Financing Activities

Dividends Paid -365.6 -526.1 -593.6

Preferred Dividends Other Distributions -0.3 -0.3 -0.3

Change in Unsecured Debt 319.0 650.0 400.0

Change in Secured Debt -110.0 -2,025.4 20.1

Increase in Capital Stocks 2,430.2 4.7 346.1

Decrease in Capital Stocks 0.0 -37.2 -6.3

Other Financing Activities -73.9 -61.1 -7.8

Cash from Financing Activities 2,199.3 -1,995.4 158.2

Net Changes in Cash 2,116.8 -2,452.3 228.1


Cash Flow Statement (in millions)

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E

Cash Flows from Operating Activities

Net income (loss) 702.0 702.6 922.1 958.9 1,052.2

Increase (decrease) in Accounts Payable 53.1 78.1 56.4 48.7 41.5

Increase (decrease) in Security Deposits 4.9 7.1 5.2 4.5 3.8

Increase (decrease) in Accumulated Depreciation 436.9 452.6 478.0 510.5 532.5

Net cash provided by operating activities 1,196.7 1,488.5 1,753.9 1,522.5 1,630.0

Cash Flows from Investing Activities

(Increase) decrease in Gross Real Estate Property -1,743.1 -3,277.4 -1,704.9 -1,501.2 -1,390.8

(Increase) decrease in Real Estate Held for Sale -160.7 -7.7 32.0 20.0 -29.1

(Increase) decrease in Real Estate Equity Interests 63.3 -22.6 -32.1 19.5 7.0

(Increase) decrease in Minority Interest 3.5 2.0 -0.0 -0.7 -0.9

(Increase) decrease in Restricted Assets -2.6 15.0 -1.9 -7.0 1.3

(Increase) decrease in Other Assets/Liabilities -66.3 -76.4 -48.6 -43.4 -29.9

Net cash used for investing activities -1,905.8 -3,367.1 -1,755.5 -1,512.8 -1,442.4

Cash Flows from Financing Activities

Proceeds from issuing Long-Term Debt 2,128.8 1,992.0 1,434.2 1,338.6 1,156.5

Payment of Dividends -688.8 -767.2 -706.9 -684.6 -766.0

(Increase) decrease in Share Capital & APIC -467.8 -363.5 -1,049.3 -503.4 -769.9

Net cash provided by financing activities 1,070.4 948.4 -385.2 181.9 -378.4

Net increase (decrease) in cash 361.4 -730.1 213.2 -8.4 409.2

Cash, beginning of year 509.5 870.8 140.7 353.9 345.5

Cash, end of year 870.8 140.7 353.9 345.5 754.6


Common Size Income Statement as a Percentage of Assets (in millions)


Revenue

Rental Income 8.9% 2.0% 2.3% 2.1% 1.9% 6.3% 1.6% 1.6%

Income from REO 0.1% 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% 0.0%

Total Revenue 9.0% 2.0% 2.3% 2.1% 1.9% 6.4% 1.6% 1.6%

Operating Expenses

Property Operating Expenses 3.3% 0.9% 0.8% 0.8% 0.7% 2.4% 0.6% 0.6%

General & Administrative 0.3% 0.1% 0.1% 0.1% 0.0% 0.2% 0.0% 0.0%

Depreciation & Amortization 2.2% 0.7% 1.2% 0.9% 0.5% 2.4% 0.4% 0.4%

Total Operating Expenses 5.8% 1.7% 2.1% 1.7% 1.2% 5.1% 1.1% 1.0%

Operating Income 3.2% 0.3% 0.3% 0.4% 0.7% 1.3% 0.6% 0.6%


Interest Expense 1.2% 0.2% 0.3% 0.2% 0.2% 0.8% 0.2% 0.2%

Loss (Gain) from Affiliates -0.3% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Sale Of Property 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -0.2%

Other Non-Op Loss (Income) 0.0% 0.0% 0.0% 0.3% 0.0% 0.2% 0.0% 0.0%

Total Non-Operating Expenses 0.9% 0.4% 0.3% 0.5% 0.2% 1.0% 0.2% -0.1%

Pretax Income (Loss) 2.3% -0.1% 0.0% -0.1% 0.5% 0.3% 0.4% 0.7%

Abnormal Losses (Gains) 0.0% 0.0% 0.0% 0.0% 0.1% 0.1% 0.0% 0.0%

Adjusted Pretax Income (Loss) 2.2% -0.1% 0.0% -0.1% 0.4% 0.3% 0.4% 0.7%

Net Extraordinary Gains 1.6% 0.6% 0.2% 0.0% 0.8% 1.3% 0.2% 0.0%

Income (Loss) Before Minority Int. 3.8% 0.5% 0.2% -0.1% 1.2% 1.5% 0.6% 0.7%

Minority Interest 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.1%

Net Income 3.8% 0.5% 0.2% -0.1% 1.2% 1.5% 0.6% 0.7%

Funds from Operations (FFO)

Net Income 3.8% 0.5% 0.2% -0.1% 1.2% 1.5% 0.6% 0.7%

Depreciation and amortization 2.2% 0.7% 1.2% 0.9% 0.5% 2.4% 0.4% 0.4%

Minority interest and affiliates -0.3% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Other Adjustments -1.0% -0.7% -0.2% 0.0% -0.8% -1.2% -0.1% -0.3%

Funds from Operations 4.7% 0.6% 1.2% 0.8% 0.9% 2.8% 0.9% 0.8%

Adjustments for AFFO 0.1% 0.5% 0.1% 0.3% 0.1% 0.7% 0.0% 0.0%

Adj. Funds from Operations (AFFO) 4.8% 1.1% 1.3% 1.1% 1.0% 3.5% 0.9% 0.8%


Common Size Balance Sheet as a Percentage of Assets (in millions)


Assets

Real Estate Held for Sale 3.03% 1.69% 0.26% 1.10% 1.02% 0.78% 0.65% 0.71%

Real Estate Equity Interests 1.16% 2.40% 1.84% 1.27% 1.25% 1.27% 1.10% 1.00%


Gross Real Estate Property 86.22% 107.53% 109.94% 108.09% 112.54% 112.26% 113.53% 112.88%

Accumulated Depreciation -17.43% -16.02% -17.87% -18.02% -18.31% -18.62% -19.46% -20.17%

Net Real Estate Property 68.79% 91.50% 92.07% 90.07% 94.24% 93.64% 94.07% 92.71%

Total Real Estate Investments 72.98% 95.59% 94.17% 92.44% 96.50% 95.69% 95.82% 94.42%

Cash & Near Cash Items 24.49% 1.84% 3.15% 4.72% 0.68% 1.55% 1.41% 2.87%

Other Assets 2.08% 1.93% 2.09% 2.31% 2.41% 2.39% 2.40% 2.36%

Restricted Assets 0.45% 0.64% 0.59% 0.53% 0.40% 0.37% 0.38% 0.35%

Total Assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%


Accounts Payable 3.71% 3.37% 3.35% 3.22% 3.26% 3.19% 3.17% 3.11%

Security Deposits 0.33% 0.29% 0.31% 0.29% 0.30% 0.29% 0.29% 0.28%

Unsecured Debt 17.44% 16.93% 18.50% 20.65% 22.16% 22.41% 22.59% 22.32%

Secured Debt 17.07% 23.09% 21.84% 24.29% 26.07% 26.36% 26.57% 26.26%

Other Long-Term Liabilities 0.16% 0.22% 0.01% 0.13% 0.09% 0.08% 0.06% 0.07%

Total Liabilities 38.70% 43.90% 44.00% 48.58% 51.88% 52.33% 52.69% 52.05%

Minority Interest 0.03% 0.02% 0.08% 0.05% 0.04% 0.03% 0.03% 0.03%

Share Capital & APIC 63.51% 58.65% 57.84% 53.19% 49.33% 49.13% 48.79% 49.66%

Retained Earnings & Other Equity -2.24% -2.57% -1.91% -1.82% -1.24% -1.49% -1.51% -1.74%

Total Equity 61.30% 56.10% 56.00% 51.42% 48.12% 47.67% 47.31% 47.95%

Total Liabilities & Equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%


Value Driver Estimation


Net Income 423.3 352.4 720.5 702.0 702.6 922.1 958.9 1,052.2

Total Shareholder's Equity 6,840.8 8,599.7 9,059.2 9,496.9 9,938.0 10,902.6 11,593.6 12,607.3

Return on Equity (ROE) 9.62% 5.15% 8.38% 7.75% 7.40% 9.28% 8.79% 9.08%

Equity Economic Profit (EEP) 202.2 8.9 288.7 247.1 225.7 423.1 411.5 470.1

Free Cash Flow to Equity (FCFE) - Easy

Net income 423.3 352.4 720.5 702.0 702.6 922.1 958.9 1,052.2

Change in total assets 2,677.7 4,168.1 848.6 2,292.5 2,181.3 2,221.7 1,633.0 1,785.5

Change in total liabilities 238.8 2,409.1 389.1 1,854.8 1,740.2 1,257.0 942.1 771.8

Free Cash Flow to Equity -2,015.6 -1,406.5 261.0 264.3 261.4 -42.6 267.9 38.6

Free Cash Flow to Equity (FCFE) - Formal

Cash from operations

Net income 423.3 352.4 720.5 702.0 702.6 922.1 958.9 1,052.2

- Minority interest 0.6 0.6 0.6 2.3 3.0 3.7 4.5 5.5

Cash from operations 423.8 353.0 721.0 704.3 705.6 925.8 963.4 1,057.7

Sources of Cash

Increase in unsecured debt 316.6 648.9 398.6 820.2 762.7 549.1 410.0 332.1

+ Increase in secured debt -64.8 1,634.4 -7.1 953.8 897.3 646.0 482.4 390.7

+ Increase in accounts payable 12.2 102.6 25.0 53.1 78.1 56.4 48.7 41.5

+ Increase in security deposits 1.1 7.5 4.9 4.9 7.1 5.2 4.5 3.8

+ Increase in other liabilities -26.3 15.7 -32.3 22.9 -5.0 0.3 -3.5 3.7

Sources of Cash 238.8 2,409.1 389.1 1,854.8 1,740.2 1,257.0 942.1 771.8

Uses of Cash

Increase in net real estate property 423.6 6,349.3 867.7 1,742.0 2,824.8 1,957.6 1,634.1 1,322.0

+ Increase in real estate equity interest -15.2 238.5 -69.6 -63.3 22.6 32.1 -19.5 -7.0

+ Increase in real estate held for sale 166.5 -80.2 -216.2 160.7 7.7 -32.0 -20.0 29.1

+ Increase in cash and equivalents 2,116.8 -2,452.3 228.1 361.4 -730.1 213.2 -8.4 409.2

+ Increase in restricted assets -23.5 48.6 -2.9 2.6 -15.0 1.9 7.0 -1.3

+ Increase in other assets 9.5 64.1 41.4 89.3 71.4 48.9 39.9 33.6

Uses of cash 2,677.7 4,168.1 848.6 2,292.5 2,181.3 2,221.7 1,633.0 1,785.5

Free Cash Flow to Equity -2,015.1 -1,405.9 261.6 266.6 264.5 -38.9 272.4 44.0


Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:

CV Growth 3.00%

CV ROE 9.08%

Cost of Equity 5.02%

Beta 0.476

Risk Free 2.71%



Equity DCF Model

Free Cash Flow to Equity 266.6 264.5 -38.9 272.4 44.0

Terminal Value 34,859.6

Discount Factor* 1.01 1.06 1.11 1.17 1.22

Discounted FCFE 265.1 250.3 -35.1 233.8

Discounted Terminal Value 28487.7

Equity DCF Value 29201.8

- ESOP 16.9

Net Value 29184.9

Shares Outstanding 137.8

Value per Share 211.84

Equity EP Model

Equity Economic Profit 247.1 225.7 423.1 411.5 470.1

Terminal Value 23,266.0

Discount Factor* 1.01 1.06 1.11 1.17 1.22

Discounted EEP 245.7 213.7 381.4 353.2


Equity EP Value 20207.2

+ Beg. TSE 9059.2

- ESOP 16.9

Net Value 29249.5

Shares Outstanding 137.8

Value per Share 212.31

*Discount factors include partial year adjustments


Dividend Discount Model (DDM) or Fundamental P/E Valuation Model


Key Assumptions

CV growth 3.00%

CV ROE 9.08%

Cost of Equity 5.02%

Beta 0.476

Risk Free 2.71%


Future Cash Flows

Dividends Per Share 5.00 5.28 5.76 6.05

Forward P/E 34.49

Continuous Value 221.18

Discount Factor* 1.01 1.06 1.11 1.17 1.17

Discounted Dividends 4.97 5.00 5.19 5.19


Present Value DDM 210.17

*Discount factors include partial year adjustments


Relative Valuation Models

EPS EPS Est. 5yr

Ticker Company Price 2015E 2016E P/E '15 P/E '16 EPS gr. PEG 15 PEG 16 P/FFO P/AFFO P/TBV P/Book

SKT Tanger Factory Outlets $32.47 $2.19 $2.34 14.8 13.9 7.9 1.88 1.76 14.8 16.4 6.27 4.45

EQR Equity Residential $72.36 $3.44 $3.73 21.0 19.4 8.1 2.61 2.40 22.3 25.0 2.52 2.45

ESS Essex Property Trust, Inc. $220.66 $9.68 $10.82 22.8 20.4 8.7 2.64 2.36 20.7 22.7 2.34 2.34

SPG Simon Property Group Inc. $183.42 $10.07 $10.73 18.2 17.1 8.3 2.20 2.07 18.0 20.3 - -

GGP General Growth Properties $24.48 $1.43 $1.58 17.1 15.5 8.7 1.96 1.77 17.2 21.6 2.66 2.74

HST Host Hotels & Resorts, Inc. $17.41 $1.54 $1.71 11.3 10.2 5.7 1.98 1.79 10.5 10.5 1.81 1.82

BXP Boston Properties Inc. $117.72 $5.42 $5.82 21.7 20.2 6.7 3.23 3.01 21.8 30.8 3.23 3.08

VNO Vornado Realty Trust $90.99 $5.18 $5.21 17.6 17.5 4.3 4.13 4.11 18.3 30.3 3.42 3.13 CBG CBRE Group, Inc. $31.79 $1.97 $2.28 16.1 13.9 14.0 1.15 1.00 - - - 4.42

Average 17.9 16.5 2.42 2.25 18.0 22.20 3.18 3.05

AVB AvalonBay Communities, Inc. $172.95 $5.10 $4.83 33.9 35.8 3.9 8.73 9.21 23.7 25.37 2.41 2.41

Implied Value:

Relative P/E (EPS15) $ 90.99

Relative P/E (EPS16) 79.53$

Relative Price/FFO $ 130.73

Relative Price/AFFO $ 151.32

Relative Price/Tangible Book $ 228.25

Relative Price/Book 219.30

Relative Value $ 182.40

Relative FFO/AFFO Value $ 144.45

P/BV Source: Ycharts

P/TBV Source: GuruFocus


Key Management Ratios


Liquidity Ratios

Cash & Cash Equivalents 2,733.6 281.4 509.5 870.8 140.7 353.9 345.5 754.6

Current Liabilities 941.5 1,083.0 1,254.8 1,445.5 1,626.3 1,759.2 1,870.2 893.8

Cash Ratio 290.4% 26.0% 40.6% 60.2% 8.7% 20.1% 18.5% 84.4%

Activity or Asset-Management Ratios

Net Income 423.3 352.4 720.5 702.0 702.6 922.1 958.9 1,052.2

Average Total Assets 9,821.2 13,244.1 15,752.4 17,323.0 19,559.9 21,761.4 23,688.7 25,398.0

Return on Assets 4.3% 2.7% 4.6% 4.1% 3.6% 4.2% 4.0% 4.1%

Net Income 423.3 352.4 720.5 702.0 702.6 922.1 958.9 1,052.2

Beg. Shareholders Equity 4,401.9 6,840.8 8,599.7 9,059.2 9,496.9 9,938.0 10,902.6 11,593.6

Return on Equity 9.6% 5.2% 8.4% 7.7% 7.4% 9.3% 8.8% 9.1%

Financial Leverage Ratios

Total Debt 3,851.0 6,134.4 6,525.9 8,299.8 9,959.8 11,154.9 12,047.3 12,770.2

Total Assets 11,160.1 15,328.1 16,176.7 18,469.2 20,650.5 22,872.2 24,505.3 26,290.7

Debt Ratio 34.5% 40.0% 40.3% 44.9% 48.2% 48.8% 49.2% 48.6%

Total Liabilities 4,319.3 6,728.4 7,117.6 8,972.4 10,712.5 11,969.6 12,911.6 13,683.4

Shareholders' Equity 6,840.8 8,599.7 9,059.2 9,496.9 9,938.0 10,902.6 11,593.6 12,607.3

Debt-to-Equity Ratio 0.63 0.78 0.79 0.94 1.08 1.10 1.11 1.09

Long-Term Debt 3,543.0 5,643.6 6,003.8 7,635.8 9,163.0 10,262.6 11,083.6 11,748.6

Long-Term Debt & TSE 10,383.7 14,243.3 15,063.0 17,132.7 19,101.0 21,165.2 22,677.2 24,355.9

Capitalization Ratio 34.1% 39.6% 39.9% 44.6% 48.0% 48.5% 48.9% 48.2%

Profitability Ratios

Price (appreciated at CV growth) 34.35 32.02 36.96 38.07 39.21 40.39 41.60 42.85

Funds from Operations/Share 5.35 5.07 7.28 7.20 6.78 8.11 8.07 8.44

Price/FFO 6.4 6.3 5.1 5.3 5.8 5.0 5.2 5.1

Payout Policy Ratios

Dividends per Share 3.57 3.88 4.28 5.00 5.28 5.76 6.05 6.41

Earnings per Share 4.34 2.78 5.22 5.10 4.83 6.01 5.93 6.17

Dividend Payout Ratio 82.2% 139.7% 82.0% 98.1% 109.2% 95.8% 102.0% 104.0%

Dividends per Share 3.57 3.88 4.28 5.00 5.28 5.76 6.05 6.41

Earnings per Share 4.34 2.78 5.22 5.10 4.83 6.01 5.93 6.17

Retention Ratio 17.8% -39.7% 18.0% 1.9% -9.2% 4.2% -2.0% -4.0%

DuPont Analysis

Net Income 423.3 352.4 720.5 702.0 702.6 922.1 958.9 1,052.2

Gross Revenue 1,000.6 1,462.9 1,685.1 1,852.5 1,978.9 2,217.2 2,335.1 2,501.5

Profit Margin 42.3% 24.1% 42.8% 37.9% 35.5% 41.6% 41.1% 42.1%

Gross Revenue 1,000.6 1,462.9 1,685.1 1,852.5 1,978.9 2,217.2 2,335.1 2,501.5

Total Assets 11,160.1 15,328.1 16,176.7 18,469.2 20,650.5 22,872.2 24,505.3 26,290.7

Total Asset Turnover 9.0% 9.5% 10.4% 10.0% 9.6% 9.7% 9.5% 9.5%

Total Assets 11,160.1 15,328.1 16,176.7 18,469.2 20,650.5 22,872.2 24,505.3 26,290.7

Shareholders Equity 6,840.8 8,599.7 9,059.2 9,496.9 9,938.0 10,902.6 11,593.6 12,607.3

Equity Multiplier 1.63 1.78 1.79 1.94 2.08 2.10 2.11 2.09

Profit Margin 42.3% 24.1% 42.8% 37.9% 35.5% 41.6% 41.1% 42.1%

x Total Asset Turnover 9.0% 9.5% 10.4% 10.0% 9.6% 9.7% 9.5% 9.5%

x Equity Multiplier 1.63 1.78 1.79 1.94 2.08 2.10 2.11 2.09

Return on Equity (alternative) 6.19% 4.10% 7.95% 7.39% 7.07% 8.46% 8.27% 8.35%

Tanger Factory Outlet Centers

Sensitivity and Scenario Analysis

CV Growth Rate

Impact on Equity DCF Value 211.84$ 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5%

0.350 188.67 212.17 247.98 309.23 437.97 882.66 -3480.09

0.400 172.91 191.41 218.52 262.05 343.43 550.01 2133.84

0.450 159.42 174.15 195.05 226.98 281.84 398.17 810.88

Beta 0.476 153.15 166.28 184.63 212.08 257.59 347.79 611.93

0.500 147.74 159.58 175.91 199.89 238.54 311.24 498.42

0.550 137.54 147.12 160.02 178.35 206.45 254.94 358.69

0.600 128.55 136.33 146.61 160.81 181.71 215.51 279.49

CV Return on Equity

Impact on Dividend Discount Model 210.17$ 15.0% 17.0% 19.0% 9.1% 21.0% 23.0% 25.0%

3.50% 1117.84 1150.11 1175.58 939.04 1196.20 1213.23 1227.54

4.00% 514.01 528.52 539.97 433.60 549.25 556.91 563.34

4.50% 335.39 344.65 351.96 284.07 357.88 362.77 366.88

Cost of Equity 5.02% 247.18 253.85 259.12 210.21 263.39 266.91 269.87

5.50% 199.55 204.82 208.99 170.32 212.36 215.14 217.48

6.00% 166.51 170.81 174.21 142.63 176.97 179.24 181.15

6.50% 143.12 146.74 149.60 123.03 151.92 153.83 155.44

Average Revenue per Unit (Established Communities)

Impact on Equity EP Value 211.84$ 1.0% 1.5% 2.0% 2.1% 2.5% 3.0% 3.5%

14.0% -133.09 3.90 140.89 170.72 277.87 414.86 551.85

17.0% -127.38 13.22 153.81 184.43 294.40 434.99 575.59

20.0% -121.66 22.53 166.73 198.14 310.93 455.12 599.32

2015 Established Communities 23.0% -115.95 31.85 179.65 211.84 327.45 475.26 623.06

Growth Rate 26.0% -110.24 41.17 192.57 225.55 343.98 495.39 646.79

29.0% -104.53 50.48 205.50 239.26 360.51 515.52 670.53

32.0% -98.82 59.80 218.42 252.96 377.03 535.65 694.27

Risk Free Rate

Impact on Equity EP Value 212.31$ 0.02 0.02 0.03 0.03 0.03 0.03 0.03

3.35% 638.13 493.06 400.96 334.63 290.69 255.07 226.99

3.85% 472.41 387.06 327.32 281.26 249.21 222.29 200.42

4.35% 374.07 317.89 276.01 242.17 217.77 196.70 179.20

Equity Risk Premium 4.85% 308.97 269.19 238.22 212.31 193.11 176.19 161.86

5.35% 262.70 233.07 209.23 188.76 173.27 159.37 147.43

5.85% 228.12 205.20 186.30 169.72 156.95 145.34 135.23

6.35% 201.32 183.06 167.70 154.00 143.30 133.45 124.79

Weight of DDM

Impact on Target Price 205.57$ 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

5.00% 185.37 188.14 190.92 193.70 196.48 199.25 202.03

10.00% 188.33 191.11 193.89 196.67 199.44 202.22 205.00

15.00% 191.30 194.08 196.86 199.63 202.41 205.19 207.97

Weight of Equity EP and DCF 20.00% 194.27 197.05 199.82 202.60 205.38 208.16 210.93

25.00% 197.24 200.01 202.79 205.57 208.35 211.12 -

30.00% 200.20 202.98 205.76 208.54 211.31 - -

35.00% 203.17 205.95 208.73 211.50 - - -

Documents

AvalonBay Communities, Inc. (AVB) November 18, 2015tippie.biz.uiowa.edu/henry/reports15/AVB_fa15.pdf · Five Year Beta 0.00 ... the northeast, northwest, and California. ... AvalonBay