avalonbay presentation

REIT Valuation: Intrinsic Value $197.6 > $187.7 Current Price

Premium 5.3%

BUYDr. Lawrence Souza – Finance 372 – Spring 2016

Jay DengMorgan Foldesi

Savannah Cotton

• AvalonBay’s Background

• Financial Analysis

• REIT Valuation

• Recommendation

Overview

• Avalon Properties grew out of Trammel Crow Residential groups, forming a REIT in 1993

• Avalon Properties and Bay Apartment Communities merged their businesses in 1998 to form AvalonBay Communities

• Type: Public• Traded as NYSE: AVB• Industry: REIT - Apartment• No. of employees: 2,981 (2016)

Source: AvalonBay Communities 10-k

Background

Timothy J. NaughtonChairman, President, and CEOEducation: University of Virginia, Harvard Business School

Years at Company: 27

Matthew H. BirenbaumChief Investment OfficerEducation: Northwestern University, Brown University

Years at Company: 9

Michael M. FeiginChief Construction OfficerEducation: Yale University, Brooklyn Law School

Years at Company: 2

Kevin O’SheaChief Financial OfficerEducation: Boston College, Harvard University

Years at Company: 13

Sean J. BreslinChief Operating OfficerEducation: Cal State Long Beach, University of Texas at Austin

Years at Company: 14

Leo S. Horey IIIChief Administrative OfficerEducation: University of North Carolina at Chapel Hill

Years at Company: 20

Leadership

AvalonBay’s business is in developing, redeveloping, acquiring and managing distinctive apartment homes in some of the best U.S. markets, and delivering outsized, risk-adjusted returns to shareholders. 

Organizational Structure

Source: Market Realist

Products and Services

Source: Market Realist

AvalonBay focus on the best performing US markets with assets located in the Northeast, Mid-Atlantic, Pacific Northwest, and Northern and Southern California.

Strengths:

• High barrier to entry market

• Diversified portfolio

• Wide distribution network

Weaknesses:

• Tied to Real Estate Cycle and interest rate trends• Low investment in R&D

• Highly competitive market

Opportunities:

• Growth in local population

• Acquisitions

• Expansion in other geographies

Threats:

• Interest rate fluctuation

• Economic downturn

• Rising cost of raw materials

SWOT

Industry Overview

Rank Institution Name Market Cap (Billions)

1 Equity Residential (EQR) 25.1

2 AvalonBay Communities (AVB) 24.6

3 Essex Properties (ESS) 14.4

4 UDR Inc. (UDR) 9.5

5 Mid-America Apartment Communities (MAA) 7.3

Culture, Peers, and Industry

• AvalonBay has a commitment to integrity, a spirit of caring, and a focus on continuous improvement. The company strives to continuously improve execution by drawing on strategic capabilities that include market research, customer insight, design, and capital management. 

• Competitors: EQR, ESS, MAA, and UDR, as well as other housing alternatives• Similarities: focused on major metropolitan markets, same portfolio diversification

strategy, active in property development and redevelopment projects • Differences: AvalonBay has three different brands and uses this to differentiate itself

from competitors

Financial Ratio AVB UDR ESS Peer GroupIndustry Average Conditions

ROA 4.6 3.8 2.0 3.5 1.5 Excellent

ROE 8.1 9.6 4.0 7.0 5.8 Excellent

ROI 4.5 4.1 1.4 3.0 2.3 Good

Dividend Yield 2.9% 3.0% 2.8% 2.9 6.0% Below Average

Dividend Payout 64.6% 62.4% 58.2% 61.7% 63.2% Average

Overall Good

Sources: Morningstar, CSIMarket

Financial Ratios

Financial Ratio AVB UDR ESSPeer

GroupIndustry Average Conditions

FFO 4.1 1.2 5.7 3.1 5.3 Below Average

FFO Multiple 21.7x 20.4x 21.5x 20.9x 19.3x Good

Debt-to-Equity 0.7x 1.2x 0.9x 0.9x 1.1x Below Average

Debt-to-Total Market Cap 0.4% 0.5% 0.5% 0.5% 0.7% Below

Average

Cash Flow to Debt 11.5% 10.4% 4.7% 9.1% 10.5% Above Average

Overall Average

Financial Ratios

Sources: Morningstar, CSIMarket

• Slight downwards trend line• Price remains above both

MA(50) and MA(200)• Flatting RSI & MACD

Sideways Trend

Scenario Analysis

Target Price $198.0 < $187.7 Current Price Premium 5.5%

Intrinsic Value $154.3 < $ 187.7Current Price Premium 17.8%

CAPM ModelRisk Free Rate 2.0%

Beta 0.6Expected Market Return 8.0%

R 5.7%

2015 2016E 2017EFFO $8.1 $9.3 $10.4

R REIT Value Range

5% $185.2 High

6% $154.3 Medium

7% $132.3 Low

Source: Nasdeq, Morningstar, Treasury Dept., S&P

R: Return on Equity

Valuation: Perpetuity Model

Intrinsic Value $231.4 > $187.7 Current PricePremium 23.3%

CAPM ModelRisk Free Rate 2.0%

Beta 0.62Expected Market Return 8.0%

R 5.7%

2015 2016E 2017E gFFO $8.1 $9.3 $10.4 2%

1.00% 2.00% 3.00% Range

5% $231.4 $308.6 $462.9 High

6% $185.2 $231.4 $308.6 Medium

7% $154.3 $185.2 $231.4 Low

Range Low Medium High

Rg

R: Return on Equity; g: Dividends Growth RateSources: Morningstar, Nasdaq

Valuation: Gordon Growth Model

Intrinsic Value $185.2 < $187.7 Current PricePremium 1.3%

FFO in 2016

$9.3

AVB UDR ESS

2015 21.7x 20.4x 21.5x

FFO Multiple REIT Value Range22x $203.7 Low20x $185.2 Medium18x $166.6 High

Competitors

Sources: Morningstar,

Valuation: Multiple Approach

FFO Multiple

Intrinsic Value $222.4 > $187.7 Current PricePremium 18.5%

Weighted Debt 40.0%Weighted

Equity 60.0%

R Debt 4.0%

R Equity 5.7%

WACC 5.0%

CAPM 5.7%

2015 2016g=15

2017g=12

2018g=9

2019g=6

2020g=3

TV

EPS $ $8.1 $9.3 $10.4 $11.3 $12.0 $12.3 $176.3

Corporation Value $222.4

CAPM REIT Value Range5.0% $253.2 High

6.0% $222.4 Medium

7.0% $199.1 LowSources: Nasdaq, Morningstar ,CNN Money

Valuation: DCF Model

Intrinsic Value $158.2 < $187.7 Current Price

Franchise Value 15.7%

NOI: 1.3 Billion

Shares Outstanding: 137 Million

CAPM: 5.7%

R REIT Value Range

5% $189.8 Low

6% $158.2 Medium

7% $135.6 High

Source: Morningstar, Nasdaq

Valuation: Net Asset Value

Model REIT Value WeightPerpetuity $154.3 5% 5% 5%

Gordon Growth $231.4 5% 10% 15%Multiple $185.2 30% 30% 25%

DCF $222.4 55% 50% 50%NAV $158.2 5% 5% 5%

Intrinsic Value by Weighted $197.2 $197.6 $199.9

Weighted REIT ValuationIntrinsic Value $ 197.6 < $187.7 Current Price Premium 5.3%

BUY

Intrinsic Value $197.6 > $187.7 Current PricePremium 5.3%

BUY

Recommendation

Trades:Buy Call OptionsWrite Put OptionsBuy AVB Stock on MarginBuy Apartment REIT ETFs on MarginBuy Call Options on Apartment REIT ETFsWrite Put Options on Apartment REIT ETFsBuy Call Options on Apartment REIT IndiciesWrite Put Options on Apartment REIT IndiciesTotal: 8