avalonbay presentation
TRANSCRIPT
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