In order to pay off its outstanding debts, AvalonBay Communities Inc. (AVB) is raising capital through notes issuance. In particular, the company priced 4.200% unsecured notes worth $350 million at 99.806% of the principal amount.
Specifically, this apartment real estate investment trust (:REIT) intends to utilize a part of the proceeds to pay off outstanding debt under its three secured debt financings facilities. The facilities have total outstanding balance of around $302.0 million, which is payable to Fannie Mae (FNMA).
Also, AvalonBay will incur prepayment penalties of about $14.9 million related to this. The remaining amount will be used to fulfill other corporate needs such as acquisition, development and redevelopment of apartment assets and payback and refinance other debts.
However, the prepayment penalty would adversely impact the company’s fourth quarter and full year 2013 results. In particular, the company expects the fourth-quarter and full-year 2013 funds from operations (:FFO) per share figures to decline by 12 cents and 13 cents, respectively.
Despite the negative impact on FFO for this notes issuance, the shares have gained on positive broader market sentiments. Shares of AvalonBay increased 0.89% during the regular trading session on Dec 6.
The unsecured notes will mature on Dec 15, 2023 and have a yield to maturity of 4.224%. Notably, the settlement is slated to complete by Dec 16, 2013. As a matter of fact, J.P. Morgan Securities LLC of JPMorgan Chase & Co. (JPM), BofA Merrill Lynch of Bank of America Corporation (BAC) and Barclays Capital Inc. supported AvalonBay in this offering as lead representatives of the agents.
As of Sep 30, 2013, AvalonBay had nearly $211.3 million in unrestricted cash and cash in escrow. Although, the notes offering will affect AvalonBay’s near-term earnings, we believe that the above-mentioned transaction is a strategic fit as it will lower interest expenses. Moreover, increased financial flexibility will enable AvalonBay to pursue strong portfolio restructuring activity that will go a long way in enhancing its top-line growth.
AvalonBay currently carries a Zacks Rank #3 (Hold).
Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.