2019
ANNUAL REPORT
Dear Fellow Shareholders,
We had a productive year at AvalonBay as our 2019
financial performance modestly exceeded
the
expectation we provided early in the year. Core FFO
of $9.34 per share surpassed our initial outlook(1) by
$0.04 per share, and this outperformance was
primarily driven by accretive acquisition activity and
favorable capital market conditions.
OPERATIONS
Apartment market fundamentals improved
moderately in 2019. Same-store revenue growth of
2.9% was 40 basis points above the levels achieved
in the preceding two years, and same-store
economic occupancy remained healthy at 96.0%.
Other key operating metrics also performed
favorably. Same-store turnover(2) fell to 51% in
2019, a ten-year low; same-store operating expenses
increased 2.8%, 20 basis points below the
expectation included in our initial outlook(1); and, our
same-store Net Operating Income (“NOI”) Margin
reached 72%, a ten-year high. We were also excited
to incorporate several new technologies and
processes into our operating platform that we
believe will enable us to better serve our customers’
needs, contain operating expense growth, and
improve NOI Margins in the future.
INVESTMENT ACTIVITY
We completed the development of seven new
communities containing over 2,000 apartment homes
for approximately $665 million in total capitalized
cost in 2019. We also commenced construction on
eight new development communities
if
developed as expected, will contain nearly 2,400
apartment homes and represent approximately $850
million in total capitalized cost.
that,
Over the course of the year, we continued to grow our
presence in our expansion markets. We (i) acquired
secured a
two operating
development right in Southeast Florida and, (ii)
acquired one operating community, commenced
communities and
construction on one development community, and
secured a development right in Denver. At year-end
2019, we had committed over $600 million to each
expansion market.
CAPITAL & BALANCE SHEET MANAGEMENT
issuances.
Importantly, our
Throughout 2019, we raised approximately $1.3
billion of new capital from a mix of (i) asset sales, (ii)
new debt, net of debt redemptions, and (iii) common
equity
leverage, as
measured by Net Debt-to-Total Market Capitalization
and Net Debt-to-Core EBITDAre, remained low at 20%
and 4.6x,
addition, our
Unencumbered NOI increased 200 basis points over
the course of the year, to 93%, and our weighted
average years to maturity on total debt outstanding
stood at 8.9 years at the end of 2019.
respectively.
In
CORPORATE RESPONSIBILITY
We believe that to be a great company we must apply
a multi-stakeholder approach to our business.
Delivering strong financial results over a sustained
period
satisfied
requires engaged associates,
customers, and the support of our local communities,
which we earn by taking an active leadership role in
addressing
important environmental and social
challenges.
In 2019, we:
→ Remained
in the top decile for associate
engagement among companies surveyed by
Perceptyx (3).
→ Were recognized by Glassdoor’s Employees’
Choice Awards as one of the top 100 companies
to work for in the U.S. for a second consecutive
year.
→ Were ranked #1 for online reputation among
public multifamily REITs by J. Turner Research for
a fourth consecutive year.
→ Were named the Global and U.S. Leader in the
Residential Sector by the Global Real Estate
Sustainability Benchmark (GRESB).
1
during this public healthcare crisis. Far from
retreating from our product, our residents will be
increasing their usage of their apartment homes. At
the same time, constraints on business activity will
impact our development activity in ways that are not
yet known. In all events, we are prepared to navigate
this public healthcare crisis with a view to serving all
our stakeholders.
Thank you for your continued support.
Sincerely,
Timothy J. Naughton
Chairman and CEO
March 20, 2020
→ Received an A- grade from the Carbon Disclosure
Project (CDP) for our carbon emission disclosure
practices. We were one of four REITs, and the
only apartment company, to receive a grade of A-
or better.
We are proud of these accomplishments, but also
recognize that we must continually strive to improve
how we support the key constituencies that drive our
business forward.
CONCLUSION
2019 was another productive year for AvalonBay. A
modest improvement in apartment market
fundamentals, accretive development and
investment activity, and favorable capital market
conditions helped deliver a 24.1% total return(4) to
our shareholders during the year.
As we close out the decade, we feel it is important to
recognize the growth that has occurred at AvalonBay
over the last 10 years. Since the beginning of 2010,
(i) Core FFO per share increased by 135%, (ii) we
completed the development of 96 new apartment
communities containing nearly 27,000 apartment
homes for approximately $8.3 billion in total
capitalized cost, and (iii) we increased our annual
common dividend per share by 70%.
Lastly, as of this writing, the spread of the COVID-19
coronavirus has impacted much of the country,
including in our markets, with each day bringing new
news. With institutions, retail outlets, restaurants,
entertainment venues, conferences and gatherings
closing or limiting their operations to increase social
distancing and slow the spread of the virus, 2020
presents new and unique challenges for us and the
rest of the nation. We are taking recommended
actions to increase the social distancing among our
associates and residents, and we are monitoring and
implementing protocols to help protect our
communities and residents.
A consensus has not yet emerged as to how long
COVID-19 will impact daily living in the United States
and what the size and duration of the impact will be
on the economy. As a developer and provider of
residential housing, we are in a unique position
2
NOTES
Initial (2019) outlook was provided by the Company on February 4, 2019.
1.
2. Turnover represents the number of apartment homes turned over during the period, divided by the total
number of apartment homes in the respective reporting period.
3. Perceptyx is a third-party service provider that surveys associates of leading companies to measure
workforce engagement.
4. Total return (“total shareholder return”) is calculated by S&P Global Market Intelligence and represents
the change in value over the period stated with all dividends reinvested.
DEFINITIONS AND RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES
AND OTHER TERMS USED IN THIS LETTER
Development rights are development opportunities in the early phase of the development process for which the
Company either has an option to acquire land or enter into a leasehold interest, for which the Company is the
buyer under a long-term conditional contract to purchase land, where the Company controls the land through a
ground lease or owns land to develop a new community, or where the Company is the designated developer in a
public-private partnership. The Company capitalizes related pre-development costs incurred in pursuit of new
developments for which the Company currently believes future development is probable.
EBITDA, EBITDAre and Core EBITDAre are considered by management to be supplemental measures of our
financial performance. EBITDA is defined by the Company as net income or loss attributable to the Company
before interest income and expense, income taxes, depreciation and amortization. EBITDAre is calculated by the
Company in accordance with the definition adopted by the Board of Governors of the National Association of Real
Estate Investment Trusts (“NAREIT”), as EBITDA plus or minus losses and gains on the disposition of depreciated
property, plus impairment write-downs of depreciated property, with adjustments to reflect the Company's share
of EBITDAre of unconsolidated entities. Core EBITDAre is the Company’s EBITDAre as adjusted for noncore items
outlined in the table below. By further adjusting for items that are not considered part of the Company’s core
business operations, Core EBITDAre can help one compare the core operating and financial performance of the
Company between periods. A reconciliation of EBITDA, EBITDAre and Core EBITDAre to net income is as follows
(dollars in thousands):
3
Economic occupancy is defined as total possible revenue less vacancy loss as a percentage of total possible
revenue. Total possible revenue (also known as “gross potential”) is determined by valuing occupied units at
contract rates and vacant units at Market Rents. Vacancy loss is determined by valuing vacant units at current
Market Rents. By measuring vacant apartments at their Market Rents, Economic occupancy takes into account the
fact that apartment homes of different sizes and locations within a community have different economic impacts on
a community’s gross revenue.
4
Q42019Net income167,671$ Interest expense, net, inclusive of loss on extinguishment of debt, net54,190 Income tax expense1,825 Depreciation expense171,364 EBITDA395,050$ Gain on sale of communities(256) Joint venture EBITDAre adjustments(2,079) EBITDAre392,715$ Gain on other real estate transactions(65) Lost NOI from casualty losses covered by business interruption insurance265 Business interruption insurance proceeds(527) Advocacy contributions50 Severance related costs60 Development pursuit write-offs and expensed transaction costs, net2,093 For-sale condominium marketing and administrative costs1,286 Asset management fee intangible write-off and other joint venture losses52 Legal settlements(2,221) Casualty and impairment loss- Core EBITDAre393,708$
FFO and Core FFO are considered by management to be supplemental measures of our operating and financial
performance. FFO is calculated by the Company in accordance with the definition adopted by NAREIT. FFO is
calculated by the Company as Net income or loss attributable to common stockholders computed in accordance
with GAAP, adjusted for gains or losses on sales of previously depreciated operating communities, cumulative
effect of a change in accounting principle, impairment write-downs of depreciable real estate assets, write-downs
of investments in affiliates which are driven by a decrease in the value of depreciable real estate assets held by the
affiliate and depreciation of real estate assets, including adjustments for unconsolidated partnerships and joint
ventures. By excluding gains or losses related to dispositions of previously depreciated operating communities and
excluding real estate depreciation (which can vary among owners of identical assets in similar condition based on
historical cost accounting and useful life estimates), FFO can help one compare the operating and financial
performance of a company’s real estate between periods or as compared to different companies. Core FFO is the
Company's FFO as adjusted for non-core items outlined in the table below. By further adjusting for items that are
not considered part of our core business operations, Core FFO can help one compare the core operating and
financial performance of the Company between periods. A reconciliation of Net income attributable to common
stockholders to FFO and to Core FFO is as follows (dollars in thousands):
5
FULL YEARFULL YEAR20192010Net income attributable to common stockholders785,974$ 175,331$ Depreciation - real estate assets, including joint venture adjustments666,563 237,041 Distributions to noncontrolling interests46 55 Gain on sale of unconsolidated entities holdingpreviously depreciated real estate (5,788) - Gain on sale of previously depreciated real estate(166,105) (74,074) FFO attributable to common stockholders1,280,690$ 338,353$ Adjusting items:Joint venture losses87 811 Business interruption insurance proceeds(1,441) - Lost NOI from casualty losses covered by business interruption insurance675 - Loss on extinguishment of consolidated debt602 - Advocacy contributions50 - Severance related costs2,327 (1,550) Development pursuit write-offs and expensed transaction costs, net3,782 - For-sale condominium marketing and administrative costs3,812 - For-sale condominium imputed carry cost6,351 - Gain on other real estate transactions(439) - Legal settlements(6,292) (927) Income tax expense (benefit)13,003 - Federal excise tax- (265) Severe weather costs- 672 Core FFO attributable to common stockholders1,303,207$ 337,094$ Average shares outstanding - diluted139,571,550 84,632,869 Earnings per share - diluted 5.63$ 2.07$ FFO per common share - diluted 9.18$ 4.00$ Core FFO per common share - diluted 9.34$ 3.98$
Market rents as reported by the Company are based on the current market rates set by the Company based on its
experience in renting apartments and publicly available market data. Trends in Market Rents for a region as
reported by others could vary. Market Rents for a period are based on the average Market Rents during that
period and do not reflect any impact for cash concessions.
Net Debt-to-Core EBITDAre is calculated by the Company as total debt (secured and unsecured notes and the
Company's variable rate unsecured credit facility) that is consolidated for financial reporting purposes, less
consolidated cash and cash in escrow, divided by annualized fourth quarter 2019 Core EBITDAre, as adjusted. A
calculation of Net Debt-to-Core EBITDAre is as follows (dollars in thousands):
Net Debt-to-Total Market Capitalization is calculated by the Company as total debt (secured and unsecured notes
and the Company's variable rate unsecured credit facility) that is consolidated for financial reporting purposes, less
consolidated cash and cash in escrow, divided by Total Market Capitalization as of December 31, 2019. A
calculation of Net Debt-to-Total Market Capitalization is as follows (dollars in thousands):
6
Q42019Total debt principal7,355,371$ Cash and cash in escrow(127,614) Net debt7,227,757$ Core EBITDAre393,708$ Core EBITDAre, annualized1,574,832$ Net Debt-to-Core EBITDAre4.6xAS OF12/31/2019Total debt principal7,355,371$ Cash and cash in escrow(127,614) Net debt7,227,757$ Common stock29,493,039$ Operating partnership units1,573 Total debt7,355,371 Total Market Capitalization36,849,983$ Net Debt-to-Total Market Capitalization20%
Net Operating Income Margin is calculated by the Company as NOI divided by rental revenue. The Company
considers Net Operating Income Margin to be an important and appropriate supplemental performance measure
because it helps both investors and management to understand the Company’s ability to limit the growth of
expenses. A reconciliation and calculation of Net Operating Income Margin is as follows (dollars in thousands):
7
20192018201720162015Net income786,103$ 974,175$ 876,660$ 1,033,708$ 741,733$ Indirect operating expenses, net of corporate income83,008 80,227 68,312 61,403 56,973 Investments and investment management expense- - - 4,822 4,370 4,991 3,265 2,736 9,922 6,822 Interest expense, net203,585 220,974 199,661 187,510 175,615 Loss (gain) on extinguishment of debt, net602 17,492 25,472 7,075 (26,736) Loss on interest rate contract- - - - - General and administrative expense58,042 60,369 53,695 45,771 42,774 Joint venture (income) loss(8,652) (15,270) (70,744) (64,962) (70,018) Depreciation expense661,578 631,196 584,150 531,434 477,923 Income tax expense (benefit)13,003 (160) 141 305 1,483 Casualty and impairment loss (gain), net- 215 6,250 (3,935) (10,542) Gain on legal settlement- - - - - Gain on sale of communities(166,105) (374,976) (252,599) (374,623) (115,625) (Gain) loss on other real estate transactions(439) (345) 10,907 (10,224) (9,647) Gain on sale of discontinued operations- - - - - (Income) loss from discontinued operations- - - - - For-sale condominium marketing and administrative costs3,812 1,044 - - - Gain on acquisition of unconsolidated real estate entity- - - - - NOI from real estate assets sold or held for sale(12,318) (58,620) (14,573) (17,509) (10,920) NOI1,627,210$ 1,539,586$ 1,490,068$ 1,410,697$ 1,264,205$ Same-store1,317,472 1,165,509 1,112,472 1,084,351 973,405 Other Stabilized202,445 178,172 196,733 165,530 145,170 Other Stabilized - Archstone- - - - - Redevelopment83,052 143,471 118,062 103,932 77,484 Development24,241 52,434 62,801 56,884 68,146 NOI1,627,210$ 1,539,586$ 1,490,068$ 1,410,697$ 1,264,205$ Same-store rental revenue1,834,372$ 1,631,633$ 1,574,395$ 1,541,034$ 1,382,895$ Same-store Net Operating Income Margin72%71%71%70%70%Expensed transaction, development and other pursuit costs, net of recoveries
NOI is defined by the Company as total property revenue less direct property operating expenses (including
property taxes), and excluding corporate-level income (including management, development and other fees),
corporate-level property management and other indirect operating expenses, expensed transaction, development
and other pursuit costs, net of recoveries, interest expense, net, loss (gain) on extinguishment of debt, net, general
and administrative expense, joint venture (income) loss, depreciation expense, corporate income tax expense
(benefit), casualty and impairment loss (gain), net, gain on sale of communities, (gain) loss on other real estate
transactions, for-sale condominium marketing and administrative costs and net operating income from real estate
assets sold or held for sale. The Company considers NOI to be an important and appropriate supplemental
performance measure to Net Income of operating performance of a community or communities because it helps
both investors and management to understand the core operations of a community or communities prior to the
allocation of any corporate-level property management overhead or financing-related costs. NOI reflects the
operating performance of a community, and allows for an easier comparison of the operating performance of
individual assets or groups of assets. In addition, because prospective buyers of real estate have different financing
and overhead structures, with varying marginal impact to overhead as a result of acquiring real estate, NOI is
considered by many in the real estate industry to be a useful measure for determining the value of a real estate
asset or groups of assets.
8
20142013201220112010Net income697,327$ 352,771$ 423,562$ 441,370$ 174,079$ Indirect operating expenses, net of corporate income49,055 41,554 31,911 30,550 30,246 Investments and investment management expense4,485 3,990 6,071 5,126 3,824 (3,717) 45,050 11,350 2,967 2,741 Interest expense, net180,618 172,402 136,920 168,179 175,209 Loss (gain) on extinguishment of debt, net412 14,921 1,179 1,940 - Loss on interest rate contract- 51,000 - - - General and administrative expense41,425 39,573 34,101 29,371 26,846 Joint venture (income) loss(148,766) 11,154 (20,914) (5,120) (762) Depreciation expense442,682 560,215 256,026 246,666 232,571 Income tax expense (benefit)9,368 - - - - Casualty and impairment loss (gain), net- - 1,449 14,052 - Gain on legal settlement- - - - - Gain on sale of communities(84,925) - - - - (Gain) loss on other real estate transactions(490) (240) (280) (13,716) - Gain on sale of discontinued operations(37,869) (278,231) (146,311) (281,090) (74,074) (Income) loss from discontinued operations(310) (16,713) (12,495) 5,658 (1,937) For-sale condominium marketing and administrative costs- - - - - Gain on acquisition of unconsolidated real estate entity- - (14,194) - - NOI from real estate assets sold or held for sale(15,199) - - - - NOI1,134,096$ 997,446$ 708,375$ 645,953$ 568,743$ Same-store673,156 578,939 531,868 468,563 419,502 Other Stabilized101,539 114,435 86,722 89,949 74,609 Other Stabilized - Archstone241,522 224,724 - - - Redevelopment56,879 45,841 66,010 69,000 64,088 Development61,000 33,507 23,775 18,441 10,544 NOI1,134,096$ 997,446$ 708,375$ 645,953$ 568,743$ Same-store rental revenue963,917$ 834,014$ 763,125$ 691,170$ 648,783$ Same-store Net Operating Income Margin70%69%70%68%65%Expensed transaction, development and other pursuit costs, net of recoveries
Same-store communities (also known as “Established Communities”) are consolidated communities in the markets
where the Company has a significant presence and where a comparison of operating results from the prior year to
the current year is meaningful, as these communities were owned and had Stabilized Operations, as defined
below, as of the beginning of the respective prior year period. Therefore, for 2019 operating results, same-store
are consolidated communities that have Stabilized Operations as of January 1, 2018, are not conducting or are not
probable to conduct substantial redevelopment activities and are not held for sale or probable for disposition
within the current year.
Stabilized Operations is defined as the earlier of (i) attainment of 95% physical occupancy or (ii) the one year
anniversary of completion of development or redevelopment. Beginning January 1, 2020, the Company has
updated its definition of Stabilized Operations to be the earlier of (i) attainment of 90% physical occupancy or (ii)
the one-year anniversary of completion of development or redevelopment. This threshold will be applied
prospectively to all periods presented.
Total Market Capitalization is calculated by the Company as the aggregate of the market value of the Company’s
common stock, the market value of the Company’s operating partnership units outstanding (based on the market
value of the Company’s common stock) and the outstanding principal balance of the Company’s debt.
9
AS OF12/31/2019Common stock29,493,039$ Operating partnership units1,573 Total debt7,355,371 Total Market Capitalization36,849,983$
Unencumbered NOI as calculated by the Company represents NOI generated by real estate assets unencumbered
by outstanding secured notes payable as of December 31, 2019 as a percentage of total NOI generated by real
estate assets. The Company believes that current and prospective unsecured creditors of the Company view
Unencumbered NOI as one indication of the borrowing capacity of the Company. Therefore, when reviewed
together with the Company’s Interest Coverage, EBITDA and cash flow from operations, the Company believes that
investors and creditors view Unencumbered NOI as a useful supplemental measure for determining the financial
flexibility of an entity. A calculation of Unencumbered NOI for the years ended December 31, 2019 and December
31, 2018 are as follows (dollars in thousands):
10
20192018Net income786,103$ 974,175$ Indirect operating expenses, net of corporate income83,008 76,522 Expensed transaction, development and other pursuit costs, net of recoveries4,991 4,309 Interest expense, net203,585 220,974 Loss on extinguishment of debt, net602 17,492 General and administrative expense58,042 56,205 Joint venture (income) loss(8,652) (15,270) Depreciation expense661,578 631,196 Income tax expense (benefit)13,003 - Casualty and impairment loss, net- 215 Gain on sale of communities(166,105) (374,976) Gain on other real estate transactions(439) (345) For-sale condominium marketing and administrative costs3,812 - NOI from real estate assets sold or held for sale(12,318) (58,620) Investments and investment management expense- 7,709 NOI1,627,210$ 1,539,586$ Established1,317,472$ 1,165,509$ Other Stabilized202,445 178,172 Redevelopment83,052 143,471 Development24,241 52,434 NOI from real estate assets sold or held for sale12,318 58,620 Total NOI generated by real estate assets1,639,528$ 1,598,206$ NOI on encumbered assets109,454 142,271 NOI on unencumbered assets1,530,074 1,455,935 Unencumbered NOI93%91% UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
Commission file number 1-12672
AVALONBAY COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
77-0404318
(I.R.S. Employer
Identification No.)
Ballston Tower
671 N. Glebe Rd, Suite 800
Arlington, Virginia 22203
(Address of principal executive offices, including zip code)
(703) 329-6300
(Registrant’s telephone number, including area code)
__________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.01 per share
Trading Symbol
AVB
Name of each exchange on which registered
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Securities registered pursuant to Section 12(g) of the Act: None
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company,"
and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one)
Yes
No
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
No
The aggregate market value of the registrant's Common Stock, par value $.01 per share, held by nonaffiliates of the registrant, as of June 30,
2019 was $28,279,444,401.
The number of shares of the registrant's Common Stock, par value $.01 per share, outstanding as of January 31, 2020 was 140,642,065.
Portions of AvalonBay Communities, Inc.'s Proxy Statement for the 2020 annual meeting of stockholders, a definitive copy of which will be
filed with the SEC within 120 days after the year end of the year covered by this Form 10-K, are incorporated by reference herein as portions
of Part III of this Form 10-K.
Documents Incorporated by Reference
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TABLE OF CONTENTS
PART I
PAGE
ITEM 1.
BUSINESS
ITEM 1A.
RISK FACTORS
ITEM 1B.
UNRESOLVED STAFF COMMENTS
ITEM 2.
COMMUNITIES
ITEM 3.
LEGAL PROCEEDINGS
ITEM 4.
MINE SAFETY DISCLOSURES
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6.
SELECTED FINANCIAL DATA
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
ITEM 9A.
CONTROLS AND PROCEDURES
ITEM 9B.
OTHER INFORMATION
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11.
EXECUTIVE COMPENSATION
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULE
ITEM 16.
FORM 10-K SUMMARY
SIGNATURES
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PART I
This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Our actual results could differ materially from those set forth in each forward-
looking statement. Certain factors that might cause such a difference are discussed in this report, including in the section entitled
“Forward-Looking Statements” included in this Form 10-K. You should also review Item 1A. “Risk Factors” for a discussion of
various risks that could adversely affect us.
ITEM 1. BUSINESS
General
AvalonBay Communities, Inc. (the “Company,” which term, unless the context otherwise requires, refers to AvalonBay
Communities, Inc. together with its subsidiaries), is a Maryland corporation that has elected to be treated as a real estate investment
trust (“REIT”) for federal income tax purposes. We develop, redevelop, acquire, own and operate multifamily communities in
New England, the New York/New Jersey metro area, the Mid-Atlantic, the Pacific Northwest, and Northern and Southern California,
as well as our expansion markets consisting of Denver, Colorado, and Southeast Florida. We focus on leading metropolitan areas
in these regions that we believe are characterized by growing employment in high wage sectors of the economy, higher cost of
home ownership and a diverse and vibrant quality of life. We believe these market characteristics offer the opportunity for superior
risk-adjusted returns over the long-term on apartment community investments relative to other markets that do not have these
characteristics.
At January 31, 2020, we owned or held a direct or indirect ownership interest in:
•
274 operating apartment communities containing 79,636 apartment homes in 11 states and the District of Columbia, of
which 261 communities containing 76,447 apartment homes were consolidated for financial reporting purposes and 13
communities containing 3,189 apartment homes were held by unconsolidated entities in which we hold an ownership
interest. One of the consolidated communities containing 422 apartment homes was under redevelopment.
• A mixed-use project located in New York, NY that contains 172 for-sale residential condominiums and 67,000 square
feet of retail space.
•
22 apartment communities under development that are expected to contain an aggregate of 6,960 apartment homes when
completed. One of these communities, expected to contain 328 apartment homes, is being developed through a joint
venture.
• Rights to develop an additional 27 communities that, if developed as expected, will contain 9,587 apartment homes.
We generally obtain ownership in an apartment community by developing a new community on either vacant land or land with
improvements that we raze, or by acquiring an existing community. In selecting sites for development or acquisition, we favor
locations that are near expanding employment centers and convenient to transportation, recreation areas, entertainment, shopping
and dining.
Our principal financial goal is to increase long-term shareholder value through the development, redevelopment, acquisition,
ownership and, when appropriate, disposition of apartment communities in our markets. To help meet this goal, we regularly
(i) monitor our investment allocation by geographic market and product type, (ii) develop, redevelop and acquire interests in
apartment communities in our selected markets, (iii) selectively sell apartment communities that no longer meet our long-term
strategy or when opportunities are presented to realize a portion of the value created through our investment and redeploy the
proceeds from those sales and (iv) endeavor to maintain a capital structure that is aligned with our business risks with a view to
maintaining continuous access to cost-effective capital. We pursue our development, redevelopment, investment and operating
activities with the purpose of Creating a Better Way to Live. Our strategic vision is to be the leading apartment company in select
US markets, providing a range of distinctive living experiences that customers value. We pursue this vision by targeting what we
believe are among the best markets and submarkets, leveraging our strategic capabilities in market research and consumer insight
and being disciplined in our capital allocation and balance sheet management. We operate our apartment communities under three
core brands Avalon, AVA and Eaves by Avalon, described in Item 2. "Communities." We pursue our development and redevelopment
activities primarily through in-house development and in-house redevelopment teams, which are complemented by our in-house
acquisition platform. We believe that our organizational structure, which includes dedicated development and operational teams
in each of our regions, and strong culture are key differentiators, providing us with highly talented, dedicated and capable associates.
1
During the three years ended December 31, 2019, we:
•
•
•
•
acquired 12 apartment communities, excluding unconsolidated investments, and in 2019 we purchased our joint venture
partner's interest in one operating community, obtaining a 100% ownership in that apartment community;
disposed of 20 apartment communities, excluding unconsolidated investments and the five wholly-owned communities
we contributed to the NYC Joint Venture (as defined below) during 2018;
realized our pro rata share of the gain from the sale of seven communities owned by unconsolidated real estate entities;
contributed five wholly-owned operating communities located in New York, NY, to a newly formed joint venture (the
"NYC Joint Venture") in 2018, retaining a 20.0% interest in the venture and acting as the managing member of the venture
as well as the property manager for the communities; and
•
completed the development of 28 apartment communities and the redevelopment of 24 apartment communities.
A more detailed description of our unconsolidated real estate entities and the related investment activity can be found in the
discussion in Note 5, “Investments in Real Estate Entities,” of the Consolidated Financial Statements in Item 8 of this report and
in Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations.”
A further discussion of our development, redevelopment, disposition, acquisition, property management and related strategies
follows.
Development Strategy. We select land for development and follow established procedures that we believe minimize both the
cost and the risks of development. As one of the largest developers of multifamily rental apartment communities in our selected
markets, we identify development opportunities through local market presence and access to local market information achieved
through our regional offices. In addition to our principal executive office in Arlington, Virginia, we also maintain regional offices,
administrative offices or specialty offices, including offices that are in or near the following cities:
• Bellevue, Washington;
• Boston, Massachusetts;
• Denver, Colorado;
Fairfield, Connecticut;
•
Irvine, California;
•
•
Iselin, New Jersey;
• Los Angeles, California;
• Melville, New York;
• New York, New York;
San Diego, California;
•
San Francisco, California;
•
San Jose, California; and
•
• Virginia Beach, Virginia.
After selecting a target site, we usually negotiate for the right to acquire the site either through an option or a long-term conditional
contract. Options and long-term conditional contracts generally allow us to acquire the target site after the completion of entitlements
and shortly before the start of construction, which reduces development-related risks and preserves capital. However, as a result
of competitive market conditions for land suitable for development, we have sometimes acquired and held land prior to construction
for extended periods while entitlements are obtained, or acquired land zoned for uses other than residential with the potential for
rezoning. For further discussion of our Development Rights, refer to Item 2. “Communities” in this report.
We generally act as our own general contractor and construction manager, except for certain mid-rise and high-rise apartment
communities, or in locations where we have limited historical experience, where we may elect to use third-party general contractors
as construction managers. We generally perform these functions directly (although we may use a wholly-owned subsidiary) both
for ourselves and for the joint ventures and partnerships of which we are a member or a partner. We believe direct involvement
in construction enables us to achieve higher construction quality, greater control over construction schedules and cost savings.
Our development, property management and construction teams monitor construction progress to ensure quality workmanship
and a smooth and timely transition into the leasing and operating phase.
2
During periods where competition for development land is more intense, we may acquire improved land with existing commercial
uses and rezone the site for multifamily residential use. During the period that we hold these buildings for future development,
any rent received in excess of expenses from these operations, which we consider to be incidental, is accounted for as a reduction
in our investment in the development pursuit and not as net income. Any expenses relating to these operations, in excess of any
rents received, are accounted for as a reduction in net income. We have also participated, and may in the future participate, in
master planned or other large multi-use developments where we commit to build infrastructure (such as roads) to be used by other
participants or commit to act as construction manager or general contractor in building structures or spaces for third parties (such
as unimproved ground floor retail space, municipal garages or parks). Costs we incur in connection with these activities may be
accounted for as additional invested capital in the community or we may earn fee income for providing these services. Particularly
with large scale, urban in-fill developments, we may engage in significant environmental remediation efforts to prepare a site for
construction.
Throughout this report, the term “development” is used to refer to the entire property development cycle, including pursuit of
zoning approvals, procurement of architectural and engineering designs and the construction process. References to “construction”
refer to the actual construction of the property, which is only one element of the development cycle.
Redevelopment Strategy. When we undertake the redevelopment of a community, our goal is to renovate and/or rebuild an
existing community so that our total investment is generally below replacement cost and the community is well positioned in the
market to achieve attractive returns on our capital. We have dedicated redevelopment teams and procedures that are intended to
control both the cost and risks of redevelopment. Our redevelopment teams, which include redevelopment, construction and
property management personnel, monitor redevelopment progress.
Throughout this report, the term “redevelopment” is used to refer to the entire redevelopment cycle, including planning and
procurement of architectural and engineering designs, budgeting and actual renovation work. The actual renovation work is referred
to as “reconstruction,” which is only one element of the redevelopment cycle.
Disposition Strategy. We sell assets that no longer meet our long-term strategy or when real estate market conditions are favorable,
and we redeploy the proceeds from those sales to develop, redevelop and acquire communities and to rebalance our portfolio
across or within geographic regions. This also allows us to realize a portion of the value created through our investments and
provides additional liquidity by redeploying the net proceeds from our dispositions in lieu of raising that amount of capital externally.
When we decide to sell a community, we generally solicit competing bids from unrelated parties for these individual assets and
consider the sales price and other terms of each proposal.
As part of the Archstone Acquisition in 2013 (as defined in Item 1. “Business” in the Company's Form 10-K filed February 22,
2019), we acquired, and still own, 14 assets that had previously been contributed by third parties on a tax-deferred basis to an
Archstone partnership in which the third parties received ownership interests. To protect the tax-deferred nature of the contribution,
the third parties are entitled to cash payments if we trigger tax obligations to the third parties by selling, or failing to maintain
sufficient levels of secured financing on, the contributed assets. Our tax protection payment obligations with respect to these assets
expire at different times and in some cases don’t expire until the death of a third party who contributed ownership interests to the
Archstone partnership. After review and investigation of Archstone’s tax and accounting records, we estimate that, had we sold
or taken other triggering actions in 2019 with respect to all 14 assets, the aggregate amount of the tax protection payments that
would have been triggered would have been approximately $47,800,000. At the present time, we do not intend to take actions that
would cause us to be required to make tax protection payments with respect to any of these assets.
Acquisition Strategy. Our core competencies in development and redevelopment discussed above allow us to be selective in the
acquisitions we target. Acquisitions allow us to achieve rapid penetration into markets in which we desire an increased presence.
Acquisitions (and dispositions) also help us achieve our desired product mix or rebalance our portfolio. Portfolio growth also
allows for fixed general and administrative costs to be a smaller percentage of overall community Net Operating Income (“NOI”).
While we have achieved growth in the past through the establishment of discretionary real estate investments funds, which placed
certain limitations on our ability to acquire new communities during their investments periods, we are not presently pursuing the
formation of a new discretionary real estate investment fund, preferring at this time to maintain flexibility in shaping our portfolio
of wholly-owned assets through acquisitions and dispositions.
Property Management Strategy. We seek to increase operating income through innovative, proactive property management that
will result in higher revenue from communities while constraining operating expenses. Our principal strategies to maximize revenue
include:
•
•
focusing on resident satisfaction;
staggering lease terms such that lease expirations are better matched to traffic patterns;
3
•
•
balancing high occupancy with premium pricing and increasing rents as market conditions permit; and
employing revenue management software to optimize the pricing and term of leases.
Constraining growth in operating expenses is another way in which we seek to increase earnings growth. Growth in our portfolio
and the resulting increase in revenue allows for fixed operating costs to be spread over a larger volume of revenue, thereby
increasing operating margins. We constrain growth in operating expenses in a variety of ways, which include, but are not limited
to, the following:
• we use purchase order controls, acquiring goods and services from pre-approved vendors;
• we use national negotiated contracts and also purchase supplies in bulk where possible;
• we bid third-party contracts on a volume basis;
• we strive to retain residents through high levels of service in order to eliminate the cost of preparing an apartment home
for a new resident and to reduce marketing and vacant apartment utility costs;
• we perform turnover work in-house or hire third parties, generally considering the most cost effective approach as well
as expertise needed to perform the work;
• we undertake preventive maintenance regularly to maximize resident safety and satisfaction, as well as to maximize
property and equipment life;
• we have a customer care center, centralizing and improving the efficiency and consistency in the application of our
policies for many of the administrative tasks associated with owning and operating apartment communities;
• we aggressively pursue real estate tax appeals; and
• we install high efficiency lighting and water fixtures, cogeneration systems and implement sustainability initiatives in
our operating platform.
On-site property management teams receive bonuses based largely upon the revenue, expense, NOI and customer service metrics
produced at their respective communities. We use and continuously seek ways to improve technology applications to help manage
our communities, believing that the accurate collection of financial and resident data will enable us to maximize revenue and
control costs through careful leasing decisions, maintenance decisions and financial management.
We generally manage the operation and leasing activity of our communities directly (although we may use a wholly-owned
subsidiary) both for ourselves and the joint ventures and partnerships of which we are a member or a partner. From time to time
we may engage a third party to manage leasing and/or maintenance activity at one or more of our communities.
From time to time we also pursue or arrange ancillary services for our residents to provide additional revenue sources or increase
resident satisfaction. We provide such non-customary services to residents or share in the revenue or income from such services
if we do so through a “taxable REIT subsidiary,” which is a subsidiary that is treated as a “C corporation” subject to federal income
taxes. See “Tax Matters” below.
Financing Strategy. Our financing strategy is to endeavor to maintain a capital structure that provides financial flexibility to
help ensure we can select cost effective capital market options that are well matched to our business risks. We estimate that our
short-term liquidity needs will be met from cash on hand, borrowings under our $1,750,000,000 revolving variable rate unsecured
credit facility (the “Credit Facility”), sales of current operating communities and/or issuance of additional debt or equity securities.
A determination to engage in an equity or debt offering depends on a variety of factors such as general market and economic
conditions, our short and long-term liquidity needs, the relative costs of debt and equity capital and growth opportunities. A
summary of debt and equity activity for the last three years is reflected on our Consolidated Statement of Cash Flows of the
Consolidated Financial Statements set forth in Item 8 of this report.
We have entered into, and may continue in the future to enter into, joint ventures (including limited liability companies or
partnerships) through which we would develop and/or own an indirect economic interest of less than 100% of the community or
communities owned directly by such joint ventures. Our decision to either hold an apartment community in fee simple or to have
an indirect interest in the community through a joint venture is based on a variety of factors and considerations, including: (i) the
economic and tax terms required by a seller of land or of a community; (ii) our desire to diversify our portfolio of communities
by market, submarket and product type; (iii) our desire at times to preserve our capital resources to maintain liquidity or balance
sheet strength; and (iv) our projection, in some circumstances, that we will achieve higher returns on our invested capital or reduce
our risk if a joint venture vehicle is used. Investments in joint ventures are not limited to a specified percentage of our assets. Each
joint venture agreement is individually negotiated, and our ability to operate and/or dispose of a community in our sole discretion
may be limited to varying degrees depending on the terms of the joint venture agreement.
In addition, from time to time, we may offer shares of our equity securities, debt securities or options to purchase stock in exchange
for property. We may also acquire properties in exchange for properties we currently own.
4
Other Strategies and Activities. While we emphasize equity real estate investments in rental apartment communities, we have
the ability to invest in other types of real estate, mortgages (including participating or convertible mortgages), securities of other
REITs or real estate operating companies, or securities of technology companies that relate to our real estate operations or of
companies that provide services to us or our residents, in each case consistent with our qualification as a REIT. In addition, we
own and lease retail space at our communities when either (i) the highest and best use of the space is for retail (e.g., street level
in an urban area); (ii) we believe the retail space will enhance the attractiveness of the community to residents or; (iii) some
component of retail space is required to obtain entitlements to build apartment homes. As of December 31, 2019, we had a total
of approximately 787,000 square feet of rentable retail space, excluding retail space within communities currently under
development. Gross rental revenue provided by leased retail space in 2019 was $32,627,000 (1.4% of total revenue). We may also
develop a property in conjunction with another real estate company that will own and operate the retail or for-sale residential
components of a mixed-use building or project that we help develop. If we secure a development right and believe that its best
use, in whole or in part, is to develop the real estate with the intent to sell rather than hold the asset, we may, through a taxable
REIT subsidiary, develop real estate for sale. Any investment in securities of other entities, and any development of real estate for
sale, is subject to the percentage of ownership limitations, gross income tests, and other limitations that must be observed for REIT
qualification.
We conduct many of the administrative functions associated with our property operations (including billing, collections, and
response to resident inquiries) through an internally operated shared services center, rather than having on-site associates conduct
such activities. We believe that this centralized platform allows our on-site associates to focus more on current and prospective
resident services, while at the same time enabling us to reduce costs, mitigate risk and increase our availability and responsiveness
to our residents. We are exploring the possibility of performing these shared service center administrative functions for a third
party as a means of creating an additional revenue stream and economies of scale at our center. We cannot assure that we will
provide such services to a third party or that it will be successful if we do so.
We have not engaged in trading, underwriting or agency distribution or sale of securities of other issuers and do not intend to do
so. At all times we intend to make investments in a manner so as to qualify as a REIT unless, because of circumstances or changes
to the Internal Revenue Code of 1986, as amended (the “Code”) (or the Treasury Regulations thereunder), our Board of Directors
determines that it is no longer in our best interest to qualify as a REIT.
Tax Matters
We filed an election with our 1994 federal income tax return to be taxed as a REIT under the Code and intend to maintain our
qualification as a REIT in the future. As a REIT, with limited exceptions, such as those described under “Property Management
Strategy” above, we will not be taxed under federal and certain state income tax laws at the corporate level on our taxable net
income to the extent taxable net income is distributed to our stockholders. We expect to make sufficient distributions to avoid
income tax at the corporate level. While we believe that we are organized and qualified as a REIT and we intend to operate in a
manner that will allow us to continue to qualify as a REIT, there can be no assurance that we will be successful in this regard.
Qualification as a REIT involves the application of highly technical and complex provisions of the Code for which there are limited
judicial and administrative interpretations and involves the determination of a variety of factual matters and circumstances not
entirely within our control.
Competition
We face competition from other real estate investors, including insurance companies, pension and investment funds, REITs both
in the multifamily as well as other sectors, and other well capitalized investors, to acquire and develop apartment communities
and acquire land for future development. As an owner and operator of apartment communities, we also face competition for
prospective residents from other operators whose communities may be perceived to offer a better location or better amenities or
whose pricing may be perceived as a better value given the quality, location, terms and amenities that the prospective resident
seeks. We also compete against condominiums and single-family homes that are for sale or rent. Although we often compete
against large, sophisticated developers and operators for development opportunities and for prospective residents, real estate
developers and operators of any size can provide effective competition for both real estate assets and potential residents.
5
Environmental and Related Matters
As a current or prior owner, operator and developer of real estate, we are subject to various federal, state and local environmental
laws, regulations and ordinances and also could be liable to third parties resulting from environmental contamination or
noncompliance at our communities. For some Development Communities we undertake extensive environmental remediation to
prepare the site for construction, which could be a significant portion of our total construction cost. Environmental remediation
efforts could expose us to possible liabilities for accidents or improper handling of contaminated materials during construction.
These and other risks related to environmental matters are described in more detail in Item 1A. “Risk Factors.”
We believe that more government regulation of energy use, along with a greater focus on environmental protection, may, over
time, have a significant impact on urban growth patterns. If changes in zoning to encourage greater density and proximity to mass
transit do occur, such changes could benefit multifamily housing and those companies with a competency in high-density
development. However, there can be no assurance as to whether or when such changes in regulations or zoning will occur or, if
they do occur, whether the multifamily industry or the Company will benefit from such changes.
Other Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may obtain copies of our
SEC filings, free of charge, from the SEC's website at www.sec.gov.
We maintain a website at www.avalonbay.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and amendments to those reports, filed or furnished pursuant to the Securities Exchange Act of 1934 are available
free of charge in the “Investor Relations” section of our website as soon as reasonably practicable after the reports are filed with
or furnished to the SEC. In addition, the charters of our Board's Nominating and Corporate Governance Committee, Audit
Committee and Compensation Committee, as well as our Director Independence Standards, Corporate Governance Guidelines,
Code of Business Conduct and Ethics, Policy Regarding Shareholder Rights Agreements, Policy Regarding Shareholder Approval
of Future Severance Agreements, Executive Stock Ownership Guidelines, Policy on Political Contributions and Government
Relations, Policy for Recoupment of Incentive Compensation, and Sustainability Reports, are available free of charge in that
section of our website or by writing to AvalonBay Communities, Inc., Ballston Tower, Suite 800, 671 N. Glebe Rd., Arlington,
Virginia 22203, Attention: Chief Financial Officer. To the extent required by the rules of the SEC and the NYSE, we will disclose
amendments and waivers relating to these documents in the same place on our website. The information posted on our website is
not incorporated into this Annual Report on Form 10-K.
We were incorporated under the laws of the State of California in 1978. In 1995, we reincorporated in the State of Maryland and
have been focused on the ownership and operation of apartment communities since that time. As of January 31, 2020, we had
3,122 employees.
6
ITEM 1A. RISK FACTORS
Our operations involve various risks that could have adverse consequences, including those described below. This Item 1A. includes
forward-looking statements. You should refer to our discussion of the qualifications and limitations on forward-looking statements
in this Form 10-K.
Development, redevelopment, construction and operating risks could affect our profitability.
We intend to continue to develop and redevelop apartment home communities. These activities can include long planning and
entitlement timelines and can involve complex and costly activities, including significant environmental remediation or
construction work in high-density urban areas. These activities may be exposed to the following risks:
• we may abandon opportunities that we have already begun to explore for a number of reasons, including changes in local
market conditions or increases in construction or financing costs, and, as a result, we may fail to recover expenses already
incurred in exploring those opportunities;
occupancy rates and rents at a community may fail to meet our original expectations for a number of reasons, including
changes in market and economic conditions beyond our control and the development by competitors of competing
communities;
•
• we may be unable to obtain, or experience delays in obtaining, necessary zoning, occupancy or other required governmental
or third party permits and authorizations, which could result in increased costs or the delay or abandonment of
opportunities;
• we may incur costs that exceed our original estimates due to increased material, labor or other costs;
• we may be unable to complete construction and lease-up of a community on schedule, resulting in increased construction
and financing costs and a decrease in expected rental revenues;
• we may be unable to obtain financing with favorable terms, or at all, for the proposed development of a community,
which may cause us to delay or abandon an opportunity;
• we may incur liabilities to third parties during the development process, for example, in connection with managing existing
improvements on the site prior to tenant terminations and demolition (such as commercial space) or in connection with
providing services to third parties (such as the construction of shared infrastructure or other improvements); and
• we may incur liability if our communities are not constructed and operated in compliance with the accessibility provisions
of the Americans with Disabilities Acts, the Fair Housing Act or other federal, state or local requirements. Noncompliance
could result in imposition of fines, an award of damages to private litigants and a requirement that we undertake structural
modifications to remedy the noncompliance.
We estimate construction costs based on market conditions at the time we prepare our budgets, and our projections include changes
that we anticipate but cannot predict with certainty. Construction costs may increase, particularly for labor and certain materials
and, for some of our Development Communities and Development Rights (as defined below), the total construction costs may be
higher than the original budget. Total capitalized cost includes all capitalized costs incurred and projected to be incurred to develop
or redevelop a community, determined in accordance with GAAP, including:
•
•
•
•
•
•
•
•
•
•
•
land and/or property acquisition costs;
fees paid to secure air rights and/or tax abatements;
construction or reconstruction costs;
costs of environmental remediation;
real estate taxes;
capitalized interest and insurance;
loan fees;
permits;
professional fees;
allocated development or redevelopment overhead; and
other regulatory fees.
Costs to redevelop communities that have been acquired have, in some cases, exceeded our original estimates and similar increases
in costs may be experienced in the future. We cannot assure you that market rents in effect at the time new Development or
Redevelopment Communities complete lease-up will be sufficient to fully offset the effects of any increased construction or
reconstruction costs.
7
The construction and maintenance of our communities include a risk of major casualty events that could materially damage our
property and the property of others and pose the risk of personal injury. While we carry insurance for such risks in amounts we
deem reasonable, we cannot assure that such insurance will be adequate, and when we have incurred and in the future may incur
such casualties, we are subject to losses on account of deductibles and self-insured amounts in any event. Such casualties may
also expose us in the future to higher insurance premiums, greater construction or operating costs (either voluntarily assumed by
us or as a result of new local regulations) and risks to our reputation among prospective residents or municipalities from which
we may seek approvals in the future, all of which could have a material adverse effect on our business and our financial condition
and results of operations.
Unfavorable changes in market and economic conditions could adversely affect occupancy, rental rates, operating expenses
and the overall market value of our real estate assets.
Local conditions in our markets significantly affect occupancy, rental rates and the operating performance of our communities.
The risks that may adversely affect conditions in those markets include the following:
•
•
•
•
•
•
corporate restructurings and/or layoffs, industry slowdowns and other factors that adversely affect the local economy;
an oversupply of, or a reduced demand for, apartment homes;
a decline in household formation or employment or lack of employment growth;
the inability or unwillingness of residents to pay rent increases;
rent control or rent stabilization laws, or other laws regulating housing, that could prevent us from raising rents sufficiently
to offset increases in operating costs; and
economic conditions that could cause an increase in our operating expenses, such as increases in property taxes, utilities,
compensation of on-site associates and routine maintenance.
Rent control and other changes in applicable laws, or noncompliance with applicable laws, could adversely affect our operations
or expose us to liability.
We must develop, construct and operate our communities in compliance with numerous federal, state and local laws and regulations,
some of which may conflict with one another or be subject to limited judicial or regulatory interpretations. These laws and
regulations may include zoning laws, building codes, landlord/tenant laws and other laws generally applicable to business
operations. Noncompliance with laws could expose us to liability.
Lower revenue growth or significant unanticipated expenditures may result from our need to comply with changes in (i) laws
imposing remediation requirements and the potential liability for environmental conditions existing on properties or the restrictions
on discharges or other conditions, (ii) rent control or rent stabilization laws or other residential landlord/tenant laws or (iii) other
governmental rules and regulations or enforcement policies affecting the development, use and operation of our communities,
including changes to building codes and fire and life-safety codes.
We have seen a recent increase in states and municipalities implementing, considering or being urged by advocacy groups to
consider rent control or rent stabilization laws and regulations or take other actions that could limit the amount by which we can
raise rents or charge non-rent fees. For example, in 2019 the State of California adopted statewide rent control for communities
older than fifteen years, limiting rent increases to the lesser of 10% or 5% plus local CPI. Also in 2019 the State of New York
adopted new rules for rent-controlled and rent-stabilized units that revised and limited the way rent increases are calculated for
renewal leases, basing increases solely on rent actually paid and eliminating the ability to increase the renewal rent to a higher
“registered rent.” Furthermore, in California the Governor has the ability to enact local or statewide states of emergency which
limit our ability to increase new and renewal rents more than 10% over the rent in place on the date such state of emergency was
declared, which has impacted some of our California communities. These initiatives and any other future enactments of rent
control or rent stabilization laws or other laws regulating multi-family housing, as well as any lawsuits against the Company arising
from such rent control or other laws, may reduce rental revenues or increase operating costs. Such laws and regulations may limit
our ability to charge market rents, increase rents, evict tenants or recover increases in our operating expenses and could make it
more difficult for us to dispose of properties in certain circumstances. Expenses associated with our investment in these
communities, such as debt service, real estate taxes, insurance and maintenance costs, are generally not reduced when circumstances
cause a reduction in rental income from the community.
Short-term leases expose us to the effects of declining market rents.
Substantially all of our apartment leases are for a term of one year or less. Because these leases generally permit the residents to
leave at the end of the lease term without penalty, our rental revenues are impacted by declines in market rents more quickly than
if our leases were for longer terms.
8
Competition could limit our ability to lease apartment homes or increase or maintain rents.
Our apartment communities compete with other housing alternatives to attract residents, including other rental apartments,
condominiums and single-family homes for rent, and short term furnished offerings such as those available from extended stay
hotels and through on-line services such as Airbnb. In addition, our residents and prospective residents also consider as an alternative
to renting the purchase of a new or existing condominium or single-family home for sale. Competitive residential housing in a
particular area could adversely affect our ability to lease apartment homes and to increase or maintain rental rates.
Attractive investment opportunities may not be available, which could adversely affect our profitability.
We expect that other real estate investors, including insurance companies, pension and investment funds, other REITs and other
well-capitalized investors, will compete with us to acquire existing properties and to develop new properties. This competition
could increase prices for properties of the type we would likely pursue and adversely affect our profitability for new investments.
Capital and credit market conditions may adversely affect our access to various sources of capital and/or the cost of capital,
which could impact our business activities, dividends, earnings and common stock price, among other things.
In periods when the capital and credit markets experience significant volatility, the amounts, sources and cost of capital available
to us may be adversely affected. We primarily use external financing to fund construction and to refinance indebtedness as it
matures. If sufficient sources of external financing are not available to us on cost effective terms, we could be forced to limit our
development and redevelopment activity and/or take other actions to fund our business activities and repayment of debt, such as
selling assets or reducing our cash dividend. To the extent that we are able and/or choose to access capital at a higher cost than
we have experienced in recent years (reflected in higher interest rates for debt financing or a lower stock price for equity financing),
absent changes in other factors, our earnings per share and cash flows could be adversely affected. In addition, the price of our
common stock may fluctuate significantly and/or decline in a high interest rate or volatile economic environment. We believe that
the lenders under our Credit Facility will fulfill their lending obligations thereunder, but if economic conditions deteriorate, there
can be no assurance that the ability of those lenders to fulfill their obligations would not be adversely impacted.
Insufficient cash flow could affect our debt financing and create refinancing risk.
We are subject to the risks associated with debt financing, including the risk that our available cash will be insufficient to meet
required payments of principal and interest on our debt. In this regard, in order for us to continue to qualify as a REIT, we are
required to annually distribute dividends generally equal to at least 90% of our REIT taxable income, computed without regard
to the dividends paid deduction and excluding any net capital gain. This requirement limits the amount of our cash flow available
to meet required principal and interest payments. The principal outstanding balance on a portion of our debt will not be fully
amortized prior to its maturity. Although we may be able to repay our debt by using our cash flows, we cannot assure you that we
will have sufficient cash flows available to make all required principal payments. Therefore, we may need to refinance at least a
portion of our outstanding debt as it matures. There is a risk that we may not be able to refinance existing debt or that a refinancing
will not be done on as favorable terms; either of these outcomes could have a material adverse effect on our financial condition
and results of operations.
Rising interest rates could increase interest costs and could affect the market price of our common stock, and efforts to hedge
such risk could be ineffective and cause us to incur costs.
We currently have, and may in the future incur, contractual variable interest rate debt. In addition, we regularly seek access to both
fixed and variable rate debt financing to repay maturing debt and to finance our development and redevelopment activity.
Accordingly, if interest rates increase, our interest costs will also rise, unless we have made arrangements that hedge the risk of
rising interest rates. In addition, an increase in market interest rates may lead purchasers of our common stock to demand a greater
annual dividend yield, which could adversely affect the market price of our common stock.
From time to time we use interest rate derivatives to hedge and manage our exposure to certain interest rate risks. For example,
from time to time, when we anticipate issuing debt securities, we may seek to limit our exposure to fluctuations in interest rates
during the period prior to the expected issuance of the securities by entering into interest rate hedging contracts. Although these
agreements may partially protect against rising interest rates, they also may reduce the benefits to the Company if interest rates
decline. The settlement of interest rate hedging contracts has involved and may in the future involve material charges to our
earnings. In addition, our use of interest rate hedging arrangements may expose us to additional risks, including a risk that a
counterparty to a hedging arrangement may fail to honor its obligations. Developing and implementing an effective interest rate
risk strategy is complex and no strategy can completely insulate us from risks associated with interest rate fluctuations. There can
9
be no assurance that our hedging activities will be effective. Termination of these hedging agreements may involve net costs, such
as transaction fees, settlement costs and/or breakage costs.
Bond financing and zoning and other compliance requirements could limit our income, restrict the use of communities and
cause favorable financing to become unavailable.
We have financed some of our apartment communities with obligations issued by local government agencies because the interest
paid to the holders of this debt is generally exempt from federal income taxes and, therefore, the interest rate is generally more
favorable to us. These obligations are commonly referred to as “tax-exempt bonds” and generally must be secured by mortgages
on our communities. As a condition to obtaining tax-exempt financing, or on occasion as a condition to obtaining favorable zoning
or an agreement relating to property taxes in some jurisdictions, we will commit to make some of the apartments in a community
available to households whose income does not exceed certain thresholds (e.g., 50% or 80% of area median income), or who meet
other qualifying tests. As of December 31, 2019, 5.2% of our apartment homes at current operating communities were under
income limitations such as these. These commitments, which may run without expiration or may expire after a period of time
(such as 15 or 20 years), may limit our ability to raise rents and, as a consequence, may also adversely affect the value of the
communities subject to these restrictions. In addition, if we fail to observe these commitments, we could lose benefits (such as
reduced property taxes) or face liabilities including liability for the benefits we received under tax exempt bonds, tax credits or
agreements related to property taxes.
In addition, some of our tax-exempt bond financing documents require us to obtain a guarantee from a financial institution of
payment of the principal of, and interest on, the bonds. The guarantee may take the form of a letter of credit, surety bond, guarantee
agreement or other additional collateral. If the financial institution defaults in its guarantee obligations, or if we are unable to
renew the applicable guarantee or otherwise post satisfactory collateral, a default will occur under the applicable tax-exempt bonds
and the community could be foreclosed upon if we do not redeem the bonds.
Risks related to indebtedness.
We have a Credit Facility with a syndicate of commercial banks. Our organizational documents do not limit the amount or percentage
of indebtedness that may be incurred. Accordingly, subject to compliance with outstanding debt covenants, we could incur more
debt, resulting in an increased risk of default on our obligations and an increase in debt service requirements that could adversely
affect our financial condition and results of operations.
The mortgages on properties that are subject to secured debt, our Credit Facility and the indentures under which a substantial
portion of our debt was issued contain customary restrictions, requirements and other limitations, as well as certain financial and
operating covenants including maintenance of certain financial ratios. Maintaining compliance with these restrictions could limit
our flexibility. A default in these requirements, if uncured, could result in a requirement that we repay indebtedness, which could
materially adversely affect our liquidity and increase our financing costs. Refer to Item 7. “Management's Discussion and Analysis
of Financial Condition and Results of Operations” for further discussion.
The mortgages on properties that are subject to secured debt generally include provisions which stipulate a prepayment penalty
or payment that we will be obligated to pay in the event that we elect to repay the mortgage note prior to the earlier of (i) the stated
maturity of the note or (ii) the date at which the mortgage note is prepayable without such penalty or payment. If we elect to repay
some or all of the outstanding principal balance for our mortgage notes, we may incur prepayment penalties or payments under
these provisions which could materially adversely affect our results of operations.
The phase-out of LIBOR and transition to SOFR as a benchmark interest rate will have uncertain and possibly adverse effects.
In 2018, the Alternative Reference Rate Committee identified the Secured Overnight Financing Rate (“SOFR”) as the alternative
to LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities, published
by the Federal Reserve Bank of New York. By the end of 2021, it is expected that no new contracts will reference LIBOR and
will instead use SOFR. Due to the broad use of LIBOR as a reference rate, all financial market participants, including the Company,
are impacted by the risks associated with this transition. The impact of this transition on the interest rates charged the Company
and the terms of lending agreements are uncertain and could possibly adversely affect our financing costs, including spread pricing
on our Credit Facility and variable rate unsecured term loans ( the "Term Loans") and certain other floating rate debt obligations,
as well as our operations and cash flows.
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Failure to maintain our current credit ratings could adversely affect our cost of funds, related margins, liquidity and access
to capital markets.
There are two major debt rating agencies that routinely evaluate and rate our debt. Their ratings are based on a number of factors,
which include their assessment of our financial strength, liquidity, capital structure, asset quality, amount of real estate under
development, and sustainability of cash flow and earnings, among other factors. If market conditions change, we may not be able
to maintain our current credit ratings, which could adversely affect our cost of funds and related margins, liquidity and access to
capital markets.
Debt financing may not be available and equity issuances could be dilutive to our stockholders.
Our ability to execute our business strategy depends on our access to cost effective debt and equity financing. Debt financing may
not be available in sufficient amounts or on favorable terms. If we issue additional equity securities, the interests of existing
stockholders could be diluted.
Failure to generate sufficient revenue or other liquidity needs could limit cash flow available for distributions to stockholders.
A decrease in rental revenue, or liquidity needs such as the repayment of indebtedness or funding of our development activities,
could have an adverse effect on our ability to pay distributions to our stockholders. Significant expenditures associated with each
community such as debt service payments, if any, real estate taxes, insurance and maintenance costs are generally not reduced
when circumstances cause a reduction in income from a community.
The form, timing and/or amount of dividend distributions in future periods may vary and be impacted by economic and other
considerations.
The form, timing and/or amount of dividend distributions will be declared at the discretion of the Board of Directors and will
depend on actual cash from operations, our financial condition, capital requirements, the annual distribution requirements under
the REIT provisions of the Code and other factors as the Board of Directors may consider relevant. The Board of Directors may
modify our dividend policy from time to time.
We may choose to pay dividends in our own stock, in which case stockholders may be required to pay tax in excess of the cash
they receive.
We may distribute taxable dividends that are payable in part in our stock. Taxable stockholders receiving such dividends will be
required to include the full amount of the dividend as income to the extent of our current and accumulated earnings and profits
for federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess
of the cash dividend received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales
proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock
at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect
to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, the trading price
of our stock would experience downward pressure if a significant number of our stockholders sell shares of our stock in order to
pay taxes owed on dividends.
We may experience regulatory or economic barriers to selling apartment communities that could limit liquidity and financial
flexibility.
Potential difficulties in selling real estate in our markets may limit our ability to change or reduce the apartment communities in
our portfolio promptly in response to changes in economic or other conditions. Federal tax laws may limit our ability to earn a
gain on the sale of a community (unless we own it through a subsidiary which will incur a taxable gain upon sale) if we are found
to have held, acquired or developed the community primarily with the intent to resell the community, and this limitation may affect
our ability to sell communities without adversely affecting returns to our stockholders. In addition, real estate in our markets can
at times be difficult to sell quickly at prices we find acceptable.
From time to time we dispose of properties in transactions intended to qualify as “like-kind exchanges” under Section 1031 of the
Code. If a transaction intended to qualify as a Section 1031 exchange is later determined to be taxable, we may face adverse tax
consequences, and if the laws applicable to such transactions are amended or repealed, we may not be able to dispose of properties
on a tax deferred basis.
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Acquisitions may not yield anticipated results.
Our business strategy includes acquiring as well as developing communities. Our acquisition activities may be exposed to the
following risks:
•
•
an acquired property may fail to perform as we expected in analyzing our investment; and
our estimate of the costs of operating, repositioning or redeveloping an acquired property may prove inaccurate.
Failure to succeed in new markets, or with new brands and community formats, or in activities other than the development,
ownership and operation of residential rental communities may have adverse consequences.
We may from time to time commence development activity or make acquisitions outside of our existing market areas if appropriate
opportunities arise. For example, in 2017 we entered the Denver, Colorado, and Southeast Florida markets, where we have now
engaged, and continue to pursue, development and acquisition opportunities. Our historical experience in our existing markets in
developing, owning and operating rental communities does not ensure that we will be able to operate successfully in new markets.
We may be exposed to a variety of risks when we enter a new market, including an inability to accurately evaluate local apartment
market conditions; an inability to obtain land for development or to identify appropriate acquisition opportunities; an inability to
hire and retain key personnel; and a lack of familiarity with local governmental and permitting procedures.
Although we are primarily in the multifamily rental business, we also own and lease ancillary retail and commercial space, in
particular when such tenants represent the best use of the space, as is often the case with large urban in-fill developments. Gross
rental revenue provided by leased retail/commercial space in our portfolio represented 1.4% of our total revenue in 2019. The
long term nature of our retail/commercial leases and characteristics of many of our tenants (small, local businesses) may subject
us to certain risks. We may not be able to lease new space for rents that are consistent with our projections or at market rates. Also,
when leases for our existing retail/commercial space expire, the space may not be relet or the terms of reletting, including the cost
of allowances and concessions to tenants, may be less favorable than the current lease terms. Our properties compete with other
properties with retail/commercial space. The presence of competitive alternatives may affect our ability to lease space and the
level of rents we can obtain. If our retail/commercial tenants experience financial distress or bankruptcy, they may fail to comply
with their contractual obligations, seek concessions in order to continue operations or cease their operations, which could adversely
impact our results of operations and financial condition.
We also may engage or have an interest in for-sale activity. For example, we are proceeding with the sale of the residential
condominiums at The Park Loggia, a mixed-use development located in New York, New York. We may be unsuccessful at
developing real estate with the intent to sell or in selling condominiums as a disposition strategy for an asset, which could have
an adverse effect on our results of operations.
Land we hold with no current intent to develop may be subject to future impairment charges.
We own parcels of land that we do not currently intend to develop. As discussed in Item 2. “Communities—Other Land and Real
Estate Assets,” in the event that the fair market value of a parcel changes such that we determine that the carrying basis of the
parcel reflected in our financial statements is greater than the parcel's then current fair value, less costs to dispose, we would be
subject to an impairment charge, which would reduce our net income.
We are exposed to various risks from our real estate activity through joint ventures.
Instead of acquiring, developing or maintaining ownership of apartment communities as a wholly-owned investment, at times we
invest in real estate as a partner or a co-venturer with other investors. Joint venture investments (including investments through
partnerships or limited liability companies) involve risks, including the possibility that our partner might become insolvent or
otherwise refuse to make capital contributions when due; that we may be responsible to our partner for indemnifiable losses; that
our partner might at any time have business goals that are inconsistent with ours; and that our partner may be in a position to take
action or withhold consent contrary to our instructions or requests. Frequently, we and our partner may each have the right to
trigger a buy-sell or similar arrangement that could cause us to sell our interest, acquire our partner's interest or force a sale of the
asset, at a time when we otherwise would not have initiated such a transaction.
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We are exposed to risks associated with investment in and management of discretionary real estate investment funds and joint
ventures.
We have investment interests in unconsolidated real estate entities (collectively, "ventures") ranging from 20.0% to 50.0%. The
ventures present risks, including the following:
•
•
our subsidiaries that are the general partner or managing member of the ventures are generally liable, under applicable
law or the governing agreement of a venture, for the debts and obligations of the respective venture, subject to certain
exculpation and indemnification rights pursuant to the terms of the governing agreement;
investors in the ventures holding a majority of the equity interests may remove us as the general partner or managing
member in certain cases involving cause;
• while we have broad discretion to manage the ventures, the investors or an advisory committee comprised of
representatives of the investors must approve certain matters, and as a result we may be unable to cause the ventures to
implement certain decisions that we consider beneficial; and
• we may be liable and/or our status as a REIT may be jeopardized if either the ventures, or the REIT entities associated
with the ventures, fail to comply with various tax or other regulatory matters.
We are exposed to risks associated with real estate assets that are subject to ground leases that may restrict our ability to finance,
sell or otherwise transfer our interests in those assets, limit our use and expose us to loss if such agreements are breached by
us or terminated.
We own assets which are subject to the terms of long-term ground leases. These ground leases may impose limitations on our use
of the properties, restrict our ability to finance, sell or otherwise transfer our interests in the properties or restrict the leasing of
the properties. These restrictions may limit our ability to timely sell or exchange the properties, impair the properties’ value or
negatively impact our ability to operate the properties. In addition, we could lose our interests in the properties if the ground leases
are breached by us, terminated or lapse. As we get closer to the lease termination dates, the values of the properties could decrease
if we are unable to agree upon an extension of the lease with the lessor. Certain of these ground leases have payments subject to
annual escalations and/or periodic fair market value adjustments which could adversely affect our financial condition or results
of operations.
We rely on information technology in our operations, and any breach, interruption or security failure of that technology, or
any non-compliance with applicable laws with respect to the use of that technology, could have a negative impact on our
business, results of operations, financial condition and/or reputation.
Information security risks have generally increased in recent years due to the rise in new technologies and the increased
sophistication and activities of perpetrators of cyber attacks.
We collect and hold personally identifiable information of our residents and prospective residents in connection with our leasing
and property management activities, and we collect and hold personally identifiable information of our associates in connection
with their employment. In addition, we engage third party service providers that may have access to such personally identifiable
information in connection with providing necessary information technology and security and other business services to us.
We address potential breaches or disclosure of this confidential personally identifiable information by implementing a variety of
security measures intended to protect the confidentiality and security of this information including (among others) engaging
reputable, recognized firms to help us design and maintain our information technology and data security systems, including testing
and verification of their proper and secure operations on a periodic basis. We also maintain cyber risk insurance to provide some
coverage for certain risks arising out of data and network breaches.
However, there can be no assurance that we will be able to prevent unauthorized access to this information. Any failure in or
breach of our operational or information security systems, or those of our third party service providers, as a result of cyber attacks
or information security breaches, could result in a wide range of potentially serious harm to our business operations and financial
prospects, including (among others) disruption of our business and operations, disclosure or misuse of confidential or proprietary
information (including personal information of our residents and/or associates), damage to our reputation, and/or potentially
significant legal and/or financial liabilities and penalties.
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Various laws and regulations and interpretations thereof, as well as agreements with payment processors, require, or may require,
us to comply with rules related to our websites for use by residents and prospective residents, including requirements related to
accessibility of our websites to persons with disabilities and our handling and use of data we collect. We could face liabilities for
failure to comply with these requirements. New statutes, such as the California Consumer Privacy Act (“CCPA”), and related
regulations are evolving and may be subject to differing interpretations. We could incur costs to comply with stricter and more
complex data privacy, data collection and information security laws and standards.
Expanding social media vehicles present new risks.
The use of social media could cause us to suffer brand damage or information leakage. Negative posts or comments about us on
any social networking website could damage our reputation. In addition, employees or others might disclose non-public sensitive
information relating to our business through external media channels. The continuing evolution of social media will present us
with new challenges and risks.
We are exposed to risks that are either uninsurable, not economically insurable or in excess of our insurance coverage, including
risks discussed below.
Earthquake risk. As further described in Item 2. “Communities—Insurance and Risk of Uninsured Losses,” many of our West
Coast communities are located in the general vicinity of active earthquake faults. We cannot assure you that an earthquake would
not cause damage or losses greater than insured levels. In the event of a loss in excess of insured limits, we could lose our capital
invested in the affected community, as well as anticipated future revenue from that community. We would also continue to be
obligated to repay any mortgage indebtedness or other obligations related to the community. Any such loss could materially and
adversely affect our business and our financial condition and results of operations.
Insurance coverage for earthquakes can be costly and in limited supply. As a result, we may experience shortages in desired
coverage levels if market conditions are such that insurance is not available or the cost of insurance makes it, in the Company's
view, economically impractical.
Severe or inclement weather risk. We are exposed to risks associated with inclement or severe weather, including hurricanes,
severe winter storms and coastal flooding. Severe or inclement weather may result in increased costs resulting from increased
maintenance, repair of water and wind damage, removal of snow and ice, and, in the case of our Development Communities,
delays in construction that result in increased construction costs and delays in realizing rental revenues from a community.
A single catastrophe that affects one of our regions, such as an earthquake that affects the West Coast or a hurricane or severe
winter storm that affects the Mid-Atlantic, Metro New York/New Jersey or New England regions, may have a significant negative
effect on our financial condition and results of operations.
Climate change risk. To the extent that significant changes in the climate occur in areas where our communities are located, we
may experience extreme weather and changes in precipitation and temperature, all of which may result in physical damage to or
a decrease in demand for properties located in these areas or affected by these conditions. Should the impact of climate change
be material in nature, including significant property damage to or destruction of our communities, or occur for lengthy periods of
time, our financial condition or results of operations may be adversely affected. In addition, changes in federal, state and local
legislation and regulation based on concerns about climate change could result in increased capital expenditures on our existing
properties and our new development properties (for example, to improve their energy efficiency and/or resistance to inclement
weather) without a corresponding increase in revenue, resulting in adverse impacts to our net income.
Terrorism risk. We have significant investments in large metropolitan markets, such as Metro New York/New Jersey and
Washington, D.C., which have in the past been or may in the future be the target of actual or threatened terrorist attacks. Future
terrorist attacks in these markets could directly or indirectly damage our communities, both physically and financially, or cause
losses that exceed our insurance coverage and that could have a material adverse effect on our business, financial condition and
results of operations.
A significant uninsured property or liability loss could have a material adverse effect on our financial condition and results of
operations.
In addition to the earthquake insurance discussed above, we carry commercial general liability insurance, property insurance and
terrorism insurance with respect to our communities on terms and in amounts we consider commercially reasonable. There are,
however, certain types of losses (such as losses arising from acts of war) that are not insured, in full or in part, because they are
either uninsurable or the cost of insurance makes it, in the Company's view, economically impractical. If an uninsured property
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loss or a property loss in excess of insured limits were to occur, we could lose our capital invested in a community, as well as the
anticipated future revenues from such community. We would also continue to be obligated to repay any mortgage indebtedness
or other obligations related to the community. If an uninsured liability to a third party were to occur, we would incur the cost of
defense and settlement with, or court ordered damages to, that third party. A significant uninsured property or liability loss could
have a material adverse effect on our business and our financial condition and results of operations.
We may incur costs due to environmental contamination or non-compliance.
Under various federal, state and local environmental and public health laws, regulations and ordinances, we may be required,
regardless of knowledge or responsibility, to investigate and remediate the effects of hazardous or toxic substances or petroleum
product releases at our properties (including in some cases natural substances such as methane and radon gas) and may be held
liable under these laws or common law to a governmental entity or to third parties for property, personal injury or natural resources
damages and for investigation and remediation costs incurred as a result of the contamination. These damages and costs may be
substantial and may exceed any insurance coverage we have for such events. The presence of these substances, or the failure to
properly remediate the contamination, may adversely affect our ability to borrow against, develop, sell or rent the affected property.
In addition, some environmental laws create or allow a government agency to impose a lien on the contaminated site in favor of
the government for damages and costs it incurs as a result of the contamination.
The development, construction and operation of our communities are subject to regulations and permitting under various federal,
state and local laws, regulations and ordinances, which regulate matters including wetlands protection, storm water runoff and
wastewater discharge. These laws and regulations may impose restrictions on the manner in which our communities may be
developed, and noncompliance with these laws and regulations may subject us to fines and penalties.
Certain federal, state and local laws, regulations and ordinances govern the removal, encapsulation or disturbance of asbestos
containing materials (“ACMs”) when such materials are in poor condition or in the event of renovation or demolition of a building.
These laws and the common law may impose liability for release of ACMs and may allow third parties to seek recovery from
owners or operators of real properties for personal injury associated with exposure to ACMs. We are not aware that any ACMs were
used in the construction of the communities we developed. ACMs were, however, used in the construction of a number of the
communities that we have acquired. Although we implement an operations and maintenance program at each of the communities
at which ACMs are detected, we may fail to adequately observe such program or a disturbance of ACMs may occur nevertheless,
exposing us to liability.
We are aware that some of our communities have lead paint and have implemented an operations and maintenance program at
each of those communities.
Environmental agencies and third parties may assert claims for remediation or personal injury based on the alleged actual or
potential intrusion into buildings of chemical vapors from soils or groundwater underlying or in the vicinity of those buildings or
on nearby properties.
All of our stabilized operating communities, and all of the communities that we are currently developing, have been subjected to
at least a Phase I or similar environmental assessment, which generally does not involve invasive techniques such as soil or
groundwater sampling. These assessments, together with subsurface assessments conducted on some properties, have not revealed,
and we are not otherwise aware of, any environmental conditions that we believe would have a material adverse effect on our
business, assets, financial condition or results of operations. In connection with our ownership, operation and development of
communities, from time to time we undertake substantial remedial action in response to the presence of subsurface or other
contaminants, including contaminants in soil, groundwater and soil vapor beneath or affecting our buildings. In some cases, an
indemnity exists upon which we may be able to rely if environmental liability arises from the contamination or remediation costs
exceed estimates. There can be no assurance, however, that all necessary remediation actions have been or will be undertaken at
our properties or that we will be indemnified, in full or at all, in the event that environmental liability arises.
Mold growth may occur when excessive moisture accumulates in buildings or on building materials, particularly if the moisture
problem remains undiscovered or is not addressed over a period of time. Certain molds may in some instances lead to adverse
health effects, including allergic or other reactions. To help limit mold growth, we educate residents about the importance of
adequate ventilation and request or require that they notify us when they see mold or excessive moisture. We have established
procedures for promptly addressing and remediating mold or excessive moisture from apartment homes when we become aware
of its presence regardless of whether we or the resident believe a health risk is presented. However, we cannot provide assurance
that mold or excessive moisture will be detected and remediated in a timely manner. If a significant mold problem arises at one
of our communities, we could be required to undertake a costly remediation program to contain or remove the mold from the
affected community and could be exposed to other liabilities that may exceed any applicable insurance coverage.
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Additionally, we have occasionally been involved in developing, managing, leasing and operating various properties for third
parties. Consequently, we may be considered to have been an operator of such properties and, therefore, potentially liable for
removal or remediation costs or other potential costs which relate to the release or presence of hazardous or toxic substances or
petroleum products at such properties.
We cannot assure you that:
•
•
•
•
•
•
the environmental assessments described above have identified all potential environmental liabilities;
no prior owner created any material environmental condition not known to us or the consultants who prepared the
assessments;
no environmental liabilities have developed since the environmental assessments were prepared;
the condition of land or operations in the vicinity of our communities, such as the presence of underground storage tanks,
will not affect the environmental condition of our communities;
future uses or conditions, including, without limitation, changes in applicable environmental laws and regulations, will
not result in the imposition of environmental liability; and
no environmental liabilities will arise at communities that we have sold for which we may have liability.
Our success depends on key personnel whose continued service is not guaranteed.
Our success depends in part on our ability to attract and retain the services of executive officers and other personnel. Our executive
officers make important capital allocation decisions or recommendations to our Board of Directors from among the opportunities
identified by our regional offices. There is substantial competition for qualified personnel in the real estate industry, and the loss
of our key personnel could adversely affect the Company.
Failure to qualify as a REIT would cause us to be taxed as a corporation, which would significantly reduce funds available
for distribution to stockholders.
If we fail to qualify as a REIT for federal income tax purposes, we will be subject to regular U.S. federal corporate income tax on
our taxable income. In addition, unless we are entitled to relief under applicable statutory provisions, we would be ineligible to
make an election for treatment as a REIT for the four taxable years following the year in which we lose our qualification. The
additional tax liability resulting from the failure to qualify as a REIT would significantly reduce or eliminate the amount of funds
available for distribution to our stockholders. Furthermore, we would no longer be required to make distributions to our stockholders.
Thus, our failure to qualify as a REIT could also impair our ability to expand our business and raise capital, and would adversely
affect the value of our common stock.
We believe that we are organized and qualified as a REIT, and we intend to operate in a manner that will allow us to continue to
qualify as a REIT. However, we cannot assure you that we are qualified as a REIT, or that we will remain qualified in the future.
This is because qualification as a REIT involves the application of highly technical and complex provisions of the Code for which
there are only limited judicial and administrative interpretations and involves the determination of a variety of factual matters and
circumstances not entirely within our control. Our qualification as a REIT will depend on our satisfaction of certain asset, income,
organizational, distribution, shareholder ownership and other requirements on a continuing basis. In addition, future legislation,
new regulations, administrative interpretations or court decisions may significantly change the tax laws or the application of the
tax laws with respect to qualification as a REIT for federal income tax purposes or the federal income tax consequences of this
qualification.
Even if we qualify as a REIT, we will be subject to certain federal, state and local taxes on our income and property and on taxable
income that we do not distribute to our stockholders. In addition, we hold through our taxable REIT subsidiaries certain assets
and engage in certain activities that a REIT could not engage in directly. We also use taxable REIT subsidiaries to hold certain
assets that we believe would be subject to the 100% prohibited transaction tax if sold at a gain outside of a taxable REIT subsidiary
or to engage in activities that generate non-qualifying REIT income. Our taxable REIT subsidiaries are subject to U.S. tax as
regular corporations. The Archstone Acquisition increased the amount of assets held through our taxable REIT subsidiaries.
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Changes in U.S. accounting standards may materially and adversely affect the reporting of our operations.
The Company follows accounting principles generally accepted in the United States (“GAAP”). GAAP is established by the
Financial Accounting Standards Board (“FASB”), an independent body whose standards are recognized by the SEC as authoritative
for publicly held companies. The FASB and the SEC create and interpret accounting standards and may issue new accounting
pronouncements or change the interpretation and application of these standards that govern the preparation of our financial
statements. These changes could have a material impact on our reported consolidated results of operations and financial position.
Prospective investors are urged to consult with their tax advisors regarding the effects of recently enacted tax legislation and
other legislative, regulatory and administrative developments.
On December 22, 2017, H.R. 1, informally titled the Tax Cuts and Jobs Act (the “TCJA”), was enacted. The TCJA made major
changes to the Code, including a number of provisions of the Code that affect the taxation of REITs and their stockholders. The
long-term effect of the significant changes made by the TCJA remains uncertain. The effect of any technical corrections with
respect to the TCJA could have an adverse effect on us or our stockholders or holders of our debt securities.
The ability of our stockholders to control our policies and effect a change of control of our company is limited by certain
provisions of our charter and bylaws and by Maryland law.
There are provisions in our charter and bylaws that may discourage a third party from making a proposal to acquire us, even if
some of our stockholders might consider the proposal to be in their best interests. These provisions include the following:
Our charter authorizes our Board of Directors to issue up to 50,000,000 shares of preferred stock without stockholder approval
and to establish the preferences and rights, including voting rights, of any series of preferred stock issued. The Board of Directors
may issue preferred stock without stockholder approval, which could allow the Board to issue one or more classes or series of
preferred stock that could discourage or delay a tender offer or a change in control.
To maintain our qualification as a REIT for federal income tax purposes, not more than 50% in value of our outstanding stock
may be owned, directly or indirectly, by or for five or fewer individuals at any time during the last half of any taxable year. To
maintain this qualification, and/or to address other concerns about concentrations of ownership of our stock, our charter generally
prohibits ownership (directly, indirectly by virtue of the attribution provisions of the Code, or beneficially as defined in Section 13
of the Securities Exchange Act) by any single stockholder of more than 9.8% of the issued and outstanding shares of any class or
series of our stock. In general, under our charter, pension plans and mutual funds may directly and beneficially own up to 15% of
the outstanding shares of any class or series of stock. Under our charter, our Board of Directors may in its sole discretion waive
or modify the ownership limit for one or more persons, but it is not required to do so even if such waiver would not affect our
qualification as a REIT. These ownership limits may prevent or delay a change in control and, as a result, could adversely affect
our stockholders' ability to realize a premium for their shares of common stock.
As a Maryland corporation, we are subject to the provisions of the Maryland General Corporation Law. Maryland law imposes
restrictions on some business combinations and requires compliance with statutory procedures before some mergers and
acquisitions may occur, which may delay or prevent offers to acquire us or increase the difficulty of completing any offers, even
if they are in our stockholders' best interests. In addition, other provisions of the Maryland General Corporation Law permit the
Board of Directors to make elections and to take actions without stockholder approval (such as classifying our Board such that
the entire Board is not up for re-election annually) that, if made or taken, could have the effect of discouraging or delaying a change
in control.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
17
ITEM 2. COMMUNITIES
Our real estate investments consist primarily of current operating apartment communities, communities in various stages of
development (“Development Communities”) and Development Rights (as defined below). Our current operating communities are
further distinguished as Established Communities, Other Stabilized Communities, Lease-Up Communities, Redevelopment
Communities and Unconsolidated Communities. While we generally establish the classification of communities on an annual
basis, we intend to update the classification of communities during the calendar year to the extent that our plans with regard to the
disposition or redevelopment of a community change during the year. The following is a description of each category:
Current Communities are categorized as Established, Other Stabilized, Lease-Up, Redevelopment or Unconsolidated according
to the following attributes:
• Established Communities (also known as Same Store Communities) for the year ended December 31, 2019 are consolidated
communities in the markets where we have a significant presence (New England, New York/New Jersey, Mid-Atlantic,
Pacific Northwest, and Northern and Southern California) and where a comparison of operating results from the prior
year to the current year is meaningful, as these communities were owned and had Stabilized Occupancy, as defined below,
as of the beginning of the respective prior year. The Established Communities for the year ended December 31, 2019 are
communities that are consolidated for financial reporting purposes, had Stabilized Occupancy as of January 1, 2018, are
not conducting or planning to conduct substantial redevelopment activities, and are not held for sale or planned for
disposition within the fiscal year. A community is considered to have Stabilized Occupancy at the earlier of (i) attainment
of 95% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment.
Beginning January 1, 2020, we have updated our definition of Stabilized Occupancy as the earlier of (i) attainment of
90% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment. In addition,
beginning January 1, 2020, Established Communities will also include consolidated communities in our expansion markets
of Denver, Colorado, and Southeast Florida. These changes will be applied prospectively to all periods presented.
• Other Stabilized Communities are all other completed consolidated communities that have Stabilized Occupancy, as of
January 1, 2019, or which were acquired during the years ended December 31, 2019 or 2018. Other Stabilized Communities
for the year ended December 31, 2019 includes stabilized operating communities in our expansion markets of Denver,
Colorado, and Southeast Florida, but excludes communities that are conducting or planning to conduct substantial
redevelopment activities within the fiscal year.
•
Lease-Up Communities are consolidated communities where construction has been complete for less than one year and
that do not have Stabilized Occupancy.
• Redevelopment Communities are consolidated communities where substantial redevelopment is in progress or is planned
to begin during the fiscal year. Redevelopment is considered substantial when capital invested during the reconstruction
effort is expected to exceed the lesser of $5,000,000 or 10% of the community's pre-redevelopment cost basis and is
expected to have a material impact on the operations of the community, including occupancy levels and future rental
rates.
Beginning January 1, 2020, we have updated our definition of Redevelopment Communities, to consist of consolidated
communities that have (i) substantial redevelopment in progress or that is planned to begin during the fiscal year, through
a capital investment during the reconstruction effort that is expected to exceed the lesser of $5,000,000 or 10% of the
community's pre-redevelopment cost basis and (ii) physical occupancy that is below or is expected to be below 90%
during or as a result of the redevelopment activity. These changes will be applied prospectively to all periods presented.
• Unconsolidated Communities are communities that we have an indirect ownership interest in through our investment
interest in an unconsolidated entity. Unconsolidated Communities that are under development are presented as
Development Communities.
Development Communities are communities that are either currently under construction, or were under construction and
completed during the fiscal year. These communities may be partially complete and operating.
18
Development Rights are development opportunities in the early phase of the development process where we either have an
option to acquire land or enter into a leasehold interest, where we are the buyer under a long-term conditional contract to
purchase land, where we control the land through a ground lease or own land to develop a new community, or where we are
the designated developer in a public-private partnership. We capitalize related pre-development costs incurred in pursuit of
new developments for which we currently believe future development is probable.
We currently lease our corporate headquarters located in Arlington, Virginia, as well as our other regional and administrative offices
under operating leases.
As of December 31, 2019, communities that we owned or held a direct or indirect interest in were classified as follows:
Number of
communities
Number of
apartment homes
Current Communities
Established Communities:
New England
Metro NY/NJ
Mid-Atlantic
Pacific Northwest
Northern California
Southern California
Total Established
Other Stabilized Communities:
New England
Metro NY/NJ
Mid-Atlantic
Pacific Northwest
Northern California
Southern California
Expansion Markets
Non-Core
Total Other Stabilized
Lease-Up Communities
Redevelopment Communities
Unconsolidated Communities
Total Current Communities
Development Communities (1)
Total Communities
Development Rights
33
40
32
16
36
53
210
8
9
8
—
5
5
8
—
43
7
2
13
275
22
297
27
8,166
11,463
11,232
4,116
10,136
14,689
59,802
2,161
2,515
2,757
—
2,099
2,371
2,300
—
14,203
2,027
665
3,189
79,886
6,960
86,846
9,587
_________________________________
(1) Development Communities includes Avalon Alderwood Mall, expected to contain 328 apartment homes, which is being developed within
an unconsolidated joint venture, and excludes The Park Loggia, which contains 172 for-sale residential condominiums and 67,000 square
feet of retail space, which was completed in the fourth quarter of 2019.
Our holdings under each of the above categories are discussed on the following pages.
19
We generally establish the composition of our Established Communities portfolio annually. Changes in the Established
Communities portfolios for the years ended December 31, 2019, 2018 and 2017 were as follows:
Number of
communities
Established Communities as of December 31, 2016
Communities added
Communities removed (1):
Redevelopment Communities
Disposed Communities
Other Stabilized (2)
Communities with multiple phases combined
Established Communities as of December 31, 2017
Communities added
Communities removed (1):
Redevelopment Communities
Disposed Communities (3)
Other Stabilized (2)
Communities with multiple phases separated
Established Communities as of December 31, 2018
Communities added
Communities removed (1):
Redevelopment Communities
Disposed Communities
Other Stabilized (2)
Established Communities as of December 31, 2019
_________________________________
191
17
(10)
(6)
(1)
(1)
190
25
(9)
(13)
(1)
2
194
22
(2)
(3)
(1)
210
(1) We remove a community from our Established Communities portfolio if we believe that planned activity for a community for the upcoming
year will result in that community's expected operations not being comparable to the prior year period. We believe that a community's
expected operations will not be comparable to the prior year period when we intend either (i) to undertake a significant capital renovation
of the community, such that we would consider the community to be classified as a Redevelopment Community; (ii) to dispose of a community
through a sale or other disposition transaction; or (iii) when a significant casualty loss occurs.
(2) Community was moved from the Established Communities portfolio to the Other Stabilized portfolio as a result of a casualty loss that
occurred during the year and impacted operations.
(3) Includes the five wholly-owned communities contributed to the NYC Joint Venture.
Current Communities
Our Current Communities include garden-style apartment communities consisting of multi-story buildings of stacked flats and/or
townhome apartments in landscaped settings, as well as mid and high rise apartment communities consisting of larger elevator-
served buildings of four or more stories, frequently with structured parking. As of January 31, 2020, our Current Communities
consisted of the following:
Garden-style
Mid-rise
High-rise
Total Current Communities
Number of
communities
Number of
apartment homes
135
110
29
274
40,979
30,168
8,489
79,636
20
As discussed in Item 1. “Business,” we operate under three core brands Avalon, AVA and Eaves by Avalon. We believe that this
branding differentiation allows us to target our product offerings to multiple customer groups and submarkets within our existing
geographic footprint. Our core “Avalon” brand focuses on upscale apartment living and high end amenities and services. “AVA”
targets customers in high energy, transit-served urban neighborhoods and generally feature smaller apartments, many of which are
designed for roommate living with an emphasis on modern design and a technology focus. “Eaves by Avalon” is targeted to the
cost conscious, “value” segment in suburban areas. We believe that these brands allow us to further penetrate our existing markets
by targeting our market by consumer preference and attitude as well as by location and price.
We also have an extensive and ongoing maintenance program to continually maintain and enhance our communities and apartment
homes. The aesthetic appeal of our communities and a service-oriented property management team, focused on the specific needs
of residents, enhances market appeal to discriminating residents. We believe our mission of Creating a Better Way To Live helps
us achieve higher rental rates and occupancy levels while minimizing resident turnover and operating expenses.
Our Current Communities are located in the following geographic markets:
Number of
communities at
Number of
apartment homes at
Percentage of total
apartment homes at
1/31/2019
1/31/2020
1/31/2019
1/31/2020
1/31/2019
1/31/2020
New England
Boston, MA
Fairfield, CT
Metro NY/NJ
New York City, NY
New York Suburban
New Jersey
Mid-Atlantic
Washington Metro/Baltimore, MD
Pacific Northwest
Seattle, WA
Northern California
San Jose, CA
Oakland-East Bay, CA
San Francisco, CA
Southern California
Los Angeles, CA
Orange County, CA
San Diego, CA
Expansion markets
Denver, CO
Southeast Florida
Non-Core
11,846
9,876
1,970
15,279
5,089
4,573
5,617
14,380
14,380
4,538
4,538
12,548
4,713
3,847
3,988
17,352
11,916
3,370
2,066
1,408
748
660
1,014
78,365
11,854
10,440
1,414
15,989
5,089
4,573
6,327
14,531
14,531
5,135
5,135
12,548
4,713
3,847
3,988
17,279
11,843
3,370
2,066
2,300
1,086
1,214
—
79,636
15.1%
12.6 %
2.5 %
19.5%
6.5 %
5.8 %
7.2 %
18.4%
18.4 %
5.8%
5.8 %
16.0%
6.0 %
4.9 %
5.1 %
22.1%
15.2 %
4.3 %
2.6 %
1.8%
1.0 %
0.8 %
14.9%
13.1 %
1.8 %
20.1%
6.5 %
5.7 %
7.9 %
18.2%
18.2 %
6.5%
6.5 %
15.7%
5.9 %
4.8 %
5.0 %
21.7%
14.9 %
4.2 %
2.6 %
2.9%
1.4 %
1.5 %
1.3%
100.0 %
—%
100.0 %
47
37
10
54
14
19
21
41
41
17
17
42
12
13
17
60
40
12
8
5
3
2
47
39
8
56
14
19
23
42
42
19
19
42
12
13
17
60
40
12
8
8
4
4
3
269
—
274
21
We manage and operate substantially all of our Current Communities. During the year ended December 31, 2019, we completed
construction of seven communities containing 2,027 apartment homes, acquired five wholly-owned operating communities
containing 1,175 apartment homes and sold six wholly-owned operating communities containing 1,660 apartment homes. The
average age of our Current Communities, on a weighted average basis according to number of apartment homes, is 19.5 years.
When adjusted to reflect redevelopment activity, as if redevelopment were a new construction completion date, the weighted
average age of our Current Communities is 10.3 years.
Of the Current Communities, as of January 31, 2020, we owned (directly or through wholly-owned subsidiaries):
•
259 operating communities, including 248 with a full fee simple, or absolute, ownership interest and 11 that are on land
subject to a land lease. The land leases have various expiration dates from October 2026 to March 2142, and six of the
land leases are used to support tax advantaged structures that ultimately allow us to purchase the land upon lease expiration.
• A general partnership interest and an indirect limited partnership interest in Archstone Multifamily Partners AC LP (the
“U.S. Fund”) and Multifamily Partners AC JV LP (the “AC JV”), subsidiaries of which own four and two operating
communities, respectively.
• A membership interest in four limited liability companies, one of which, the NYC Joint Venture, through subsidiaries
owns a fee simple interest in three operating communities and a leasehold interest in two additional operating communities,
as well as three ventures that each hold a fee simple interest in an operating community, one of which is consolidated for
financial reporting purposes.
• A general partnership interest in one partnership structured as a “DownREIT,” as described more fully below, that owns
one community.
We also hold, directly or through wholly-owned subsidiaries, the full fee simple or leasehold ownership interest in our Development
Communities, except for one which is being developed within an unconsolidated joint venture. In addition, we own a mixed-use
project for which we are pursuing a for-sale strategy of individual condominium units.
In our partnership structured as a DownREIT, one of our wholly-owned subsidiaries is the general partner, and there are limited
partners whose interest in the partnership is represented by units of limited partnership interest. Limited partners are entitled to
receive an initial distribution before any distribution is made to the general partner. Under the partnership agreement for the
DownREIT, the distributions per unit paid to the holders of units of limited partnership interests are equal to our current common
stock dividend amount. The holders of units of limited partnership interest have the right to present all or some of their units for
redemption for a cash amount as determined by the partnership agreement and based on the fair value of our common stock. In
lieu of a cash redemption by the partnership, we may elect to acquire any unit presented for redemption for one share of our
common stock or for such cash amount. As of January 31, 2020, there were 7,500 DownREIT partnership units outstanding. The
DownREIT partnership is consolidated for financial reporting purposes.
Development Communities
As of December 31, 2019, we owned or held a direct or indirect interest in 22 Development Communities under construction. We
expect these Development Communities, when completed, to add a total of 6,960 apartment homes and 64,000 square feet of retail
space to our portfolio for a total capitalized cost, including land acquisition costs, of approximately $2,596,000,000. We cannot
assure you that we will meet our schedule for construction completion or that we will meet our budgeted costs, either individually,
or in the aggregate. You should carefully review Item 1A. “Risk Factors” for a discussion of the risks associated with development
activity and our discussion under Item 7. “Management's Discussion and Analysis of Financial Condition and Results of
Operations” (including the factors identified under “Forward-Looking Statements”) for further discussion of development activity.
During 2019 we completed the construction of The Park Loggia, located in New York, NY, which contains 172 for-sale residential
condominium units and 67,000 square feet of retail space for an estimated total capitalized cost of $626,000,000. We currently
intend to own and operate the retail portion of the development. In 2020, through the date on which this report was filed with the
SEC, we sold 14 residential condominiums at The Park Loggia, for gross proceeds of approximately $47,000,000. In addition, we
have contracts outstanding on 41 of the remaining residential condominiums.
The following table presents a summary of the Development Communities. We hold a fee simple ownership interest in these
communities (directly or through a wholly-owned subsidiary) unless otherwise noted in the table.
22
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
Avalon Teaneck
Teaneck, NJ
Avalon North Creek
Bothell, WA
Avalon Norwood
Norwood, MA
Avalon Public Market
Emeryville, CA
Avalon Yonkers
Yonkers, NY
AVA Hollywood (4)
Hollywood, CA
Avalon Towson
Towson, MD
Avalon Walnut Creek II
Walnut Creek, CA
Avalon Doral
Doral, FL
Avalon East Harbor
Baltimore, MD
Avalon Old Bridge
Old Bridge, NJ
Avalon Newcastle Commons II
Newcastle, WA
Twinbrook Station
Rockville, MD
Avalon Harrison (4)
Harrison, NY
Avalon Brea Place
Brea, CA
Avalon Foundry Row
Owings Mill, MD
Avalon Marlborough II
Marlborough, MA
Avalon Acton II
Acton, MA
Avalon Woburn
Woburn, MA
AVA RiNo
Denver, CO
Avalon Monrovia
Monrovia, CA
Avalon Alderwood Mall (5)
Lynnwood, WA
Number of
apartment
homes
Projected total
capitalized cost (1)
($ millions)
Construction
start
Initial actual/
projected
occupancy (2)
Estimated
completion
Estimated
stabilization
(3)
248
$
316
198
289
590
695
371
200
350
400
252
293
238
143
653
437
123
86
350
246
154
328
73
84
61
Q4 2016
Q2 2019
Q1 2020
Q2 2020
Q4 2017
Q2 2019
Q1 2020
Q2 2020
Q2 2018
Q3 2019
Q1 2020
Q3 2020
175
Q4 2016
Q3 2019
Q3 2020
Q4 2020
189
Q4 2017
Q3 2019
Q4 2020
Q2 2021
373
Q4 2016
Q4 2019
Q4 2020
Q1 2021
114
Q4 2017
Q1 2020
Q4 2020
Q2 2021
111
Q4 2017
Q1 2020
Q3 2020
Q1 2021
114
Q2 2018
Q2 2020
Q3 2020
Q3 2021
139
Q3 2018
Q3 2020
Q3 2021
Q4 2021
66
Q3 2018
Q2 2020
Q1 2021
Q3 2021
106
Q4 2018
Q3 2020
Q2 2021
Q4 2021
66
76
Q4 2018
Q3 2020
Q1 2021
Q3 2021
Q4 2018
Q1 2021
Q1 2022
Q2 2022
290
Q2 2019
Q1 2021
Q2 2022
Q3 2022
100
Q2 2019
Q1 2021
Q1 2022
Q3 2022
42
31
Q2 2019
Q2 2020
Q4 2020
Q1 2021
Q4 2019
Q3 2020
Q4 2020
Q1 2021
121
Q4 2019
Q3 2021
Q2 2022
Q3 2022
87
68
Q4 2019
Q1 2022
Q2 2022
Q4 2022
Q4 2019
Q1 2021
Q3 2021
Q4 2021
110
Q4 2019
Q3 2021
Q2 2022
Q3 2022
Total
6,960
$
2,596
_________________________________
(1) Projected total capitalized cost includes all capitalized costs projected to be or actually incurred to develop the respective Development
Community, determined in accordance with GAAP, including land acquisition costs, construction costs, real estate taxes, capitalized interest
and loan fees, permits, professional fees, allocated development overhead and other regulatory fees, as well as costs incurred for first
generation retail tenants such as tenant improvements and leasing commissions. Projected total capitalized cost for communities identified
as having joint venture ownership, either during construction or upon construction completion, represents the total projected joint venture
contribution amount unless otherwise noted.
(2) Initial projected occupancy dates are estimates. There can be no assurance that we will complete any or all of these proposed developments.
(3) Estimated stabilization will occur subsequent to January 1, 2020, when Stabilized Operations is defined as the earlier of (i) attainment of
90% or greater physical occupancy or (ii) the one-year anniversary of completion of development.
(4) Developments containing at least 10,000 square feet of retail space include AVA Hollywood (19,000 square feet) and Avalon Harrison
(27,000 square feet).
(5) We are developing this project within an unconsolidated joint venture that was formed in December 2019, in which we own a 50.0% interest.
The information above represents the total cost for the venture.
23
During the year ended December 31, 2019, the Company completed the development of the following communities:
Number of
apartment
homes
Total capitalized
cost (1)
($ millions)
Approximate
rentable area
(sq. ft.)
Total
capitalized cost
per sq. ft.
Quarter of
completion
1.
2.
3.
4.
5.
6.
7.
Avalon at the Hingham Shipyard II
Hingham, MA
190
$
Avalon Sudbury
Sudbury, MA
Avalon Piscataway
Piscataway, NJ
AVA Esterra Park
Redmond, WA
Avalon Boonton
Boonton, NJ
Avalon Belltown Towers (2)
Seattle, WA
Avalon Saugus (2)
Saugus, MA
250
360
323
350
274
280
Total (3)
2,027
$
202,820
$
320
Q1 2019
336,684
399,492
229,514
376,006
243,321
315,039
258
Q1 2019
228
Q2 2019
396
Q3 2019
247
Q4 2019
604
Q4 2019
295
Q4 2019
65
87
91
91
93
147
93
667
____________________________________
(1) Total capitalized cost is as of December 31, 2019. We generally anticipate incurring additional costs associated with these communities that
are customary for new developments.
(2) Approximate rentable area includes retail space. Developments containing at least 10,000 square feet of retail space include Avalon Belltown
Towers (11,000 square feet) and Avalon Saugus (23,000 square feet).
(3) Excludes the development of The Park Loggia, which contains 172 for-sale residential condominiums and 67,000 square feet of retail space.
Development was complete in the fourth quarter of 2019.
Redevelopment Communities
As of December 31, 2019, we had two communities containing 665 apartment homes under redevelopment. We expect the total
capitalized cost to redevelop these communities to be $45,000,000, excluding costs incurred prior to redevelopment. We have
found that the cost to redevelop an existing apartment community is more difficult to budget and estimate than the cost to develop
a new community. Accordingly, we expect that actual costs may vary from our budget by a wider range than for a new Development
Community. We cannot assure you that we will meet our schedule for reconstruction completion or for attaining restabilized
operations, or that we will meet our budgeted costs, either individually or in the aggregate. We anticipate maintaining or increasing
our current level of redevelopment activity related to communities in our current operating portfolio. You should carefully review
Item 1A. “Risk Factors” for a discussion of the risks associated with redevelopment activity.
Development Rights
At December 31, 2019, we had $70,486,000 in capitalized costs (including legal fees, design fees and related overhead costs)
related to Development Rights for which we control the land parcel, typically through a conditional agreement or option to purchase
or lease the land. Collectively, the land held for development and associated costs for deferred development rights relate to 27
Development Rights for which we expect to develop new apartment communities in the future. The Development Rights range
from those beginning design and architectural planning to those that have completed site plans and drawings and can begin
construction almost immediately. We estimate that the successful completion of all of these communities would ultimately add
approximately 9,587 apartment homes to our portfolio. Substantially all of these apartment homes will offer features like those
offered by the communities we currently own.
For 22 Development Rights, we control the land through a conditional agreement or option to purchase or lease the parcel. In
addition, five Development Rights are additional development phases of existing stabilized operating communities we own and
will be constructed on land currently associated with, or adjacent to, those operating communities.
24
The properties comprising the Development Rights are in different stages of the due diligence and regulatory approval process.
The decisions as to which of the Development Rights to invest in, if any, or to continue to pursue once an investment in a Development
Right is made, are business judgments that we make after we perform financial, demographic and other analyses. In the event that
we do not proceed with a Development Right, we generally would not recover any of the capitalized costs incurred in the pursuit
of those communities, unless we were to recover amounts in connection with the sale of land; however, we cannot guarantee a
recovery. Pre-development costs incurred in the pursuit of Development Rights, for which future development is not yet considered
probable, are expensed as incurred. In addition, if the status of a Development Right changes, making future development no
longer probable, any unrecoverable capitalized pre-development costs are charged to expense. During 2019, we incurred a charge
of $4,991,000 for development pursuits that were not yet probable of future development at the time incurred, or for pursuits that
we determined were no longer probable of being developed.
You should carefully review Item 1A. “Risk Factors,” for a discussion of the risks associated with Development Rights.
The following presents a summary of the Development Rights:
Market
New England
Metro NY/NJ
Mid-Atlantic
Pacific Northwest
Northern California
Southern California
Southeast Florida
Denver, CO
Total
Number of rights
Estimated
number of homes
Projected total
capitalized cost
($ millions) (1)
3
12
—
3
4
2
1
2
27
424
$
5,171
—
1,223
1,198
637
254
680
164
2,260
—
446
714
326
99
208
9,587
$
4,217
____________________________________
(1) Projected total capitalized cost includes all capitalized costs incurred to date (if any) and projected to be incurred to develop the respective
community, determined in accordance with GAAP, including land acquisition costs, construction costs, real estate taxes, capitalized interest
and loan fees, permits, professional fees, allocated development overhead and other regulatory fees, as well as costs incurred for first
generation retail tenants such as tenant improvements and leasing commissions.
Land Acquisitions
We select land for development and follow established procedures that we believe minimize both the cost and the risks of
development. During 2019, we acquired land parcels for five Development Rights, as shown in the table below, for an aggregate
investment of $63,864,000. For all of the parcels, construction has either started or is expected to start within the next six months.
1.
2.
3.
4.
5.
AVA RiNo
Denver, CO
Avalon Foundry Row
Owings Mill, MD
Avalon Marlborough II
Marlborough, MA
Avalon Woburn
Woburn, MA
Avalon Monrovia
Monrovia, CA
Total
____________________________________
25
Estimated
number of
apartment
homes
Projected total
capitalized
cost (1)
($ millions)
246
$
437
123
350
154
1,310
$
87
100
42
121
68
418
Date
acquired
January 2019
April 2019
April 2019
October 2019
November 2019
(1) Projected total capitalized cost includes all capitalized costs incurred to date (if any) and projected to be incurred to develop the respective
community, determined in accordance with GAAP, including land and related acquisition costs, construction costs, real estate taxes,
capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees, as well as costs
incurred for first generation retail tenants such as tenant improvements and leasing commissions, net of projected proceeds for any planned
sales of associated outparcels and other real estate.
Disposition Activity
We sell assets when they do not meet our long-term investment strategy or when real estate markets allow us to realize a portion
of the value created over our periods of ownership, and we generally redeploy the proceeds from those sales to develop, redevelop
and acquire communities. Pending such redeployment, we will generally use the proceeds from the sale of these communities to
reduce amounts outstanding under our Credit Facility or retain the cash proceeds on our balance sheet until it is redeployed into
acquisition, development or redevelopment activity. On occasion, we will set aside the proceeds from the sale of communities into
a cash escrow account to facilitate a tax deferred, like-kind exchange transaction. From January 1, 2019 to January 31, 2020, we
sold our interest in seven wholly-owned operating communities, containing 1,910 apartment homes, with an aggregate gross sales
price of $492,350,000.
Insurance and Risk of Uninsured Losses
We maintain commercial general liability insurance and property insurance with respect to all of our communities. These policies,
along with other insurance policies we maintain, have policy specifications, insured and self-insured limits, exclusions and
deductibles that we consider commercially reasonable. There are, however, certain types of losses (including, but not limited to,
losses arising from nuclear liability or acts of war) that are not insured, in full or in part, because they are either uninsurable or the
cost of insurance makes it, in management’s view, economically impractical. You should carefully review the discussion under
Item 1A. “Risk Factors” of this Form 10-K for a discussion of risks associated with an uninsured property or casualty loss.
Many of our West Coast communities are located in the general vicinity of active earthquake faults. Many of our communities are
near, and thus susceptible to, the major fault lines in California, including the San Andreas Fault, the Hayward Fault or other
geological faults that are known or unknown. We cannot assure you that an earthquake would not cause damage or losses greater
than our current insured levels. We procure property damage and resulting business interruption insurance coverage with a loss
limit of $175,000,000 for any single occurrence and in the annual aggregate for losses resulting from earthquakes. However, for
any losses resulting from earthquakes at communities located in California or Washington, the loss limit is $200,000,000 for any
single occurrence and in the annual aggregate. The deductible applicable to losses resulting from earthquakes occurring in California
is five percent of the insured value of each damaged building subject to a minimum of $100,000 and a maximum of $25,000,000
per loss. Limits, deductibles, self-insured retentions and coverages may increase or decrease annually during the insurance renewal
process which occurs on different dates throughout the calendar year.
Our communities are insured for certain property damage and business interruption losses through a combination of community
specific insurance policies and/or a master property insurance program which covers the majority of our communities. This master
property program provides a $400,000,000 limit for any single occurrence, subject to certain sublimits and exclusions. Under the
master property program, we are subject to a $100,000 deductible per occurrence, as well as additional self-insured retention for
the next $350,000 of loss, per occurrence, until the aggregate incurred self-insured retention exceeds $1,500,000 for the policy
year.
Our communities are insured for third-party liability losses through a combination of community specific insurance policies and/
or coverage provided under a master commercial general liability and umbrella/excess insurance program. The master commercial
general liability and umbrella/excess insurance policies cover the majority of our communities and are subject to certain coverage
limitations and exclusions, and they require a self-insured retention of $500,000 per occurrence.
We also maintain certain casualty policies (general liability, umbrella/excess and workers compensation) for construction related
risks which have various exclusions and deductibles that, in management’s view, are commercially reasonable. Certain projects
are insured through our master insurance policies while others are insured through project-specific insurance policies. The limits
vary by project and may be subject to deductibles up to $1,500,000 per occurrence.
We utilize a wholly-owned captive insurance company to insure certain types and amounts of risks, which includes property
damage and resulting business interruption losses, general liability insurance and other construction related liability risks. In
addition to our potential liability for the various policy self-insured retentions and deductibles, our captive insurance company is
directly responsible for (i) 50% of the first $25,000,000 of losses (per occurrence) and 10% of the first $50,000,000 of losses (per
occurrence) incurred by the master property insurance policy and (ii) covered liability claims arising out of our primary commercial
26
general liability policy, subject to a $2,000,000 per occurrence loss limit. The captive is utilized to insure other limited levels of
risk, which may be in part reinsured by third party insurance.
Just as with office buildings, transportation systems and government buildings, there have been reports that apartment communities
could become targets of terrorism. Our communities are insured for terrorism related losses through the Terrorism Risk Insurance
Program Reauthorization Act (“TRIPRA”) program. This coverage extends to most of our casualty exposures (subject to deductibles
and insured limits) and certain property insurance policies. We have also purchased private-market insurance for property damage
due to terrorism with limits of $600,000,000 per occurrence and in the annual aggregate that includes certain coverages (not covered
under TRIPRA) such as domestic-based terrorism. This insurance, often referred to as “non-certified” terrorism insurance, is
subject to deductibles, limits and exclusions.
An additional consideration for insurance coverage and potential uninsured losses is mold growth or other environmental
contamination. Mold growth may occur when excessive moisture accumulates in buildings or on building materials, particularly
if the moisture problem remains undiscovered or is not addressed over a period of time. If a significant mold problem arises at
one of our communities, we could be required to undertake a costly remediation program to contain or remove the mold from the
affected community and could be exposed to other liabilities. For further discussion of the risks and our related prevention and
remediation activities, please refer to the discussion under Item 1A. “Risk Factors - We may incur costs due to environmental
contamination or non-compliance” elsewhere in this report. We cannot provide assurance that we will have coverage under our
existing policies for property damage or liability to third parties arising as a result of exposure to mold or a claim of exposure to
mold at one of our communities.
We also carry crime policies (also commonly referred to as a fidelity policy or employee dishonesty policy) and limited cyber
liability insurance. The crime policies protect us, up to $30,000,000 per occurrence (subject to sublimits and exclusions), from
employee theft of money, securities or property. The limited cyber liability insurance is part of our professional liability coverage
and has limits of $15,000,000 per occurrence and in the annual aggregate. The cyber liability coverage protects us from certain
claims arising out of data breach, wrongful acts, data privacy issues and media liability.
The amount or types of insurance we maintain may not be sufficient to cover all losses.
27
ITEM 3. LEGAL PROCEEDINGS
Following the filing of a petition by Local 30 of the International Union of Operating Engineers ("Local 30"), on April 23, 2019 an
election was held among our non-management, onsite maintenance associates at our Westchester County, New York operating
communities, and the associates elected to be represented by Local 30 in collective bargaining. The Company has filed an objection
contesting the election on various grounds. On December 20, 2019, the local hearing officer issued his report overruling the
Company’s objections. The Company has filed exceptions to (i.e., appealed) the ruling. The Company does not believe that this
matter and the possible representation by Local 30 of our maintenance associates in Westchester County will have a material
adverse effect on the Company's financial condition or its results of operations.
The Company is involved in various other claims and/or administrative proceedings that arise in the ordinary course of its business.
While no assurances can be given, the Company does not currently believe that any of these outstanding litigation matters,
individually or in the aggregate, will have a material adverse effect on its financial condition or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the NYSE under the ticker symbol AVB. On January 31, 2020 there were 456 holders of record
of an aggregate of 140,642,065 shares of our outstanding common stock. The number of holders does not include individuals or
entities who beneficially own shares but whose shares are held of record by a broker or clearing agency, but does include each
such broker or clearing agency as one record holder.
At present, we expect to continue our policy of paying regular quarterly cash dividends. However, the form, timing and/or amount
of dividend distributions will be declared at the discretion of the Board of Directors and will depend on actual cash from operations,
our financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code and
other factors as the Board of Directors may consider relevant. The Board of Directors may modify our dividend policy from time
to time.
In February 2020, we announced that our Board of Directors declared a dividend on our common stock for the first quarter of
2020 of $1.59 per share, a 4.6% increase over the previous quarterly dividend per share of $1.52. The dividend will be payable
on April 15, 2020 to all common stockholders of record as of March 31, 2020.
Issuer Purchases of Equity Securities
Period
October 1- October 31, 2019
November 1- November 30, 2019
December 1- December 31, 2019
(a)
Total Number
of Shares
Purchased (1)
(b)
Average
Price Paid
per Share
615
493
$
$
— $
217.97
213.25
—
(c)
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
(d)
Maximum Dollar
Amount that May Yet
be Purchased Under
the Plans or Programs
(in thousands) (2)
— $
— $
— $
200,000
200,000
200,000
_________________________________
(1) Reflects shares surrendered to the Company in connection with exercise of stock options as payment of exercise price.
(2) As disclosed in our Form 10-Q for the quarter ended March 31, 2008, represents amounts outstanding under the Company's $500,000,000
Stock Repurchase Program. There is no scheduled expiration date to this program.
Information regarding securities authorized for issuance under equity compensation plans is included in the section entitled Item
12. “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in this Form 10-K.
29
ITEM 6. SELECTED FINANCIAL DATA
The following table provides historical consolidated financial, operating and other data for the Company. You should read the
table with our Consolidated Financial Statements and the Notes included in this report (in thousands, except share and per share
data).
Operating data:
Total revenue
Gain on sale of communities
Gain (loss) on other real estate transactions
Net income
Net income attributable to common stockholders
Per Common Share and Share Information:
Earnings per common share—basic:
Net income attributable to common stockholders
Weighted average shares outstanding—basic (1)
Earnings per common share—diluted:
Net income attributable to common stockholders
Weighted average shares outstanding—diluted
Cash dividends declared
Other Information:
Net income attributable to common stockholders
Depreciation
Interest expense, net (2)
Income tax expense (benefit)
EBITDA (3)
Funds from Operations attributable to common stockholders (4)
Core Funds from Operations (4)
Number of Current Communities (5)
Number of apartment homes
Balance Sheet Information:
Real estate, before accumulated depreciation
Total assets
Notes payable and unsecured credit facilities, net
Cash Flow Information:
Net cash flows provided by operating activities
Net cash flows used in investing activities
Net cash flows (used in) provided by financing activities
_________________________________
12/31/19
12/31/18
12/31/17
12/31/16
12/31/15
For the year ended
$
$
$
$
$
2,324,626
166,105
439
786,103
785,974
$ 2,284,535
374,976
$
345
$
974,175
$
974,525
$
$ 2,045,255
$ 2,158,628
374,623
252,599
$
$
10,224
(10,907) $
$
$ 1,033,708
876,660
$
$ 1,034,002
876,921
$
$ 1,856,028
115,625
$
9,647
$
741,733
$
742,038
$
$
5.64
139,054,191
$
7.05
137,844,755
$
6.36
137,523,771
$
7.53
136,928,251
$
5.54
133,565,711
$
5.63
139,571,550
$
7.05
138,289,241
$
6.35
138,066,686
$
7.52
137,461,637
$
5.51
134,593,177
$
$
$
$
$
6.08
$
5.88
$
5.68
$
5.40
$
5.00
785,974
661,578
204,187
13,003
1,664,742
$
974,525
631,196
238,466
(160)
$ 1,844,027
$
876,921
584,150
225,133
141
$ 1,686,345
$ 1,034,002
531,434
194,585
305
$ 1,760,326
$
742,038
477,923
148,879
1,483
$ 1,370,323
1,280,690
1,303,207
275
79,886
$ 1,218,752
$ 1,244,286
270
78,549
$ 1,167,218
$ 1,189,976
267
77,614
$ 1,135,762
$ 1,125,341
258
74,538
$ 1,083,085
$ 1,016,035
259
75,584
$ 23,606,872
$ 19,121,051
7,296,290
$
$ 22,342,577
$ 18,380,200
$ 7,040,263
$ 21,935,936
$ 18,414,821
$ 7,329,470
$ 20,776,626
$ 17,867,271
$ 7,030,880
$ 19,268,099
$ 16,931,305
$ 6,456,948
$ 1,301,111
$ 1,256,257
$
1,321,804
$ (1,193,869) $
(218,185) $
$
(596,651) $
(688,502) $
$ 1,160,272
$ 1,074,667
(965,381) $ (1,032,352) $ (1,199,517)
25,093
(418,947) $
(303,271) $
(1) Amounts do not include unvested restricted shares included in the calculation of Earnings per Share. Please refer to Note 1, “Organization,
Basis of Presentation and Significant Accounting Policies—Earnings per Common Share,” of the Consolidated Financial Statements set
forth in Item 8 of this report for a discussion of the calculation of Earnings per Share.
(2) Interest expense, net includes any gain or loss incurred from the extinguishment of debt.
(3) EBITDA is defined as net income before interest income and expense, income taxes and depreciation and amortization. Under this definition,
EBITDA includes gains on sale of assets and gain on sale of partnership interests. Management generally considers EBITDA to be an
appropriate supplemental measure to net income of our operating performance because it helps investors to understand our ability to incur
and service debt and to make capital expenditures. EBITDA should not be considered as an alternative to net income (as determined in
accordance with GAAP), as an indicator of our operating performance, or to cash flows from operating activities (as determined in accordance
with GAAP) as a measure of liquidity. Our calculation of EBITDA may not be comparable to EBITDA as calculated by other companies.
(4) Refer to “Reconciliation of Non-GAAP Financial Measures” below.
30
(5) Current Communities consist of all communities other than those which are still under construction and for which a certificate or certificates
of occupancy for the entire community have not been received.
Reconciliation of Non-GAAP Financial Measures
Funds from Operations attributable to common stockholders, or “FFO,” and FFO adjusted for non-core items, or “Core FFO,” as
defined below, are generally considered by management to be appropriate supplemental measures of our operating and financial
performance. In calculating FFO, we exclude gains or losses related to dispositions of previously depreciated property and exclude
real estate depreciation, which can vary among owners of identical assets in similar condition based on historical cost accounting
and useful life estimates. FFO can help one compare the operating performance of a real estate company between periods or as
compared to different companies. By further adjusting for items that are not considered part of our core business operations, Core
FFO allows one to compare the core operating performance of the Company year over year. We believe that in order to understand
our operating results, FFO and Core FFO should be examined with net income as presented in the Consolidated Statements of
Comprehensive Income included elsewhere in this report.
Consistent with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts®
(“NAREIT”), we calculate FFO as net income or loss attributable to common stockholders computed in accordance with GAAP,
adjusted for:
gains or losses on sales of previously depreciated operating communities;
cumulative effect of change in accounting principle;
impairment write-downs of depreciable real estate assets;
•
•
•
• write-downs of investments in affiliates due to a decrease in the value of depreciable real estate assets held by those
affiliates;
depreciation of real estate assets; and
adjustments for unconsolidated partnerships and joint ventures, including those from a change in control.
•
•
We calculate Core FFO as FFO, adjusted for:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
joint venture gains (if not adjusted through FFO), non-core costs, and promoted interests;
casualty and impairment losses or gains, net on non-depreciable real estate;
business interruption insurance proceeds and the related lost NOI that is covered by the business interruption insurance
proceeds;
gains or losses from early extinguishment of consolidated borrowings;
advocacy contributions;
hedge ineffectiveness;
severance related costs;
abandoned pursuits;
for-sale condominium activity, including gains, marketing and administrative costs and imputed carry cost;
gains or losses on sales of assets not subject to depreciation;
expensed acquisition costs related to business acquisitions that occurred prior to the adoption of ASU 2017-0 as of
October 1, 2016;
property and casualty insurance proceeds and legal settlements;
income taxes; and
other non-core items.
FFO and Core FFO do not represent net income in accordance with GAAP, and therefore should not be considered an alternative
to net income, which remains the primary measure, as an indication of our performance. In addition, FFO and Core FFO as
calculated by other REITs may not be comparable to our calculations of FFO and Core FFO.
FFO and Core FFO also do not represent cash generated from operating activities in accordance with GAAP, and therefore should
not be considered an alternative to net cash flows from operating activities, as determined by GAAP, as a measure of liquidity.
Additionally, it is not necessarily indicative of cash available to fund cash needs. A presentation of GAAP based cash flow metrics
is provided in “Cash Flow Information” in the table above.
The following is a reconciliation of net income attributable to common stockholders to FFO attributable to common stockholders
and to Core FFO attributable to common stockholders (dollars in thousands, except per share data).
31
12/31/19
12/31/18
12/31/17
12/31/16
12/31/15
For the year ended
Net income attributable to common stockholders
$
785,974
$
974,525
$
876,921
$
1,034,002
$
742,038
Depreciation—real estate assets, including discontinued
operations and joint venture adjustments
Distributions to noncontrolling interests, including
discontinued operations
Gain on sale of unconsolidated entities holding previously
depreciated real estate assets
Gain on sale of previously depreciated real estate assets
Casualty and impairment (recovery) loss, net on real estate
(1) (6)
666,563
629,814
582,907
538,606
486,019
46
44
42
41
38
(5,788)
(166,105)
(10,655)
(374,976)
(40,053)
(252,599)
(58,069)
(374,623)
(33,580)
(115,625)
—
—
—
(4,195)
4,195
FFO attributable to common stockholders
$
1,280,690
$
1,218,752
$
1,167,218
$
1,135,762
$
1,083,085
Adjusting items:
Joint venture losses (gains) (2)
Joint venture promote (3)
Impairment loss on real estate (4) (6)
Casualty gain, net on real estate (5) (6)
87
—
—
—
Business interruption insurance proceeds (7)
(1,441)
Lost NOI from casualty losses covered by business
interruption insurance (8)
Loss (gain) on extinguishment of consolidated debt
Advocacy contributions
Hedge ineffectiveness
Severance related costs
Development pursuit and other write-offs
For-sale condominium marketing and administrative
costs
For-sale condominium imputed carry cost (9)
(Gain) loss on sale of other real estate transactions
Acquisition costs
Legal settlements (10)
Income tax expense (benefit) (11)
675
602
50
—
2,327
3,782
3,812
6,351
(439)
—
(6,292)
13,003
852
(925)
826
(612)
(26)
1,730
17,492
3,489
—
1,466
280
1,044
—
(344)
—
513
(251)
950
(26,742)
9,350
(3,100)
(3,495)
7,904
25,472
—
(753)
87
1,406
—
—
6,031
(7,985)
10,500
(10,239)
(20,565)
7,366
7,075
—
—
852
3,662
—
—
10,907
(10,224)
92
680
—
3,523
(417)
—
(9,059)
(21,969)
800
(15,538)
(1,509)
7,862
(26,736)
—
—
1,999
1,838
—
—
(9,647)
3,806
—
1,103
Core FFO attributable to common stockholders
$
1,303,207
$
1,244,286
$
1,189,976
$
1,125,341
$
1,016,035
Weighted average common shares outstanding - diluted
139,571,550
138,289,241
138,066,686
137,461,637
134,593,177
EPS per common share - diluted
FFO per common share - diluted
Core FFO per common share - diluted
$
$
$
5.63
9.18
9.34
$
$
$
7.05
8.81
9.00
$
$
$
6.35
8.45
8.62
$
$
$
7.52
8.26
8.19
$
$
$
5.51
8.05
7.55
_________________________________
(1) During 2015, we recognized an impairment on depreciable real estate of $4,195 from the severe winter storms that occurred in our Northeast
markets. During 2016, we received insurance proceeds, net of additional costs incurred, of $5,732 related to the winter storms, and recognized
$4,195 of this recovery as an offset to the loss recognized in the prior year period. The balance of the net insurance proceeds received in
2016 of $1,537 is recognized as a casualty gain and is included in the reconciliation of FFO to Core FFO.
(2) Amounts for 2019, 2018, 2017 and 2016 are primarily composed of (i) the write-off of asset management fee intangibles primarily associated
with the disposition of communities in the U.S. Fund in 2019, 2018, 2017 and 2016 and the AC JV in 2018 and (ii) our proportionate share
of operating results for joint ventures formed with Equity Residential as part of the Archstone Acquisition. Amounts for 2015 are primarily
composed of our proportionate share of gains and operating results for joint ventures formed with Equity Residential as part of the Archstone
Acquisition.
(3) Amounts for 2018, 2017 and 2016 are composed of the recognition of our promoted interest in AvalonBay Value Added Fund II, L.P.
(“Fund II”). Amount for 2015 is primarily composed of amounts received related to the modification of the joint venture agreement for the
entity that owns Avalon at Mission Bay II to eliminate our promoted interest in future distributions.
(4) Amounts include impairment charges relating to ancillary land parcels.
32
(5) Amount for 2018 includes $554 in legal settlement proceeds relating to construction defects at a community acquired as part of the Archstone
Acquisition. Amount for 2017 includes $19,481 for the Maplewood casualty loss, partially offset by $17,143 of property damage insurance
proceeds, and $5,438 in legal settlement proceeds relating to construction defects at a community acquired as part of the Archstone
Acquisition. Amount for 2016 includes $8,702 in property damage insurance proceeds for the Edgewater casualty loss, and $1,537 in
insurance proceeds in excess of the total recognized loss related to severe winter storms in our Northeast markets that occurred in 2015.
Amount for 2015 includes $44,142 of Edgewater insurance proceeds received partially offset by $28,604 for the write-off of real estate and
related costs.
(6) The aggregate impact of (i) casualty and impairment (recovery) loss, net on real estate, (ii) impairment loss on real estate and (iii) casualty
(gain) loss, net on real estate for 2018 and 2017 are losses of $215 and $6,250, respectively, and for 2016 and 2015 are gains of $3,935 and
$10,542, respectively.
(7) Amount for 2017 is composed of business interruption insurance proceeds resulting from the final insurance settlement of the Maplewood
casualty loss. Amount for 2016 is primarily composed of business interruption insurance proceeds resulting from the final insurance
settlement of the Edgewater casualty loss.
(8) Amounts for 2017, 2016 and 2015 primarily relate to lost NOI resulting from the Edgewater casualty loss, for which we received $20,306
in business interruption insurance proceeds in the first quarter of 2016. Amount for 2018, as well as a portion of the amount for 2017, relates
to the Maplewood casualty loss, for which we received $3,495 in business interruption insurance proceeds in the third quarter of 2017.
(9) Represents the imputed carry cost of the for-sale residential condominiums at The Park Loggia. The Company computes this adjustment
by multiplying the total capitalized cost of completed and unsold for-sale residential condominiums by the Company's weighted average
unsecured debt rate.
(10) Amounts for 2019 include $2,237 in legal settlement proceeds related to a construction defect at a community and $3,126 in legal settlement
proceeds related to a former Development Right.
(11) Amount for 2015 is composed of income taxes on income that was earned in taxable REIT subsidiaries and that is not considered to be a
component of primary operations. Amount for 2018 represents a partial refund for payments in prior years. Amount for 2019 consists of
$5,782 primarily related to a net deferred tax liability for the GAAP to tax basis differences at The Park Loggia and $7,221 related to the
other activity the Company undertook through taxable REIT subsidiaries ("TRS"), including the disposition of two wholly-owned operating
communities and deferred tax obligations related to the Company's sustainability initiatives.
33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help provide
an understanding of our business, financial condition and results of operations. This MD&A should be read in conjunction with
our Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included elsewhere in
this report. This report, including the following MD&A, contains forward-looking statements regarding future events or trends
that should be read in conjunction with the factors described under “Forward-Looking Statements” included in this report. Actual
results or developments could differ materially from those projected in such statements as a result of the factors described under
“Forward-Looking Statements” as well as the risk factors described in Item 1A. “Risk Factors” of this report.
Capitalized terms used without definition have the meanings provided elsewhere in this Form 10-K.
Executive Overview
Business Description
Our strategic vision is to be the leading apartment company in select U.S. markets, providing a range of distinctive living experiences
that customers value. We pursue this vision by targeting what we believe are among the best markets and submarkets, leveraging
our strategic capabilities in market research and consumer insight and being disciplined in our capital allocation and balance sheet
management. Our communities are predominately upscale and generally command among the highest rents in their markets.
However, we also pursue the ownership and operation of apartment communities that target a variety of customer segments and
price points, consistent with our goal of offering a broad range of products and services. We regularly evaluate the allocation of
our investments by the amount of invested capital and by product type within our individual markets.
We develop, redevelop, acquire, own and operate multifamily apartment communities primarily in New England, the New York/
New Jersey metro area, the Mid-Atlantic, the Pacific Northwest, and Northern and Southern California. We focus on leading
metropolitan areas that we believe are characterized by growing employment in high wage sectors of the economy, higher cost of
home ownership and a diverse and vibrant quality of life. We believe these market characteristics offer the opportunity for superior
risk-adjusted returns over the long-term on apartment community investments relative to other markets that do not have these
characteristics. We believe that the Denver, Colorado, and Southeast Florida markets share these characteristics, and in 2017 we
began to invest in these markets through acquisitions and developments. We seek to create long-term shareholder value by accessing
capital on cost effective terms; deploying that capital to develop, redevelop and acquire apartment communities in our selected
markets; operating apartment communities; and selling communities when they no longer meet our long-term investment strategy
or when pricing is attractive.
2019 Financial Highlights
Net income attributable to common stockholders for the year ended December 31, 2019 was $785,974,000, a decrease of
$188,551,000, or 19.3%, from the prior year. The decrease is primarily attributable to decreases in real estate sales and related
gains, increases in depreciation expense and income tax expense and decreases in joint venture real estate gains from the prior
year. These amounts were partially offset by increases in NOI from newly developed, acquired and existing operating communities,
as well as decreases in interest expense and loss on extinguishment of debt, net from the prior year.
Established Communities NOI for the year ended December 31, 2019 increased by $39,149,000, or 3.1%, over the prior year. The
increase was driven by an increase in rental revenue of 2.9%, partially offset by an increase in operating expenses of 2.8% over
2018.
During 2019, we raised approximately $1,278,098,000 of gross capital through the issuance of unsecured notes, sale of common
shares under CEP IV and V, including settlement of the Forward, and the sale of consolidated operating communities and other
real estate. This amount does not include proceeds from joint venture dispositions. The funds raised from the sale of real estate
consist of the proceeds from the sale of six operating communities and two ancillary land parcels. We believe that our current
capital structure will continue to provide financial flexibility to access capital on attractive terms.
34
We believe our development activity will continue to create long-term value. During 2019, we:
• Completed the construction of seven apartment communities containing an aggregate of 2,027 apartment homes and
34,000 square feet of retail space, for an aggregate total capitalized cost of $667,000,000.
•
Started the construction of eight apartment communities containing an aggregate of 2,377 apartment homes, which are
expected to be completed for an estimated total capitalized cost of $849,000,000, or $794,000,000 when including only
our 50.0% interest in one community developed through an unconsolidated joint venture.
• Completed the redevelopment of nine apartment communities containing an aggregate of 3,276 apartment homes for a
total investment of $136,000,000, excluding costs incurred prior to the redevelopment.
We also achieved portfolio growth through acquisitions, acquiring five consolidated apartment communities containing an
aggregate of 1,175 apartment homes for an aggregate purchase price of $345,450,000. In addition, we purchased our joint venture
partner's 45.0% interest in one operating community for $71,280,000, obtaining a 100% ownership interest in that community.
We believe that our balance sheet strength, as measured by our current level of indebtedness, our current ability to service interest
and other fixed charges, and our current moderate use of financial encumbrances (such as secured financing) provide us with
adequate access to liquidity from the capital markets. We expect to be able to meet our reasonably foreseeable liquidity needs, as
they arise, through a combination of one or more of the following sources: existing cash on hand; operating cash flows; borrowings
under our Credit Facility; secured debt; the issuance of corporate securities (which could include unsecured debt, preferred equity
and/or common equity); the sale of apartment communities; or through the formation of joint ventures. See the discussion under
"Liquidity and Capital Resources."
Communities Overview
As of December 31, 2019 we owned or held a direct or indirect ownership interest in 297 apartment communities containing
86,846 apartment homes in 11 states and the District of Columbia, of which 22 communities were under development and two
communities were under redevelopment. Of these communities, 14 were owned by entities that were not consolidated for financial
reporting purposes, including five owned by the NYC Joint Venture, four owned by the U.S. Fund, two owned by the AC JV and
one that is being developed within a joint venture. In addition, we held a direct or indirect ownership interest in Development
Rights to develop an additional 27 wholly-owned communities that, if developed as expected, will contain an estimated 9,587
apartment homes.
Our real estate investments consist primarily of Current Communities, Development Communities and Development Rights. Our
Current Communities are further distinguished as Established Communities, Other Stabilized Communities, Lease-Up
Communities, Redevelopment Communities and Unconsolidated Communities.
Established Communities are generally consolidated communities in markets where we have a significant presence that were
owned and had stabilized occupancy as of the beginning of the prior year, allowing for a meaningful comparison of operating
results between years. Other Stabilized Communities are generally all other completed consolidated communities that have
stabilized occupancy during the fiscal year. Lease-Up Communities are consolidated communities where construction has been
complete for less than one year and stabilized occupancy has not been achieved. Redevelopment Communities are consolidated
communities where substantial redevelopment is in progress or is planned to begin during the fiscal year. Unconsolidated
Communities are communities that we have an indirect ownership interest in through our investment interest in an unconsolidated
joint venture. A more detailed description of our reportable segments and other related operating information can be found in
Note 8, “Segment Reporting,” of our Consolidated Financial Statements.
Although each of these categories is important to our business, we generally evaluate overall operating, industry and market trends
based on the operating results of Established Communities, for which a detailed discussion can be found in “Results of Operations”
as part of our discussion of overall operating results. We evaluate our current and future cash needs and future operating potential
based on acquisition, disposition, development, redevelopment and financing activities within Other Stabilized, Redevelopment
and Development Communities. Discussions related to current and future cash needs and financing activities can be found under
"Liquidity and Capital Resources."
35
NOI of our current operating communities is one of the financial measures that we use to evaluate the performance of our
communities. NOI is affected by the demand and supply dynamics within our markets, our rental rates and occupancy levels and
our ability to control operating costs. Our overall financial performance is also impacted by the general availability and cost of
capital and the performance of newly developed, redeveloped and acquired apartment communities.
Results of Operations
Our year-over-year operating performance is primarily affected by both overall and individual geographic market conditions and
apartment fundamentals and is reflected in changes in NOI of our Established Communities; NOI derived from acquisitions and
development completions; the loss of NOI related to disposed communities; and capital market and financing activity. A comparison
of our operating results for 2019 and 2018 follows (dollars in thousands). Discussion of our operating results for 2017 and
comparison to 2018 can be found in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Form 10-K filed with the SEC on February 22, 2019.
For the year ended
2019 vs. 2018
2019
2018
$ Change
% Change
Revenue:
Rental and other income (1)
$
2,319,666
$
2,280,963
$
Management, development and other fees
Total revenue
Expenses:
Direct property operating expenses, excluding property taxes (1)
Property taxes
Total community operating expenses
Corporate-level property management and other indirect
operating expenses
Expensed acquisition, development and other pursuit costs, net of
recoveries
Interest expense, net
Loss on extinguishment of debt, net
Depreciation expense
General and administrative expense
Casualty and impairment loss, net
Total other expenses
Equity in income of unconsolidated real estate entities
Gain on sale of communities
Gain on other real estate transactions
For-sale condominium marketing and administrative costs
Income before income taxes
Income tax expense (benefit)
Net income
4,960
2,324,626
3,572
2,284,535
427,114
252,961
680,075
88,031
4,991
203,585
602
661,578
58,042
—
441,155
241,563
682,718
83,838
3,265
220,974
17,492
631,196
60,369
215
1,016,829
1,017,349
8,652
166,105
439
(3,812)
799,106
13,003
786,103
15,270
374,976
345
(1,044)
974,015
(160)
974,175
38,703
1,388
40,091
(14,041)
11,398
(2,643)
4,193
1,726
(17,389)
(16,890)
30,382
(2,327)
(215)
(520)
(6,618)
(208,871)
94
(2,768)
(174,909)
13,163
(188,072)
1.7 %
38.9 %
1.8 %
(3.2)%
4.7 %
(0.4)%
5.0 %
52.9 %
(7.9)%
(96.6)%
4.8 %
(3.9)%
(100.0)%
(0.1)%
(43.3)%
(55.7)%
27.2 %
265.1 %
(18.0)%
N/A (2)
(19.3)%
Net loss attributable to noncontrolling interests
(129)
350
(479)
(136.9)%
Net income attributable to common stockholders
$
785,974
$
974,525
$
(188,551)
(19.3)%
_________________________________
(1) Historically for years prior to January 1, 2019, we presented charges for uncollectible lease revenue in direct property operating expenses,
excluding property taxes. With the adoption of ASU 2016-02, Leases, we are presenting such charges as an adjustment to rental and other
income in our consolidated financial statements on a prospective basis as of January 1, 2019.
(2) Percent change is not meaningful.
36
Net income attributable to common stockholders decreased $188,551,000, or 19.3%, to $785,974,000 in 2019 from 2018, primarily
attributable to decreases in real estate sales and related gains, increases in depreciation expense and income tax expense and
decreases in joint venture real estate gains from the prior year. These amounts were partially offset by increases in NOI from newly
developed, acquired and existing operating communities, as well as decreases in interest expense and loss on extinguishment of
debt, net from the prior year.
NOI is considered by management to be an important and appropriate supplemental performance measure to net income because
it helps both investors and management to understand the core operations of a community or communities prior to the allocation
of any corporate-level or financing-related costs. NOI reflects the operating performance of a community and allows for an easier
comparison of the operating performance of individual assets or groups of assets. In addition, because prospective buyers of real
estate have different financing and overhead structures, with varying marginal impact to overhead as a result of acquiring real
estate, NOI is considered by many in the real estate industry to be a useful measure for determining the value of a real estate asset
or group of assets. We define NOI as total property revenue less direct property operating expenses (including property taxes),
and excluding corporate-level income (including management, development and other fees), corporate-level property management
and other indirect operating expenses, expensed transaction, development and other pursuit costs, net of recoveries, interest expense,
net, loss (gain) on extinguishment of debt, net, general and administrative expense, equity in income of unconsolidated real estate
entities, depreciation expense, corporate income tax (benefit) expense, casualty and impairment loss (gain), net, gain on sale of
communities, loss (gain) on other real estate transactions, net, for-sale condominiums marketing and administrative costs and net
operating income from real estate assets sold or held for sale.
NOI does not represent cash generated from operating activities in accordance with GAAP, and NOI should not be considered an
alternative to net income as an indication of our performance. NOI should also not be considered an alternative to net cash flow
from operating activities, as determined by GAAP, as a measure of liquidity, nor is NOI indicative of cash available to fund cash
needs. Reconciliations of NOI for the years ended December 31, 2019 and 2018 to net income for each year are as follows (dollars
in thousands):
For the year ended
12/31/19
12/31/18
Net income
$
786,103
$
Indirect operating expenses, net of corporate income
Expensed transaction, development and other pursuit costs, net of recoveries
Interest expense, net
Loss on extinguishment of debt, net
General and administrative expense
Equity in income of unconsolidated real estate entities
Depreciation expense
Income tax expense (benefit)
Casualty and impairment loss, net
Gain on sale of real estate assets
Gain on other real estate transactions, net
For-sale condominium marketing and administrative costs
Net operating income from real estate assets sold or held for sale
83,008
4,991
203,585
602
58,042
(8,652)
661,578
13,003
—
(166,105)
(439)
3,812
(12,318)
Net operating income
$
1,627,210
$
974,175
80,227
3,265
220,974
17,492
60,369
(15,270)
631,196
(160)
215
(374,976)
(345)
1,044
(79,372)
1,518,834
The NOI increase for 2019 as compared to 2018 consists of changes in the following categories (dollars in thousands):
Established Communities
Other Stabilized Communities
Development and Redevelopment Communities
Total
37
Full Year
2019
39,149
42,700
26,527
108,376
$
$
The increase in our Established Communities' NOI in 2019 is due to increased rental rates, partially offset by increased operating
expenses.
Historically for years prior to January 1, 2019, we presented charges related to uncollectible lease revenue in operating expenses.
With the adoption of ASU 2016-02, Leases, we are presenting such charges as an adjustment to revenue in our consolidated
financial statements on a prospective basis as of January 1, 2019. For reported segment financial information for the year ended
December 31, 2018, including for Established Communities as discussed below, we have also included such charges as an
adjustment to revenue for all prior years presented in order to provide comparability.
Rental and other income increased in 2019 compared to the prior year due to additional rental income generated from newly
developed, acquired and existing operating communities and an increase in rental rates at our Established Communities, partially
offset by a decrease in rental income from communities sold. The change in classification of charges for uncollectible lease revenue,
as described above, partially offsets the increase in rental and other income for the year ended December 31, 2019 over the prior
year.
Consolidated Communities—The weighted average number of occupied apartment homes for consolidated communities
decreased to 72,901 apartment homes for 2019, as compared to 73,385 homes for 2018. The weighted average monthly
rental revenue per occupied apartment home increased to $2,647 for 2019 as compared to $2,588 in 2018.
The following table presents the year to date change in rental revenue, including the attribution of the change between rental
rates and Economic Occupancy, for Established Communities.
For the year ended
Rental revenue (000s)
Average rental rates
Economic Occupancy (1)
2019
2018
$ Change % Change
2019 to
2018
2019 to
2018
2019
2018
% Change
2019 to
2018
2019
2018
% Change
2019 to
2018
New England
$ 249,515
$ 242,127
$
7,388
3.1% $ 2,662
$
2,575
Metro NY/NJ (2)
Mid-Atlantic
Pacific Northwest
410,503
292,691
112,553
Northern California
363,554
Southern California
405,556
400,205
284,131
108,549
352,879
394,237
10,298
8,560
4,004
10,675
11,319
2.6%
3.0%
3.7%
3.0%
2.9%
3,104
2,256
2,368
3,107
2,400
3,024
2,195
2,284
3,011
2,330
Total Established
$ 1,834,372
$ 1,782,128
$
52,244
2.9% $ 2,661
$
2,584
3.4%
2.6%
2.8%
3.7%
3.2%
3.0%
3.0%
95.7%
96.2%
96.2%
96.2%
96.2%
95.9%
96.0%
96.0%
96.2%
96.0%
96.2%
96.4%
96.0%
96.1%
(0.3)%
— %
0.2 %
— %
(0.2)%
(0.1)%
(0.1)%
_________________________________
(1) Economic occupancy takes into account the fact that apartment homes of different sizes and locations within a community have
different economic impacts on a community's gross revenue. Economic occupancy is defined as gross potential revenue less vacancy
loss, as a percentage of gross potential revenue. Gross potential revenue is determined by valuing occupied homes at leased rates
and vacant homes at market rents.
(2) The New York State Housing Stability and Tenant Protection Act of 2019, which was signed into law on June 14, 2019, now limits
some of the fees we previously charged in New York State (including late fees and new lease application fees), eliminates our ability
to raise rents on rent stabilized apartments up to the full legal rent when residents with a preferential rent renew their lease, and
implements other changes that are expected to limit our rent increases on rent stabilized apartments and generally increases tenant
rights. We expect the impact of the New York State Housing Stability and Tenant Protection Act of 2019 to be immaterial to our
Metro New York/New Jersey results of operations.
Management, development and other fees increased $1,388,000, or 38.9%, in 2019 as compared to the prior year, primarily due
to increased property management fees earned from the NYC Joint Venture that was formed in December 2018, partially offset
by lower property and asset management fees earned as a result of dispositions from the U.S. Fund and the AC JV.
Direct property operating expenses, excluding property taxes decreased $14,041,000, or 3.2%, in 2019 as compared to the prior
year, primarily due to the change in classification of charges for uncollectible lease revenue, as described above, as well as a
decrease from dispositions in the prior and current years, partially offset by an increase due to the addition of newly developed
and acquired apartment communities.
38
For Established Communities, direct property operating expenses, excluding property taxes, increased $7,974,000, or
2.5%, in 2019 as compared to the prior year, primarily due to increased property insurance costs, compensation and
maintenance expense.
Property taxes increased $11,398,000, or 4.7%, in 2019 as compared to the prior year, primarily due to the addition of newly
developed and acquired apartment communities and increased assessments for the Company's stabilized portfolio, partially offset
by decreased property taxes from dispositions.
For Established Communities, property taxes increased $6,103,000, or 3.3%, in 2019 as compared to the prior year,
primarily due to increased assessments and rates in the current year in the Company's East Coast and Northern and
Southern California markets, as well as successful appeals in the Company's Pacific Northwest market in the prior year.
These increases are partially offset by decreased tax rates in the Pacific Northwest and a successful appeal in Northern
California in the current year. For communities in California, property tax changes are determined by the change in the
California Consumer Price Index, with increases limited by law (Proposition 13). We evaluate property tax increases
internally and also engage third-party consultants to assist in our evaluations. We appeal property tax increases when
appropriate.
Corporate-level property management and other indirect operating expenses increased $4,193,000, or 5.0%, in 2019 as compared
to the prior year, primarily due to increased compensation related costs and spending on corporate initiatives in the current year,
partially offset by decreased advocacy contributions in the current year compared to the prior year.
Expensed acquisition, development and other pursuit costs, net of recoveries primarily reflect costs incurred for development
pursuits not yet considered probable for development, as well as the abandonment of Development Rights and costs related to
abandoned acquisition and disposition pursuits. These costs can be volatile, particularly in periods of increased acquisition pursuit
activity, periods of economic downturn or when there is limited access to capital, and therefore may vary significantly from year
to year. Expensed acquisition, development and other pursuit costs, net of recoveries, increased $1,726,000, or 52.9%, in 2019 as
compared to the prior year.
Interest expense, net decreased $17,389,000, or 7.9%, in 2019 as compared to the prior year. This category includes interest costs
offset by capitalized interest pertaining to development and redevelopment activity, amortization of premium/discount on debt,
and interest income. The decrease in 2019 was primarily due to a decrease in outstanding consolidated secured indebtedness and
an increase in capitalized interest, partially offset by an increase in outstanding unsecured indebtedness.
Loss on the extinguishment of debt, net reflects prepayment penalties, the write-off of unamortized deferred financing costs and
premiums from our debt repurchase and retirement activity, or payments to acquire our outstanding debt at amounts above or
below the carrying basis of the debt acquired. Loss on the extinguishment of debt, net decreased $16,890,000, or 96.6%, in
2019 as compared to the prior year. The loss of $17,492,000 in 2018 was due to:
•
•
a prepayment penalty of $8,579,000 and the non-cash write-off of deferred financing costs of $347,000 associated with
the early repayment of $250,000,000 principal amount of 6.10% unsecured notes; and
the aggregate prepayment penalty of $3,308,000 and the non-cash write-off of deferred financing costs of $5,258,000 on
the repayment or refinancing of $244,546,000 principal amount of mortgage notes secured by six wholly-owned operating
communities.
Depreciation expense increased $30,382,000, or 4.8%, in 2019 as compared to the prior year, primarily due to the addition of
newly developed and acquired apartment communities, partially offset by dispositions.
General and administrative expense (“G&A”) decreased $2,327,000, or 3.9%, in 2019 as compared to the prior year, primarily
due to legal settlement proceeds related to a former Development Right and a construction defect at a community, partially offset
by an increase in compensation related expenses in the current year.
Equity in income of unconsolidated real estate entities decreased $6,618,000, or 43.3%, in 2019 as compared to the prior year,
primarily due to gains on the sale of communities in various ventures in the prior year, coupled with non-cash charges for the
depreciation of in-place leases associated with purchase accounting within the NYC Joint Venture, which were not present in the
prior year.
39
Gain on sale of communities decreased in 2019 as compared to the prior year. The amount of gain realized in a given period
depends on many factors, including the number of communities sold, the size and carrying value of the communities sold and the
market conditions in the local area. The gain of $166,105,000 in 2019 was primarily due to the sale of six wholly-owned operating
communities. The gain of $374,976,000 in 2018 was primarily due to the sale of eight wholly-owned operating communities and
the recognition of the gain associated with the contribution of five wholly-owned operating communities to the NYC Joint Venture,
a venture in which we retained a 20.0% interest.
For-sale condominium marketing and administrative costs consist of costs associated with the for-sale condominiums of The Park
Loggia.
Income tax expense of $13,003,000 for the year ended December 31, 2019 consists of $5,782,000 of income tax expense, primarily
related to a net deferred tax liability for the GAAP to tax basis differences at The Park Loggia and $7,221,000 of current and
deferred tax expense related to other activity we undertook through taxable REIT subsidiaries ("TRS") including the disposition
of two wholly-owned operating communities and our sustainability initiatives.
Liquidity and Capital Resources
We employ a disciplined approach to our liquidity and capital management. When we source capital, we take into account both
our view of the most cost effective alternative available and our desire to maintain a balance sheet that provides us with flexibility.
Our principal short-term liquidity needs are to fund:
•
•
•
•
development and redevelopment activity in which we are currently engaged;
the minimum dividend payments on our common stock required to maintain our REIT qualification under the Code;
debt service and principal payments either at maturity or opportunistically before maturity; and
normal recurring operating expenses and corporate overhead expenses.
Factors affecting our liquidity and capital resources are our cash flows from operations, financing activities and investing activities
(including dispositions) as well as general economic and market conditions. Operating cash flow has historically been determined
by: (i) the number of apartment homes currently owned, (ii) rental rates, (iii) occupancy levels and (iv) operating expenses with
respect to apartment homes. The timing and type of capital markets activity in which we engage, as well as our plans for development,
redevelopment, acquisition and disposition activity, are affected by changes in the capital markets environment, such as changes
in interest rates or the availability of cost-effective capital. We regularly review our liquidity needs, the adequacy of cash flows
from operations and other expected liquidity sources to meet these needs.
We had cash and cash equivalents and restricted cash of $127,614,000 at December 31, 2019, a decrease of $90,250,000 from
$217,864,000 at December 31, 2018. The following discussion relates to changes in cash and cash equivalents and restricted cash
due to operating, investing and financing activities, which are presented in our Consolidated Statements of Cash Flows included
elsewhere in this report.
Operating Activities—Net cash provided by operating activities increased to $1,321,804,000 in 2019 from $1,301,111,000
in 2018. The change was driven primarily by increased NOI from existing, acquired and newly developed communities.
Investing Activities—Net cash used in investing activities totaled $1,193,869,000 in 2019. The net cash used was primarily
due to:
•
•
•
investment of $1,052,011,000 in the development and redevelopment of communities;
acquisition of five wholly-owned operating communities and our joint venture partner's 45.0% interest in one
operating community for $420,517,000; and
capital expenditures of $140,892,000 for our operating communities and non-real estate assets.
These amounts are partially offset by proceeds from the sale of real estate of $422,041,000.
Financing Activities—Net cash used in financing activities totaled $218,185,000 in 2019. The net cash used was primarily
due to:
•
•
payment of cash dividends in the amount of $839,646,000; and
the repayment of mortgage notes payable in the amount of $227,570,000.
40
These amounts are partially offset by:
•
•
•
proceeds from the issuance of unsecured notes in the amount of $449,804,000;
the issuance of common stock in the amount of $409,725,000, including $197,122,000 in settlement of the Forward
under CEP V and $196,700,000 through CEP IV and CEP V; and
the issuance of a mortgage note payable in the amount of $30,250,000.
Variable Rate Unsecured Credit Facility
On February 28, 2019, we entered into a $1,750,000,000 Fifth Amended and Restated Revolving Loan Agreement (the “Credit
Facility”) with a syndicate of banks, which replaces our prior $1,500,000,000 credit facility dated as of January 14, 2016. The
term of the Credit Facility ends on February 28, 2024.
The Credit Facility bears interest at varying levels based on (i) the London Interbank Offered Rate (“LIBOR”) applicable to the
period of borrowing for a particular draw of funds from the facility (e.g., one month to maturity, three months to maturity, etc.)
and (ii) the rating levels issued for our unsecured notes. The current stated pricing for drawn borrowings is LIBOR plus 0.775%
per annum (2.44% at January 31, 2020), assuming a one month borrowing rate. The stated spread over LIBOR can vary from
LIBOR plus 0.70% to LIBOR plus 1.45% based upon the rating of our unsecured notes. The Credit Facility also provides a
competitive bid option that is available for borrowings of up to 65% of the Credit Facility amount. This option allows banks that
are part of the lender consortium to bid to provide us loans at a rate that is lower than the stated pricing provided by the unsecured
credit facility. The competitive bid option may result in lower pricing than the stated rate if market conditions allow. The annual
facility fee for the Credit Facility remained at 0.125%, resulting in a fee of $2,188,000 annually based on the $1,750,000,000
facility size and based on our current credit rating.
We had $110,000,000 outstanding under the Credit Facility and had $6,632,000 outstanding in letters of credit that reduced our
borrowing capacity as of January 31, 2020. In addition, we had $28,767,000 outstanding in additional letters of credit as of
January 31, 2020.
The phase-out of LIBOR and expected transition to SOFR as a benchmark interest rate will have uncertain and possibly adverse
effects on our LIBOR borrowings. See Item 1A. “Risk Factors” for further discussion.
Financial Covenants
We are subject to financial covenants contained in the Credit Facility, Term Loans and the indentures under which our unsecured
notes were issued. The principal financial covenants include the following:
•
•
limitations on the amount of total and secured debt in relation to our overall capital structure;
limitations on the amount of our unsecured debt relative to the undepreciated basis of real estate assets that are not
encumbered by property-specific financing; and
• minimum levels of debt service coverage.
We were in compliance with these covenants at December 31, 2019.
In addition, our secured borrowings may include yield maintenance, defeasance, or prepayment penalty provisions, which would
result in us incurring an additional charge in the event of a full or partial prepayment of outstanding principal before the scheduled
maturity. These provisions in our secured borrowings are generally consistent with other similar types of debt instruments issued
during the same time period in which our borrowings were secured.
Continuous Equity Offering Program
In December 2015, we commenced a fourth continuous equity program (“CEP IV”) under which we were able to sell (and/or enter
into forward sale agreements for the sale of) up to $1,000,000,000 of its common stock from time to time. In conjunction with
CEP IV, we engaged sales agents who received compensation of up to 2.0% of the gross sales price for shares sold.
41
In May 2019, we replaced CEP IV with a new continuous equity program ("CEP V") under which we may sell (and/or enter into
forward sale agreements for the sale of) up to $1,000,000,000 of our common stock from time to time. Actual sales will depend
on a variety of factors to be determined, including market conditions, the trading price of our common stock and determinations
of the appropriate sources of funding. In conjunction with CEP V, we engaged sales agents who will receive compensation of up
to 1.5% of the gross sales price for shares sold. We expect that, if entered into, we will physically settle each forward sale agreement
on one or more dates prior to the maturity date of that particular forward sale agreement, in which case we will expect to receive
aggregate net cash proceeds at settlement equal to the number of shares underlying the particular forward agreement multiplied
by the relevant forward sale price. However, we may also elect to cash settle or net share settle a forward sale agreement. In
connection with each forward sale agreement, we will pay the relevant forward seller, in the form of a reduced initial forward sale
price, a commission of up to 1.5% of the sales prices of all borrowed shares of common stock sold. During 2019, we entered into
and settled a forward sales agreement, as discussed below.
On September 25, 2019, we entered into a forward contract under CEP V to sell 947,868 shares of common stock (the "Forward").
The sales price was established based on the stock price during intraday trading on September 25, 2019. In December 2019, we
issued 947,868 shares of common stock at a weighted average sales price of $207.96 per share, for net proceeds of $197,122,000,
in settlement of the Forward. The proceeds received were determined on the date of settlement, with adjustments during the term
of the contract for our dividends as well as for a daily interest factor that varied with changes in the Overnight Bank Funding rate.
In addition to the shares issued in settlement of the Forward, in 2019, we sold 755,054 shares at an average sales price of $198.26
per share, for net proceeds of $147,450,000 under CEP IV, and 239,580 shares at an average sales price of $208.70 per share, for
net proceeds of $49,250,000 under CEP V. We have not engaged in sales activity subsequent to December 31, 2019. As of January 31,
2020, we had $752,878,000 remaining authorized for issuance under CEP V.
Forward Interest Rate Swap Agreements
In 2019, in conjunction with the issuance of our 3.30% notes due 2029, we settled $250,000,000 of forward interest rate swap
agreements designated as cash flow hedges of the interest rate variability of the unsecured notes, making a payment of $12,309,000.
In addition, in 2019 we entered into $350,000,000 of forward interest rate swap agreements executed to reduce the impact of
variability in interest rates on a portion of our expected debt issuance activity in 2020, which are outstanding as of December 31,
2019. In February 2020, in conjunction with the pricing of the $700,000,000 principal amount of 2.30% unsecured notes due in
2030, discussed below, we settled $350,000,000 of forward interest rate swap agreements, making a payment of $20,314,000.
Future Financing and Capital Needs—Debt Maturities
One of our principal long-term liquidity needs is the repayment of long-term debt at maturity. For both our unsecured and secured
notes, a portion of the principal of these notes may be repaid prior to maturity. Early retirement of our unsecured or secured notes
could result in gains or losses on extinguishment. If we do not have funds on hand sufficient to repay our indebtedness as it becomes
due, it will be necessary for us to refinance or otherwise provide liquidity to satisfy the debt at maturity. This refinancing may be
accomplished by uncollateralized private or public debt offerings, equity issuances, additional debt financing that is secured by
mortgages on individual communities or groups of communities or borrowings under our Credit Facility. Although we believe we
will have the capacity to meet our currently anticipated liquidity needs, we cannot assure you that additional debt financing or
debt or equity offerings will be available or, if available, that they will be on terms we consider satisfactory.
In addition to the Credit Facility, the following debt activity occurred during 2019:
•
•
•
In February 2019, we amended and restated the $250,000,000 variable rate unsecured term loan that we originally entered
into in February 2017, of which $100,000,000 matures in February 2022 with stated pricing of LIBOR plus 0.90%, which
remained the same, and $150,000,000 matures in February 2024 with stated pricing of LIBOR plus 0.85% that decreased
from LIBOR plus 1.50%.
In April 2019, we repaid $13,363,000 of 2.99% fixed rate debt and $33,854,000 of variable rate debt secured by Avalon
Natick at par on its maturity date.
In May 2019, we repaid $7,635,000 principal amount of variable rate debt secured by Eaves Mission Viejo at par in
advance of its scheduled maturity date. We utilized $3,706,000 of restricted cash held in a principal reserve fund to repay
a portion of the outstanding indebtedness.
42
•
•
•
•
•
In May 2019, we repaid $20,800,000 principal amount of variable rate debt secured by AVA Nob Hill at par in advance
of its scheduled maturity date. We utilized $10,584,000 of restricted cash held in a principal reserve fund to repay a
portion of the outstanding indebtedness.
In May 2019, we repaid $38,800,000 principal amount of variable rate debt secured by Avalon Campbell at par in advance
of its scheduled maturity date. We utilized $22,622,000 of restricted cash held in a principal reserve fund to repay a
portion of the outstanding indebtedness.
In May 2019, we repaid $17,600,000 principal amount of variable rate debt secured by Eaves Pacifica at par in advance
of its scheduled maturity date. We utilized $10,263,000 of restricted cash held in a principal reserve fund to repay a
portion of the outstanding indebtedness.
In May 2019, we issued $450,000,000 principal amount of unsecured notes in a public offering under our existing shelf
registration statement for net proceeds of approximately $446,877,000. The notes mature in June 2029 and were issued
at a 3.30% interest rate. The effective interest rate of the notes is 3.66%, including the impact of an interest rate hedge
and offering costs.
In August 2019, as part of the tax-deferred exchange associated with the disposition of Archstone Lexington and acquisition
of Avalon Cerritos, we (i) repaid $21,700,000 principal amount of variable rate debt secured by Archstone Lexington at
par in advance of its scheduled maturity date and (ii) entered into a $30,250,000 fixed rate note secured by Avalon Cerritos,
with a contractual interest rate of 3.26%, maturing in August 2029. Further discussion of the disposition and acquisition
activity can be found in Note 6, "Real Estate Disposition Activities," and Note 5, "Investments in Real Estate Entities,"
of our Consolidated Financial Statements.
•
In November 2019, we repaid $65,749,000 of 3.38% fixed rate debt secured by Avalon Columbia Pike at par on its
maturity date.
In February 2020, we priced an underwritten public offering under our existing shelf registration statement for $700,000,000
principal amount of 2.30% unsecured notes due in 2030. We anticipate receiving the net proceeds from this borrowing on February
25, 2020. In addition, we called for redemption of (i) $400,000,000 principal amount of our 3.625% unsecured notes in advance
of the October 2020 scheduled maturity and (ii) $250,000,000 principal amount of our 3.95% unsecured notes in advance of the
January 2021 scheduled maturity. In conjunction with the redemption of the outstanding unsecured notes due in October 2020 and
January 2021, we anticipate recognizing a loss on debt extinguishment comprised of approximately $9,300,000 in prepayment
penalties and the non-cash write-off of unamortized deferred financing costs.
The following table details our consolidated debt maturities for the next five years, excluding our Credit Facility and amounts
outstanding related to communities classified as held for sale, for debt outstanding at December 31, 2019 and 2018 (dollars in
thousands). We are not directly or indirectly (as borrower or guarantor) obligated in any material respect to pay principal or interest
on the indebtedness of any unconsolidated entities in which we have an equity or other interest.
43
All-In
interest
rate (1)
Principal
maturity
date
Balance Outstanding (2)
Scheduled Maturities
12/31/2018
12/31/2019
2020
2021
2022
2023
2024
Thereafter
Community
Tax-exempt bonds
Fixed rate
Avalon at Chestnut Hill
6.16% Oct-2047
$
37,561
$
36,995
$
596
$
629
$
663
$
699
$
737
$
33,671
Avalon Westbury
3.86% Nov-2036
(3)
62,200
99,761
62,200
99,195
—
596
—
629
—
663
—
699
—
737
62,200
95,871
Variable rate
Eaves Mission Viejo
AVA Nob Hill
Avalon Campbell
Eaves Pacifica
Avalon Acton
Avalon Clinton North
Avalon Clinton South
Avalon Midtown West
Avalon San Bruno I
Conventional loans
Fixed rate
2.67% Jun-2025
2.65% Jun-2025
2.98% Jun-2025
3.00% Jun-2025
2.39%
Jul-2040
3.30% Nov-2038
3.30% Nov-2038
3.21% May-2029
3.19% Dec-2037
(4)
(4)
(4)
(4)
(5)
(5)
(5)
(5)
(5)
$250 million unsecured notes
4.04% Jan-2021
(6)
$450 million unsecured notes
4.30% Sep-2022
$250 million unsecured notes
3.00% Mar-2023
$400 million unsecured notes
3.78% Oct-2020
(6)
$350 million unsecured notes
4.30% Dec-2023
$300 million unsecured notes
3.66% Nov-2024
$525 million unsecured notes
3.55% Jun-2025
$300 million unsecured notes
3.62% Nov-2025
$475 million unsecured notes
3.35% May-2026
$300 million unsecured notes
3.01% Oct-2026
$350 million unsecured notes
3.95% Oct-2046
$400 million unsecured notes
3.50% May-2027
$300 million unsecured notes
4.09%
Jul-2047
$450 million unsecured notes
3.32% Jan-2028
$300 million unsecured notes
3.97% Apr-2048
$450 million unsecured notes
3.66% Jun-2029
Avalon Walnut Creek
Eaves Los Feliz
Eaves Woodland Hills
Avalon Russett
Avalon San Bruno II
Avalon Westbury
4.00%
Jul-2066
3.68% Jun-2027
3.67% Jun-2027
3.77% Jun-2027
3.85% Apr-2021
4.88% Nov-2036
(3)
Avalon San Bruno III
3.18% Jun-2020
Avalon Natick
Avalon Hoboken
Avalon Columbia Pike
Avalon Cerritos
3.15% Apr-2019
(7)
3.55% Dec-2020
3.24% Nov-2019
3.35% Aug-2029
(7)
(8)
7,635
20,800
38,800
17,600
45,000
147,000
121,500
100,500
64,450
563,285
250,000
450,000
250,000
400,000
350,000
300,000
525,000
300,000
475,000
300,000
350,000
400,000
300,000
450,000
300,000
—
3,699
41,400
32,200
28,999
15,095
52,090
13,482
67,904
67,085
—
— 250,000
—
— 450,000
—
—
400,000
400,000
—
—
—
—
45,000
147,000
121,500
98,200
64,450
476,150
250,000
450,000
250,000
350,000
300,000
525,000
300,000
475,000
300,000
350,000
400,000
300,000
450,000
300,000
450,000
3,847
41,400
32,200
28,435
13,665
50,825
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,700
1,400
6,100
5,200
1,900
7,100
5,600
2,000
7,600
6,100
2,200
8,300
6,800
2,200
9,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
591
1,495
50,825
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
27,844
1,575
—
—
—
—
—
—
—
—
—
—
300,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 250,000
—
—
— 350,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,655
1,740
1,840
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
67,904
67,904
—
30,250
—
—
—
—
—
—
45,000
147,000
121,500
69,800
54,750
438,050
—
—
—
—
—
—
525,000
300,000
475,000
300,000
350,000
400,000
300,000
450,000
300,000
450,000
3,847
41,400
111,500
32,200
—
5,360
—
—
—
—
30,250
111,500
111,500
5,833,454
6,230,026
520,815
279,419
451,655
601,740
301,840
4,074,557
Variable rate
Avalon Natick
Archstone Lexington
4.80% Apr-2019
4.13% Oct-2020
(7)
(8)
Term Loan - $100 million
2.79% Feb-2022
Term Loan - $150 million
2.72% Feb-2024
$300 million unsecured notes
2.62% Jan-2021
34,155
21,700
100,000
150,000
300,000
605,855
—
—
100,000
150,000
300,000
—
—
—
—
—
—
—
—
— 100,000
—
— 300,000
—
—
550,000
— 300,000
100,000
—
—
—
—
—
—
—
—
—
150,000
—
150,000
—
—
—
—
—
—
Total indebtedness - excluding Credit Facility
$ 7,102,355
$ 7,355,371 $527,511
$587,148
$559,918
$610,739
$ 461,577
$ 4,608,478
44
_________________________________
(1) Rates are given as of December 31, 2019 and include credit enhancement fees, facility fees, trustees’ fees, the impact of interest rate hedges,
offering costs, mark to market amortization and other fees.
(2) Balances outstanding represent total amounts due at maturity, and exclude deferred financing costs and debt discount for the unsecured
notes of $41,352 and $44,007 as of December 31, 2019 and 2018, respectively, deferred financing costs and debt discount associated with
secured notes of $17,729 and $18,085 as of December 31, 2019 and 2018, respectively, as reflected on our Consolidated Balance Sheets
included elsewhere in this report.
(3) Maturity date reflects the contractual maturity of the underlying bond. There is also an associated earlier credit enhancement maturity date.
(4) During 2019, we repaid this borrowing at par in advance of its scheduled maturity date.
(5) Financed by variable rate debt, but interest rate is capped through an interest rate protection agreement.
(6) In February 2020, we called these borrowings for redemption in advance of their scheduled maturity dates.
(7) During 2019, we repaid this borrowing at par on its scheduled maturity date.
(8) In August 2019, as part of the tax-deferred exchange associated with the disposition of Archstone Lexington and acquisition of Avalon
Cerritos, we (i) repaid the borrowing secured by Archstone Lexington at par in advance of its scheduled maturity date and (ii) entered into
a new borrowing secured by Avalon Cerritos.
Future Financing and Capital Needs—Portfolio and Capital Markets Activity
In 2020, we expect to meet our liquidity needs from a variety of internal and external sources, which may include (i) real estate
dispositions, (ii) cash balances on hand as well as cash generated from our operating activities, (iii) borrowing capacity under our
Credit Facility and (iv) secured and unsecured debt financings. Additional sources of liquidity in 2020 may include the issuance
of common and preferred equity. Our ability to obtain additional financing will depend on a variety of factors such as market
conditions, the general availability of credit, the overall availability of credit to the real estate industry, our credit ratings and credit
capacity, as well as the perception of lenders regarding our long or short-term financial prospects.
Before beginning new construction or reconstruction activity, including activity related to communities owned by unconsolidated
joint ventures, we intend to plan adequate financing to complete these undertakings, although we cannot assure you that we will
be able to obtain such financing. In the event that financing cannot be obtained, we may have to abandon Development Rights,
write off associated pre-development costs that were capitalized and/or forego reconstruction activity. In such instances, we will
not realize the increased revenues and earnings that we expected from such Development Rights or reconstruction activity and
significant losses could be incurred.
From time to time we use joint ventures to hold or develop individual real estate assets. We generally employ joint ventures
primarily to mitigate asset concentration or market risk and secondarily as a source of liquidity. We may also use joint ventures
related to mixed-use land development opportunities and new markets where our partners bring development and operational
expertise and/or experience to the venture. Each joint venture or partnership agreement has been individually negotiated, and our
ability to operate and/or dispose of a community in our sole discretion may be limited to varying degrees depending on the terms
of the joint venture or partnership agreement. We cannot assure you that we will achieve our objectives through joint ventures.
In evaluating our allocation of capital within our markets, we sell assets that do not meet our long-term investment criteria or when
capital and real estate markets allow us to realize a portion of the value created over our ownership periods and redeploy the
proceeds from those sales to develop and redevelop communities. Because the proceeds from the sale of communities may not
be immediately redeployed into revenue generating assets that we develop, redevelop or acquire, the immediate effect of a sale
of a community for a gain is to increase net income, but reduce future total revenues, total expenses and NOI until such time as
the proceeds have been redeployed into revenue generating assets. We believe that the temporary absence of future cash flows
from communities sold will not have a material impact on our ability to fund future liquidity and capital resource needs.
45
Unconsolidated Real Estate Investments and Off-Balance Sheet Arrangements
Unconsolidated Investments
As of December 31, 2019, we had investments in the following unconsolidated real estate entities accounted for under the equity
method of accounting, excluding development joint ventures and limited liability company agreements we entered into, through
subsidiaries, with Equity Residential in conjunction with the Archstone Acquisition (collectively, the “Residual JV”). Refer to
Note 5, “Investments in Real Estate Entities,” of the Consolidated Financial Statements included elsewhere in this report, which
includes information on the aggregate assets, liabilities and equity, as well as operating results, and our proportionate share of
their operating results. For ventures holding operating apartment communities as of December 31, 2019, detail of the real estate
and associated indebtedness underlying our unconsolidated investments is presented in the following table (dollars in thousands).
Unconsolidated Real Estate Investments
NYC Joint Venture
1. Avalon Bowery Place I—New York, NY
2. Avalon Bowery Place II—New York, NY
3. Avalon Morningside—New York, NY (4)
4. Avalon West Chelsea—New York, NY (5)
5. AVA High Line—New York, NY (5)
Company
Ownership
Percentage
# of
Apartment
Homes
Total
Capitalized
Cost (1)
Principal
Amount
Type
Interest
Rate (3)
Maturity
Date
Debt (2)
206
$
208,531
$
93,800
Fixed
90
295
305
405
90,745
39,639
Fixed
210,788
127,573
121,206
758,843
112,500
Fixed
66,000
Fixed
84,000
Fixed
395,939
Jan 2029
Jan 2029
Jan 2029/
May 2046
Jan 2029
Jan 2029
4.01%
4.01%
3.55%
4.01%
4.01%
3.88%
Total NYTA MF Investors LLC
20.0%
1,301
U.S. Fund
1. Avalon Studio 4121—Studio City, CA
2. Avalon Venice on Rose—Venice, CA
3. Avalon Station 250—Dedham, MA
4. Avalon Grosvenor Tower—Bethesda, MD
Total U.S. Fund
28.6%
AC JV
1. Avalon North Point—Cambridge, MA (6)
2. Avalon North Point Lofts — Cambridge, MA
Total AC JV
Other Operating Joint Ventures
1. MVP I, LLC
2. Brandywine Apartments of Maryland, LLC
Total Other Joint Ventures
20.0%
25.0%
28.7%
149
70
285
237
741
426
103
529
313
305
618
57,171
57,447
98,009
80,416
27,653
Fixed
27,626
Fixed
53,876
Fixed
41,761
Fixed
3.34% Nov 2022
3.28% Jun 2020
3.73% Sep 2022
3.74% Sep 2022
293,043
150,916
3.58%
190,089
111,653
Fixed
6.00% Aug 2021
26,865
— N/A
216,954
111,653
N/A
6.00%
N/A
125,539
103,000
Fixed
19,383
21,610
Fixed
144,922
124,610
3.24%
Jul 2025
3.40% Jun 2028
3.27%
4.03%
Total Unconsolidated Investments
3,189
$ 1,413,762
$ 783,118
_________________________________
(1) Represents total capitalized cost as of December 31, 2019.
(2) We have not guaranteed the debt of unconsolidated investees and bear no responsibility for the repayment.
(3) Represents weighted average rate on outstanding debt as of December 31, 2019.
(4) Borrowing on this community is comprised of two mortgage loans.
(5) Borrowing on this dual-branded community is comprised of a single mortgage loan.
(6) Borrowing is comprised of a loan made by the equity investors in the venture in proportion to their equity interests.
46
U.S. Fund—During 2019, the U.S. Fund sold one community and the adjacent marina, containing 205 apartment homes and 229
boat slips, for an aggregate sales price of $86,000,000. Our share of the gain in accordance with GAAP was $5,788,000. In
conjunction with the disposition of the community, the U.S. Fund repaid $49,800,000 of related secured indebtedness in advance
of its scheduled maturity date.
North Point II JV, LP—During 2016, we entered into a joint venture with an institutional investor to develop, own, and operate
AVA North Point, an apartment community located in Cambridge, MA, which completed construction during 2018 and contains
265 apartment homes. We owned a 55.0% interest in the venture, and the venture partner owned the remaining 45.0% interest.
During 2019, we acquired the 45.0% equity interest of AVA North Point that was owned by our venture partner, for a purchase
price of $71,280,000. Upon acquisition, we consolidated AVA North Point as a wholly-owned operating community.
Off-Balance Sheet Arrangements
In addition to our investment interests in consolidated and unconsolidated real estate entities, we have certain off-balance sheet
arrangements with the entities in which we invest. Additional discussion of these entities can be found in Note 5, “Investments in
Real Estate Entities,” of our Consolidated Financial Statements included elsewhere in this report.
We have not guaranteed the debt of our unconsolidated real estate entities, as referenced in the table above, nor do we have any
obligation to fund this debt should the unconsolidated real estate entities be unable to do so. In the future, in the event the
unconsolidated real estate entities were unable to meet their obligations under a loan, we cannot predict at this time whether we
would provide any voluntary support, or take any other action, as any such action would depend on a variety of factors, including
the amount of support required and the possibility that such support could enhance the return of the unconsolidated real estate
entities and/or our returns by providing time for performance to improve.
There are no other material lines of credit, side agreements, financial guarantees or any other derivative financial instruments
related to or between our unconsolidated real estate entities and us. In evaluating our capital structure and overall leverage,
management takes into consideration our proportionate share of the indebtedness of unconsolidated entities in which we have an
interest.
Contractual Obligations
Scheduled contractual obligations required for the next five years and thereafter are as follows as of December 31, 2019 (dollars
in thousands):
Debt Obligations
Interest on Debt Obligations (1)
Operating Lease Obligations (2)
Finance Lease Obligations (2)(3)
_________________________________
Payments due by period
Total
Less than 1
Year
1-3 Years
3-5 Years
More than 5
Years
$ 7,355,371
$
527,511
$ 1,147,066
$ 1,072,316
$ 4,608,478
2,450,337
431,185
45,543
259,353
12,050
1,077
445,202
28,058
2,162
373,327
1,372,455
26,793
2,171
364,284
40,133
$ 10,282,436
$
799,991
$ 1,622,488
$ 1,474,607
$ 6,385,350
(1) Interest payments on variable rate debt obligations are calculated based on the rate as of December 31, 2019.
(2) Includes ground leases expiring between October 2026 and March 2142. Amounts do not include any adjustment for purchase options
available under the ground leases.
(3) Aggregate finance lease payments include $25,336 in interest costs.
Inflation and Deflation
Substantially all of our apartment leases are for a term of one year or less. In an inflationary environment, this may allow us to
realize increased rents upon renewal of existing leases or the beginning of new leases. Short-term leases generally minimize our
risk from the adverse effect of inflation, although these leases generally permit residents to leave at the end of the lease term and
therefore expose us to the effect of a decline in market rents. Similarly, in a deflationary rent environment, we may be exposed to
declining rents more quickly under these shorter-term leases.
47
Recent U.S. Federal Income Tax Updates
This summary is for general information purposes only and is not tax advice. This discussion does not address all aspects of
taxation that may be relevant to particular holders of our securities in light of their personal investment or tax circumstances.
The following discussion supplements and updates the disclosures under “Federal Income Tax Considerations and Consequences
of Your Investment” in the prospectus dated February 23, 2018 contained in our Registration Statement on Form S-3 filed with
the SEC on February 23, 2018.
Consolidated Appropriations Act and Proposed Regulations Updates
On March 23, 2018, the Consolidated Appropriations Act, 2018 (the “CAA”) was enacted. The CAA amended various provisions
of the Code and implicate certain tax-related disclosures contained in the prospectus. Also on June 7, 2019, the Internal Revenue
Service promulgated proposed Treasury Regulations under Section 897 of the Code regarding qualified foreign pension funds.
While these proposed Treasury Regulations have not yet been finalized, taxpayers generally may rely on the proposed Treasury
Regulations. As a result, the discussion under “Federal Income Tax Considerations and Consequences of Your Investment-U.S.
Taxation of Non-U.S. Stockholders-Special FIRPTA Rules” of the prospectus is replaced with the following paragraphs:
Special FIRPTA Rules. To the extent our stock is held directly (or indirectly through one or more partnerships) by a
“qualified shareholder,” it will not be treated as a U.S. real property interest for such qualified shareholder. Further, to
the extent such treatment applies, any distribution to such shareholder will not be treated as gain recognized from the
sale or exchange of a U.S. real property interest. For these purposes, a qualified shareholder is generally a non-U.S.
stockholder that (i)(A) is eligible for treaty benefits under an income tax treaty with the United States that includes an
exchange of information program, and the principal class of interests of which is listed and regularly traded on one or
more stock exchanges as defined by the treaty, or (B) is a foreign limited partnership organized in a jurisdiction with an
exchange of information agreement with the United States and that has a class of regularly traded limited partnership
units (having a value greater than 50% of the value of all partnership units) on the New York Stock Exchange or Nasdaq,
(ii) is a “qualified collective investment vehicle” (within the meaning of Section 897(k)(3)(B) of the Code) and (iii)
maintains records of persons holding 5% or more of the class of interests described in clauses (i)(A) or (i)(B) above.
However, in the case of a qualified shareholder having one or more “applicable investors,” the exception described in
the first sentence of this paragraph will not apply to the applicable percentage of the qualified shareholder's stock (with
“applicable percentage” generally meaning the percentage of the value of the interests in the qualified shareholder held
by applicable investors after applying certain constructive ownership rules). The applicable percentage of the amount
realized by a qualified shareholder on the disposition of our stock or with respect to a distribution from us attributable
to gain from the sale or exchange of a U.S. real property interest will be treated as amounts realized from the disposition
of U.S. real property interest. Such treatment shall also apply to applicable investors in respect of distributions treated
as a sale or exchange of stock with respect to a qualified shareholder. For these purposes, an “applicable investor” is a
person (other than a qualified shareholder) who generally holds an interest in the qualified shareholder and holds more
than 10% of our stock applying certain constructive ownership rules.
For FIRPTA purposes, neither a “qualified foreign pension fund” (as defined below) nor a “qualified controlled entity” (as
defined below) is treated as a non-U.S. shareholder. Accordingly, the U.S. federal income tax treatment of ordinary
dividends received by qualified foreign pension funds and qualified controlled entities will be determined without regard
to the FIRPTA rules discussed above, and their gain from the sale or exchange of our stock, as well as our capital gain
dividends and distributions treated as gain from the sale or exchange of our stock, will not be subject to U.S. federal
income tax unless such gain is treated as effectively connected with the qualified foreign pension fund’s (or the qualified
controlled entity’s) conduct of a U.S. trade or business. A “qualified foreign pension fund” is an organization or
arrangement (i) created or organized in a foreign country, (ii) established to provide retirement or pension benefits to
current or former employees (including self-employed individuals) or their designees by either (A) such foreign country
as a result of services rendered by such employees to their employers, or (B) one or more employers in consideration for
services rendered by such employees to such employers, (iii) which does not have a single participant or beneficiary that
has a right to more than 5% of its assets or income, (iv) which is subject to government regulation and with respect to
which annual information about its beneficiaries is provided, or is otherwise available, to relevant local tax authorities,
and (v) with respect to which, under its local laws, (A) contributions that would otherwise be subject to tax are deductible
or excluded from its gross income or taxed at a reduced rate, or (B) taxation of its investment income is deferred, or such
income is excluded from its gross income or taxed at a reduced rate. A “qualified controlled entity” for purposes of the
above summary means an entity all the interests of which are held by a qualified foreign pension fund. Alternatively,
under proposed Treasury Regulations that taxpayers generally may rely on, but which are subject to change, a “qualified
controlled entity” is a trust or corporation organized under the laws of a foreign country all of the interests of which are
48
held by one or more qualified foreign pension funds either directly or indirectly through one or more qualified controlled
entities or partnerships.
In addition, the CAA clarified that for purposes of determining if a REIT is a “domestically controlled qualified investment entity”
under FIRPTA, the presumption that generally a person holding less than 5% of a REIT’s class of stock that is regularly traded
on an established securities market in the United States for five years has been, and will be, treated as a U.S. person applies for
testing periods ending on or after December 18, 2015 (e.g., if a testing period ends on June 1, 2018, then the presumption applies
for the entire five-year period starting on June 1, 2013).
The CAA also amended numerous Code provisions relating to the new rules applicable to federal income tax audits of partnerships
effective for taxable years beginning after December 31, 2017 to provide that a broader range of partnership-related items may
be adjusted on audit or in other tax proceedings.
Recent FATCA Regulations
On December 18, 2018, the Internal Revenue Service promulgated proposed Treasury Regulations under Sections 1471-1474 of
the Code (commonly referred to as FATCA), which proposed regulations eliminate FATCA withholding on gross proceeds of a
disposition of property that can produce U.S. source interest or dividends and thus implicate certain tax-related disclosures contained
in the prospectus. While these proposed Treasury Regulations have not yet been finalized, taxpayers are generally entitled to rely
on the proposed Treasury Regulations (subject to certain limited exceptions). As a result, the following revisions are made to the
prospectus:
•
In the first sentence of the fourth paragraph under “Federal Income Tax Considerations and Consequences of Your
Investment - Taxation of Non-U.S. Holders of Debt Securities - Disposition of the Debt Securities,” of the prospectus,
the phrase “subject to the discussion below regarding FATCA withholding” is deleted; and
• The paragraph under “Federal Income Tax Considerations and Consequences of Your Investment - Other Tax
Consequences for Avalon Bay, its Stockholders, and Holders of its Debt Securities - Other U.S. Federal Income Tax
Withholding and Reporting Requirements; FATCA” of the prospectus is replaced with the following:
Other U.S. Federal Income Tax Withholding and Reporting Requirements; FATCA. The FATCA provisions of the Code,
subject to administrative guidance and certain intergovernmental agreements entered into thereunder, impose a 30%
withholding tax on certain types of payments made to “foreign financial institutions” and certain other non-U.S. entities
unless (i) the foreign financial institution undertakes certain diligence and reporting obligations or (ii) the foreign non-
financial entity either certifies it does not have any substantial United States owners or furnishes identifying information
regarding each substantial United States owner. If the payee is a foreign financial institution that is not subject to special
treatment under certain intergovernmental agreements, it must enter into an agreement with the United States Treasury
Department requiring, among other things, that it undertakes to identify accounts held by certain United States persons
or United States-owned foreign entities, annually report certain information about such accounts, and withhold 30% on
payments to account holders whose actions prevent them from complying with these reporting and other requirements.
Investors in jurisdictions that have entered into “intergovernmental agreements” may, in lieu of the foregoing requirements,
be required to report such information to their home jurisdictions. The compliance requirements under FATCA are complex
and special requirements may apply to certain categories of payees.
Clarification
Finally, the discussion under “Federal Income Tax Considerations and Consequences of Your Investment-U.S. Taxation of Non-
U.S. Stockholders-Distributions by AvalonBay” of the prospectus is clarified to explain that the exception to FIPRTA for 10% or
smaller holders may apply only if our common stock is regularly traded an established securities market located in the United
States.
49
Forward-Looking Statements
This Form 10-K contains “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act
of 1995. You can identify forward-looking statements by our use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,”
“assume,” “project,” “plan,” “may,” “shall,” “will” and other similar expressions in this Form 10-K, that predict or indicate future
events and trends and that do not report historical matters. These statements include, among other things, statements regarding
our intent, belief or expectations with respect to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our potential development, redevelopment, acquisition or disposition of communities;
the timing and cost of completion of apartment communities under construction, reconstruction, development or
redevelopment;
the timing of lease-up, occupancy and stabilization of apartment communities;
the timing and net sales proceeds of condominium sales;
the pursuit of land on which we are considering future development;
the anticipated operating performance of our communities;
cost, yield, revenue, NOI and earnings estimates;
the impact of landlord-tenant laws and rent regulations;
our declaration or payment of dividends;
our joint venture and discretionary fund activities;
our policies regarding investments, indebtedness, acquisitions, dispositions, financings and other matters;
our qualification as a REIT under the Internal Revenue Code;
the real estate markets in Northern and Southern California, Denver, Colorado, and Southeast Florida, and markets in
selected states in the Mid-Atlantic, New England, Metro New York/New Jersey and Pacific Northwest regions of the
United States and in general;
the availability of debt and equity financing;
interest rates;
general economic conditions including the potential impacts from current economic conditions;
trends affecting our financial condition or results of operations; and
the impact of outstanding legal proceedings.
We cannot assure the future results or outcome of the matters described in these statements; rather, these statements merely reflect
our current expectations of the approximate outcomes of the matters discussed. We do not undertake a duty to update these forward-
looking statements, and therefore they may not represent our estimates and assumptions after the date of this report. You should
not rely on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, some of
which are beyond our control. These risks, uncertainties and other factors may cause our actual results, performance or achievements
to differ materially from the anticipated future results, performance or achievements expressed or implied by these forward-looking
statements. You should carefully review the discussion under Item 1A. “Risk Factors” in this report for further discussion of risks
associated with forward-looking statements.
Some of the factors that could cause our actual results, performance or achievements to differ materially from those expressed or
implied by these forward-looking statements include, but are not limited to, the following:
• we may fail to secure development opportunities due to an inability to reach agreements with third parties to obtain land
at attractive prices or to obtain desired zoning and other local approvals;
• we may abandon or defer development opportunities for a number of reasons, including changes in local market conditions
which make development less desirable, increases in costs of development, increases in the cost of capital or lack of
capital availability, resulting in losses;
construction costs of a community may exceed our original estimates;
•
• we may not complete construction and lease-up of communities under development or redevelopment on schedule,
•
•
•
•
•
resulting in increased interest costs and construction costs and a decrease in our expected rental revenues;
the timing and net proceeds of condominium sales may not equal our current expectations;
occupancy rates and market rents may be adversely affected by competition and local economic and market conditions
which are beyond our control;
financing may not be available on favorable terms or at all, and our cash flows from operations and access to cost effective
capital may be insufficient for the development of our pipeline which could limit our pursuit of opportunities;
the impact of new landlord-tenant laws and rent regulations may be greater than we expected;
our cash flows may be insufficient to meet required payments of principal and interest, and we may be unable to refinance
existing indebtedness or the terms of such refinancing may not be as favorable as the terms of existing indebtedness;
50
• we may be unsuccessful in our management of the U.S. Fund, the AC JV or the REIT vehicles that are used with each
respective joint venture;
• we may be unsuccessful in managing changes in our portfolio composition;
•
laws and regulations implementing rent control or rent stabilization, or otherwise limiting our ability to increase rents,
charge fees or evict tenants, may impact our revenue or increase our costs; and
our expectations, estimates and assumptions regarding outstanding legal proceedings are subject to change.
•
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of
accounting policies, including making estimates and assumptions. If our judgment or interpretation of the facts and circumstances
relating to various transactions had been different, or different assumptions were made, it is possible that different accounting
policies would have been applied, resulting in different financial results or a different presentation of our financial statements.
Below is a discussion of the accounting policies that we consider critical to an understanding of our financial condition and
operating results that may require complex or significant judgment in their application or require estimates about matters which
are inherently uncertain. A discussion of our significant accounting policies, including further discussion of the accounting policies
described below, can be found in Note 1, “Organization, Basis of Presentation and Significant Accounting Policies,” of our
Consolidated Financial Statements.
Cost Capitalization
We capitalize costs during the development of assets. Capitalization begins when we determine that development of a future asset
is probable and continues until the asset, or a portion of the asset, is delivered and is ready for its intended use. For redevelopment
efforts, we capitalize costs either (i) in advance of taking apartment homes out of service when significant renovation of the
common area has begun and continue until the redevelopment is completed, or (ii) when an apartment home is taken out of service
for redevelopment and continue until the redevelopment is completed and the apartment home is available for a new resident.
Rental income and operating expenses incurred during the initial lease-up or post-redevelopment lease-up period are fully
recognized in earnings as they accrue.
During the development and redevelopment efforts we capitalize all direct costs and indirect costs which have been incurred as a
result of the development and redevelopment activities. These costs include interest and related loan fees, property taxes as well
as other direct and indirect costs. Interest is capitalized for any project-specific financing, as well as for general corporate financing
to the extent of our aggregate investment in the projects. Indirect project costs, which include personnel and office and administrative
costs that are clearly associated with our development and redevelopment efforts, are also capitalized. Capitalized indirect costs
associated with our development and redevelopment activities are comprised primarily of compensation related costs for associates
dedicated to our development and redevelopment efforts and total $48,168,000, $46,857,000 and $47,063,000 for 2019, 2018 and
2017, respectively. The estimation of the direct and indirect costs to capitalize as part of our development and redevelopment
activities requires judgment and, as such, we believe cost capitalization to be a critical accounting estimate.
There may be a change in our operating expenses in the event that there are changes in accounting guidance governing capitalization
or changes to our levels of development or redevelopment activity. If changes in the accounting guidance limit our ability to
capitalize costs or if we reduce our development and redevelopment activities without a corresponding decrease in indirect project
costs, there may be an increase in our operating expenses.
We capitalize pre-development costs incurred in pursuit of Development Rights. These costs include legal fees, design fees and
related overhead costs. Future development of these pursuits is dependent upon various factors, including zoning and regulatory
approval, rental market conditions, construction costs and availability of capital. Pre-development costs incurred for pursuits for
which future development is not yet considered probable are expensed as incurred. In addition, if the status of a Development
Right changes, making future development no longer probable, any capitalized pre-development costs are written off with a charge
to expense.
Due to the subjectivity in determining whether a pursuit will result in the development of an apartment community, and therefore
should be capitalized, the accounting for pursuit costs is a critical accounting estimate. As of December 31, 2019, capitalized
pursuit costs associated with Development Rights totaled $70,486,000.
51
Abandoned Pursuit Costs & Asset Impairment
We evaluate our direct and indirect investments in real estate and other long-lived assets for impairment when potential indicators
of impairment exist. If events or circumstances indicate that the carrying amount of a property may not be recoverable, we assess
its recoverability by comparing the carrying amount of the property to its estimated undiscounted future cash flows. If the carrying
amount exceeds the aggregate undiscounted future cash flows, we recognize an impairment loss to the extent the carrying amount
exceeds the estimated fair value of the property. We assess land held for development for impairment if our intent changes with
respect to the development of the land. We evaluate our unconsolidated investments for impairment, considering both the carrying
value of the investment, estimated to be the expected proceeds that it would receive if the entity were dissolved and the net assets
were liquidated, as well as our proportionate share of any impairment of assets held by unconsolidated investments.
We expense costs related to abandoned pursuits, which include the abandonment of Development Rights and disposition pursuits.
These costs can vary greatly, and the costs incurred in any given period may be significantly different in future years.
Our focus on value creation through real estate development presents an impairment risk in the event of a future deterioration of
the real estate and/or capital markets or a decision by us to reduce or cease development. We cannot predict the occurrence of
future events that may cause an impairment assessment to be performed, or the likelihood of any future impairment charges, if
any. You should also review Item 1A. “Risk Factors” in this Form 10-K.
52
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks from our financial instruments primarily from changes in market interest rates. We do not have
exposure to any other significant market risk. We monitor interest rate risk as an integral part of our overall risk management,
which recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effect on our results of
operations. Our operating results are affected by changes in interest rates, primarily in short-term LIBOR and the SIFMA index
as a result of borrowings under our Credit Facility and outstanding bonds and unsecured notes with variable interest rates. In
addition, the fair value of our fixed rate unsecured and secured notes are impacted by changes in market interest rates. The effect
of interest rate fluctuations on our results of operations historically has been small relative to other factors affecting operating
results, such as rental rates and occupancy.
We currently use interest rate protection agreements (consisting of interest rate swap and interest rate cap agreements) for our risk
management objectives, as well as for compliance with the requirements of certain lenders, and not for trading or speculative
purposes. During 2019, we settled an aggregate of $250,000,000 of forward interest rate swap agreements entered into in 2018 in
conjunction with the May 2019 unsecured note issuance. During 2019, we entered into $350,000,000 of forward interest rate swap
agreements to reduce the impact of variability in interest rates on a portion of our expected debt issuance activity in 2020, which
are outstanding as of December 31, 2019. In February 2020, in conjunction with the pricing of the $700,000,000 principal amount
of 2.30% unsecured notes due in 2030, we settled $350,000,000 of forward interest rate swap agreements.
In addition, we have interest rate caps that serve to effectively limit the amount of interest rate expense we would incur on a floating
rate borrowing. Further discussion of the financial instruments impacted and our exposure is presented below.
As of December 31, 2019 and 2018, we had $1,026,150,000 and $1,169,140,000, respectively, in variable rate debt outstanding,
with no amounts outstanding under our Credit Facility. If interest rates on the variable rate debt had been 100 basis points higher
throughout 2019 and 2018, our annual interest incurred would have increased by approximately $11,221,000 and $14,963,000,
respectively, based on balances outstanding during the applicable years.
Because the counterparties providing the interest rate cap and swap agreements are major financial institutions which have an A
or better credit rating by the Standard & Poor's Ratings Group, we do not believe there is exposure at this time to a default by a
counterparty provider.
In addition, changes in interest rates affect the fair value of our fixed rate debt, computed using quoted market prices for our
unsecured notes or a discounted cash flow model for our secured notes, considering our current market yields, which impacts the
fair value of our aggregate indebtedness. Debt securities and notes payable (including amounts outstanding under our Credit
Facility) with an aggregate principal amount outstanding of $7,355,371,000 at December 31, 2019 had an estimated aggregate
fair value of $7,595,918,000 at December 31, 2019. Contractual fixed rate debt represented $6,675,131,000 of the fair value at
December 31, 2019. If interest rates had been 100 basis points higher as of December 31, 2019, the fair value of this fixed rate
debt would have decreased by approximately $720,500,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item 8 is included as a separate section of this Annual Report on Form 10-K.
53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. As required by Rule 13a-15 under the Securities Exchange Act
of 1934, as of the end of the period covered by this report, the Company carried out an evaluation under the supervision
and with the participation of the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and
procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by
the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commission's rules and forms. We continue
to review and document our disclosure controls and procedures, including our internal controls and procedures for
financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure
that our systems evolve with our business.
(b) Management's Report on Internal Control Over Financial Reporting. Our management is responsible for establishing
and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal
control over financial reporting as of December 31, 2019 based on the framework in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on
that evaluation, our management concluded that our internal control over financial reporting was effective as of
December 31, 2019.
Our internal control over financial reporting as of December 31, 2019 has been audited by Ernst & Young LLP, an
independent registered public accounting firm, as stated in their report which is included elsewhere herein.
(c) Changes in Internal Control Over Financial Reporting. As of January 1, 2019, the Company adopted ASU 2016-02,
Leases. The Company implemented internal controls related to the lease accounting process, but there were no
significant changes to the internal control over financial reporting due to the adoption of this new standard.
ITEM 9B. OTHER INFORMATION
None.
54
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 pertaining to directors and executive officers of the Company and the Company's Code of
Conduct is incorporated herein by reference to the Company's Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting of Stockholders
scheduled to be held on May 12, 2020.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 pertaining to executive compensation is incorporated herein by reference to the Company's
Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by
this Form 10-K with respect to the Annual Meeting of Stockholders scheduled to be held on May 12, 2020.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by Item 12 pertaining to security ownership of management and certain beneficial owners of the
Company's common stock is incorporated herein by reference to the Company's Proxy Statement to be filed with the Securities
and Exchange Commission within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting
of Stockholders scheduled to be held on May 12, 2020, to the extent not set forth below.
The Company maintains the Second Amended and Restated 2009 Equity Incentive Plan (the “2009 Plan”) and the 1996 Non-
Qualified Employee Stock Purchase Plan (the “ESPP”), pursuant to which common stock or other equity awards may be issued
or granted to eligible persons.
The following table gives information about equity awards under the 2009 Plan, under which awards were previously made, and
the ESPP as of December 31, 2019:
(a)
(b)
(c)
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
554,664 (2) $
124.05 (3)
—
554,664
$
N/A
124.05 (3)
7,227,600
654,435
7,882,035
Plan category
Equity compensation plans approved by security
holders (1)
Equity compensation plans not approved by
security holders (4)
Total
_________________________________
(1) Consists of the 2009 Plan.
(2) Includes 33,392 deferred restricted stock units granted under the 2009 Plan, which, subject to vesting requirements, will convert in the
future to common stock on a one-for-one basis. Also includes the maximum number of shares that may be issued upon settlement of
outstanding Performance Awards awarded to officers and maturing on December 31, 2019, 2020 and 2021. Does not include 311,437 shares
of restricted stock that are outstanding and that are already reflected in the Company's outstanding shares.
(3) Excludes performance awards and deferred units granted under the 2009 Plan, which, subject to vesting requirements, will convert in the
future to common stock on a one-for-one basis.
(4) Consists of the ESPP.
The ESPP, which was adopted by the Board of Directors on October 29, 1996, has not been approved by our shareholders. A
further description of the ESPP appears in Note 9, “Stock-Based Compensation Plans,” of the Consolidated Financial Statements
set forth in Item 8 of this report.
55
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 pertaining to certain relationships and related transactions is incorporated herein by reference
to the Company's Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the
year covered by this Form 10-K with respect to the Annual Meeting of Stockholders to be held on May 12, 2020.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 pertaining to the fees paid to and services provided by the Company's principal accountant
is incorporated herein by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission
within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting of Stockholders to be
held on May 12, 2020.
56
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE
PART IV
15(a)(1) Financial Statements
Index to Financial Statements
Consolidated Financial Statements and Financial Statement Schedule:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Equity for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
15(a)(2) Financial Statement Schedule
Schedule III—Real Estate and Accumulated Depreciation
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
15(a)(3) Exhibits
The exhibits listed on the accompanying Index to Exhibits are filed as a part of this report.
ITEM 16. FORM 10-K SUMMARY
Not Applicable.
F-1
F-4
F-5
F-6
F-7
F-10
F-41
57
Exhibit No.
Description
INDEX TO EXHIBITS
3(i).1
— Articles of Amendment and Restatement of Articles of Incorporation of the Company, dated as of June 4,
1998. (Incorporated by reference to Exhibit 3(i).1 to Form 10-K of the Company filed March 1, 2007.)
3(i).2
— Articles of Amendment, dated as of October 2, 1998. (Incorporated by reference to Exhibit 3(i).2 to
Form 10-K of the Company filed March 1, 2007.)
3(i).3
— Articles of Amendment, dated as of May 22, 2013. (Incorporated by reference to Exhibit 3(i).3 to Form 8-
K of the Company filed May 22, 2013.)
3(ii).1
— Amended and Restated Bylaws of the Company, as adopted by the Board of Directors on November
12, 2015, and as further amended on February 16, 2017, November 13, 2017, and May 6, 2019.
(Incorporated by reference to Exhibit 3(ii).1 to Form 10-Q of the Company filed August 6, 2019.)
4.1
4.2
4.3
— Indenture for Senior Debt Securities, dated as of January 16, 1998, between the Company and State
Street Bank and Trust Company, as Trustee. (Incorporated by reference to Exhibit 4.1 to Registration
Statement on Form S-3 of the Company (File No. 333-139839), filed January 8, 2007.)
— Amended and Restated Third Supplemental Indenture, dated as of July 10, 2000 between the Company
and State Street Bank and Trust Company, as Trustee. (Incorporated by reference to Exhibit 4.4 to
Registration Statement on Form S-3 of the Company (File No. 333-139839), filed January 8, 2007.)
— Fourth Supplemental Indenture, dated as of September 18, 2006, between the Company and U.S. Bank
National Association as Trustee. (Incorporated by reference to Exhibit 4.5 to Registration Statement on
Form S-3 of the Company (File No. 333-139839), filed January 8, 2007.)
4.4
__
Fifth Supplemental Indenture, dated as of November 21, 2014, between the Company and the Bank of
New York Mellon, as Trustee. (Incorporated by reference to Exhibit 4.1 to Form 8-K of the Company
filed November 21, 2014.)
4.5
4.6
4.7
4.8
— Indenture for Debt Securities, dated as of February 23, 2018, between the Company and the Bank of
New York, as Trustee (Incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-3
of the Company (File No. 333-223183), filed February 23, 2018.)
— First Supplemental Indenture, dated as March 26, 2018, between the Company and the Bank of New
York Mellon, as Trustee, (Incorporated by reference to Exhibit 4.8 to Form 10-Q of the Company filed
May 4, 2018.)
— Second Supplemental Indenture, dated as of May 29, 2018, between the Company and the Bank of New
York Mellon, as Trustee, (Incorporated by reference to Exhibit 4.3 to Form 8-K of the Company, filed
May 29, 2018.)
— Dividend Reinvestment and Stock Purchase Plan of the Company. (Incorporated by reference to the
prospectus contained in the Registration Statement on Form S-3DPOS of the Company (File No.
333-87063), filed February 23, 2018.)
4.9
— Description of the Registrant's Securities Registered Pursuant to Section 12 of the Securities Exchange
Act of 1934. (Filed herewith.)
10.1+
— AvalonBay Communities, Inc. Second Amended and Restated 2009 Equity Incentive Plan. (Incorporated
by reference to Exhibit 10.1 to Form 10-Q of the Company filed August 4, 2017.)
10.2+
— First Amendment to AvalonBay Communities, Inc. Second Amended and Restated 2009 Equity
Incentive Plan, dated February 14, 2019. (Incorporated by reference to Exhibit 10.4 to Form 10-K of
the Company filed February 22, 2019.)
10.3+
— Form of Stock Grant and Restricted Stock Agreement for use with officers and associates. (Incorporated
by reference to Exhibit 10.1 to Form 8-K of the Company filed February 22, 2018.)
58
10.4+
— Form of Incentive Stock Option/Non-Qualified Stock Option Agreement for use with officers and
associates. (Incorporated by reference to Exhibit 10.2 to Form 8-K of the Company filed February 22,
2018.)
10.5+
— 2018 Amended and Restated Directors Deferred Compensation Program. (Incorporated by reference to
Exhibit 10.4 to Form 8-K of the Company filed February 22, 2018.)
10.6+
— Form of Director Restricted Stock Agreement. (Incorporated by reference to Exhibit 10.5 to Form 8-K
of the Company filed February 22, 2018.)
10.7+
— Form of Director Restricted Unit Agreement (deferred stock award). (Incorporated by reference to
Exhibit 10.6 of Form 8-K of the Company filed February 22, 2018.)
10.8+
— Form of Agreement for Grant of Performance-Based Restricted Stock Units with attached Award Terms
(subject to changes in the following: weightings; target, threshold and maximum levels of achievement;
and metrics used.) (Incorporated by reference to Exhibit 10.10 to Form 10-K of the Company filed
February 22, 2019.)
10.9+
— Form of Indemnity Agreement between the Company and its Directors. (Incorporated by reference to
Exhibit 10.19 to Form 10-K of the Company filed February 19, 2015.)
10.10+
— The Company's Officer Severance Plan, as amended and restated on February 11, 2016. (Incorporated
by reference to Exhibit 99.2 to Form 8-K of the Company filed February 16, 2016.)
10.11
10.12+
10.13+
10.14+
— Fifth Amended and Restated Revolving Loan Agreement, dated as of February 28, 2019, among the
Company, as Borrower, Bank of America, N.A., as administrative agent, an issuing bank and a bank,
JPMorgan Chase Bank, N.A., as an issuing bank, a bank and as a syndication agent, Wells Fargo Bank,
N.A., as an issuing bank, a bank and a syndication agent, Barclays Bank PLC, Deutsche Bank
Securities, Inc., Goldman Sachs Bank USA, Morgan Stanley Senior Funding, Inc.. and Citibank, N.A.
as documentation agents, PNC Bank, National Association and SunTrust Bank as senior managing
agents, TD Bank, N.A., Royal Bank of Canada and U.S. Bank National Association as managing agents,
Branch Banking and Trust Company and The Bank of Nova Scotia as co-agents, each (or its affiliate)
as a bank, and the other bank parties signatory thereto. (Incorporated by reference to Exhibit 1.2 to Form
8-K of the Company filed February 28, 2019.)
— Amended and Restated AvalonBay Communities, Inc. Deferred Compensation Plan, effective as of
January 1, 2011. (Incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company filed
August 6, 2010.)
— First Amendment to Amended and Restated AvalonBay Communities, Inc. Deferred Compensation
Plan, effective as of November 7, 2011. (Incorporated by reference to Exhibit 10.28 to Form 10-K of
the Company filed February 24, 2017.)
— Second Amendment to Amended and Restated AvalonBay Communities, Inc. Deferred Compensation
Plan, effective as of November 15, 2012. (Incorporated by reference to Exhibit 10.29 to Form 10-K of
the Company filed February 24, 2017.)
10.15
— Archstone Residual JV, LLC Limited Liability Company Agreement. (Incorporated by reference to
Exhibit 10.3 to Form 8-K of the Company filed March 5, 2013.)
10.16
— Archstone Parallel Residual JV, LLC Limited Liability Company Agreement. (Incorporated by reference
to Exhibit 10.4 to Form 8-K of the Company filed March 5, 2013.)
10.17
— Archstone Parallel Residual JV 2, LLC Limited Liability Company Agreement. (Incorporated by
reference to Exhibit 10.5 to Form 8-K of the Company filed March 5, 2013.)
10.18
— Legacy Holdings JV, LLC Limited Liability Company Agreement. (Incorporated by reference to
Exhibit 10.6 to Form 8-K of the Company filed March 5, 2013.)
10.19
— Amended and Restated Term Loan Agreement, dated as of February 28, 2019, among the Company, as
Borrower, PNC Bank, National Association, as Administrative Agent and a bank, The Bank of New
York Mellon, as a Syndication Agent and a bank, SunTrust Bank, as a Syndication agent and a bank,
and a syndicate of other financial institutions, serving as banks. (Incorporated by reference to Exhibit
1.1 to Form 8-K of the Company filed February 28, 2019.)
59
10.20+
10.21+
21.1
23.1
31.1
— Retirement Agreement by and between AvalonBay Communities, Inc. and Stephen W. Wilson, dated
June 27, 2019. (Incorporated by reference to Exhibit 1.1 to Form 8-K of the Company filed July 1,
2019.)
— Retirement Agreement by and between AvalonBay Communities, Inc. and Leo S. Horey, dated December
16, 2019. (Incorporated by reference to Exhibit 1.1 to Form 8-K of the Company filed December 16,
2019.)
— Schedule of Subsidiaries of the Company. (Filed herewith.)
— Consent of Ernst & Young LLP. (Filed herewith.)
— Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).
(Filed herewith.)
31.2
— Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer). (Filed
herewith.)
32
— Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer and
Chief Financial Officer). (Furnished herewith.)
101
— The following financial materials from AvalonBay Communities, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 2019 formatted in Inline XBRL (Extensible Business Reporting
Language) includes: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of
Comprehensive Income, (iii) the Consolidated Statements of Equity, (iv) the Consolidated Statements
of Cash Flows and (v) Notes to the Consolidated Financial Statements. (Filed herewith.)
104
— Cover Page Interactive Data File (embedded within the Inline XBRL document). (Filed herewith.)
_______________________________________________________________________________
+
Management contract or compensatory plan or arrangement required to be filed or incorporated by reference as an
exhibit to this Form 10-K pursuant to Item 15(a)(3) of Form 10-K.
60
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: February 21, 2020
By:
/s/ TIMOTHY J. NAUGHTON
AvalonBay Communities, Inc.
Timothy J. Naughton, Director, Chairman, Chief Executive Officer and
President (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: February 21, 2020
By:
/s/ TIMOTHY J. NAUGHTON
Timothy J. Naughton, Director, Chairman, Chief Executive Officer and
President (Principal Executive Officer)
Date: February 21, 2020
By:
/s/ KEVIN P. O’SHEA
Date: February 21, 2020
By:
/s/ KERI A. SHEA
Kevin P. O’Shea, Chief Financial Officer
(Principal Financial Officer)
Keri A. Shea, Senior Vice President—Finance & Treasurer
(Principal Accounting Officer)
Date: February 21, 2020
Date: February 21, 2020
Date: February 21, 2020
Date: February 21, 2020
Date: February 21, 2020
Date: February 21, 2020
Date: February 21, 2020
Date: February 21, 2020
Date: February 21, 2020
By:
By:
By:
By:
By:
By:
By:
By:
By:
/s/ GLYN F. AEPPEL
Glyn F. Aeppel, Director
/s/ TERRY S. BROWN
Terry S. Brown, Director
/s/ ALAN B. BUCKELEW
Alan B. Buckelew, Director
/s/ RONALD L. HAVNER, JR.
Ronald L. Havner, Jr., Director
/s/ STEPHEN P. HILLS
Stephen P. Hills, Director
/s/ RICHARD J. LIEB
Richard J. Lieb, Director
/s/ H. JAY SARLES
H. Jay Sarles, Director
/s/ SUSAN SWANEZY
Susan Swanezy, Director
/s/ W. EDWARD WALTER
W. Edward Walter, Director
61
[This page intentionally left blank]
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of AvalonBay Communities, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of AvalonBay Communities, Inc. (the Company) as of December 31,
2019 and 2018, the related consolidated statements of comprehensive income, equity and cash flows for each of the three years
in the period ended December 31, 2019, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2)
(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations
and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) and our report dated February 21, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
F-1
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are
material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and
we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the
account or disclosure to which it relates.
Description of
the Matter
Valuation of Deferred Development Costs
As of December 31, 2019, the Company’s capitalized deferred development costs totaled $70.5 million
and during the year ended December 31, 2019, the Company expensed costs of approximately $4.0 million
related to the abandonment of development rights as well as the costs incurred in pursuing the acquisition
or disposition of assets for which the acquisition and disposition activity did not occur. As discussed in
Footnote 1 of the consolidated financial statements, the Company capitalizes pre-development costs
incurred in pursuit of new development opportunities for which the Company currently believes future
development is probable. Future development is dependent upon various factors, including zoning and
regulatory approvals, rental market conditions, construction costs and the availability of capital.
Auditing the valuation of deferred development costs involved a high degree of subjectivity as
management’s assessment of the probability that future development will occur was highly judgmental
and subject to the various factors affecting future development discussed above. The Company’s
assessment of probability of future development included an analysis of the likelihood of factors outside
their control that could prevent the development from occurring and factors that could cause the Company
to decide not to pursue or complete the development.
How We
Addressed
the Matter
in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls
over the Company’s process to assess the valuation of deferred development costs. For example, we
tested controls over the Company’s pursuit monitoring process and management’s review of the
probability assessment related to future development.
Our procedures included, among others, evaluating the Company’s determination that the future
development is probable. We performed procedures to test the accuracy and completeness of the
information included in the Company’s analysis by agreeing data to underlying agreements,
communications, minutes of management’s quarterly development meetings, and third-party evidence,
where available. We further assessed the likelihood of the Company’s ability to obtain zoning and
regulatory approvals for developments by considering, among other things, the Company’s prior
experience with other development projects and the current status of the future projects for which pursuit
or development rights costs were capitalized. We also met with executives who lead the Company’s
development team to further understand the probability of future development.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2002.
Tysons, Virginia
February 21, 2020
F-2
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of AvalonBay Communities, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited AvalonBay Communities, Inc.’s internal control over financial reporting as of December 31, 2019, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). In our opinion, AvalonBay Communities, Inc. (the Company) maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements
of comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2019, and the related
notes and financial statement schedule listed in the Index at Item 15(a)(2) and our report dated February 21, 2020 expressed an
unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal
Control over Financial Reporting in Item 9A. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Tysons, Virginia
February 21, 2020
F-3
AVALONBAY COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
ASSETS
Real estate:
Land and improvements
Buildings and improvements
Furniture, fixtures and equipment
Less accumulated depreciation
Net operating real estate
Construction in progress, including land
Land held for development
For-sale condominium inventory
Real estate assets held for sale, net
Total real estate, net
Cash and cash equivalents
Cash in escrow
Resident security deposits
Investments in unconsolidated real estate entities
Deferred development costs
Prepaid expenses and other assets
Right of use lease assets
Total assets
LIABILITIES AND EQUITY
Unsecured notes, net
Variable rate unsecured credit facility
Mortgage notes payable, net
Dividends payable
Payables for construction
Accrued expenses and other liabilities
Lease liabilities
Accrued interest payable
Resident security deposits
Liabilities related to real estate assets held for sale
Total liabilities
Commitments and contingencies
Redeemable noncontrolling interests
Equity:
Preferred stock, $0.01 par value; $25 liquidation preference; 50,000,000 shares authorized at
December 31, 2019 and December 31, 2018; zero shares issued and outstanding at December 31,
2019 and December 31, 2018
Common stock, $0.01 par value; 280,000,000 shares authorized at December 31, 2019 and
December 31, 2018; 140,643,962 and 138,508,424 shares issued and outstanding at December 31,
2019 and December 31, 2018, respectively
Additional paid-in capital
Accumulated earnings less dividends
Accumulated other comprehensive loss
Total stockholders' equity
Noncontrolling interests
Total equity
Total liabilities and equity
12/31/19
12/31/18
$
$
$
4,299,162
16,668,496
829,242
21,796,900
(5,164,398)
16,632,502
1,303,751
—
457,809
38,927
18,432,989
39,687
87,927
34,224
165,806
70,486
164,971
124,961
19,121,051
6,358,648
—
937,642
215,414
92,135
274,013
140,468
47,154
61,752
375
8,127,601
4,077,090
15,651,035
696,200
20,424,325
(4,601,447)
15,822,878
1,768,132
84,712
—
55,208
17,730,930
91,659
126,205
31,816
217,432
47,443
134,715
—
18,380,200
5,905,993
—
1,134,270
204,191
96,983
297,700
—
46,648
58,415
150
7,744,350
3,252
3,244
—
—
1,406
10,736,733
282,913
(31,503)
10,989,549
649
10,990,198
19,121,051
$
1,385
10,306,588
350,777
(26,144)
10,632,606
—
10,632,606
18,380,200
$
$
$
$
See accompanying notes to Consolidated Financial Statements.
F-4
AVALONBAY COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands, except per share data)
Revenue:
Rental and other income
Management, development and other fees
Total revenue
Expenses:
Operating expenses, excluding property taxes
Property taxes
Interest expense, net
Loss on extinguishment of debt, net
Depreciation expense
General and administrative expense
Expensed transaction, development and other pursuit costs, net of recoveries
Casualty and impairment loss, net
Total expenses
Equity in income of unconsolidated real estate entities
Gain on sale of communities
Gain (loss) on other real estate transactions, net
For-sale condominium marketing and administrative costs
Income before income taxes
Income tax expense (benefit)
Net income
Net (income) loss attributable to noncontrolling interests
For the year ended
12/31/19
12/31/18
12/31/17
$
2,319,666
$
2,280,963
$
2,154,481
4,960
3,572
4,147
2,324,626
2,284,535
2,158,628
515,145
252,961
203,585
602
661,578
58,042
4,991
—
524,993
241,563
220,974
17,492
631,196
60,369
3,265
215
500,924
221,375
199,661
25,472
584,150
53,695
2,736
6,250
1,696,904
1,700,067
1,594,263
8,652
166,105
439
(3,812)
799,106
13,003
786,103
(129)
15,270
374,976
345
(1,044)
974,015
(160)
974,175
350
70,744
252,599
(10,907)
—
876,801
141
876,660
261
Net income attributable to common stockholders
$
785,974
$
974,525
$
876,921
Other comprehensive income (loss):
(Loss) gain on cash flow hedges
Cash flow hedge losses reclassified to earnings
Comprehensive income
Earnings per common share - basic:
Net income attributable to common stockholders
Earnings per common share - diluted:
Net income attributable to common stockholders
(11,930)
6,571
5,132
6,143
780,615
$
985,800
$
(13,979)
7,070
870,012
5.64
$
7.05
$
6.36
5.63
$
7.05
$
6.35
$
$
$
See accompanying notes to Consolidated Financial Statements.
F-5
AVALONBAY COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(Dollars in thousands)
Shares issued
Preferred
stock
Common
stock
Preferred
stock
Common
stock
Additional
paid-in
capital
Accumulated
earnings
less
dividends
Balance at December 31, 2016
— 137,330,904
$
— $ 1,373
$10,105,654
$
94,899
Accumulated
other
comprehensive
loss
(30,510) $ 10,171,416
Total
AvalonBay
stockholders'
equity
$
Noncontrolling
interests
Total
equity
$
— $10,171,416
Net income attributable to
common stockholders
Loss on cash flow hedges
Cash flow hedge losses
reclassified to earnings
Change in redemption value
and acquisition of
noncontrolling interest
Dividends declared to
common stockholders ($5.68
per share)
Issuance of common stock, net
of withholdings
Amortization of deferred
compensation
—
—
—
—
—
—
—
—
—
—
—
—
763,250
—
Balance at December 31, 2017
— 138,094,154
Net income attributable to
common stockholders
Gain on cash flow hedges
Cash flow hedge losses
reclassified to earnings
Change in redemption value
and acquisition of
noncontrolling interest
Dividends declared to
common stockholders ($5.88
per share)
Issuance of common stock, net
of withholdings
Amortization of deferred
compensation
—
—
—
—
—
—
—
—
—
—
—
—
414,270
—
Balance at December 31, 2018
— 138,508,424
Net income attributable to
common stockholders
Loss on cash flow hedges
Cash flow hedge losses
reclassified to earnings
Change in redemption value of
noncontrolling interest
Noncontrolling interests
contribution
Dividends declared to
common stockholders ($6.08
per share)
Issuance of common stock, net
of withholdings
Amortization of deferred
compensation
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,135,538
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
8
—
—
—
—
—
—
876,921
—
—
2,026
(783,912)
101,621
(1,325)
28,200
—
—
(13,979)
876,921
(13,979)
7,070
7,070
—
—
—
—
2,026
(783,912)
100,304
28,200
—
—
—
—
—
—
—
876,921
(13,979)
7,070
2,026
(783,912)
100,304
28,200
1,381
10,235,475
188,609
(37,419)
10,388,046
— 10,388,046
—
—
—
—
—
4
—
—
—
—
—
—
974,525
—
—
223
(813,722)
39,408
1,142
31,705
—
—
5,132
6,143
—
—
—
—
974,525
5,132
6,143
223
(813,722)
40,554
31,705
—
—
—
—
—
—
—
974,525
5,132
6,143
223
(813,722)
40,554
31,705
1,385
10,306,588
350,777
(26,144)
10,632,606
— 10,632,606
—
—
—
—
—
—
21
—
—
—
—
—
—
—
785,974
—
—
(373)
—
(851,287)
395,275
(2,178)
34,870
—
—
(11,930)
785,974
(11,930)
6,571
6,571
—
—
—
—
—
(373)
—
(851,287)
393,118
34,870
—
—
—
—
649
—
—
—
785,974
(11,930)
6,571
(373)
649
(851,287)
393,118
34,870
Balance at December 31, 2019
— 140,643,962
$
— $ 1,406
$10,736,733
$
282,913
$
(31,503) $ 10,989,549
$
649
$10,990,198
See accompanying notes to Consolidated Financial Statements.
F-6
AVALONBAY COMMUNITIES, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation expense
Amortization of deferred financing costs
Amortization of debt discount
Loss on extinguishment of debt, net
Amortization of stock-based compensation
Equity in loss (income) of, and return on, unconsolidated real estate entities and
noncontrolling interests, net of eliminations
Casualty and impairment gain, net
Abandonment of development pursuits
Cash flow hedge losses reclassified to earnings
Gain on sale of real estate assets
(Increase) decrease in resident security deposits, prepaid expenses and other assets
Increase in accrued expenses, other liabilities and accrued interest payable
Net cash provided by operating activities
Cash flows from investing activities:
Development/redevelopment of real estate assets including land acquisitions and
deferred development costs
Acquisition of real estate assets, including partnership interest
Capital expenditures - existing real estate assets
Capital expenditures - non-real estate assets
(Decrease) increase in payables for construction
Proceeds from sale of real estate, net of selling costs
Insurance proceeds for property damage claims
Mortgage note receivable lending
Mortgage note receivable payments
Distributions from unconsolidated real estate entities
Investments in unconsolidated real estate entities
Net cash used in investing activities
Cash flows from financing activities:
Issuance of common stock, net
Dividends paid
Issuance of mortgage notes payable
Repayments of mortgage notes payable, including prepayment penalties
Issuance of unsecured notes
Repayment of unsecured notes, including prepayment penalties
Payment of deferred financing costs
Payment of finance lease obligation
(Payment) receipt for termination of forward interest rate swaps
Contribution from noncontrolling interest
Payments related to tax withholding for share-based compensation
Distributions to DownREIT partnership unitholders
Contributions from joint venture and profit-sharing partners
Distributions to joint venture and profit-sharing partners
Preferred interest obligation redemption and dividends
Net cash used in financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents and restricted cash, beginning of year
Cash and cash equivalents and restricted cash, end of year
Cash paid during the year for interest, net of amount capitalized
For the year ended
12/31/19
12/31/18
12/31/17
$
786,103
$
974,175
$
876,660
661,578
7,346
1,591
602
25,621
12,278
—
2,943
6,571
(172,332)
(19,118)
8,621
1,321,804
(1,052,011)
(420,517)
(135,626)
(5,266)
(4,848)
422,041
—
(692)
2,779
10,454
(10,183)
(1,193,869)
409,725
(839,646)
30,250
(227,570)
449,804
—
(10,909)
—
(12,309)
456
(16,101)
(46)
—
(439)
(1,400)
(218,185)
631,196
7,939
1,701
17,492
20,280
6,583
826
501
6,143
(385,976)
12,583
7,668
1,301,111
(1,139,954)
(338,620)
(83,607)
(3,325)
11,606
883,313
—
(3,699)
53,136
35,516
(11,017)
(596,651)
52,261
(805,239)
295,939
(255,452)
299,442
(258,579)
(16,258)
(1,070)
12,598
—
(10,556)
(44)
—
(424)
(1,120)
(688,502)
(90,250)
217,864
127,614
187,570
$
$
15,958
201,906
217,864
201,659
$
$
$
$
584,150
7,657
(5,915)
25,472
17,920
(19,798)
8,568
388
7,070
(281,745)
9,382
26,448
1,256,257
(979,947)
(462,317)
(65,181)
(8,809)
(15,621)
503,039
16,233
(17,590)
—
89,305
(24,493)
(965,381)
111,093
(772,657)
206,800
(1,313,025)
1,696,826
(300,000)
(17,552)
(18,951)
391
—
(10,450)
(42)
1,038
(418)
(2,000)
(418,947)
(128,071)
329,977
201,906
207,842
See accompanying notes to Consolidated Financial Statements.
F-7
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported with the Consolidated Statements
of Cash Flows (dollars in thousands):
Cash and cash equivalents
Cash in escrow
Cash, cash equivalents and restricted cash shown in the Consolidated
Statements of Cash Flows
For the year ended
12/31/19
12/31/18
12/31/17
$
$
$
39,687
87,927
91,659
126,205
$
127,614
$
217,864
$
67,088
134,818
201,906
Supplemental disclosures of non-cash investing and financing activities:
During the year ended December 31, 2019:
• As described in Note 4, “Equity,” 152,502 shares of common stock were issued as part of the Company's stock based
compensation plans, of which 73,072 shares related to the conversion of performance awards to restricted shares, and the
remaining 79,430 shares valued at $15,603,000 were issued in connection with new stock grants; 1,838 shares valued at
$205,000 were issued in conjunction with the conversion of deferred stock awards; 2,069 shares valued at $418,000 were
issued through the Company’s dividend reinvestment plan; 84,710 shares valued at $16,101,000 were withheld to satisfy
employees’ tax withholding and other liabilities; and 2,361 restricted shares with an aggregate value of $399,000 previously
issued in connection with employee compensation were canceled upon forfeiture.
• Common stock dividends declared but not paid totaled $214,832,000.
• The Company recorded an increase of $373,000 in redeemable noncontrolling interest with a corresponding decrease to
accumulated earnings less dividends to adjust the redemption value associated with the put options held by joint venture
partners and DownREIT partnership units. For further discussion of the nature and valuation of these items, see Note
11, “Fair Value.”
• The Company recorded an increase in other liabilities of $6,379,000, an increase in prepaid expenses and other assets of
$388,000 and a corresponding adjustment to other comprehensive income, and reclassified $6,571,000 of cash flow hedge
losses from other comprehensive income to interest expense, net, to record the impact of the Company’s derivative and
hedge accounting activity.
• The Company recorded $122,276,000 of lease liabilities and offsetting right of use lease assets for its ground and office
leases, upon the adoption of ASU 2016-02, Leases, as of January 1, 2019. For further discussion on the adoption of the
guidance, see Note 1, "Organization, Basis of Presentation and Significant Accounting Policies."
During the year ended December 31, 2018:
• The Company issued 187,010 shares of common stock as part of the Company's stock based compensation plans, of
which 88,297 shares related to the conversion of performance awards to restricted shares, and the remaining 98,713 shares
valued at $15,950,000 were issued in connection with new stock grants; 2,272 shares valued at $387,000 were issued
through the Company’s dividend reinvestment plan; 68,565 shares valued at $10,556,000 were withheld to satisfy
employees’ tax withholding and other liabilities; and 4,860 restricted shares with an aggregate value of $717,000 previously
issued in connection with employee compensation were canceled upon forfeiture.
• Common stock dividends declared but not paid totaled $204,191,000.
• The Company recorded a decrease of $223,000 in redeemable noncontrolling interest with a corresponding increase to
accumulated earnings less dividends to adjust the redemption value associated with the put options held by joint venture
partners and DownREIT partnership units.
• The Company recorded an increase in other liabilities of $6,366,000, and a corresponding adjustment to other
comprehensive income, and reclassified $6,143,000 of cash flow hedge losses from other comprehensive income to
interest expense, net, to record the impact of the Company’s derivative and hedge accounting activity.
F-8
•
In conjunction with the formation of NYTA MF Investors LLC (the "NYC Joint Venture”), the venture assumed
$395,939,000 of secured indebtedness as partial consideration for the purchase of the associated operating communities
and the Company recorded an investment of $74,159,000 in unconsolidated real estate entities, representing its 20.0%
retained interest in the venture.
During the year ended December 31, 2017:
• The Company issued 201,824 shares of common stock as part of the Company's stock based compensation plan, of which
128,482 shares related to the conversion of performance awards to restricted shares, and the remaining 73,342 shares
valued at $13,171,000 were issued in connection with new stock grants; 3,058 shares valued at $558,000 were issued
through the Company’s dividend reinvestment plan; 60,319 shares valued at $10,542,000 were withheld to satisfy
employees’ tax withholding and other liabilities; and 3,388 restricted shares with an aggregate value of $588,000 previously
issued in connection with employee compensation were canceled upon forfeiture.
• Common stock dividends declared but not paid totaled $196,094,000.
• The Company recorded a decrease of $65,000 in redeemable noncontrolling interest with a corresponding increase to
accumulated earnings less dividends to adjust the redemption value associated with the put options held by joint venture
partners and DownREIT partnership units.
• The Company recorded a decrease in prepaid expenses and other assets of $12,114,000 and an increase in other liabilities
of $1,171,000, and a corresponding adjustment to other comprehensive income, and reclassified $7,070,000 of cash flow
hedge losses from other comprehensive income to interest expense, net, to record the impact of the Company’s derivative
and hedge accounting activity.
• As discussed in Note 1, "Organization, Basis of Presentation and Significant Accounting Policies," the Company
recognized a non-cash charge of $16,361,000 to write-off the net book value of the fixed assets destroyed by the fire that
occurred in February 2017 at the Company's Avalon Maplewood ("Maplewood") which at the time was under construction
and not yet occupied.
See accompanying notes to Consolidated Financial Statements.
F-9
AVALONBAY COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization, Basis of Presentation and Significant Accounting Policies
Organization and Basis of Presentation
AvalonBay Communities, Inc. (the “Company,” which term, unless the context otherwise requires, refers to AvalonBay
Communities, Inc. together with its subsidiaries), is a Maryland corporation that has elected to be treated as a real estate investment
trust (“REIT”) for federal income tax purposes under the Internal Revenue Code of 1986 (the “Code”). The Company focuses on
the development, redevelopment, acquisition, ownership and operation of multifamily communities primarily in New England,
the New York/New Jersey metro area, the Mid-Atlantic, the Pacific Northwest, and Northern and Southern California.
At December 31, 2019, the Company owned or held a direct or indirect ownership interest in 275 operating apartment communities
containing 79,886 apartment homes (unaudited) in 11 states and the District of Columbia, of which two communities containing
665 apartment homes were under redevelopment. In addition, the Company owned or held a direct or indirect ownership interest
in 22 communities under development that are expected to contain an aggregate of 6,960 apartment homes (unaudited) when
completed, as well as a mixed-use project that contains 172 for-sale residential condominiums and 67,000 square feet of retail
space. The Company also owned or held a direct or indirect ownership interest in land or rights to land on which the Company
expects to develop an additional 27 communities that, if developed as expected, will contain an estimated 9,587 apartment homes
(unaudited).
Capitalized terms used without definition have meanings provided elsewhere in this Form 10-K.
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries,
certain joint venture partnerships, subsidiary partnerships structured as DownREITs and any variable interest entities that qualify
for consolidation. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company accounts for joint venture entities and subsidiary partnerships in accordance with the consolidation guidance. The
Company evaluates the partnership of each joint venture entity and determines first whether to follow the variable interest entity
(“VIE”) or the voting interest entity (“VOE”) model. Once the appropriate consolidation model is identified, the Company then
evaluates whether it should consolidate the venture. Under the VIE model, the Company consolidates an investment when it has
control to direct the activities of the venture and the obligation to absorb losses or the right to receive benefits that could potentially
be significant to the VIE. Under the VOE model, the Company consolidates an investment when 1) it controls the investment
through ownership of a majority voting interest if the investment is not a limited partnership or 2) it controls the investment through
its ability to remove the other partners in the investment, at its discretion, when the investment is a limited partnership.
The Company generally uses the equity method of accounting for its investment in joint ventures, including when the Company
holds a noncontrolling limited partner interest in a joint venture. Any investment in excess of the Company's cost basis at acquisition
or formation of an equity method venture, will be recorded as a component of the Company's investment in the joint venture and
recognized over the life of the underlying fixed assets of the venture as a reduction to its equity in income from the venture.
Investments in which the Company has little or no influence are accounted for using the cost method.
Real Estate
Operating real estate assets are stated at cost and consist of land and improvements, buildings and improvements, furniture, fixtures
and equipment, and other costs incurred during their development, redevelopment and acquisition. Significant expenditures which
improve or extend the life of an existing asset and that will benefit the Company for periods greater than a year, are capitalized.
Expenditures for maintenance and repairs are charged to expense as incurred.
Project costs related to the development, construction and redevelopment of real estate projects (including interest and related loan
fees, property taxes and other direct costs) are capitalized as a cost of the project. Indirect project costs that relate to several projects
are capitalized and allocated to the projects to which they relate. Indirect costs not clearly related to development, construction
and redevelopment activity are expensed as incurred. For development, capitalization (i) begins when the Company has determined
that development of the future asset is probable, (ii) can be suspended if there is no current development activity underway, but
future development is still probable and (iii) ends when the asset, or a portion of an asset, is delivered and is ready for its intended
use, or the Company's intended use changes such that capitalization is no longer appropriate.
F-10
For land parcels improved with operating real estate, for which the Company intends to pursue development, the Company generally
manages the current improvements until such time as all tenant obligations have been satisfied or eliminated through negotiation,
and construction of new apartment communities is ready to begin. Revenue from incidental operations received from the current
improvements on land parcels in excess of any incremental costs are recorded as a reduction of total capitalized costs of the
respective Development Right and not as part of net income. Incidental operating costs in excess of incidental operating income
are expensed in the period incurred.
For redevelopment efforts, the Company capitalizes costs either (i) in advance of taking homes out of service when significant
renovation of the common area has begun until the redevelopment is completed, or (ii) when an apartment home is taken out of
service for redevelopment until the redevelopment is completed and the apartment home is available for a new resident. Rental
income and operating costs incurred during the initial lease-up or post-redevelopment lease-up period are recognized in earnings
as incurred.
The Company assesses acquisitions of operating communities to determine if it meets the definition of a business or if it qualifies
as an asset acquisition. The Company generally views acquisitions of individual operating communities as asset acquisitions, and
results in the capitalization of acquisition costs, and the allocation of purchase price to the assets acquired and liabilities assumed,
based on the relative fair value of the respective assets and liabilities.
The purchase price allocation to tangible assets, such as land and improvements, buildings and improvements, and furniture,
fixtures and equipment, and the in-place lease intangible assets, is reflected in real estate assets and depreciated over their estimated
useful lives. Any purchase price allocation to intangible assets, other than in-place lease intangibles, is included in prepaid expenses
and other assets on the accompanying Consolidated Balance Sheets and amortized over the term of the acquired intangible asset.
The Company values land based on a market approach, looking to recent sales of similar properties, adjusting for differences due
to location, the state of entitlement as well as the shape and size of the parcel. Improvements to land are valued using a replacement
cost approach and consider the structures and amenities included for the communities. The approach for improvements applies
industry standard replacement costs adjusted for geographic specific considerations and reduced by estimated depreciation. The
value for furniture, fixtures and equipment is also determined based on a replacement cost approach, considering costs for both
items in the apartment homes as well as common areas and was adjusted for estimated depreciation. The fair value of buildings
acquired is estimated using the replacement cost approach, assuming the buildings were vacant at acquisition. The replacement
cost approach considers the composition of structures acquired, adjusted for an estimate of depreciation. The estimate of depreciation
is made considering industry standard information, depreciation curves for the identified asset classes and estimated useful life of
the acquired property. The value of the acquired lease-related intangibles considers the estimated cost of leasing the apartment
homes as if the acquired building(s) were vacant, as well as the value of the current leases relative to market-rate leases. The in-
place lease value is determined using an average total lease-up time, the number of apartment homes and net revenues generated
during the lease-up time. The lease-up period for an apartment community is assumed to be 12 months to achieve stabilized
occupancy. Net revenues use market rent considering actual leasing and industry rental rate data. The value of current leases relative
to a market-rate lease is based on market rents obtained for market comparables, and considered a market derived discount rate.
Given the heterogeneous nature of multifamily real estate, the fair values for the land, debt, real estate assets and in-place leases
incorporated significant unobservable inputs and therefore are considered to be Level 3 prices within the fair value hierarchy.
Consideration for acquisitions is typically in the form of cash unless otherwise disclosed.
Depreciation is calculated on buildings and related improvements using the straight-line method over their estimated useful lives,
which range from seven to 30 years. Furniture, fixtures and equipment are generally depreciated using the straight-line method
over their estimated useful lives, which range from three years (primarily computer-related equipment) to seven years.
For-Sale Condominium Inventory
In conjunction with the Company’s election to proceed with the sale of the residential condominiums of The Park Loggia, the
Company reclassified the associated real estate to for-sale condominium inventory based on the condominiums' relative fair value
to the overall development, as presented on the accompanying Consolidated Balance Sheets. The Company presents for-sale
condominium inventory at historical cost and evaluates the condominiums for impairment when potential indicators exist, as
further discussed under "Abandoned Pursuit Costs and Impairment of Long-Lived Assets" below.
F-11
Income Taxes
The Company elected to be treated as a REIT for U.S. federal income tax purposes for its tax year ended December 31, 1994 and
has not revoked such election. A REIT is a corporate entity which holds real estate interests and can deduct from its federally
taxable income qualifying dividends it pays if it meets a number of organizational and operational requirements, including a
requirement that it currently distribute at least 90% of its adjusted taxable income to stockholders. Therefore, as a REIT, the
Company generally will not be subject to corporate level federal income tax on its taxable income if it annually distributes 100%
of its taxable income to its stockholders.
The states in which the Company operates have similar tax provisions which recognize the Company as a REIT for state income
tax purposes. Management believes that all such conditions for the exemption from income taxes on ordinary income have been
or will be met for the periods presented. Accordingly, no provision for federal and state income taxes has been made. If the Company
fails to qualify as a REIT in any taxable year, it will be subject to federal corporate income taxes at regular corporate rates and
may not be able to qualify as a corporate REIT for four subsequent taxable years. Even if the Company qualifies for taxation as a
REIT, the Company may be subject to certain state and local taxes on its income and property, and to federal income and excise
taxes on its undistributed taxable income and in certain other instances.
The Company did not incur any charges or receive refunds of excise taxes related to the years ended December 31, 2019, 2018
and 2017.
Taxable income from activities performed through taxable REIT subsidiaries (“TRS”) is subject to federal, state and local income
taxes. The Company recognized income tax expense of $13,003,000 in 2019, recorded an income tax benefit of $160,000 in 2018
and recognized income tax expense of $141,000 in 2017, related to its activities through its TRS. The income tax expense in 2019
was primarily due to (i) a net deferred tax liability of $5,782,000 for the GAAP to tax basis differences at the Company's for-sale
condominiums, The Park Loggia, and the associated 67,000 square feet of retail space and (ii) expense for current and net deferred
tax liabilities of $7,221,000, associated with the disposition of two wholly-owned operating communities, as well as the Company's
sustainability initiatives. See Note 6, "Real Estate Disposition Activities" for further discussion of transacted and planned TRS
disposition activity. As of December 31, 2019 and 2018, the Company did not have any unrecognized tax benefits. The Company
does not believe that there will be any material changes in its unrecognized tax positions over the next 12 months. The Company
is subject to examination by the respective taxing authorities for the tax years 2016 through 2018.
On December 22, 2017, H.R. 1, the Tax Cuts and Jobs Act (the “TCJA”), was enacted. The TCJA makes major changes to the
Code, including lowering the statutory U.S. federal income tax rate from 35% to 21% effective January 1, 2018, which was
considered in determining the Company's current and net deferred tax liabilities.
The following reconciles net income attributable to common stockholders to taxable net income for the years ended December 31,
2019, 2018 and 2017 (unaudited, dollars in thousands):
Net income attributable to common stockholders
GAAP gain on sale of communities in excess of tax gain
Depreciation/amortization timing differences on real estate
Amortization of debt/mark to market interest
Tax compensation expense less than GAAP
Other adjustments
Taxable net income
2019 Estimate
2018 Actual
2017 Actual
$
785,974
$
974,525
$
876,921
(108,962)
(192,722)
(5,619)
(594)
4,738
22,637
(15,590)
(2,276)
13,126
19,617
(86,661)
(3,642)
(18,096)
20,243
(392)
$
698,174
$
796,680
$
788,373
The following summarizes the tax components of the Company's common dividends declared for the years ended December 31,
2019, 2018 and 2017 (unaudited):
Ordinary income
20% capital gain
Unrecaptured §1250 gain
2019
2018
2017
96%
3%
1%
76%
11%
13%
75%
18%
7%
F-12
Deferred Financing Costs
Deferred financing costs include fees and other expenditures necessary to obtain debt financing and are amortized on a straight-
line basis, which approximates the effective interest method, over the shorter of the term of the loan or the related credit enhancement
facility, if applicable. Unamortized financing costs are charged to earnings when debt is retired before the maturity date.
Accumulated amortization of deferred financing costs related to unsecured notes was $25,995,000 and $20,564,000 as of
December 31, 2019 and 2018, respectively, and related to mortgage notes payable was $1,784,000 and $2,044,000 as of
December 31, 2019 and 2018, respectively. Deferred financing costs, except for costs associated with line-of-credit arrangements,
are presented as a direct deduction from the related debt liability. Accumulated amortization of deferred financing costs related to
the Company's Credit Facility was $11,815,000 and $10,108,000 as of December 31, 2019 and 2018, respectively, and was included
in prepaid expenses and other assets on the accompanying Consolidated Balance Sheets.
Cash, Cash Equivalents and Cash in Escrow
Cash and cash equivalents include all cash and liquid investments with an original maturity of three months or less from the date
acquired. Cash in escrow includes principal reserve funds that are restricted for the repayment of specified secured financing. The
majority of the Company's cash, cash equivalents and cash in escrow are held at major commercial banks.
Comprehensive Income
Comprehensive income, as reflected on the Consolidated Statements of Comprehensive Income, is defined as all changes in equity
during each period except for those resulting from investments by or distributions to shareholders. Accumulated other
comprehensive loss, as reflected on the Consolidated Statements of Equity, reflects the effective portion of the cumulative changes
in the fair value of derivatives in qualifying cash flow hedge relationships.
Earnings per Common Share
Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted average number
of shares outstanding during the period. All outstanding unvested restricted share awards contain rights to non-forfeitable dividends
and participate in undistributed earnings with common shareholders and, accordingly, are considered participating securities that
are included in the two-class method of computing basic earnings per share (“EPS”). Both the unvested restricted shares and other
potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a
diluted basis. The Company's earnings per common share are determined as follows (dollars in thousands, except per share data):
F-13
Basic and diluted shares outstanding
Weighted average common shares—basic
Weighted average DownREIT units outstanding
Effect of dilutive securities
Weighted average common shares—diluted
Calculation of Earnings per Share—basic
Net income attributable to common stockholders
Net income allocated to unvested restricted shares
Net income attributable to common stockholders, adjusted
Weighted average common shares—basic
Earnings per common share—basic
Calculation of Earnings per Share—diluted
Net income attributable to common stockholders
Add: noncontrolling interests of DownREIT unitholders in consolidated partnerships,
including discontinued operations
Adjusted net income attributable to common stockholders
Weighted average common shares—diluted
Earnings per common share—diluted
For the year ended
12/31/19
12/31/18
12/31/17
139,054,191
137,844,755
137,523,771
7,500
509,859
7,500
436,986
7,500
535,415
139,571,550
138,289,241
138,066,686
785,974
(2,063)
783,911
$
$
974,525
(2,839)
971,686
$
$
876,921
(2,463)
874,458
139,054,191
137,844,755
137,523,771
5.64
$
7.05
$
6.36
785,974
$
974,525
$
876,921
46
44
42
786,020
$
974,569
$
876,963
139,571,550
138,289,241
138,066,686
5.63
$
7.05
$
6.35
$
$
$
$
$
$
All options to purchase shares of common stock outstanding as of December 31, 2019, 2018 and 2017 are included in the computation
of diluted earnings per share.
Abandoned Pursuit Costs and Impairment of Long-Lived Assets
The Company capitalizes pre-development costs incurred in pursuit of new development opportunities for which the Company
currently believes future development is probable (“Development Rights”). Future development of these Development Rights is
dependent upon various factors, including zoning and regulatory approval, rental market conditions, construction costs and the
availability of capital. Initial pre-development costs incurred for pursuits for which future development is not yet considered
probable are expensed as incurred. In addition, if the status of a Development Right changes, making future development by the
Company no longer probable, any non-recoverable capitalized pre-development costs are expensed. The Company expensed costs
related to development pursuits not yet considered probable for development and the abandonment of Development Rights, as
well as costs incurred in pursuing the acquisition or disposition of assets for which such acquisition and disposition activity did
not occur, in the amounts of $4,896,000, $4,388,000 and $2,370,000 during the years ended December 31, 2019, 2018 and 2017,
respectively. These costs are included in expensed acquisition, development and other pursuit costs, net of recoveries on the
accompanying Consolidated Statements of Comprehensive Income. Abandoned pursuit costs can vary greatly, and the costs incurred
in any given period may be significantly different in future periods.
F-14
The Company evaluates its real estate and other long-lived assets for impairment when potential indicators of impairment exist.
Such assets are stated at cost, less accumulated depreciation and amortization, unless the carrying amount of the asset is not
recoverable. If events or circumstances indicate that the carrying amount of a property or long-lived asset may not be recoverable,
the Company assesses its recoverability by comparing the carrying amount of the property or long-lived asset to its estimated
undiscounted future cash flows. If the carrying amount exceeds the aggregate undiscounted future cash flows, the Company
recognizes an impairment loss to the extent the carrying amount exceeds the estimated fair value of the property or long-lived
asset. Based on periodic tests of recoverability of long-lived assets, for the years ended December 31, 2019, 2018 and 2017, the
Company did not recognize any impairment losses other than those related to the impairment on land held for investment and
casualty gains and losses from property damage as discussed below.
The Company evaluates its for-sale condominium inventory for potential indicators of impairment, considering whether the fair
value of the individual for-sale condominium units exceeds the carrying value of those units. For-sale condominium inventory is
stated at cost, unless the carrying amount of the inventory is not recoverable when compared to the fair value of each unit. The
Company determines the fair value of its for-sale condominium inventory using estimated undiscounted future cash flows. For
the year ended December 31, 2019, the Company did not recognize any impairment losses on its for-sale condominium inventory.
The Company assesses its portfolio of land held for both development and investment for impairment if the intent of the Company
changes with respect to either the development of, or the expected holding period for, the land. The Company did not recognize
any material impairment charges on its investment in land during the year ended December 31, 2019. During the year ended
December 31, 2018, the Company recognized an impairment charge of $826,000 related to a land parcel the Company had previously
acquired for development and no longer intends to develop. During the year ended December 31, 2017, the Company recognized
an impairment charge of $9,350,000 related to a land parcel the Company had acquired for development in 2004 and sold during
2017. These charges were determined as the excess of the Company's carrying basis over the expected sales price for each parcel,
and are included in casualty and impairment loss (gain), net on the accompanying Consolidated Statements of Comprehensive
Income.
The Company evaluates its unconsolidated investments for other than temporary impairment, considering both the extent and
amount by which the carrying value of the investment exceeds the fair value, and the Company’s intent and ability to hold the
investment to recover its carrying value. The Company also evaluates its proportionate share of any impairment of assets held by
unconsolidated investments. There were no other than temporary impairment losses recognized by any of the Company's
investments in unconsolidated real estate entities during the years ended December 31, 2019, 2018 or 2017.
Casualty Gains and Losses
In February 2017, a fire occurred at the Company's Avalon Maplewood, located in Maplewood, NJ, which at the time was under
construction and not yet occupied. The Company completed reconstruction of the damaged and destroyed portions of the community
as well as the vertical construction of the community in 2018. During the year ended December 31, 2017, the Company recorded
a net casualty loss of $2,338,000 for the fire at Maplewood, included in casualty and impairment loss (gain), net on the accompanying
Consolidated Statements of Comprehensive Income. During the year ended December 31, 2017, the Company reached a final
insurance settlement for the property damage and lost income for the Maplewood casualty loss of $19,696,000, after self-insurance
and deductibles, of which the Company recognized $3,495,000 as business interruption insurance proceeds. See Note 7,
“Commitments and Contingencies,” for additional discussion of the related casualty loss.
A casualty loss may also result in lost operating income from one or more communities that is covered by the Company’s business
interruption insurance policies. The Company recognizes income for amounts received under its business interruption insurance
policies as a component of rental and other income in the Consolidated Statements of Comprehensive Income. Revenue is recognized
upon resolution of all contingencies related to the receipt, typically upon written confirmation by the insurer or receipt of the actual
proceeds. The Company recognized $1,441,000, $26,000 and $3,498,000 (including Maplewood as discussed above) in income
related business interruption insurance proceeds for the years ended December 31, 2019, 2018 and 2017, respectively.
F-15
Assets Held for Sale and Discontinued Operations
The Company presents the assets and liabilities of any communities which have been sold, or otherwise qualify as held for sale,
separately in the Consolidated Balance Sheets. In addition, the results of operations for those assets that meet the definition of
discontinued operations are presented as such in the accompanying Consolidated Statements of Comprehensive Income. Real
estate assets held for sale are measured at the lower of the carrying amount or the fair value less the cost to sell. Both the real estate
assets and corresponding liabilities are presented separately in the accompanying Consolidated Balance Sheets. Upon the
classification of an asset as held for sale, no further depreciation is recorded. Disposals representing a strategic shift in operations
(e.g., a disposal of a major geographic area, a major line of business or a major equity method investment) will be presented as
discontinued operations, and for those assets qualifying for classification as discontinued operations, the specific components of
net income presented as discontinued operations include net operating income, depreciation expense and interest expense, net. For
periods prior to the asset qualifying for discontinued operations, the Company reclassifies the results of operations to discontinued
operations. In addition, the net gain or loss (including any impairment loss) on the eventual disposal of assets held for sale will be
presented as discontinued operations when recognized. A change in presentation for held for sale or discontinued operations has
no impact on the Company's financial condition or results of operations. The Company combines the operating, investing and
financing portions of cash flows attributable to discontinued operations with the respective cash flows from continuing operations
on the accompanying Consolidated Statements of Cash Flows. The Company had one wholly-owned operating community that
qualified as held for sale presentation at December 31, 2019.
Redeemable Noncontrolling Interests
Redeemable noncontrolling interests are comprised of potential future obligations of the Company, which allow the investors
holding the noncontrolling interest to require the Company to purchase their interest. The Company classifies obligations under
the redeemable noncontrolling interests at fair value, with a corresponding offset for changes in the fair value recorded in
accumulated earnings less dividends. Reductions in fair value are recorded only to the extent that the Company has previously
recorded increases in fair value above the redeemable noncontrolling interest's initial basis. The redeemable noncontrolling interests
are presented outside of permanent equity as settlement in shares of the Company's common stock, where permitted, may not be
within the Company's control. The nature and valuation of the Company's redeemable noncontrolling interests are discussed further
in Note 11, “Fair Value.”
Derivative Instruments and Hedging Activities
The Company enters into interest rate swap and interest rate cap agreements (collectively, "Hedging Derivatives") for interest rate
risk management purposes and in conjunction with certain variable rate secured debt to satisfy lender requirements. The Company
does not enter into Hedging Derivative transactions for trading or other speculative purposes. The Company assesses the
effectiveness of qualifying cash flow and fair value hedges, both at inception and on an on-going basis. Hedge ineffectiveness is
reported as a component of interest expense, net. The fair values of Hedging Derivatives that are in an asset position are recorded
in prepaid expenses and other assets. The fair value of Hedging Derivatives that are in a liability position are included in accrued
expenses and other liabilities. The Company does not present or disclose the fair value of Hedging Derivatives on a net basis. Fair
value changes for derivatives that are not in qualifying hedge relationships are reported as a component of interest expense, net.
For the Hedging Derivative positions that the Company has determined qualify as effective cash flow hedges, the Company has
recorded the cumulative changes in the fair value of Hedging Derivatives in other comprehensive loss. Amounts recorded in
accumulated other comprehensive loss will be reclassified into earnings in the periods in which earnings are affected by the hedged
cash flow. The effective portion of the change in fair value of the Hedging Derivatives that the Company has determined qualified
as effective fair value hedges is reported as an adjustment to the carrying amount of the corresponding debt being hedged. See
Note 11, “Fair Value,” for further discussion of derivative financial instruments.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to amounts in prior years' notes to financial statements to conform to current year
presentations as a result of changes in held for sale classification, disposition activity and segment classification.
F-16
Leases
The Company is party to leases as both a lessor and a lessee, primarily as follows:
•
•
lessor of residential and retail space within its apartment communities; and
lessee under (i) ground leases for land underlying current operating or development communities and (ii) office leases
for its corporate headquarters and regional offices.
The Company adopted ASU 2016-02, Leases, as of January 1, 2019 using the prospective adoption approach, applying the provisions
of the new standard to existing leases as of the date of adoption.
Lessee Considerations
The Company assessed whether a contract is or contains a lease based on whether the contract conveys the right to control the use
of an identified asset, including specified portions of larger assets, for a period of time in exchange for consideration. The Company
identified leases as contracts in which it has the right to direct the use of the property and obtain all of the economic benefits.
The Company’s leases include both fixed and variable lease payments, which are based on an index or rate such as the consumer
price index (CPI) or percentage rents based on total sales. When evaluating what payments to include in the measurement of the
lease liability, the Company included lease payments that depend on an index or rate only. Variable lease payments that are not
based on an index or rate including changes in CPI, percentage rents based on total sales, fair market value resets and others are
not included in the measurement of the lease liability, but will be recognized as variable lease expense in the period in which they
are incurred.
For leases that have options to extend the term or terminate the lease early, the Company considered whether these options are
reasonably certain to be exercised, taking into account physical improvements, installation or relocation costs, rent during the
option periods and the cost of returning the assets to a contractually specified condition. The Company only factored the impact
of options into the lease term if the option was considered reasonably certain to be exercised.
The Company determined the discount rate associated with its ground and office leases using the Company’s actual borrowing
rates as well as indicative market pricing for longer term rates. The Company determined the discount rates on a lease by lease
basis using the incremental borrowing rate and taking into consideration the remaining term of each of the lease agreements.
Lessor Considerations
The Company evaluated leases in which it is the lessor, which are composed of residential and retail leases at its apartment
communities. The accounting model for lessors did not significantly change as a result of ASU 2016-02, with the impacts primarily
related to the accounting for sales-type and direct financing leases. The Company evaluated its residential and retail leases and
determined that they continue to be considered operating leases. For lease agreements that provide for rent concessions and/or
scheduled fixed and determinable rent increases, rental income is recognized on a straight-line basis over the noncancellable term
of the lease. The Company’s residential lease term is generally one year. Some of the Company’s retail leases have fixed-price
renewal options, and the lessee may be able to exercise its renewal option at an amount less than the fair value of the rent at such
time. The Company only includes renewal options in the lease term, if at the commencement of the lease, it is reasonably certain
that the lessee will exercise this option.
Additionally, for the Company’s residential and retail leases, which are comprised of the lease component and common area
maintenance as a non-lease component, the Company determined that (i) the leases are operating leases, (ii) the lease component
is the predominant component and (iii) that all components of its operating leases share the same timing and pattern of transfer.
The Company changed its presentation of charges for uncollectible lease revenue associated with its residential and retail leasing
activity, reflecting those amounts as a component of rental and other income on the accompanying Consolidated Statement of
Comprehensive Income for the year ended December 31, 2019. However, in accordance with its prospective adoption of the lease
standard, the Company did not adjust the prior year period presentation of charges for uncollectible lease revenue associated with
its residential and retail leasing activity as a component of operating expenses, excluding property taxes, on the accompanying
Consolidated Statement of Comprehensive Income for the years ended December 31, 2018 and 2017.
F-17
Implementation Considerations and Impact
As discussed above, the Company used the prospective adoption approach for the standard. Additionally, in conjunction with the
implementation of the standard, the Company elected to apply certain lessee practical expedients allowed under the standard
including:
•
not reassessing (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any
expired or existing leases and (iii) the accounting for initial direct costs for any existing leases;
not evaluating short term leases;
not assessing whether existing land easements are, or contain leases; and
•
•
• making an accounting policy election by class of underlying asset, to not separate non-lease components from lease
components and instead to account for each separate lease and non-lease component as a single lease component.
Also in conjunction with the implementation of the standard, the Company elected to apply the following practical expedients for
lessors, making an accounting policy election:
•
•
•
by class of underlying asset for retail and residential leases, to not separate non-lease components from lease components
and instead to account for each separate lease and non-lease component as a single lease component;
to exclude costs paid by lessees directly to third parties on behalf of the Company; and
to exclude sales taxes and other similar taxes assessed by a government authority and collected by the Company from
the lessee.
Upon adoption, the Company recorded lease liabilities and offsetting right of use lease assets for its ground and office leases of
$122,276,000. In addition, the Company made certain other reclassifications in the current year period of lease related amounts
on its Consolidated Balance Sheet to conform to the presentation under the new standard. The adoption of the standard did not
have a material impact on the accompanying Consolidated Statements of Comprehensive Income.
Revenue and Gain Recognition
Under ASU 2014-09, Revenue from Contracts with Customers, revenue is recognized in accordance with the transfer of goods
and services to customers at an amount that reflects the consideration that the Company expects to be entitled to for those goods
and services. The majority of the Company’s revenue is derived from residential and retail rental income and other lease income,
which are accounted for under ASU 2016-02, Leases, discussed above. The Company's revenue streams that are not accounted
for under ASU 2016-02 include:
• Management fees - The Company has investment interests in real estate joint ventures, for which the Company may
manage (i) the venture, (ii) the associated operating communities owned by the ventures and/or (iii) the development or
redevelopment of those operating communities. For these activities, the Company receives asset management, property
management, development and/or redevelopment fee revenue. The performance obligation is the management of the
venture, community or other defined task such as the development or redevelopment of the community. While the
individual activities that comprise the performance obligation of the management fees can vary day to day, the nature of
the overall performance obligation to provide management service is the same and considered by the Company to be a
series of services that have the same pattern of transfer to the customer and the same method to measure progress toward
satisfaction of the performance obligation. The Company recognizes revenue for fees as earned on a monthly basis.
• Rental and non-rental related income - The Company recognizes revenue for new rental related income not included as
components of a lease, such as reservation and application fees, as well as for non-rental related income, as earned.
• Gains or losses on sales of real estate - The Company accounts for the sale of real estate assets and any related gain
recognition in accordance with the accounting guidance applicable to sales of real estate, which establishes standards for
recognition of profit on all real estate sales transactions, other than retail land sales. The Company recognizes the sale,
and associated gain or loss from the disposition, provided that the earnings process is complete and the Company does
not have significant continuing involvement. A gain or loss is recognized when the criteria for an asset to be derecognized
are met, which include when (i) a contract exists and (ii) the buyer obtained control of the nonfinancial asset that was
sold. In addition, a gain or loss recognized on the sale of a nonfinancial asset to an unconsolidated entity is recognized
at 100%, and not the Company’s proportionate ownership percentage.
F-18
The following table provides details of the Company’s revenue streams disaggregated by the Company’s reportable operating
segments, further discussed in Note 8, “Segment Reporting,” for the years ended December 31, 2019, 2018 and 2017. The segments
are classified based on the individual community's status at January 1, 2019 for the years ended December 31, 2019 and 2018, and
at January 1, 2018 for the year ended December 31, 2017. Segment information for total revenue has been adjusted to exclude the
real estate assets that were sold from January 1, 2017 through December 31, 2019, or otherwise qualify as held for sale as of
December 31, 2019, as described in Note 6, "Real Estate Disposition Activities." Additionally, as discussed below, the Company
changed its presentation of charges for uncollectible lease revenue for the year ended December 31, 2019, including it as an
adjustment to revenue and not as a component of operating expenses, as it is presented for prior periods on the accompanying
Consolidated Statement of Comprehensive Income. In order to provide comparability between periods presented in the Company's
segment reporting, the Company has included charges for uncollectible lease revenue for its segment results as a component of
revenue for all periods presented. See Note 8, "Segment Reporting," for further discussion (dollars in thousands):
For the year ended December 31, 2019
Management, development and other fees
Rental and non-rental related income (2)
Total non-lease revenue (3)
Lease income (4)
Business interruption insurance proceeds
Established
Communities
Other
Stabilized
Communities
Development/
Redevelopment
Communities
Non-
allocated (1)
Total
$
— $
— $
— $
6,113
6,113
1,829,748
478
1,941
1,941
295,511
963
803
803
162,668
—
$
4,960
—
4,960
4,960
8,857
13,817
—
—
2,287,927
1,441
Total revenue
$
1,836,339
$
298,415
$
163,471
$
4,960
$
2,303,185
For the year ended December 31, 2018
Management, development and other fees
Rental and non-rental related income (2)
Total non-lease revenue (3)
Lease income (4)
Business interruption insurance proceeds
$
— $
— $
— $
4,245
4,245
1,778,841
26
1,732
1,732
236,852
—
269
269
120,553
—
$
3,572
—
3,572
3,572
6,246
9,818
—
—
2,136,246
26
Total revenue
$
1,783,112
$
238,584
$
120,822
$
3,572
$
2,146,090
For the year ended December 31, 2017
Management, development and other fees
Rental and non-rental related income (2)
Total non-lease revenue (3)
Lease income (4)
Business interruption insurance proceeds (5)
$
— $
— $
— $
3,845
3,845
1,570,262
3
1,294
1,294
173,639
—
740
740
231,031
3,495
$
4,147
—
4,147
4,147
5,879
10,026
—
—
1,974,932
3,498
Total revenue
$
1,574,110
$
174,933
$
235,266
$
4,147
$
1,988,456
__________________________________
(1) Revenue represents third-party management, asset management and developer fees and miscellaneous income which are not allocated
to a reportable segment.
(2) Amounts include revenue streams related to leasing activities that are not considered components of a lease, including but not limited
to, apartment hold fees and application fees, as well as revenue streams not related to leasing activities, including but not limited to,
vendor revenue sharing, building advertising, vending and dry cleaning revenue.
(3) Represents all revenue accounted for under ASC 2014-09.
(4) Amounts include all revenue streams derived from residential and retail rental income and other lease income, which are accounted
for under ASU 2016-02.
(5) Amount for 2017 is primarily business interruption insurance proceeds related to the Maplewood casualty loss as discussed above in
"Casualty Gains and Losses."
F-19
Due to the nature and timing of the Company’s identified revenue streams, there are no material amounts of outstanding or
unsatisfied performance obligations as of December 31, 2019.
Recently Issued and Adopted Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses
on Financial Instruments. This ASU requires entities to estimate a lifetime expected credit loss for most financial assets, including
trade and other receivables and other long term financings including available for sale and held-to-maturity debt securities, and
loans. Subsequently, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses,
which amends the scope of ASU 2016-13 and clarified that receivables arising from operating leases are not within the scope of
the standard and should continue to be accounted for in accordance with the leases standard (Topic 842). The new standard will
be effective for the Company beginning on January 1, 2020 and the Company does not expect the standard to have a material
effect on the Company’s financial position or results of operations.
2. Interest Capitalized
The Company capitalizes interest during the development and redevelopment of real estate assets. Capitalized interest associated
with the Company's development or redevelopment activities totaled $62,823,000, $60,331,000 and $64,420,000 for years ended
December 31, 2019, 2018 and 2017, respectively.
3. Mortgage Notes Payable, Unsecured Notes and Credit Facility
The Company's mortgage notes payable, unsecured notes, variable rate unsecured term loans (the “Term Loans”) and Credit
Facility, as defined below, as of December 31, 2019 and 2018 are summarized below. The following amounts and discussion do
not include the mortgage notes related to the communities classified as held for sale, if any, as of December 31, 2019 and 2018,
as shown on the Consolidated Balance Sheets (dollars in thousands) (see Note 6, “Real Estate Disposition Activities”).
Fixed rate unsecured notes (1)
Variable rate unsecured notes (1)
Term Loans (1)
Fixed rate mortgage notes payable—conventional and tax-exempt (2)
Variable rate mortgage notes payable—conventional and tax-exempt (2)
Total mortgage notes payable and unsecured notes and Term Loans
Credit Facility
12/31/19
12/31/18
$
5,850,000
$
5,400,000
300,000
250,000
479,221
476,150
300,000
250,000
533,215
619,140
7,355,371
7,102,355
—
—
Total mortgage notes payable, unsecured notes, Term Loans and Credit Facility
$
7,355,371
$
7,102,355
_________________________________
(1) Balances at December 31, 2019 and 2018 exclude $8,610 and $9,879, respectively, of debt discount, and $32,742 and $34,128, respectively,
of deferred financing costs, as reflected in unsecured notes, net on the accompanying Consolidated Balance Sheets.
(2) Balances at December 31, 2019 and 2018 exclude $14,464 and $14,590 of debt discount, respectively, and $3,265 and $3,495, respectively,
of deferred financing costs, as reflected in mortgage notes payable, net on the accompanying Consolidated Balance Sheets.
The following debt activity occurred during the year ended December 31, 2019:
•
•
In February 2019, the Company amended and restated the $250,000,000 variable rate unsecured term loan that it originally
entered into in February 2017, of which $100,000,000 matures in February 2022 with stated pricing of LIBOR plus 0.90%,
which remained the same, and $150,000,000 matures in February 2024 with stated pricing of LIBOR plus 0.85% that
decreased from LIBOR plus 1.50%.
In April 2019, the Company repaid $13,363,000 of 2.99% fixed rate debt and $33,854,000 of variable rate debt secured
by Avalon Natick at par on its maturity date.
F-20
•
•
•
•
•
•
In May 2019, the Company repaid $7,635,000 principal amount of variable rate debt secured by Eaves Mission Viejo at
par in advance of its scheduled maturity date. The Company utilized $3,706,000 of restricted cash held in a principal
reserve fund to repay a portion of the outstanding indebtedness.
In May 2019, the Company repaid $20,800,000 principal amount of variable rate debt secured by AVA Nob Hill at par
in advance of its scheduled maturity date. The Company utilized $10,584,000 of restricted cash held in a principal reserve
fund to repay a portion of the outstanding indebtedness.
In May 2019, the Company repaid $38,800,000 principal amount of variable rate debt secured by Avalon Campbell at
par in advance of its scheduled maturity date. The Company utilized $22,622,000 of restricted cash held in a principal
reserve fund to repay a portion of the outstanding indebtedness.
In May 2019, the Company repaid $17,600,000 principal amount of variable rate debt secured by Eaves Pacifica at par
in advance of its scheduled maturity date. The Company utilized $10,263,000 of restricted cash held in a principal reserve
fund to repay a portion of the outstanding indebtedness.
In May 2019, the Company issued $450,000,000 principal amount of unsecured notes in a public offering under its existing
shelf registration statement for net proceeds of approximately $446,877,000. The notes mature in June 2029 and were
issued at a 3.30% interest rate. The effective interest rate of the notes is 3.66%, including the impact of an interest rate
hedge and offering costs.
In August 2019, as part of the tax-deferred exchange associated with the disposition of Archstone Lexington and acquisition
of Avalon Cerritos, the Company (i) repaid $21,700,000 principal amount of variable rate debt secured by Archstone
Lexington at par in advance of its scheduled maturity date and (ii) entered into a $30,250,000 fixed rate note secured by
Avalon Cerritos, with a contractual interest rate of 3.26%, maturing in August 2029. See Note 6, "Real Estate Disposition
Activities," and Note 5, "Investments in Real Estate Entities," for further discussion of the disposition and acquisition
activity.
•
In November 2019, the Company repaid $65,749,000 of 3.38% fixed rate debt secured by Avalon Columbia Pike at par
on its maturity date.
In February 2019, the Company entered into a $1,750,000,000 Fifth Amended and Restated Revolving Loan Agreement (the
“Credit Facility”) with a syndicate of banks, which replaces its prior $1,500,000,000 credit facility dated as of January 14, 2016.
The term of the Credit Facility ends on February 28, 2024.
The Credit Facility bears interest at varying levels based on (i) the London Interbank Offered Rate (“LIBOR”) applicable to the
period of borrowing for a particular draw of funds from the facility (e.g., one month to maturity, three months to maturity, etc.)
and (ii) the rating levels issued for our unsecured notes. The current stated pricing for drawn borrowings is LIBOR plus 0.775%
per annum (2.54% at December 31, 2019), assuming a one month borrowing rate. The stated spread over LIBOR can vary from
LIBOR plus 0.70% to LIBOR plus 1.45% based upon the rating of the Company's unsecured notes. The Credit Facility also provides
a competitive bid option that is available for borrowings of up to 65% of the Credit Facility amount. This option allows banks that
are part of the lender consortium to bid to provide the Company loans at a rate that is lower than the stated pricing provided by
the unsecured credit facility. The competitive bid option may result in lower pricing than the stated rate if market conditions allow.
The annual facility fee for the Credit Facility remained 0.125%, resulting in a fee of $2,188,000 annually based on the $1,750,000,000
facility size and based on the Company's current credit rating.
The Company had no borrowings outstanding under the Credit Facility and had $11,488,000 and $39,810,000 outstanding in letters
of credit that reduced the borrowing capacity as of December 31, 2019 and 2018, respectively. In addition, the Company had
$24,939,000 outstanding in additional letters of credit as of December 31, 2019.
In the aggregate, secured notes payable mature at various dates from June 2020 through July 2066, and are secured by certain
apartment communities (with a net carrying value of $1,592,764,000, excluding communities classified as held for sale, as of
December 31, 2019).
The weighted average interest rate of the Company's fixed rate secured notes payable (conventional and tax-exempt) was 3.9%
and 3.8% at December 31, 2019 and 2018, respectively. The weighted average interest rate of the Company's variable rate secured
notes payable (conventional and tax exempt), the Term Loans and its Credit Facility, including the effect of certain financing
related fees, was 3.2% and 3.4% at December 31, 2019 and 2018, respectively.
F-21
Scheduled payments and maturities of secured notes payable and unsecured notes outstanding at December 31, 2019 are as follows
(dollars in thousands):
Year
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
Thereafter
Secured
notes
payments
Secured
notes
maturities
Unsecured
notes
maturities
Stated interest
rate of
unsecured notes
8,782
9,304
9,918
10,739
11,577
12,508
13,545
14,980
20,607
11,742
189,162
118,729
27,844
—
—
—
—
—
185,100
—
66,250
244,584
400,000
250,000
300,000
450,000
100,000
350,000
250,000
300,000
150,000
525,000
300,000
475,000
300,000
400,000
450,000
450,000
350,000
300,000
300,000
3.625%
3.950%
LIBOR + 0.43%
2.950%
LIBOR + 0.90%
4.200%
2.850%
3.500%
LIBOR + 0.85%
3.450%
3.500%
2.950%
2.900%
3.350%
3.200%
3.300%
3.900%
4.150%
4.350%
$
312,864
$
642,507
$
6,400,000
The Company's unsecured notes are redeemable at the Company's option, in whole or in part, generally at a redemption price equal
to the greater of (i) 100% of their principal amount or (ii) the sum of the present value of the remaining scheduled payments of
principal and interest discounted at a rate equal to the yield on U.S. Treasury securities with a comparable maturity plus a spread
between 20 and 45 basis points depending on the specific series of unsecured notes, plus accrued and unpaid interest to the
redemption date.
The Company is subject to financial covenants contained in the Credit Facility, the Term Loans and the indentures under which
the unsecured notes were issued. The principal financial covenants include the following:
•
•
limitations on the amount of total and secured debt in relation to our overall capital structure;
limitations on the amount of our unsecured debt relative to the undepreciated basis of real estate assets that are not
encumbered by property-specific financing; and
• minimum levels of debt service coverage.
The Company was in compliance with these covenants at December 31, 2019.
F-22
4. Equity
As of December 31, 2019 and 2018, the Company's charter had authorized for issuance a total of 280,000,000 shares of common
stock and 50,000,000 shares of preferred stock.
During the year ended December 31, 2019, the Company:
issued 109,804 shares of common stock in connection with stock options exercised;
issued 2,069 common shares through the Company's dividend reinvestment plan;
i.
ii.
iii. issued 152,502 common shares in connection with restricted stock grants and the conversion of performance awards to
restricted shares;
issued 1,942,502 shares under CEP IV and CEP V, including amounts in settlement of the Forward, as discussed below;
iv.
v.
issued 1,838 common shares in conjunction with the conversion of deferred stock awards;
vi. withheld 84,710 common shares to satisfy employees' tax withholding and other liabilities;
vii. issued 13,894 shares through the Employee Stock Purchase Plan; and
viii. canceled 2,361 shares of restricted stock upon forfeiture.
Any deferred compensation related to the Company’s stock option, restricted stock and performance award grants during the year
ended December 31, 2019 is not reflected on the accompanying Consolidated Balance Sheet as of December 31, 2019, and will
not be reflected until recognized as compensation cost.
In December 2015, the Company commenced a fourth continuous equity program (“CEP IV”) under which the Company was able
to sell (and/or enter into forward agreements for) up to $1,000,000,000 of its common stock from time to time. In conjunction
with CEP IV, the Company engaged sales agents who received compensation of up to 2.0% of the gross sales price for shares sold.
In May 2019, the Company replaced CEP IV with a new continuous equity program ("CEP V") under which the Company may
sell (and/or enter into forward sale agreements for the sale of) up to $1,000,000,000 of its common stock from time to time. Actual
sales will depend on a variety of factors to be determined by the Company, including market conditions, the trading price of the
Company's common stock and determinations by the Company of the appropriate sources of funding for the Company. In
conjunction with CEP V, the Company engaged sales agents who will receive compensation of up to 1.5% of the gross sales price
for shares sold. The Company expects that, if entered into, it will physically settle each forward sale agreement on one or more
dates specified by the Company on or prior to the maturity date of that particular forward sale agreement, in which case the
Company will expect to receive aggregate net cash proceeds at settlement equal to the number of shares underlying the particular
forward agreement multiplied by the relevant forward sale price. However, the Company may also elect to cash settle or net share
settle a forward sale agreement. In connection with each forward sale agreement, the Company will pay the relevant forward seller,
in the form of a reduced initial forward sale price, a commission of up to 1.5% of the sales prices of all borrowed shares of common
stock sold. During 2019, the Company entered into and settled a forward sales agreement, as discussed below.
On September 25, 2019, the Company entered into a forward contract under CEP V to sell 947,868 shares of common stock (the
"Forward"). The sales price was established based on the stock price during intraday trading on September 25, 2019. In December
2019, the Company issued 947,868 shares of common stock at a weighted average sales price of $207.96 per share, for net proceeds
of $197,122,000, in settlement of the Forward. The proceeds received by the Company were determined on the date of settlement,
with adjustments during the term of the contract for the Company’s dividends as well as for a daily interest factor that varied with
changes in the Overnight Bank Funding rate.
In addition to the shares issued in settlement of the Forward, in 2019, the Company sold 755,054 shares at an average sales price
of $198.26 per share, for net proceeds of $147,450,000 under CEP IV, and 239,580 shares at an average sales price of $208.70 per
share, for net proceeds of $49,250,000 under CEP V. As of December 31, 2019, the Company had $752,878,000 remaining
authorized for issuance under CEP V.
F-23
5. Investments in Real Estate Entities
Investments in Unconsolidated Real Estate Entities
The Company accounts for its investments in unconsolidated real estate entities under the equity method of accounting, as discussed
in Note 1, “Organization, Basis of Presentation and Significant Accounting Policies,” under Principles of Consolidation. The
significant accounting policies of the Company's unconsolidated real estate entities are consistent with those of the Company in
all material respects. Certain of these investments are subject to various buy sell provisions or other rights which are customary
in real estate joint venture agreements. The Company and its partners in these entities may initiate these provisions to either sell
the Company's interest or acquire the joint venture interest from the Company's partner.
The following presents the Company's activities in unconsolidated real estate entities for the years ended December 31, 2019,
2018 and 2017:
Archstone Multifamily Partners AC LP (the “U.S. Fund”)—The Company is the general partner of the U.S. Fund and has a 28.6%
combined general partner and limited partner equity interest. The Company acquired its interest in the U.S. Fund as part of the
Archstone Acquisition (as defined in Note 5, “Investments in Real Estate Entities,” of the Consolidated Financial Statements in
Item 8 in the Company's Form 10-K filed February 22, 2019). During 2019, the U.S. Fund sold Avalon Marina Bay and the adjacent
marina, The Harbor at Marina Bay, located in Marina del Rey, CA, containing 205 apartment homes and 229 boat slips for
$86,000,000. The Company's proportionate share of the gain in accordance with GAAP was $5,788,000. In conjunction with the
disposition of the community, the U.S. Fund repaid $49,800,000 of related secured indebtedness in advance of its scheduled
maturity date. The U.S. Fund sold one community in each 2018 and 2017, and the Company's proportionate share of the gains in
accordance with GAAP was $8,636,000 and $13,788,000, respectively.
Multifamily Partners AC JV LP (the “AC JV”)—The Company has a 20.0% equity interest in the AC JV, and acquired its interest
as part of the Archstone Acquisition. During 2018, the AC JV sold one community, and the Company's proportionate share of the
gain in accordance with GAAP was $2,019,000.
Legacy JV—As part of the Archstone Acquisition the Company entered into a limited liability company agreement with Equity
Residential, through which it assumed obligations of Archstone in the form of preferred interests, some of which are governed by
tax protection arrangements (the “Legacy JV”). The Company has a 40.0% interest in the Legacy JV. During the years ended
December 31, 2019, 2018 and 2017, the Legacy JV redeemed certain of the preferred interests and paid accrued dividends, of
which the Company's portion was $1,400,000, $1,120,000 and $2,000,000, respectively. At December 31, 2019, the remaining
preferred interests had an aggregate liquidation value of $35,542,000, the Company's 40.0% share of which was included in accrued
expenses and other liabilities in the accompanying Consolidated Balance Sheets.
Sudbury Development, LLC—During 2015, the Company entered into a joint venture agreement to purchase land and pursue
entitlements and pre-development activity for a mixed-use development project in Sudbury, MA, including multifamily apartment
homes, retail, senior housing and age-restricted housing. The Company has a 60.0% ownership interest in the venture, which is
considered a VIE. During the year ended December 31, 2017, the Company and its venture partner each acquired their respective
portion of the real estate held by the venture, with the Company's portion consisting of a parcel of land on which the Company
developed an apartment community, acquired for an investment of $19,200,000. The Company and its venture partner retained
continuing involvement with the venture to fund the completion of the planned infrastructure and site work, which was substantially
complete during 2018.
North Point II JV, LP—During 2016, the Company entered into a joint venture to develop, own, and operate AVA North Point, an
apartment community located in Cambridge, MA, which completed construction during 2018 and contains 265 apartment homes.
The Company owned a 55.0% interest in the venture, and the venture partner owned the remaining 45.0% interest. During the
year ended December 31, 2019, the Company acquired the 45.0% equity interest of AVA North Point that was owned by the venture
partner, for a purchase price of $71,280,000. Upon acquisition, the Company consolidated AVA North Point as a wholly-owned
operating community.
NYTA MF Investors LLC (“NYC Joint Venture”)—During 2018, the Company contributed five wholly-owned operating
communities located in New York, NY to a newly formed joint venture with the intent to own and operate the communities. The
Company retained a 20.0% interest in the venture, with the venture partner owning the remaining 80.0% interest, and the partners
sharing in returns in accordance with their ownership interests. In conjunction with the formation of the venture in 2018, the
Company sold the five communities, containing an aggregate of 1,301 apartment homes and 58,000 square feet of retail space, to
the venture for a sales price of $758,900,000. The Company received net cash proceeds of $276,799,000 and the venture assumed
F-24
$395,939,000 of secured indebtedness from the Company. The Company recognized a gain on sale of $179,861,000, including
the recognition of the Company's 20.0% retained interest at fair value.
Avalon Alderwood MF Member, LLC—During 2019, the Company entered into a joint venture to develop, own, and operate Avalon
Alderwood Mall, an apartment community located in Lynnwood, WA, which is currently under construction and expected to
contain 328 apartment homes when complete. The Company has a 50.0% interest in the venture, which is considered a VIE, though
the Company was not considered to be the primary beneficiary because it shares control with its third party partner. The Company
and its venture partner share decision making authority for all significant aspects of the venture's activities including, but not
limited to, changes in the ownership or capital structure, and the capital budget to construct Avalon Alderwood Mall.
AvalonBay Value Added Fund II, L.P. (“Fund II”)—During 2018 the Company held an investment in and received the final
distributions for the AvalonBay Value Added Fund II, L.P. (“Fund II”), a private, discretionary real estate investment vehicle formed
in 2008. During 2017, Fund II sold its final three communities, and the Company's proportionate share of the gain in accordance
with GAAP was $26,322,000, and the Company completed the dissolution of Fund II in 2018. A wholly owned subsidiary of the
Company was the general partner of Fund II. The Company had an equity interest of 31.3% in Fund II, and upon achievement of
a threshold return the Company had a right to incentive distributions for its promoted interest based on current returns earned by
Fund II which represented 40.0% of further Fund II distributions, which was in addition to its proportionate share of the remaining
60.0% of distributions. During the years ended December 31, 2018 and 2017, the Company recognized income of $925,000 and
$26,472,000 for its promoted interest, respectively, which was reported as a component of equity in income of unconsolidated real
estate entities on the accompanying Consolidated Statements of Comprehensive Income.
The following is a combined summary of the financial position of the entities accounted for using the equity method and presented
on the accompanying Consolidated Balance Sheets as of the dates presented (dollars in thousands):
Assets:
Real estate, net
Other assets
Total assets
Liabilities and partners' capital:
Mortgage notes payable, net (1)
Other liabilities
Partners' capital
Total liabilities and partners' capital
12/31/19
12/31/18
$
$
$
$
1,204,470
196,488
1,400,958
782,257
157,379
461,322
1,400,958
$
$
$
$
1,420,453
47,333
1,467,786
837,311
15,627
614,848
1,467,786
_________________________________
(1) The Company has not guaranteed the debt, nor does the Company have any obligation to fund this debt should the unconsolidated entity
be unable to do so.
The following is a combined summary of the operating results of the entities accounted for using the equity method and presented
on the accompanying Consolidated Statements of Comprehensive Income, for the years presented (dollars in thousands):
Rental and other income
Operating and other expenses
Gain on sale of communities
Interest expense, net
Depreciation expense
Net income
Company's share of net income (3)
Amortization of excess investment and other
Equity in income from unconsolidated real estate investments
_________________________________
F-25
For the year ended
12/31/2019 (1)
12/31/2018 (2)
12/31/17
$
144,431
$
92,533
$
(55,732)
21,748
(33,896)
(58,387)
(35,840)
54,202
(22,500)
(26,706)
18,164
$
61,689
$
10,779
(2,127)
17,519
(2,249)
8,652
$
15,270
$
$
$
102,261
(40,341)
136,333
(27,122)
(25,914)
145,217
73,120
(2,376)
70,744
(1) Amounts include results from AVA North Point through the date the Company acquired its venture partner's 45.0% equity interest.
(2) Amounts include results from the NYC Joint Venture from the date the venture was formed.
(3) Includes the Company's share of gain on sale of communities and income recognized for its promoted interest.
Investments in Consolidated Real Estate Entities
During the year ended December 31, 2019, the Company acquired five consolidated communities:
• Avalon Southlands, located in Aurora, CO, which contains 338 apartment homes and was acquired for a purchase price
of $91,250,000.
• Avalon Cerritos, located in Cerritos, CA, which contains 132 apartment homes and was acquired for a purchase price of
$60,500,000. The acquisition of Avalon Cerritos was facilitated through a tax-deferred exchange as the replacement
property for Archstone Lexington, which was sold during the year ended December 31, 2019, as further discussed in Note
6, "Real Estate Disposition Activities." Archstone Lexington was acquired by the Company as part of the Archstone
Acquisition, and was subject to both limitations related to disposal of the community, as well as for there to be a required
level of secured financing as a result of the tax structured contribution of the assets to the prior Archstone partnerships.
The Company maintained compliance with the tax protection requirements when selling Archstone Lexington by
facilitating the sale through the tax-deferred exchange, acquiring and encumbering Avalon Cerritos. See Note 3, "Mortgage
Notes Payable, Unsecured Notes and Credit Facility," for further discussion of indebtedness associated with Archstone
Lexington and Avalon Cerritos.
•
Portico at Silver Spring Metro, located in Silver Spring, MD, which contains 151 apartment homes and was acquired for
a purchase price of $43,450,000.
• Avalon Bonterra, located in Hialeah, FL, which contains 314 apartment homes and was acquired for a purchase price of
$90,000,000.
• Avalon Toscana, located in Margate, FL, which contains 240 apartment homes and was acquired for a purchase price of
$60,250,000.
During the year ended December 31, 2018, the Company acquired four communities, containing an aggregate 1,096 apartment
homes, which were acquired for an aggregate purchase price of $334,450,000. During the year ended December 31, 2017, the
Company acquired three communities, containing an aggregate 1,062 apartment homes, which were acquired for an aggregate
purchase price of $365,750,000.
The Company accounted for these as asset acquisitions and recorded the acquired assets and assumed liabilities, including
identifiable intangibles, at their relative fair values based on the purchase price and acquisition costs incurred. The Company used
third party pricing or internal models for the values of the land, a valuation model for the values of the buildings, and an internal
model to determine the fair values of the remaining real estate assets and in-place leases. Given the heterogeneous nature of
multifamily real estate, the fair values for the land, debt, real estate assets and in-place leases incorporated significant unobservable
inputs and therefore are considered to be Level 3 prices within the fair value hierarchy.
6. Real Estate Disposition Activities
The following activity took place during the year ended December 31, 2019:
• The Company sold six wholly-owned operating communities, containing an aggregate of 1,660 apartment homes for an
aggregate sales price of $427,600,000 and an aggregate gain in accordance with GAAP of $166,105,000.
• The Company sold other real estate for an aggregate sales price of $3,680,000, resulting in an aggregate gain in accordance
with GAAP of $439,000.
F-26
Details regarding the real estate sales are summarized in the following table (dollars in thousands):
Community Name
Location
Oakwood Arlington
Archstone Toscano (1)
AVA Stamford
Archstone Lexington
Arlington, VA
Houston, TX
Stamford, CT
Flower Mound, TX
Memorial Heights Villages (1)
Houston, TX
Avalon Orchards
Marlborough, MA
Other real estate dispositions (2)
multiple
Period
of sale
Q119
Q219
Q319
Q319
Q319
Q319
2019
Total of 2019 asset sales
Total of 2018 asset sales
Total of 2017 asset sales
Apartment
homes
Debt
Gross
sales price
Net cash
proceeds
184
474
306
222
318
156
N/A
$
— $
70,000
$
—
—
21,700
—
—
—
98,000
105,000
45,100
65,250
44,250
3,680
1,660
3,099
1,624
$
$
$
21,700
$
431,280
395,939
$ 1,378,289
— $
514,654
$
$
$
68,317
95,975
102,485
44,524
63,298
43,448
3,995
422,042
883,313
503,039
_________________________________
(1) The Company held its investment in, and sold these real estate assets from, a wholly-owned TRS.
(2) Primarily composed of the sale of two undeveloped land parcels, located in Houston, TX, and Bronxville, NY.
As of December 31, 2019, the Company had one community that qualified as held for sale.
The Park Loggia
As of December 31, 2019, the Company has completed the construction of The Park Loggia, located in New York, NY, which
contains 172 for-sale residential condominiums and 67,000 square feet of retail space for a total capitalized cost of $626,000,000.
The Company incurred $3,812,000 and $1,044,000 for the years ended December 31, 2019 and 2018, respectively, in marketing
and administrative costs associated with The Park Loggia, included in for-sale condominium marketing and administrative costs,
on the accompanying Consolidated Statements of Comprehensive Income. As of December 31, 2019, the for-sale residential
condominiums have an aggregate carrying value of $457,809,000, presented as for-sale condominium inventory on the
accompanying Consolidated Balance Sheets. The Company recognized a net deferred tax liability of $5,782,000 during the year
ended December 31, 2019 for the GAAP to tax basis differences of The Park Loggia and the associated 67,000 square feet of retail
space. See Note 1, "Organization, Basis of Presentation and Significant Accounting Policies," for further discussion of the income
tax associated to The Park Loggia.
7. Commitments and Contingencies
Employment Agreements and Arrangements
At December 31, 2019, the Company does not have any employment agreements with executive officers.
The standard restricted stock and option agreements used by the Company in its compensation program provide that upon an
employee's termination without cause or the employee's Retirement (as defined in the agreement), all outstanding stock options
and restricted shares of stock held by the employee will vest, and the employee will have up to 12 months or until the fifth
anniversary of the grant date, if later, or until the option expiration date, if earlier, to exercise any options then held. Under the
agreements, Retirement generally means a termination of employment and other business relationships, other than for cause, after
attainment of age 50, provided that (i) the employee has worked for the Company for at least 10 years, (ii) the employee's age at
Retirement plus years of employment with the Company equals at least 70, (iii) the employee provides at least six months written
notice of intent to retire, and (iv) the employee enters into a one year non-compete and employee non-solicitation agreement.
F-27
The Company also has an Officer Severance Program (the “Program”). Under the Program, in the event an officer who is not
otherwise covered by a severance arrangement is terminated (other than for cause), or chooses to terminate his or her employment
for good reason (as defined), in either case within 18 months following a sale event (as defined) of the Company, such officer will
generally receive a cash lump sum payment equal to a multiple of the officer's covered compensation (base salary plus annual cash
bonus). The multiple is one time for vice presidents and senior vice presidents, two times for executive vice presidents and three
times for the chief executive officer. The officer's restricted stock and options would also vest. Costs related to the Program are
deferred and recognized over the requisite service period when considered by management to be probable and estimable.
Legal Contingencies
The Company accounts for recoveries from legal matters as a reduction in the legal and related costs incurred associated with the
matter, with recoveries in excess of these costs reported as a gain or, where appropriate, a reduction in the net cost basis of a
community to which the suit related. During the years ended December 31, 2019, 2018 and 2017, the Company recognized
$6,292,000, $946,000 and $6,118,000 in legal recoveries, respectively. Legal recoveries recognized during the year ended
December 31, 2019 include $3,126,000 in proceeds related to a former Development Right and $2,237,000 in proceeds related to
a construction defect at a community. Amounts recognized during the years ended December 31, 2018 and 2017 include $554,000
and $5,438,000 respectively, in legal settlement proceeds relating to construction defects at communities acquired as part of the
Archstone Acquisition, reported as a component of casualty and impairment loss, net on the accompanying Consolidated Statements
of Comprehensive Income.
The Company is involved in various other claims and/or administrative proceedings that arise in the ordinary course of its business.
While no assurances can be given, the Company does not currently believe that any of these outstanding litigation matters,
individually or in the aggregate, will have a material adverse effect on its financial condition or results of operations.
Lease Obligations
The Company owns 11 apartment communities, one community under development and two commercial properties, located on
land subject to ground leases expiring between October 2026 and March 2142. The ground leases for 10 of 11 of the apartment
communities and the rest of the ground leases, are accounted for as operating leases, with rental expense recognized on a straight-
line basis over the lease term. These operating leases have varying rental escalation terms, primarily based on variables determined
at future dates such as changes in the Consumer Price Index, and five of these leases have purchase options exercisable through
2095. In addition, the Company is party to 17 leases for its corporate and regional offices with varying terms through 2031, all of
which are accounted for as operating leases.
As of December 31, 2019, the Company has total operating lease assets of $103,063,000 and lease obligations of $120,261,000,
reported as components of right of use lease assets and lease liabilities, respectively, on the accompanying Consolidated Balance
Sheets. The Company incurred costs of $14,371,000, $21,788,000 and $23,431,000 in the years ended December 31, 2019, 2018
and 2017, respectively, related to operating leases.
One apartment community is located on land subject to a ground lease which is accounted for as a finance lease. Under the terms
of the lease, the Company has the option to purchase the land during the lease term, which expires in 2046. In addition to the leases
described above, the Company is party to two leases for portions of parking garages, one adjacent to an apartment community and
one adjacent to a community under development, accounted for as finance leases and subject to the Company's lease accounting
policies discussed in Note 1, “Organization, Basis of Presentation and Significant Accounting Policies.” The Company has total
finance lease assets of $21,898,000 and lease obligations of $20,207,000, reported as components of right of use lease assets and
lease liabilities, respectively, on the accompanying Consolidated Balance Sheets.
During the year ended December 31, 2018, the Company contributed a dual-branded apartment community, Avalon West Chelsea
and AVA High Line, located on land subject to a single land lease, to the newly formed NYC Joint Venture. See Note 5, “Investments
in Real Estate Entities,” for discussion of the formation of the venture. During the year ended December 31, 2017, the Company
acquired the land encumbered by the ground lease for Avalon Morningside Park for $95,000,000, recognizing a non-cash write-
off of prepaid rent of $11,153,000 associated with the ground lease termination, reported as a component of (loss) gain on other
real estate transactions on the accompanying Consolidated Statements of Comprehensive Income. Also during the year ended
December 31, 2017, the Company exercised its purchase option under a capital lease, acquiring the land encumbered by the ground
lease for Avalon at Assembly Row and AVA Somerville for $17,285,000.
The following table details the weighted average remaining lease term and discount rates for the Company’s ground and office
leases:
F-28
Weighted-average remaining lease term - finance leases
Weighted-average remaining lease term - operating leases
Weighted-average discount rate - finance leases
Weighted-average discount rate - operating leases
26 years
53 years
4.63%
5.06%
The following tables details the future minimum lease payments under the Company's current leases and a reconciliation of
undiscounted and discounted cash flows for operating and finance leases (dollars in thousands):
Operating Lease Obligations
Finance Lease Obligations
Operating Lease Obligations
Finance Lease Obligations
8. Segment Reporting
Payments due by period
2020
2021
2022
2023
2024
Thereafter
12,050
1,077
13,127
$
$
14,055
1,080
15,135
$
$
14,003
1,082
15,085
$
$
13,473
1,084
14,557
$
$
13,320
1,087
14,407
$
$
364,284
40,133
404,417
Total undiscounted
cash flows
Total lease
liabilities
431,185
45,543
476,728
$
$
Difference between
discounted and
undiscounted cash flows
120,261
20,207
140,468
$
$
310,924
25,336
336,260
$
$
$
$
The Company's reportable operating segments include Established Communities, Other Stabilized Communities and Development/
Redevelopment Communities. Annually as of January 1, the Company determines which of its communities fall into each of these
categories and generally maintains that classification throughout the year for the purpose of reporting segment operations, unless
disposition or redevelopment plans regarding a community change.
• Established Communities (also known as Same Store Communities) are consolidated communities where the Company
has a significant presence (New England, New York/New Jersey, Mid-Atlantic, Pacific Northwest, and Northern and
Southern California) and where a comparison of operating results from the prior year to the current year is meaningful,
as these communities were owned and had stabilized occupancy as of the beginning of the prior year. The Established
Communities for the year ended December 31, 2019, are communities that are consolidated for financial reporting
purposes, had stabilized occupancy as of January 1, 2018, are not conducting or planning to conduct substantial
redevelopment activities and are not held for sale or planned for disposition within the fiscal year. A community is
considered to have stabilized occupancy at the earlier of (i) attainment of 95% physical occupancy or (ii) the one year
anniversary of completion of development or redevelopment.
• Other Stabilized Communities includes all other completed consolidated communities that have stabilized occupancy, as
defined above, as January 1, 2019, or which were acquired during the years ended December 31, 2019 or 2018. Other
Stabilized Communities includes stabilized operating communities in our expansion markets of Denver, Colorado, and
Southeast Florida, but excludes communities that are conducting or planning to conduct substantial redevelopment
activities within the fiscal year.
• Development/Redevelopment Communities consists of (i) consolidated communities that are either currently under
construction, or were under construction during the fiscal year, which may be partially or fully complete and operating,
(ii) consolidated communities where substantial redevelopment is in progress or is planned to begin during the fiscal year
and (iii) communities under lease-up that have been complete for less than one year and have not reached stabilized
occupancy, as defined above, as of January 1, 2019.
In addition, the Company owns land for future development and has other corporate assets that are not allocated to an operating
segment.
The Company's segment disclosures present the measure(s) used by the chief operating decision maker for purposes of assessing
each segment's performance. The Company's chief operating decision maker is comprised of several members of its executive
F-29
management team who use net operating income (“NOI”) as the primary financial measure for Established Communities and Other
Stabilized Communities. NOI is defined by the Company as total property revenue less direct property operating expenses (including
property taxes), and excluding corporate-level income (including management, development and other fees), corporate-level
property management and other indirect operating expenses, expensed transaction, development and other pursuit costs, net of
recoveries, interest expense, net, loss (gain) on extinguishment of debt, net, general and administrative expense, equity in income
of unconsolidated real estate entities, depreciation expense, corporate income tax (benefit) expense, casualty and impairment loss
(gain), net, gain on sale of communities, loss (gain) on other real estate transactions, net, for-sale condominium marketing and
administrative costs and net operating income from real estate assets sold or held for sale. Although the Company considers NOI
a useful measure of a community's or communities' operating performance, NOI should not be considered an alternative to net
income or net cash flow from operating activities, as determined in accordance with GAAP. NOI excludes a number of income
and expense categories as detailed in the reconciliation of NOI to net income.
A reconciliation of NOI to net income for years ended December 31, 2019, 2018 and 2017 is as follows (dollars in thousands):
Net income
Indirect operating expenses, net of corporate income
Expensed acquisition, development and other pursuit costs, net of recoveries
Interest expense, net
Loss on extinguishment of debt, net
General and administrative expense
Equity in income of unconsolidated real estate entities
Depreciation expense
Income tax expense (benefit)
Casualty and impairment loss, net
Gain on sale of communities
(Gain) loss on other real estate transactions
For-sale condominium marketing and administrative costs
Net operating income from real estate assets sold or held for sale
For the year ended
12/31/19
12/31/18
12/31/17
$
786,103
$
974,175
$
876,660
83,008
4,991
203,585
602
58,042
(8,652)
661,578
13,003
—
80,227
3,265
220,974
17,492
60,369
(15,270)
631,196
(160)
215
68,312
2,736
199,661
25,472
53,695
(70,744)
584,150
141
6,250
(166,105)
(374,976)
(252,599)
(439)
3,812
(12,318)
(345)
1,044
10,907
—
(79,372)
(105,663)
Net operating income
$
1,627,210
$
1,518,834
$
1,398,978
The following is a summary of NOI from real estate assets sold or held for sale for the periods presented (dollars in thousands):
For the year ended
12/31/2019
12/31/2018
12/31/2017
Rental income from real estate assets sold or held for sale
Operating expenses from real estate assets sold or held for sale
Net operating income from real estate assets sold or held for sale
$
$
21,441
(9,123)
12,318
$
$
124,373
(45,001)
79,372
$
$
170,172
(64,509)
105,663
The primary performance measure for communities under development or redevelopment depends on the stage of completion.
While under development, management monitors actual construction costs against budgeted costs as well as lease-up pace and
rent levels compared to budget.
The following table provides details of the Company's segment information as of the dates specified (dollars in thousands). The
segments are classified based on the individual community's status at January 1, 2019 for the years ended December 31, 2019 and
2018 and at January 1, 2018, for the year ended December 31, 2017. Segment information for the years ended December 31, 2019,
2018 and 2017 has been adjusted to exclude the real estate assets that were sold from January 1, 2017 through December 31, 2019,
or otherwise qualify as held for sale as of December 31, 2019, as described in Note 6, “Real Estate Disposition Activities.”
In addition to NOI, the Company's CODM considers total revenue in assessing each segment's performance. As discussed in Note
1, "Organization, Basis of Presentation and Significant Accounting Policies," the Company changed its presentation of charges
F-30
for uncollectible lease revenue beginning with the year ended December 31, 2019, including it as an adjustment to revenue and
not as a component of operating expenses, as it is presented for prior year periods on the accompanying Consolidated Statements
of Comprehensive Income. Consistent with how the Company's CODM evaluates total revenue, and to provide comparability
between periods presented in the Company's segment reporting, the Company has included charges for uncollectible lease revenue
for its segment results as a component of revenue for the year ended December 31, 2018, the comparable period presented in the
following table. Total revenue for the year ended December 31, 2018 as presented in the following table includes $14,072,000 of
charges for uncollectible lease revenue.
For the year ended December 31, 2019
Established
New England
Metro NY/NJ
Mid-Atlantic
Pacific Northwest
Northern California
Southern California
Total Established (2)
Other Stabilized
Development / Redevelopment
Land Held for Future Development
Non-allocated (3)
Total
For the year ended December 31, 2018
Established
New England
Metro NY/NJ
Mid-Atlantic
Pacific Northwest
Northern California
Southern California
Total Established (2)
Other Stabilized
Development / Redevelopment
Land Held for Future Development
Non-allocated (3)
Total
For the year ended December 31, 2017
Established
New England
Metro NY/NJ
Mid-Atlantic
Pacific Northwest
Northern California
Southern California
Total Established (2)
Other Stabilized
Development / Redevelopment (4)
Land Held for Future Development
Non-allocated (3)
Total
Total
revenue
NOI
Gross
real estate (1)
$
249,301
$
164,977
$
411,115
292,943
113,021
363,910
406,049
291,662
207,091
82,186
280,216
291,340
2,065,954
3,545,753
2,685,052
990,563
2,850,491
3,609,595
1,836,339
1,317,472
15,747,408
$
$
$
$
298,415
163,471
N/A
4,960
202,445
107,293
N/A
N/A
2,303,185
$
1,627,210
$
241,793
$
159,394
$
400,422
284,381
108,861
353,136
394,519
284,344
200,381
78,313
272,096
283,795
3,551,512
3,702,194
—
557,346
23,558,460
2,050,131
3,527,098
2,669,040
985,102
2,832,026
3,573,953
1,783,112
1,278,323
15,637,350
238,584
120,822
N/A
3,572
159,745
80,766
N/A
N/A
3,063,669
2,652,967
84,712
504,229
2,146,090
$
1,518,834
$
21,942,927
215,133
$
141,342
$
354,444
232,987
84,313
357,209
330,024
251,760
161,546
61,705
273,940
237,796
1,845,692
3,071,563
2,216,292
724,751
2,972,311
2,905,512
1,574,110
1,128,089
13,736,121
174,933
235,266
N/A
4,147
117,837
153,052
N/A
N/A
2,392,244
4,104,956
68,364
78,864
$
1,988,456
$
1,398,978
$
20,380,549
_________________________________
(1) Does not include gross real estate assets held for sale of $48,412 as of December 31, 2019 and gross real estate either sold or classified as
held for sale subsequent to December 31, 2018 and 2017 of $334,242 and $1,555,387, respectively.
F-31
(2) Gross real estate for the Company's Established Communities includes capitalized additions of approximately $128,324, $78,469 and
$78,241 in 2019, 2018 and 2017, respectively.
(3) Revenue represents third-party management, accounting, and developer fees and miscellaneous income which are not allocated to a reportable
segment. Gross real estate includes the for-sale residential condominiums at The Park Loggia, as discussed in Note 6, "Real Estate Disposition
Activities."
(4) Total revenue and NOI for the year ended December 31, 2017 includes $3,495 in business interruption insurance proceeds related to the
Maplewood casualty loss.
F-32
9. Stock-Based Compensation Plans
The Company's Second Amended and Restated 2009 Equity Incentive Plan (the “2009 Plan”) includes an authorization to issue
shares of the Company's common stock, par value $0.01 per share. At December 31, 2019, the Company had 7,227,600 shares
remaining available to issue under the 2009 Plan, exclusive of shares that may be issued to satisfy currently outstanding awards
such as stock options or performance awards. In addition, any awards that were outstanding under the Company's 1994 Stock
Option and Incentive Plan (the “1994 Plan”) on May 21, 2009, the date the Company adopted the 2009 Plan, that are subsequently
forfeited, canceled, surrendered or terminated (other than by exercise) will become available for awards under the 2009 Plan. The
2009 Plan provides for various types of equity awards to associates, officers, non-employee directors and other key personnel of
the Company and its subsidiaries. The types of awards that may be granted under the 2009 Plan include restricted stock, restricted
stock units, stock options that qualify as incentive stock options (“ISOs”) under Section 422 of the Code, non-qualified stock
options, stock appreciation rights and performance awards, among others. No grants of stock options and other awards will be
made after May 15, 2027, and no grants of incentive stock options will be made after February 16, 2027.
Information with respect to stock options granted under the 2009 and 1994 Plans is as follows:
2009 Plan
shares
Weighted
average
exercise price
per share
1994 Plan
shares
Weighted
average
exercise price
per share
Options Outstanding, December 31, 2016
Exercised
Granted
Forfeited
Options Outstanding, December 31, 2017
Exercised
Granted (1)
Forfeited
Options Outstanding, December 31, 2018
Exercised
Granted
Forfeited
177,333
$
(27,360)
—
—
149,973
$
(32,756)
6,995
—
124,212
$
(109,804)
—
—
124.25
110.47
—
—
126.77
126.24
161.10
—
128.84
129.47
—
—
22,541
$
(14,763)
—
—
7,778
$
(7,778)
—
—
— $
—
—
—
Options Outstanding, December 31, 2019
14,408
$
124.05
— $
77.91
93.35
—
—
48.60
48.60
—
—
—
—
—
—
—
Options Exercisable:
December 31, 2017
December 31, 2018
December 31, 2019
149,973
117,217
14,408
$
$
$
126.77
126.91
124.05
7,778
$
48.60
— $
— $
—
—
_________________________________
(1) Options granted during the year ended December 31, 2018 are a result of recipient elections to receive a portion of earned performance
awards and time-vesting restricted stock in the form of stock options.
The following summarizes the exercise prices and contractual lives of options outstanding as of December 31, 2019:
2009 Plan
Number of Options
1,218
2,071
11,119
14,408
Range—Exercise Price
$70.00
$110.00
$130.00
-
-
-
$79.99
$119.99
$139.99
Weighted Average
Remaining Contractual Term
(in years)
0.1
1.1
2.8
F-33
Options outstanding and exercisable at December 31, 2019 both had an intrinsic value of $1,234,000. Options exercisable had a
weighted average contractual life of 2.4 years. The intrinsic value of options exercised under the 2009 and 1994 Plans during 2019,
2018 and 2017 was $7,970,000, $3,016,000 and $3,592,000, respectively. There were no stock options granted in 2019, 2018 and
2017, other than those elected under the Company's performance award plan discussed below.
The Company has a compensation framework under which share-based compensation granted is composed of annual restricted
stock awards for which one third of the award vests annually over a three year period, and multi-year long term incentive performance
awards. For annual restricted stock awards, in lieu of time-vesting restricted stock, the recipient may elect to receive up to 25%
of the award value in the form of stock options, for which one third of the award vests annually over a three year period. Under
the Company's multi-year long term incentive compensation framework, the Company grants a target number of performance
awards, with the ultimate award determined by the total shareholder return of the Company's common stock and/or operating
performance metrics, measured in each case over a measurement period of up to three years. Performance awards granted in 2017
or earlier are earned in the form of time-vesting restricted stock following the end of the three-year performance period, provided
that the predetermined goals have been achieved. Performance awards granted after 2017 are fully vested for the recipient following
the measurement period.
For performance awards with performance periods beginning on or after January 1, 2015, after the first year of the performance
period, if the employee's employment terminates on account of death, disability, retirement, or termination without cause, the
employee shall vest in a pro rata portion of the award (based on the employee's service time during the performance period), with
such vested portion to be earned and converted into shares at the end of the performance period based on actual achievement under
the performance award. For other terminating events, performance awards are generally forfeited.
Information with respect to performance awards granted is as follows:
Outstanding at December 31, 2016
Granted (1)
Change in awards based on performance (2)
Converted to restricted stock
Forfeited
Outstanding at December 31, 2017
Granted (3)
Change in awards based on performance (2)
Converted to restricted stock
Forfeited
Outstanding at December 31, 2018
Granted (4)
Change in awards based on performance (2)
Converted to restricted stock
Forfeited
Outstanding at December 31, 2019
Performance awards
Weighted average grant
date fair value per award
251,163
$
81,708
49,323
(128,482)
(1,942)
251,770
$
100,965
5,990
(88,477)
(3,119)
267,129
$
80,512
(16,760)
(73,072)
(4,377)
253,432
$
136.74
176.59
119.26
118.75
159.39
155.25
155.31
148.79
148.79
160.33
157.21
200.75
142.03
142.03
166.44
176.27
_________________________________
(1) The amount of restricted stock that ultimately may be earned is based on the total shareholder return metrics related to the Company’s
common stock for 49,374 performance awards and financial metrics related to operating performance and leverage metrics of the Company
for 32,334 performance awards.
(2) Represents the change in the number of performance awards earned based on performance achievement for the performance period.
(3) The amount of restricted stock that ultimately may be earned is based on the total shareholder return metrics related to the Company’s
common stock for 62,043 performance awards and financial metrics related to operating performance and leverage metrics of the Company
for 38,922 performance awards.
(4) The amount of restricted stock that ultimately may be earned is based on the total shareholder return metrics related to the Company’s
common stock for 47,502 performance awards and financial metrics related to operating performance and leverage metrics of the Company
for 33,010 performance awards.
F-34
The Company used a Monte Carlo model to assess the compensation cost associated with the portion of the performance awards
granted for which achievement will be determined by using total shareholder return measures. The assumptions used are as follows:
Dividend yield
Estimated volatility over the life of the plan (1)
Risk free rate
Estimated performance award value based on total
shareholder return measure
2019
3.1%
13.9% - 18.8%
2.46% - 2.57%
$204.15
2018
3.7%
11.8% - 18.7%
1.86% - 2.46%
$151.67
2017
3.2%
15.3% - 19.7%
0.69% - 1.61%
$175.86
_________________________________
(1) Estimated volatility of the life of the plan is using 50% historical volatility and 50% implied volatility.
For the portion of the performance awards granted for which achievement is determined by using financial metrics, the compensation
cost was based on a weighted average grant date value of $195.86, $161.10 and $179.07, for the years ended December 31, 2019,
2018 and 2017, respectively, and the Company's estimate of corporate achievement for the financial metrics.
Information with respect to restricted stock granted is as follows:
Outstanding at December 31, 2016
Granted - restricted stock shares
Vested - restricted stock shares
Forfeited
Outstanding at December 31, 2017
Granted - restricted stock shares
Vested - restricted stock shares
Forfeited
Outstanding at December 31, 2018
Granted - restricted stock shares
Vested - restricted stock shares
Forfeited
Outstanding at December 31, 2019
Restricted stock shares
Restricted stock shares
weighted average grant
date fair value per share
Restricted stock shares
converted from
performance awards
136,705
$
73,342
(73,683)
(2,731)
133,633
$
98,713
(67,832)
(4,103)
160,411
$
79,430
(89,289)
(2,226)
148,326
$
158.51
179.58
153.86
173.42
172.33
161.58
171.22
166.40
166.33
196.43
168.06
174.45
181.29
176,698
128,482
(70,595)
(657)
233,928
88,297
(112,230)
(757)
209,238
73,072
(119,064)
(135)
163,111
Total employee stock-based compensation cost recognized in income was $24,885,000, $19,707,000 and $17,085,000 for the years
ended December 31, 2019, 2018 and 2017, respectively, and total capitalized stock-based compensation cost was $9,396,000,
$10,208,000 and $9,474,000 for the years ended December 31, 2019, 2018 and 2017, respectively. At December 31, 2019, there
was a total unrecognized compensation cost of $26,002,000 for unvested restricted stock and performance awards, which does
not include forfeitures, and is expected to be recognized over a weighted average period of 1.9 years.
As of January 1, 2017, the Company adopted the provisions of ASU 2016-09, electing to account for forfeitures as they occur.
Prior to the adoption of ASU 2016-09, the Company was required to estimate the forfeiture of stock options and recognized
compensation cost net of the estimated forfeitures. The estimated forfeitures included in compensation cost were adjusted to reflect
actual forfeitures at the end of the vesting period. The actual forfeiture rate for the years ended December 31, 2019, 2018 and 2017
was 0.6%, 0.6% and 0.7%, respectively.
F-35
Employee Stock Purchase Plan
In October 1996, the Company adopted the 1996 Non-Qualified Employee Stock Purchase Plan (as amended, the “ESPP”). Initially
1,000,000 shares of common stock were reserved for issuance under this plan. There are currently 654,435 shares remaining
available for issuance under the ESPP. Employees of the Company generally are eligible to participate in the ESPP if, as of the
last day of the applicable purchase period, they have been employed by the Company for at least one month. Under the ESPP,
eligible employees are permitted to acquire shares of the Company's common stock through payroll deductions, subject to maximum
purchase limitations, during two purchase periods. The first purchase period begins January 1 and ends June 10, and the second
purchase period begins July 1 and ends December 10. The purchase price for common stock purchased under the plan is 85% of
the lesser of the fair market value of the Company's common stock on the first day of the applicable purchase period or the last
day of the applicable purchase period. The offering dates, purchase dates and duration of purchase periods may be changed if the
change is announced prior to the beginning of the affected date or purchase period. The Company issued 13,894, 12,955 and 11,528
shares and recognized compensation expense of $761,000, $436,000 and $418,000 under the ESPP for the years ended December 31,
2019, 2018 and 2017, respectively. The Company accounts for transactions under the ESPP using the fair value method prescribed
by accounting guidance applicable to entities that use employee share purchase plans.
10. Related Party Arrangements
Unconsolidated Entities
The Company manages unconsolidated real estate entities for which it receives asset management, property management,
development and redevelopment fee revenue. From these entities, the Company earned fees of $4,960,000, $3,572,000 and
$4,147,000 in the years ended December 31, 2019, 2018 and 2017, respectively. In addition, the Company had outstanding
receivables associated with its property and construction management role of $3,924,000 and $2,519,000 as of December 31, 2019
and 2018, respectively.
Director Compensation
Directors of the Company who are also employees receive no additional compensation for their services as a director. Following
each annual meeting of stockholders, non-employee directors receive (i) a number of shares of restricted stock (or deferred stock
units) having a value of $160,000 and (ii) a cash payment of $90,000, payable in equal quarterly installments of $22,500. The
number of shares of restricted stock (or deferred stock units) is calculated based on the closing price on the day of the award. Non-
employee directors may elect to receive all or a portion of cash payments in the form of deferred stock units. Additionally, the
Lead Independent Director receives in the aggregate an additional annual fee of $30,000 payable in equal quarterly installments
of $7,500, the non-employee director serving as the chairperson of the Audit Committee receives additional cash compensation
of $25,000 per year payable in equal quarterly installments of $6,250, the non-employee director serving as the chairperson of the
Compensation Committee receives additional cash compensation of $20,000 per year payable in equal quarterly installments of
$5,000 and the Nominating and Corporate Governance and Investment and Finance Committee chairpersons receive an additional
annual fee of $15,000 payable in equal quarterly installments of $3,750.
The Company recorded non-employee director compensation expense relating to restricted stock grants and deferred stock awards
in the amount of $1,725,000, $1,624,000 and $1,524,000 for the years ended December 31, 2019, 2018 and 2017, respectively, as
a component of general and administrative expense. Deferred compensation relating to these restricted stock grants and deferred
stock awards to non-employee directors was $594,000, $571,000 and $525,000 on December 31, 2019, 2018 and 2017, respectively,
reported as a component of prepaid expenses and other assets on the accompanying Consolidated Balance Sheets.
F-36
11. Fair Value
Financial Instruments Carried at Fair Value
Derivative Financial Instruments
The Company uses interest rate swap and interest rate cap agreements to manage its interest rate risk. These instruments are carried
at fair value in the Company's financial statements. In adjusting the fair value of its derivative contracts for the effect of counterparty
nonperformance risk, the Company has considered the impact of its net position with a given counterparty, as well as any applicable
credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees. The Company minimizes its credit risk
on these transactions by dealing with major, creditworthy financial institutions which have an A or better credit rating by the
Standard & Poor's Ratings Group. As part of its on-going control procedures, the Company monitors the credit ratings of
counterparties and the exposure of the Company to any single entity, thus reducing credit risk concentration. The Company believes
the likelihood of realizing losses from counterparty nonperformance is remote. Although the Company has determined that the
majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, such as interest rate, term to
maturity and volatility, the credit valuation adjustments associated with its derivatives use Level 3 inputs, such as estimates of
current credit spreads, to evaluate the likelihood of default by itself and its counterparties. As of December 31, 2019, the Company
assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and
has determined it is not significant. As a result, the Company has determined that its derivative valuations are classified in Level 2
of the fair value hierarchy.
The Company recognized a gain of $753,000 for hedge ineffectiveness for the year ended December 31, 2017, included as a
component of interest expense, net on the accompanying Consolidated Statements of Comprehensive Income.
The following table summarizes the consolidated derivative positions at December 31, 2019 (dollars in thousands):
Notional balance
Weighted average interest rate (1)
Weighted average swapped/capped interest rate
Earliest maturity date
Latest maturity date
Non-designated
Hedges
Interest Rate Caps
Cash Flow
Hedges
Interest Rate Swaps
$
443,827
$
350,000
3.2%
6.5%
January 2021
November 2021
N/A
2.1%
October 2020
October 2020
_________________________________
(1) For interest rate caps, represents the weighted average interest rate on the hedged debt.
During 2019, in conjunction with the issuance of the Company's 3.30% notes due 2029 in May 2019, the Company settled
$250,000,000 of forward interest rate swap agreements designated as cash flow hedges of the interest rate variability on the
forecasted issuance of the unsecured notes, making a payment of $12,309,000. The Company has deferred this amount in
accumulated other comprehensive loss on the accompanying Consolidated Balance Sheets, and will recognize the impact as a
component of interest expense, net, over the term of the debt of ten years.
In 2019, the Company entered into $350,000,000 of new forward interest rate swap agreements executed to reduce the impact of
variability in interest rates on a portion of the Company's expected debt issuance activity in 2020, which were outstanding as of
December 31, 2019. For further discussion, see Note 13, "Subsequent Events."
The Company had six derivatives designated as cash flow hedges and five derivatives not designated as hedges at December 31,
2019. Fair value changes for derivatives not in qualifying hedge relationships for the years ended December 31, 2019 and 2018,
were not material. During 2019, the Company deferred $11,930,000 of losses for cash flow hedges as a component of other
comprehensive income (loss).
F-37
The following table summarizes the deferred losses reclassified from accumulated other comprehensive income as a component
of interest expense, net (dollars in thousands):
Cash flow hedge losses reclassified to earnings
For the year ended
12/31/19
12/31/18
12/31/17
$
6,571
$
6,143
$
7,070
The Company anticipates reclassifying approximately $6,983,000 of hedging losses from accumulated other comprehensive loss
into earnings within the next 12 months to offset the variability of cash flows of the hedged item during this period. The Company
did not have any derivatives designated as fair value hedges as of December 31, 2019 and 2018.
Redeemable Noncontrolling Interests
The Company provided redemption options (the “Puts”) that allow joint venture partners of the Company to require the Company
to purchase their interests in the investment at a guaranteed minimum amount related to two consolidated ventures. The Puts are
payable in cash. The Company determines the fair value of the Puts based on unobservable inputs, applying a guaranteed rate of
return to the joint venture partners' net capital contribution balances as of period end. Given the significance of the unobservable
inputs, the valuations are classified in Level 3 of the fair value hierarchy.
The Company issued units of limited partnership interest in DownREITs which provide the DownREIT limited partners the ability
to present all or some of their units for redemption for cash as determined by the partnership agreement. Under the DownREIT
agreements, for each limited partnership unit, the limited partner is entitled to receive cash in the amount equal to the fair value
of the Company's common stock on or about the date of redemption. In lieu of cash redemption, the Company may elect to exchange
such units for an equal number of shares of the Company's common stock. The limited partnership units in the DownREITs are
valued using the market price of the Company's common stock, a Level 1 price under the fair value hierarchy.
Financial Instruments Not Carried at Fair Value
Cash and Cash Equivalents
Cash and cash equivalent balances are held with various financial institutions within accounts designed to preserve principal. The
Company monitors credit ratings of these financial institutions and the concentration of cash and cash equivalent balances with
any one financial institution and believes the likelihood of realizing material losses related to cash and cash equivalent balances
is remote. Cash and cash equivalents are carried at their face amounts, which reasonably approximate their fair values and are
Level 1 within the fair value hierarchy.
Other Financial Instruments
Rents and other receivables and prepaids, accounts and construction payable and accrued expenses and other liabilities are carried
at their face amounts, which reasonably approximate their fair values.
In conjunction with the development of Avalon Brooklyn Bay, the Company entered into a joint venture agreement to construct a
mixed-use building that included for-sale residential condominium units and related common elements, in additional to the
Company's rental apartments, in which the Company has a 100% interest. The venture partner has a 100% interest in the for-sale
residential condominium units. The Company was responsible for the development and construction of the structure, and provided
a loan to the venture partner for the venture partner's share of costs for the for-sale residential condominium units. As of December 31,
2019, the Company has a receivable from the venture partner in the form of a variable rate mortgage note, secured by the remaining
for-sale residential condominium units. The balance as of December 31, 2019 was $10,650,000, representing outstanding principal
and interest, net of repayments, and as of December 31, 2018, was $12,819,000, representing outstanding principal and interest.
These amounts are reported as a component of prepaid expenses and other assets on the accompanying Consolidated Balance
Sheets. The Company recognizes interest income on the accrual basis.
F-38
The Company values its unsecured notes using quoted market prices, a Level 1 price within the fair value hierarchy. The Company
values its notes payable and outstanding amounts under the Credit Facility and Term Loans using a discounted cash flow analysis
on the expected cash flows of each instrument. This analysis reflects the contractual terms of the instrument, including the period
to maturity, and uses observable market-based inputs, including interest rate curves. The process also considers credit valuation
adjustments to appropriately reflect the Company’s nonperformance risk. The Company has concluded that the value of its notes
payable and amounts outstanding under its Credit Facility and Term Loans are Level 2 prices as the majority of the inputs used to
value its positions fall within Level 2 of the fair value hierarchy.
Financial Instruments Measured/Disclosed at Fair Value on a Recurring Basis
The following table summarizes the classification between the three levels of the fair value hierarchy of the Company's financial
instruments measured/disclosed at fair value on a recurring basis (dollars in thousands):
Description
Cash Flow Hedges
Interest Rate Swaps - Assets
Interest Rate Swaps - Liabilities
Puts
DownREIT units
Indebtedness
Fixed rate unsecured notes
Secured notes and variable rate unsecured indebtedness
Total
Non Designated Hedges
Interest Rate Caps
Cash Flow Hedges
Interest Rate Swaps - Liabilities
Puts
DownREIT units
Indebtedness
Fixed rate unsecured notes
Secured notes and variable rate unsecured indebtedness
Total
12. Quarterly Financial Information
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total Fair
Value
12/31/2019
$
$
$
$
$
388
(6,379)
(206)
(1,573)
— $
—
—
(1,573)
$
388
(6,379)
—
—
(6,197,771)
(1,398,147)
(7,603,688) $
(6,197,771)
—
—
(1,398,147)
(6,199,344) $ (1,404,138) $
—
—
(206)
—
—
—
(206)
12/31/2018
2
$
— $
2
$
—
(6,366)
(465)
(1,305)
—
—
(1,305)
(6,366)
—
—
(5,268,277)
(1,505,876)
(6,782,287) $
(5,268,277)
—
—
(1,505,876)
(5,269,582) $ (1,512,240) $
—
(465)
—
—
—
(465)
The following summary represents the unaudited quarterly results of operations for the years ended December 31, 2019 and 2018
(dollars in thousands, except per share data):
Total revenue
Net income
Net income attributable to common stockholders
Net income per common share - basic
Net income per common share - diluted
For the three months ended (1)
3/31/19
6/30/19
9/30/19
12/31/19
$
$
$
$
$
566,184
170,418
170,366
1.23
1.23
$
$
$
$
$
577,263
168,305
168,281
1.21
1.21
$
$
$
$
$
587,613
279,709
279,677
2.00
2.00
$
$
$
$
$
593,566
167,671
167,650
1.20
1.20
F-39
Total revenue
Net income
Net income attributable to common stockholders
Net income per common share - basic
Net income per common share - diluted
_________________________________
(1) Amounts may not equal full year results due to rounding.
13. Subsequent Events
For the three months ended (1)
3/31/18
6/30/18
9/30/18
12/31/18
$
$
$
$
$
560,792
141,590
141,643
1.03
1.03
$
$
$
$
$
569,239
254,543
254,662
1.84
1.84
$
$
$
$
$
575,982
192,407
192,486
1.39
1.39
$
$
$
$
$
578,522
385,636
385,734
2.79
2.79
The Company has evaluated subsequent events, through the date on which this Form 10-K was filed, the date on which these
financial statements were issued, and identified the items below for discussion.
In January 2020, the Company sold Avalon Shelton, a wholly-owned operating community, located in Shelton, CT. Avalon Shelton
contains 250 apartment homes, was sold for $64,750,000 and was classified as held for sale as of December 31, 2019.
In January 2020, the Company entered into an agreement to sell an operating community containing 216 apartment homes and
net real estate of $28,285,000 as of December 31, 2019, resulting in the community qualifying as held for sale subsequent to
December 31, 2019. The Company expects to complete the sale in the second quarter of 2020.
In February 2020, the Company entered into an agreement to sell an operating community containing 109 apartment homes and
net real estate of $22,358,000 as of December 31, 2019, resulting in the community qualifying as held for sale subsequent to
December 31, 2019. The Company expects to complete the sale in the second quarter of 2020.
In February 2020, the Company priced an underwritten public offering under its existing shelf registration statement for
$700,000,000 principal amount of 2.30% unsecured notes due in 2030. The Company anticipates receiving the net proceeds from
this borrowing on February 25, 2020.
In conjunction with the pricing of the $700,000,000 principal amount of 2.30% unsecured notes due in 2030, the Company settled
$350,000,000 of forward interest rate swap agreements, making a payment of $20,314,000.
In addition, the Company called for redemption of (i) $400,000,000 principal amount of its 3.625% unsecured notes in advance
of the October 2020 scheduled maturity and (ii) $250,000,000 principal amount of its 3.95% unsecured notes in advance of the
January 2021 scheduled maturity. In conjunction with this redemption, the Company anticipates recognizing a loss on debt
extinguishment comprised of approximately $9,300,000 in prepayment penalties and the non-cash write-off of unamortized
deferred financing costs.
The Company sold 14 residential condominiums at The Park Loggia, for gross proceeds of approximately $47,000,000. In addition,
the Company has contracts outstanding on 41 of the remaining residential condominiums.
As of February 21, 2020, the Company has $87,000,000 outstanding under the Credit Facility.
F-40
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F
AVALONBAY COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
December 31, 2019
(Dollars in thousands)
Amounts include real estate assets held for sale.
Depreciation of AvalonBay Communities, Inc. building, improvements, upgrades and furniture, fixtures and equipment (FF&E)
is calculated over the following useful lives, on a straight line basis:
Building—30 years
Improvements, upgrades and FF&E—not to exceed 7 years
The aggregate cost of total real estate for federal income tax purposes was approximately $22,635,619 at December 31, 2019.
The changes in total real estate assets for the years ended December 31, 2019, 2018 and 2017 are as follows:
Balance, beginning of period
Acquisitions, construction costs and improvements
Dispositions, including casualty losses and impairment loss on planned
dispositions
Balance, end of period
$
$
For the year ended
12/31/2019
12/31/2018
12/31/2017
22,342,576
$
21,935,936
$
20,776,626
1,615,949
1,568,878
1,526,516
(351,653)
(1,162,238)
(367,206)
23,606,872
$
22,342,576
$
21,935,936
The changes in accumulated depreciation for the years ended December 31, 2019, 2018 and 2017, are as follows:
Balance, beginning of period
Depreciation, including discontinued operations
Dispositions, including casualty losses
Balance, end of period
For the year ended
12/31/2019
12/31/2018
12/31/2017
$
$
4,611,646
$
4,218,379
$
3,743,632
661,578
(99,341)
631,196
(237,929)
584,150
(109,403)
5,173,883
$
4,611,646
$
4,218,379
F-53
Board of Directors
Timothy J. Naughton
Chairman of the Board,
Chief Executive Officer & President,
AvalonBay Communities, Inc.
Investment & Finance Committee
Terry S. Brown
Chairman of the Board &
Chief Executive Officer,
Asana Partners
A real estate investment company
Investment & Finance Committee (Chair);
Nominating & Corporate Governance
Committee
Ron L. Havner, Jr.
Chairman of the Board,
Public Storage, Inc.
A real estate investment trust
Audit Committee (Chair);
Investment & Finance Committee
Richard J. Lieb
Managing Director, Chairman of Real Estate
Greenhill & Co., LLC
An investment bank
Audit Committee;
Compensation Committee
Susan Swanezy
Partner,
Hodes Weill & Associates, LP
A global advisory firm
Investment & Finance Committee;
Nominating & Corporate Governance
Committee
Glyn F. Aeppel
Chief Executive Officer & President,
Glencove Capital
A hotel investment and advisory company
Investment & Finance Committee;
Nominating & Corporate Governance
Committee
Alan B. Buckelew
Private Investor
Audit Committee;
Compensation Committee
Stephen P. Hills
Founding Director,
Business Law Scholars Program,
Georgetown University Law Center
Audit Committee;
Investment & Finance Committee
H. Jay Sarles
Private Investor
Compensation Committee;
Nominating & Corporate Governance
Committee (Chair)
W. Edward Walter
Global Chief Executive Officer,
Urban Land Institute
Nonprofit research and education program
Lead Independent Director;
Compensation Committee (Chair);
Nominating & Corporate Governance Committee
Executive and Senior Officers
Timothy J. Naughton
Chairman of the Board,
Chief Executive Officer & President
Matthew H. Birenbaum
Chief Investment Officer
William M. McLaughlin
Executive Vice President
East Coast Development & Construction
Keri A. Shea
Senior Vice President
Finance & Treasurer (Principal Accounting Officer)
Kevin P. O’Shea
Chief Financial Officer
Sean J. Breslin
Chief Operating Officer
Edward M. Schulman
Executive Vice President
General Counsel & Secretary
Investor Information
Corporate Office
AvalonBay Communities, Inc.
4040 Wilson Boulevard
Suite 1000
Arlington, VA 22203
Phone: 703.329.6300
Website
www.avalonbay.com
Common Stock Listing
Ticker: AVB
New York Stock Exchange
Investor Relations Contact
Jason Reilley
AvalonBay Communities, Inc.
4040 Wilson Boulevard
Suite 1000
Arlington, VA 22203
Phone: 703.329.6300
Email: ir@avalonbay.com
Transfer Agent
Computershare
Regular Mail
P.O. Box 505000
Louisville, KY 40233
Overnight Delivery
462 South 4th Street, Suite 1600
Louisville, KY 40202
Phone: 866.230.0668
www.computershare.com
contains
Forward-Looking Statements
“forward-looking
This Annual Report
statements” within the meaning of the Securities Act of
1933 and the Securities Exchange Act of 1934. Please
see
“Forward-Looking
Statements” on page 50 of our accompanying Annual
Report on Form 10-K for a discussion regarding risks
associated with these statements.
discussion
titled
our
Stock performance graph
The Stock Performance Graph provides a comparison, from December 31, 2014 through December 31, 2019, of the
cumulative total shareholder return (assuming reinvestment of dividends) among the Company, a peer group index
(the FTSE NAREIT Apartment REIT Index) that includes the Company, and the S&P 500 based on an initial purchase
price of $100. The FTSE NAREIT Apartment REIT Index includes only REITs that invest directly or indirectly primarily
in the equity ownership of multifamily residential apartment communities. Upon written request to the Company’s
Secretary, the Company will provide any stockholder with a list of REITs included in the FTSE NAREIT Apartment REIT
Index. The historical information set forth below is not necessarily indicative of future performance. Data for the
FTSE NAREIT Apartment REIT Index and the S&P 500 Index were provided to the Company by S&P Global Market
Intelligence.
STOCK PERFORMANCE
$200
$150
$100
$50
-
2014
2015
2016
2017
2018
2019
AvalonBay Communities, Inc.
FTSE NAREIT Apartment REIT Index
S&P 500 Index
Period EndingIndex12/31/1412/31/1512/31/1612/31/1712/31/1812/31/19AvalonBay Communities, Inc.100$ 116 115 119 121 150 FTSE NAREIT Apartment REIT Index100 101 114 138 132 174 S&P 500 Index100 116 120 124 129 163 BR053484-0320-AR