AVALONBAY COMMUNITIES : MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q) – marketscreener.com

5August 2020


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 Condensed Consolidated Financial Statements and the
accompanying Notes to Condensed 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 Part
I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended
December 31, 2019 (the “Form 10-K”) and in Part II, Item 1A. “Risk Factors” in
this report.
Capitalized terms used without definition have the meanings provided elsewhere in this Form 10-Q. Executive Overview Business Description We develop, redevelop, acquire, own and operate multifamily apartment
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 in our expansion markets in Southeast Florida and Denver, Colorado (the “Expansion Markets”). We focus on leading metropolitan areas that we believe
historically have been 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 have offered and will continue
in the future to 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 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. 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.
Second Quarter 2020 Highlights• Net income attributable to common stockholders for the three months ended June 30, 2020 was $170,828,000, an increase of $2,547,000, or 1.5%, as compared to the prior year period. The increase is primarily due to anincrease in NOI from Development and Other Stabilized Communities, as well as increases in gains on real estate dispositions in the current year period. These amounts were partially offset by a decrease in NOI fromEstablished Communities, and increases in depreciation expense, property taxes and interest expense in the current year period. • Established Communities NOI for the three months ended June 30, 2020 was $368,191,000, a decrease of $14,225,000, or 3.7%, from the prior year period, due primarily to a reduction in revenues from uncollectible lease revenue, which increased $14,214,000 over the prior year period. COVID-19 Pandemic The Company has taken various actions in response to the COVID-19 pandemic to
adjust our business operations and to address the needs of our residents and
associates. We are committed to the health and safety of our residents and
associates. During the first and second quarters of 2020 we adopted certain
measures to help mitigate the financial impact arising from the national
emergency on our residents, including providing flexible lease renewal options
at no rent increase for leases expiring through June 30, 2020, creating payment
plans for residents who are unable to pay their rent because they are impacted
by this national emergency and waiving late fees and certain other customary
fees associated with apartment rentals. We may discontinue these measures at any
time except where required by law. 26
——————————————————————————–Table of Contents The ultimate impact on our consolidated results of operations from COVID-19 for
2020 and periods beyond will depend on the duration and severity of the
pandemic, the duration and nature of governmental responses to contain the
spread of the disease and cushion the impact on consumers, and how quickly and
to what extent normal economic and operating conditions can resume. The current
and potential future impacts of the COVID-19 pandemic on our business,
particularly on (i) rent levels, collectibility of rents, occupancy and the
extent to which we waive certain other customary fees associated with our
apartment rental business and (ii) development timing and volume, mean that our
historical results of operations and financial condition are not necessarily
indicative of future results of operations and financial condition. Because
those factors are beyond our control and knowledge, the adverse impact of the
pandemic on our results of operations for 2020 and beyond cannot be reasonably
estimated, and could be material. The COVID-19 pandemic has impacted our rental operations including (i) revenues
and expenses, as well as (ii) our collections and associated outstanding
receivables. For further discussion of the impact on revenues and expenses see “Results of Operations.” The following table presents the percentage of (i)
apartment base rent charged to residents and (ii) other rentable items,
including parking and storage rent, along with pet and other fees in accordance
with residential leases, that has been collected (“Collected Residential
Revenue”) for Established Communities for the three months ended June 30, 2020
(unaudited). Collected Residential Revenue excludes transactional and other
fees. At month end (1)(2) At July 31, 2020 (3) April 2020 93.9 % 97.7 %
May 2020 92.8 % 96.4 %
June 2020 93.6 % 95.5 %
July 2020 93.9 % 93.9 %
_________________________(1) Excludes retail revenue, which was 1.4% of our 2019 Established Communities’ total revenue. As of June 30, 2020, we collected 56.5% of billed retail revenue for the three months ended June 30, 2020. (2) The percentage of Collected Residential Revenue as of the last calendar day for each month. (3) The percentage of Collected Residential Revenue as of July 31, 2020 for each month. The collection rates are based on individual resident and retail tenant activity
as reflected in our property management systems, and are presented to provide
information about collections trends during the COVID-19 pandemic. Prior to the
COVID-19 pandemic, the collections information provided was not routinely
produced for internal use by senior management or publicly disclosed by the
Company and is a result of analysis that is not subject to internal controls
over financial reporting. This information is not prepared in accordance with
GAAP, does not reflect GAAP revenue or cash flow metrics and may be subject to
adjustment in preparing GAAP revenue and cash flow metrics. Additionally, this
information should not be interpreted as predicting the Company’s financial
performance, results of operations or liquidity for any period. At June 30,
2020, our outstanding rent receivable balance for residential and retail
tenants, net of reserves, increased to $20,197,000 from $11,594,000 at December
31, 2019. The net receivable at June 30, 2020 includes $4,643,000 of residential
receivables subject to payment plans.
Second Quarter 2020 Development HighlightsAt June 30, 2020, we owned or held a direct or indirect interest in:• 19 communities under construction, which are expected to contain 6,198apartment homes with a projected total capitalized cost of $2,399,000,000. During the three months ended June 30, 2020, construction at six of these
Development Communities had been temporarily suspended after considering state
and local regulations and/or advisories and the construction at many of the
remaining Development Communities had been slowed due to the impact of safety
precautions on labor availability and inspection constraints. As of June 30,
2020, construction has been restarted at all six Development Communities that
had been temporarily suspended, and construction work at our remaining sites
that had been slowed was largely back to normal pace. We may be required to, or
may at our discretion, temporarily suspend ongoing construction at one or more
of our Development Communities as a result of either governmental actions or
social or economic conditions arising as a result of the COVID-19 pandemic. 27
——————————————————————————–Table of Contents
• Land or rights to land on which we expect to develop an additional 28 apartment communities that, if developed as expected, will contain 9,786
apartment homes, and will be developed for an aggregate total capitalizedcost of $4,202,000,000. In response to the COVID-19 pandemic, we have not started the construction of
any new development communities through June 30, 2020. In July 2020 we entered
into a joint venture to develop AVA Arts District, as discussed under “Unconsolidated Real Estate Investments and Off-Balance Sheet Arrangements.” We
will evaluate future starts on an individual basis, based on evolving economic
and market conditions. In addition, we have substantially reduced our planned
redevelopment and other non-essential capex investment. 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.” During the three months ended June 30, 2020, we sold one wholly-owned operating
community containing 216 apartment homes for $64,900,000, and our gain in
accordance with GAAP was $35,297,000. In addition, we sold 16 residential
condominiums at The Park Loggia, for gross proceeds of $61,207,000, resulting in
a gain in accordance with GAAP of $2,544,000.
Communities Overview 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 classified 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 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. 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) areconsolidated communities in the markets where we have a significantpresence (New England, New York/New Jersey, Mid-Atlantic, PacificNorthwest, Northern and Southern California and our expansion marketsof Southeast Florida and Denver, Colorado), and where a comparison ofoperating results from the prior year to the current year ismeaningful, as these communities were owned and had stabilizedoccupancy as of the beginning of the respective prior year period. Forthe six month periods ended June 30, 2020 and 2019, EstablishedCommunities are communities that are consolidated for financialreporting purposes, had stabilized occupancy as of January 1, 2019, arenot conducting or are not probable to conduct substantial redevelopment activities and are not held for sale as of June 30, 2020 or probable for disposition to unrelated third parties within the current year. Acommunity is considered to have stabilized occupancy at the earlier of (i) attainment of 90% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment. • Other Stabilized Communities are all other completed consolidated communities that have stabilized occupancy, as defined above, as of January 1, 2020, or which were acquired subsequent to January 1, 2019.Other Stabilized Communities excludes communities that are conducting or are probable to conduct substantial redevelopment activities within the current year, as defined below. • 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 probable to begin during the current year. Redevelopment is considered substantial when (i) capital invested during the reconstruction effort is expected to exceedthe lesser of $5,000,000 or 10% of the community’s pre-redevelopmentgross cost basis and (ii) physical occupancy is below or is expected tobe below 90% during, or as a result of, the redevelopment activity. We had no Redevelopment Communities at June 30, 2020. • Unconsolidated Communities are communities that we have an indirect ownership interest in through our investment interest in an unconsolidated joint venture. 28——————————————————————————–Table of ContentsDevelopment Communities are communities that are under construction and for which a certificate or certificates of occupancy for the entire community have not been received. These communities may be partially complete and operating. 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 June 30, 2020, communities that we owned or held a direct or indirect interest in were classified as follows: Number of Number of communities apartment homes
Current Communities Established Communities:
New England 40 10,055
Metro NY/NJ 47 13,268
Mid-Atlantic 39 13,838
Pacific Northwest 16 4,116
Northern California 40 11,362
Southern California 56 16,379
Expansion Markets 3 912
Total Established 241 69,930 Other Stabilized Communities:
New England 3 705
Metro NY/NJ 2 854
Mid-Atlantic 1 151
Pacific Northwest 2 745
Northern California 1 873
Southern California 2 681
Expansion Markets 5 1,388
Total Other Stabilized 16 5,397 Lease-Up Communities 6 1,666 Redevelopment Communities – – Unconsolidated Communities 13 3,189 Total Current Communities 276 80,182 Development Communities (1) 19 6,198 Total Communities 295 86,380 Development Rights (2) 28 9,786 _________________________
(1) Development Communities includes Avalon Alderwood Mall, expected to contain 328 apartment homes, which is being developed within an unconsolidated joint venture. (2) Development Rights includes AVA Arts District, expected to contain 475 apartments homes, which will be developed within an unconsolidated joint venture. 29——————————————————————————–Table of ContentsResults of Operations As discussed above under “Executive Overview – COVID-19 Pandemic” and elsewhere
in this report, the COVID-19 pandemic has affected our business, and may
continue to do so. See also Part II, Item 1A, “Risk Factors.” 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,
development completions and development under construction and in lease-up; the
loss of NOI related to disposed communities; and capital market and financing
activity. A comparison of our operating results for the three and six months
ended June 30, 2020 and 2019 follows (unaudited, dollars in thousands). For the three months ended For the six months ended 6/30/2020 6/30/2019 $ Change % Change 6/30/2020 6/30/2019 $ Change % Change Revenue:
Rental and other income $ 575,479$ 576,149$ (670 ) (0.1 )% $ 1,176,123$ 1,141,194$ 34,929 3.1 %
Management, development and
other fees 926 1,114 (188 ) (16.9 )% 1,933 2,252 (319 ) (14.2 )%
Total revenue 576,405 577,263 (858 ) (0.1 )% 1,178,056 1,143,446 34,610 3.0 % Expenses:
Direct property operating
expenses, excluding
property taxes 106,753 108,777 (2,024 ) (1.9 )% 214,934 211,362 3,572 1.7 %
Property taxes 67,013 62,187 4,826 7.8 % 134,039 123,516 10,523 8.5 %
Total community operating
expenses 173,766 170,964 2,802 1.6 % 348,973 334,878 14,095 4.2 % Corporate-level property
management and other
indirect operating expenses 24,337 24,147 190 0.8 % 48,149 45,016 3,133 7.0 %
Expensed transaction,
development and other
pursuit costs, net of
recoveries 388 1,766 (1,378 ) (78.0 )% 3,722 2,388 1,334 55.9 %
Interest expense, net 53,399 50,010 3,389 6.8 % 109,313 97,902 11,411 11.7 % Loss on extinguishment of debt, net 268 229 39 17.0 % 9,438 509 8,929 1,754.2 %
Depreciation expense 176,249 162,693 13,556 8.3 % 354,160 324,749 29,411 9.1 %
General and administrative
expense 15,573 18,965 (3,392 ) (17.9 )% 32,893 32,671 222 0.7 %
Total other expenses 270,214 257,810 12,404 4.8 % 557,675 503,235 54,440 10.8 % Equity in income (loss) of
unconsolidated real estate
entities 512 197 315 159.9 % 1,687 (863 ) 2,550 N/A (1)
Gain on sale of communities 35,295 20,530 14,765 71.9 % 59,731 35,365 24,366 68.9 %
Gain on other real estate
transactions, net 156 34 122 358.8 % 199 300 (101 ) (33.7 )%
Gain on for-sale
condominiums, net of
marketing and
administrative costs 1,348 (945 ) 2,293 N/A (1) 4,808 (1,418 ) 6,226 N/A (1)
Income before income taxes 169,736 168,305 1,431 0.9 % 337,833 338,717 (884 ) (0.3 )%
Income tax benefit 1,133 – 1,133 100.0 % 1,042 6 1,036 N/A (1)
Net income 170,869 168,305 2,564 1.5 % 338,875 338,723 152 – %
Net income attributable to noncontrolling interests (41 ) (24 ) (17 ) 70.8 % (76 ) (76 ) – – % Net income attributable to common stockholders $ 170,828$ 168,281$ 2,547 1.5 % $ 338,799$ 338,647$ 152 – % _________________________(1) Percent change is not meaningful. Net income attributable to common stockholders increased $2,547,000, or 1.5%, to
$170,828,000 for the three months ended June 30, 2020 and increased $152,000 to
$338,799,000 for the six months ended June 30, 2020 as compared to the prior
year periods. The increases for the three and six months ended June 30, 2020 are
primarily due to increases in NOI from Development and Other Stabilized
Communities, as well as increases in gains on real estate dispositions in the
current year periods. These amounts were partially offset by decreases in NOI
from Established Communities, and increases in depreciation expense, property
taxes and interest expense in the current year periods. 30
——————————————————————————–Table of Contents 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 on extinguishment of debt, net, general and administrative expense, equity
in income of unconsolidated real estate entities, depreciation expense,
corporate income tax expense, casualty and impairment (gain) loss, net, gain on
sale of communities, (gain) loss on other real estate transactions, net, gain on
for-sale condominiums, net of 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 three and six months ended June 30, 2020 and 2019
to net income for each period are as follows (unaudited, dollars in thousands): For the three months ended For the six months ended 6/30/2020 6/30/2019 6/30/2020 6/30/2019 Net income $ 170,869$ 168,305$ 338,875$ 338,723
Indirect operating expenses, net of
corporate income 23,407 23,018 46,206 42,740
Expensed transaction, development
and other pursuit costs, net of
recoveries 388 1,766 3,722 2,388
Interest expense, net 53,399 50,010 109,313 97,902
Loss on extinguishment of debt, net 268 229 9,438 509
General and administrative expense 15,573 18,965 32,893 32,671
Equity in (income) loss of
unconsolidated real estate entities (512 ) (197 ) (1,687 ) 863
Depreciation expense 176,249 162,693 354,160 324,749
Income tax benefit (1,133 ) – (1,042 ) (6 )
Gain on sale of real estate assets (35,295 ) (20,530 ) (59,731 ) (35,365 )
Gain on other real estate
transactions, net (156 ) (34 ) (199 ) (300 )
Gain on for-sale condominiums, net
of marketing and administrative
costs (1,348 ) 945 (4,808 ) 1,418
Net operating income from real
estate assets sold or held for sale (336 ) (5,075 ) (1,232 ) (11,281 )
Net operating income $ 401,373$ 400,095 $
825,908 $ 795,011The NOI changes for the three and six months ended June 30, 2020, compared to the prior year periods, consist of changes in the following categories (unaudited, dollars in thousands): For the three months ended For the six months ended 6/30/2020 6/30/2020 Established Communities $ (14,225 ) $ (2,917 )
Other Stabilized Communities 5,871 14,638
Development / Redevelopment (1) 9,632 19,176
Total $ 1,278 $ 30,897 _________________________
(1) We had no Redevelopment Communities at June 30, 2020. 31——————————————————————————–Table of Contents Rental and other income decreased $670,000, or 0.1%, and increased $34,929,000,
or 3.1%, for the three and six months ended June 30, 2020 compared to the prior
year periods. The decrease for the three months ended June 30, 2020 is primarily
due to an increase of $16,791,000 in residential and retail uncollectible lease
revenue as a result of the COVID-19 pandemic, as well as decreased occupancy and
rental rates at our Established Communities, partially offset by additional
rental income generated from development completions, development under
construction and in lease-up and acquired operating communities. The increase
for the six months ended June 30, 2020 is due to additional rental income
generated from development completions, development under construction and in
lease-up and acquired operating communities and an increase in rental rates at
our Established Communities, partially offset by an increase of $18,159,000 in
residential and retail uncollectible lease revenue as a result of the COVID-19
pandemic. As discussed elsewhere in this report, the COVID-19 impact and related economic,
regulatory and operating impacts are likely to continue to adversely affect our
rental revenue, and comparisons to prior year periods, during the COVID-19
pandemic. If job losses in our markets and nationally continue, this would
likely continue to decrease our ability to maintain and/or increase rents and/or
maintain occupancy at our historical levels. Deteriorating financial conditions
among our residents and retail tenants, as well as regulations that limit our
ability to quickly evict residents and tenants, may continue to result in higher
than normal uncollectible lease revenue. The pandemic may also continue to
depress demand among consumers for our apartments for a variety of other
reasons, including the following: consumers whose income has declined, who are
working from home remotely or who cannot freely access neighborhood amenities
like restaurants, gyms and entertainment venues, may decide during the pandemic
to live in markets or submarkets that are less costly than ours; and low
interest rates that are caused by government response to the pandemic may
encourage consumers who would otherwise rent to seek out single family
ownership; and various sources of demand for our apartments (e.g., students,
corporate apartment homes, seasonal job-related demand as in the entertainment
industry) may remain below pre-pandemic levels if institutions of higher
learning turn to online education or business activity and travel remain at
lower levels than before the pandemic. Consolidated Communities – The weighted average number of occupied apartment
homes increased to 74,079 apartment homes for the six months ended June 30,
2020, compared to 72,323 homes for the prior year period. The weighted average
monthly revenue per occupied apartment home increased to $2,642 for the six
months ended June 30, 2020 compared to $2,626 in the prior year period. For Established Communities, rental revenue decreased $15,670,000, or 2.9%, and
increased $540,000, or 0.1%, for the three and six months ended June 30, 2020
compared to the prior year periods. Residential and retail uncollectible lease
revenue contributed an aggregate of $14,214,000 and $15,227,000 to the changes
in rental revenue for the three and six months ended June 30, 2020,
respectively, compared to the prior year periods.
The following table presents the change in rental revenue, including the attribution of the change between rental rates and Economic Occupancy, for Established Communities for the six months ended June 30, 2020 (unaudited). For the six months ended June 30, 2020 Rental revenue (000s) Average rental rates Economic Occupancy (1) $ Change % Change % Change % Change 2020 to 2020 to 2020 to 2020 to 2020 2019 2019 2019 2020 2019 2019 2020 2019 2019
New England $ 161,542$ 158,369$ 3,173 2.0 % $ 2,821$ 2,758 2.3 % 94.9 % 95.2 % (0.3 )%
Metro NY/NJ 234,472 238,351 (3,879 ) (1.6 )% 3,085 3,116 (1.0 )% 95.5 % 96.1 % (0.6 )%
Mid-Atlantic 179,507 178,181 1,326 0.7 % 2,264 2,232 1.4 % 95.5 % 96.2 % (0.7 )%
Pacific
Northwest 56,178 55,807 371 0.7 % 2,361 2,343 0.8 % 96.3 % 96.4 % (0.1 )%
Northern
California 205,342 203,473 1,869 0.9 % 3,133 3,100 1.1 % 96.1 % 96.3 % (0.2 )%
Southern
California 221,675 224,004 (2,329 ) (1.0 )% 2,358 2,381 (1.0 )% 95.7 % 95.7 % – %
Expansion
Markets 11,790 11,781 9 0.1 %
2,307 2,270 1.6 % 93.4 % 94.9 % (1.5 )% Total Established $ 1,070,506$ 1,069,966$ 540 0.1 % $ 2,669$ 2,658 0.4 % 95.6 % 95.9 % (0.3 )%_________________________________(1) Economic occupancy takes into account the fact that apartment homes ofdifferent sizes and locations within a community have different economicimpacts on a community’s gross revenue. Economic occupancy is defined asgross potential revenue less vacancy loss, as a percentage of grosspotential revenue. Gross potential revenue is determined by valuingoccupied homes at leased rates and vacant homes at market rents. Vacancy loss is determined by valuing vacant units at current market rents. 32——————————————————————————–Table of ContentsThe following table presents the change in rental revenue for Established Communities for the three and six months ended June 30, 2020, compared to the prior year periods (unaudited): For the three months ended For the six months ended 6/30/2020 6/30/2020
Residential rental revenue
Lease rates 1.8 % 2.2 %
Concessions and other discounts (0.2 )% – %
Economic occupancy (1.2 )% (0.4 )%
Other rental revenue (0.6 )% (0.3 )%
Uncollectible lease revenue (2.0 )% (1.1 )%
Total residential rental revenue (2.2 )% 0.4 %
Retail rental revenue (1) (0.7 )% (0.3 )%
Total Established Communities change in
rental revenue (2.9 )%
0.1 %_________________________________(1) Consists primarily of the impact of uncollectible retail lease revenue. Direct property operating expenses, excluding property taxes, decreased
$2,024,000, or 1.9%, and increased $3,572,000, or 1.7%, for the three and six
months ended June 30, 2020 compared to the prior year periods. The decrease for
the three months ended June 30, 2020 is primarily due to the deferral or
cancellation of repairs and maintenance projects due to the COVID-19 pandemic.
The increase for the six months ended June 30, 2020 is primarily due to the
addition of newly developed and acquired apartment communities, partially offset
by decreased costs related to the deferral or cancellation of repairs and
maintenance projects due to the COVID-19 pandemic. For Established Communities, direct property operating expenses, excluding
property taxes, decreased $4,113,000, or 4.1%, and $2,327,000, or 1.2%, for the
three and six months ended June 30, 2020 compared to the prior year periods. The
decreases are primarily due to decreased costs related to the deferral or
cancellation of repairs and maintenance projects due to the COVID-19 pandemic,
partially offset by an increase in COVID-19 related costs for personal
protective equipment and cleaning. The decrease for the three months ended
June 30, 2020 is also due to decreased compensation expense. Property taxes increased $4,826,000, or 7.8%, and $10,523,000, or 8.5%, for the
three and six months ended June 30, 2020, compared to the prior year periods.
The increases for the three and six months ended June 30, 2020 are 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 $2,365,000, or 4.1%, and
$5,397,000, or 4.7%, for the three and six months ended June 30, 2020, compared
to the prior year periods. The increases for the three and six months ended
June 30, 2020 are primarily due to increased assessments and rates across the
portfolio in the current year periods. The increase for the six months ended
June 30, 2020 is also due to successful appeals in the prior year period in
excess of those in the current year period. 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 $3,133,000, or 7.0%, for the six months ended June 30, 2020, compared
to the prior year period, primarily due to increased compensation related costs
and advocacy contributions in the current year period. Expensed transaction, 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 or
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, decreased $1,378,000, or 78.0%, and
increased $1,334,000, or 55.9%, respectively, for the three and six months ended
June 30, 2020 as compared to the prior year periods. 33
——————————————————————————–Table of Contents Interest expense, net increased $3,389,000, or 6.8%, and $11,411,000, or 11.7%,
for the three and six months ended June 30, 2020, compared to the prior year
periods. 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 increases for the three and
six months ended June 30, 2020 were primarily due to a decrease in capitalized
interest. The increase for the three months ended June 30, 2020 is partially
offset by lower overall effective rates on unsecured indebtedness, and a
combination of a decrease in variable rates on, and amounts of, secured
indebtedness. The increase for the six months ended June 30, 2020 was also due
to an increase in outstanding unsecured indebtedness, partially offset by a
decrease in variable rates on, and amounts of, outstanding secured indebtedness. Loss on extinguishment of debt, net reflects prepayment penalties, the write-off
of unamortized deferred financing costs and premiums and discounts from our debt
repurchase and retirement activity, and payments to acquire our outstanding debt
at amounts above or below the carrying basis of the debt acquired. The losses of
$268,000 and $9,438,000 for the three and six months ended June 30, 2020 were
due to the repayments of unsecured debt during the periods. Depreciation expense increased $13,556,000, or 8.3%, and $29,411,000, or 9.1%,
for the three and six months ended June 30, 2020, compared to the prior year
periods, primarily due to the addition of newly developed and acquired apartment
communities, partially offset by dispositions. General and administrative expense decreased $3,392,000, or 17.9%, for the three
months ended June 30, 2020, compared to the prior year period, primarily due to
a decrease in compensation related expenses, including severance costs. Equity in income (loss) of unconsolidated real estate entities increased
$315,000, or 159.9%, and $2,550,000 for the three and six months ended June 30,
2020, compared to the prior year periods. The increases for the three and six
months ended June 30, 2020 are primarily due non-cash charges for the
depreciation of in-place leases associated with purchase accounting within the
NYTA MF Investors LLC unconsolidated venture (the “NYC Joint Venture”) in the
prior year periods.
Gain on sale of communities increased for the three and six months ended June 30, 2020 compared to the prior year periods. 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. Gain on for-sale condominiums, net of marketing and administrative costs is a
gain of $1,348,000 and $4,808,000 for the three and six months ended June 30,
2020 and a loss of $945,000 and $1,418,000 for the three and six months ended
June 30, 2019, and is comprised of the net gain before taxes on the sale of
condominiums at The Park Loggia, net of marketing and administrative costs
associated with the for-sale condominiums. During the three and six months ended
June 30, 2020, we sold 16 and 52 residential condominiums at The Park Loggia,
for gross proceeds of $61,207,000 and $166,814,000, resulting in a gain in
accordance with GAAP of $2,544,000 and $7,447,000, respectively. In addition, we
incurred $1,196,000 and $945,000 for the three months ended June 30, 2020 and
2019, respectively, and $2,639,000 and $1,418,000 for the six months ended
June 30, 2020 and 2019, respectively, in marketing and administrative costs
associated with The Park Loggia.
Income tax benefit of $1,133,000 and $1,042,000 for the three and six months ended June 30, 2020 was primarily due to provisions of the Coronavirus Aid, Relief, and Economic Security Act, allowing for further carryback of net operating losses.Reconciliation of Non-GAAP Financial Measures Consistent with the definition adopted by the Board of Governors of the National
Association of Real Estate Investment Trusts® (“NAREIT”), we calculate Funds
from Operations Attributable to Common Stockholders (“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 ofdepreciable real estate assets held by those affiliates;• depreciation of real estate assets; and• similar adjustments for unconsolidated partnerships and joint ventures, including those from a change in control. 34——————————————————————————–Table of Contents 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 between periods. We believe that in order to understand our operating
results, FFO and Core FFO should be examined with net income as presented in our
Condensed Consolidated Financial Statements included elsewhere in this report.
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;• gains or losses from early extinguishment of consolidated borrowings;• abandoned pursuits;• business interruption insurance proceeds and the related lost NOI that iscovered by the expected business interruption insurance proceeds;• property and casualty insurance proceeds and legal settlements;• gains or losses on sales of assets not subject to depreciation; • advocacy contributions, representing payments to promote our business interests; • hedge ineffectiveness; • severance related costs; • expensed transaction costs; • for-sale condominium activity, including gains, marketing and administrative costs and imputed carry cost; • 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.
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 (unaudited, dollars in thousands, except per share amounts): 35——————————————————————————– Table of Contents For the three months ended For the six months ended 6/30/2020 6/30/2019 6/30/2020 6/30/2019 Net income attributable to common
stockholders $ 170,828$ 168,281$ 338,799$ 338,647
Depreciation – real estate assets,
including joint venture adjustments 175,558 164,830 352,986 329,576
Distributions to noncontrolling
interests 12 12 24 23
Gain on sale of previously depreciated
real estate (35,295 ) (20,530 ) (59,731 ) (35,365 )
FFO attributable to common
stockholders 311,103 312,593 632,078 632,881 Adjusting items:
Business interruption insurance
proceeds (103 ) (435 ) (103 ) (607 )
Lost NOI from casualty losses covered
by business interruption insurance 48 – 48 –
Loss on extinguishment of consolidated
debt 268 229 9,438 509
Advocacy contributions 1,465 – 1,766 –
Severance related costs 89 1,353 2,040 1,372
Development pursuit write-offs and
expensed transaction costs, net 269 1,327 3,389 1,604
Gain on for-sale condominiums (1)(2) (2,544 ) – (7,447 ) –
For-sale condominium marketing and
administrative costs (2) 1,196 945 2,639 1,418
For-sale condominium imputed carry
cost (3) 2,824 506 6,433 506
Gain on other real estate transactions (156 ) (34 ) (199 ) (301 )
Legal settlements (67 ) 38 (24 ) (978 )
Income tax benefit (1,133 ) – (1,042 ) (6 )
Core FFO attributable to common
stockholders $ 313,259$ 316,522
$ 649,016$ 636,398 Weighted average common shares
outstanding – diluted 140,738,160 139,618,231
140,752,331 139,227,376EPS per common share – diluted $ 1.21 $ 1.21 $ 2.41$ 2.43
FFO per common share – diluted $ 2.21 $ 2.24 $ 4.49$ 4.55
Core FFO per common share – diluted $ 2.23 $ 2.27
$ 4.61$ 4.57_________________________(1) Amount for the three and six months ended June 30, 2020 includes the saleof 16 and 52 residential condominiums, respectively, at The Park Loggia.(2) The aggregate impact of (i) gain on for-sale condominiums and (ii)for-sale condominium marketing and administrative costs for the three and six months ended June 30, 2020 are gains of $1,348 and $4,808, respectively, and for the three and six months ended June 30, 2019 are losses of $945 and $1,418, respectively. (3) Represents the imputed carry cost of for-sale residential condominiums atThe Park Loggia. We compute this adjustment by multiplying the totalcapitalized cost of completed and unsold for-sale residential condominiumsby our weighted average unsecured debt rate. 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 as follows (unaudited, dollars
in thousands) and a discussion of “Liquidity and Capital Resources” can be found
later in this report: For the three months ended For the six months ended 6/30/2020 6/30/2019 6/30/2020 6/30/2019
Net cash provided by operating
activities $ 287,213$ 275,946$ 628,917$ 637,732
Net cash used in investing
activities $ (49,061 )$ (276,838 )$ (185,128 )$ (590,024 )
Net cash (used in) provided by
financing activities $ (690,879 )$ 135,729$ (155,709 )$ 64,472 36
——————————————————————————–Table of ContentsLiquidity 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 focus on near-term and intermediate-term
liquidity is to ensure we have adequate capital to fund:
• development and redevelopment activity in which we are currently engagedor in which we plan to engage;• 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. Cash flows from
operations are determined by operating activities and factors including but not
limited to (i) the number of apartment homes currently owned, (ii) rental rates,
(iii) occupancy levels, (iv) uncollectible lease revenue levels or interruptions
in collections caused by market conditions and (iv) operating expenses with
respect to apartment homes. The timing and type of capital markets activity in
which we engage is affected by changes in the capital markets environment, such
as changes in interest rates or the availability of cost-effective capital. Our
plans for development, redevelopment, non-routine capital expenditure,
acquisition and disposition activity are affected by market conditions and
capital availability. We frequently review our liquidity needs, especially in
periods with volatile market conditions, as well as 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 $415,694,000 at June 30,
2020, an increase of $288,080,000 from $127,614,000 at December 31, 2019. As
presented in our Condensed Consolidated Statements of Cash Flows included
elsewhere in this report, the following discussion relates to changes in cash
and cash equivalents and restricted cash due to operating, investing and
financing activities. Operating Activities – Net cash provided by operating activities decreased to
$628,917,000 for the six months ended June 30, 2020 from $637,732,000 for the
six months ended June 30, 2019.
Investing Activities – Net cash used in investing activities totaled $185,128,000 for the six months ended June 30, 2020. The net cash used was primarily due to:
• investment of $383,139,000 in the development and redevelopment of communities; and • capital expenditures of $66,319,000 for our operating communities and non-real estate assets.
These amounts are partially offset by:•net proceeds from the sale of for-sale residential condominiums of $155,217,000; and •net proceeds from the disposition of two operating communities of $132,882,000.Financing Activities – Net cash used in financing activities totaled $155,709,000 for the six months ended June 30, 2020. The net cash provided by was primarily due to:• repayments of unsecured notes in the amount of $958,680,000;• payment of cash dividends in the amount of $437,326,000; and • repayment of a mortgage note payable in the amount of $56,852,000 that was subsequently refinanced, as discussed below. These amounts are partially offset by:
• proceeds from the issuance of unsecured notes in the amount of $1,296,581,000; and • the issuance of a secured note that was part of a refinancing, as discussed above, in the amount of $51,000,000.
Variable Rate Unsecured Credit Facility We have a $1,750,000,000 revolving variable rate unsecured credit facility with
a syndicate of banks (the “Credit Facility”) which matures in February 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 37
——————————————————————————–Table of Contents is LIBOR plus 0.775% per annum (0.93% at July 31, 2020), assuming a one month
borrowing rate. The annual facility fee is 0.125% (or approximately $2,188,000
annually based on the $1,750,000,000 facility size and based on our current
credit rating). We had no borrowings outstanding under the Credit Facility and had $4,852,000
outstanding in letters of credit that reduced our borrowing capacity as of
July 31, 2020. In addition, we had $32,322,000 outstanding in additional letters
of credit on a separate facility unrelated to the Credit Facility as of July 31,
2020. 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 June 30, 2020. In addition, some of our secured borrowings 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 May 2019, we commenced a fifth 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. As of July 31, 2020, there are no outstanding forward sales
agreements. As of July 31, 2020, we had $752,878,000 remaining authorized for
issuance under this program.
Forward Interest Rate Swap AgreementsThe following activity occurred during the six months ended June 30, 2020:• We settled an aggregate of $600,000,000 of forward interest rate swapagreements, making aggregate payments of $25,135,000. Of the positionssettled, $250,000,000 were forward interest swaps that we had entered into during 2020. • In conjunction with the issuance of our $700,000,000unsecured notes due 2030 in February 2020, we settled $350,000,000 of forward interest rate swap agreements designated as cash flow hedges of the interest rate variability on the issuance of the unsecured notes, making a payment of $20,314,000. • In conjunction with the issuance of our $600,000,000unsecured notes due 2031 in May 2020, we settled $250,000,000 of forward interest rate swap agreements designated as cash flow hedges of the interest rate variability on the issuance of the unsecured notes, making a payment of $4,821,000. • We entered into an additional $100,000,000 of new forward interest rateswap agreements executed to reduce the impact of variability of interestrates on a portion of our expected debt issuance activity in 2021.In July 2020, we entered into $50,000,000 of forward interest rate swap agreements executed to reduce the impact of variability of interest rates on a portion of our expected debt issuance activity in 2021. 38——————————————————————————–Table of Contents At maturity of the outstanding swap agreements, we expect to cash settle the
contracts and either pay or receive cash for the then current fair value.
Assuming that we issue the debt as expected, the hedging impact from these
positions will then be recognized over the life of the issued debt as a yield
adjustment. Stock Repurchase Program In July 2020, our Board of Directors voted to terminate our prior $500,000,000
Stock Repurchase Program (the “Amended 2005 Stock Repurchase Program”) and
approved a new stock repurchase program under which we may acquire shares of our
common stock in open market or negotiated transactions up to an aggregate
purchase price of $500,000,000 (the “2020 Stock Repurchase Program”). Purchases
of common stock under the 2020 Stock Repurchase Program may be exercised from
time to time in our discretion and in such amounts as market conditions warrant.
The timing and actual number of shares repurchased will depend on a variety of
factors including price, corporate and regulatory requirements, market
conditions and other corporate liquidity requirements and priorities. The 2020
Stock Repurchase Program does not have an expiration date and may be suspended
or terminated at any time without prior notice. We intend that funds used for
the stock repurchase program will be matched over time with the proceeds from
sales of existing apartment communities and in some cases with newly issued
debt, but initially may be funded from existing cash balances, retained cash
flow and/or our Credit Facility. There have been no stock repurchases under this
program through the date on which this report was filed.
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 capital from additional debt
financing or debt or equity offerings will be available or, if available, that
they will be on terms we consider satisfactory, especially in light of the
uncertain impacts of the COVID-19 pandemic on capital markets.
The following debt activity occurred during the six months ended June 30, 2020:• In February 2020, we issued $700,000,000 principal amount of unsecurednotes in a public offering under our existing shelf registration statement for net proceeds of approximately $694,701,000. The notes mature in March 2030 and were issued at a 2.30% interest rate. • In February 2020, we refinanced the secured borrowing for Avalon San BrunoIII. The secured borrowing had a fixed interest rate of 3.08% and wasrefinanced for a principal balance of $51,000,000, with a fixed interest rate of 2.38% and maturity date of March 2027. • In March 2020, we repaid (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 ofthe January 2021 scheduled maturity. In conjunction with these repayments,we recognized a loss on debt extinguishment of $9,170,000 for prepaymentpenalties and the non-cash write-off of unamortized deferred financing costs. • In May 2020, we issued $600,000,000 principal amount of unsecured notes ina public offering under our existing shelf registration statement for net proceeds of approximately $593,430,000. The notes mature in January 2031 and were issued at a 2.45% interest rate. • In May 2020, we repaid $300,000,000 principal amount of variable rate unsecured notes in advance of the January 2021 scheduled maturity,recognizing a charge of $268,000 for the non-cash write-off of 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 June 30, 2020
and December 31, 2019 (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. 39
——————————————————————————– Table of Contents All-In Principal Balance Outstanding (2) Scheduled Maturities interest maturity
Community rate (1) date 12/31/2019 6/30/2020 2020 2021 2022 2023 2024 Thereafter
Tax-exempt bonds
Fixed rate
Avalon at Chestnut
Hill 6.16 % Oct-2047 $ 36,995 $
36,701 $ 302$ 629$ 663$ 699$ 737 $ 33,671
Avalon Westbury 3.86 % Nov-2036 (3) 62,200 62,200 – – – – – 62,200 99,195 98,901 302 629 663 699 737 95,871
Variable rate
Avalon Acton 1.13 % Jul-2040 (4) 45,000 45,000 – – – – – 45,000
Avalon Clinton
North 1.78 % Nov-2038 (4) 147,000 147,000 – – – – – 147,000
Avalon Clinton
South 1.78 % Nov-2038 (4) 121,500 121,500 – – – – – 121,500
Avalon Midtown West 1.70 % May-2029 (4) 98,200 93,500 – 5,200 5,600 6,100 6,800 69,800
Avalon San Bruno I 1.67 % Dec-2037 (4) 64,450 64,450 1,400 1,900 2,000 2,200 2,200 54,750 476,150 471,450 1,400 7,100 7,600 8,300 9,000 438,050
Conventional loans
Fixed rate
$250 million
unsecured notes 4.04 % Jan-2021 (5) 250,000 – – – – – – –
$450 million
unsecured notes 4.30 % Sep-2022 450,000 450,000 – – 450,000 – – –
$250 million
unsecured notes 3.00 % Mar-2023 250,000 250,000 – – – 250,000 – –
$400 million
unsecured notes 3.78 % Oct-2020 (5) 400,000 – – – – – – –
$350 million
unsecured notes 4.30 % Dec-2023 350,000 350,000 – – – 350,000 – –
$300 million
unsecured notes 3.66 % Nov-2024 300,000 300,000 – – – – 300,000 –
$525 million
unsecured notes 3.55 % Jun-2025 525,000 525,000 – – – – – 525,000
$300 million
unsecured notes 3.62 % Nov-2025 300,000 300,000 – – – – – 300,000
$475 million
unsecured notes 3.35 % May-2026 475,000 475,000 – – – – – 475,000
$300 million
unsecured notes 3.01 % Oct-2026 300,000 300,000 – – – – – 300,000
$350 million
unsecured notes 3.95 % Oct-2046 350,000 350,000 – – – – – 350,000
$400 million
unsecured notes 3.50 % May-2027 400,000 400,000 – – – – – 400,000
$300 million
unsecured notes 4.09 % Jul-2047 300,000 300,000 – – – – – 300,000
$450 million
unsecured notes 3.32 % Jan-2028 450,000 450,000 – – – – – 450,000
$300 million
unsecured notes 3.97 % Apr-2048 300,000 300,000 – – – – – 300,000
$450 million
unsecured notes 3.66 % Jun-2029 450,000 450,000 – – – – – 450,000
$700 million
unsecured notes 2.69 % Mar-2030 – 700,000 – – – – – 700,000
$600 million
unsecured notes 2.65 % Jan-2031 – 600,000 – – – – – 600,000
Avalon Walnut Creek 4.00 % Jul-2066 3,847 3,847 – – – – –
3,847
Eaves Los Feliz 3.68 % Jun-2027 41,400 41,400 – – – – –
41,400
Eaves Woodland
Hills 3.67 % Jun-2027 111,500 111,500 – – – – –
111,500
Avalon Russett 3.77 % Jun-2027 32,200 32,200 – – – – –
32,200
Avalon San Bruno II 3.85 % Apr-2021 28,435 28,143 299 27,844 – – – –
Avalon Westbury 4.88 % Nov-2036 (3) 13,665 12,925 755 1,575 1,655 1,740 1,840 5,360
Avalon San Bruno
III 3.18 % Jun-2020 (6) 50,825 – – – – – – –
Avalon San Bruno
III 2.38 % Mar-2027 (6) – 51,000 – – – – – 51,000
Avalon Hoboken 3.55 % Dec-2020 67,904 67,904 67,904 – – – – –
Avalon Cerritos 3.35 % Aug-2029 30,250 30,250 – – – – – 30,250 6,230,026 6,879,169 68,958 29,419 451,655 601,740 301,840 5,425,557 Variable rate
Term Loan – $100
million 2.03 % Feb-2022 100,000 100,000 – – 100,000 – – –
Term Loan – $150
million 1.96 % Feb-2024 150,000 150,000 – – – – 150,000 –
$300 million
unsecured notes 2.45 % Jan-2021 (7) 300,000 – – – – – – – 550,000 250,000 – – 100,000 – 150,000 – Total indebtedness
– excluding Credit
Facility $ 7,355,371$ 7,699,520$ 70,660$ 37,148$ 559,918$ 610,739$ 461,577$ 5,959,478
_________________________(1) Rates are given as of June 30, 2020 and include credit enhancement fees,facility fees, trustees’ fees, the impact of interest rate hedges, offeringcosts, 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 $51,562 and $41,352 as of June 30, 2020 and December 31, 2019, respectively, and deferred financing costs and debt discount 40——————————————————————————–Table of Contents associated with secured notes of $17,748 and $17,729 as of June 30, 2020 and
December 31, 2019, respectively, as reflected on our Condensed 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) Financed by variable rate debt, but interest rate is capped through an interest rate protection agreement.
(5) In March 2020, we repaid these borrowings in advance of their scheduled maturity date. (6) In February 2020, we repaid a borrowing secured by this community and subsequently refinanced the secured borrowing. (7) In May 2020, we repaid this borrowing in advance of the scheduled maturity date. Future Financing and Capital Needs – Portfolio and Capital Markets Activity In light of the COVID-19 pandemic, we continue to monitor the availability of
our various capital raising alternatives. During the remainder of 2020, we
expect to meet our liquidity needs from one or more of 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. In addition, the
impacts of the COVID-19 pandemic on capital markets, including the availability
and costs of debt and equity capital, remain uncertain and may have material
adverse effects on our access to capital on attractive terms. As discussed in this Form 10-Q, as of June 30, 2020, construction has been
restarted at all six Development Communities where construction previously had
been temporarily suspended, and construction work at our remaining sites that
had been slowed is largely back to normal pace. Before beginning new
construction or reconstruction activity in 2020, 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. 41
——————————————————————————–Table of ContentsUnconsolidated Real Estate Investments and Off-Balance Sheet ArrangementsUnconsolidated Investments As of June 30, 2020, we had investments in unconsolidated real estate entities
accounted for under the equity method of accounting shown in the following
table, excluding development joint ventures. Refer to Note 5, “Investments in
Real Estate Entities,” of the Condensed 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 June 30, 2020, detail of the real estate and
associated indebtedness underlying our unconsolidated investments is presented
in the following table (dollars in thousands). Company # of Total Debt (2) ownership Apartment capitalized Interest Maturity
Unconsolidated Real Estate Investments percentage homescost (1) Amount Type rate (3) date NYC Joint Venture
1. Avalon Bowery Place I – New York, NY 206
$ 209,076$ 93,800 Fixed 4.01 % Jan 2029 2. Avalon Bowery Place II – New York, NY 90 90,775 39,639 Fixed 4.01 % Jan 2029 Jan 2029/May
3. Avalon Morningside – New York, NY (4) 295
210,847 112,500 Fixed 3.55 % 2046 4. Avalon West Chelsea – New York, NY (5) 305 127,740 66,000 Fixed 4.01 % Jan 2029 5. AVA High Line – New York, NY (5) 405 121,223 84,000 Fixed 4.01 % Jan 2029 Total NYC Joint Venture 20.0 % 1,301 759,661 395,939 3.88 % Archstone Multifamily Partners AC LP (the “U.S. Fund”) 1. Avalon Studio 4121 – Studio City, CA 149 57,179 27,324 Fixed 3.34 % Nov 2022 Sep 2020
2. Avalon Venice on Rose – Venice, CA 70
57,455 27,245 Fixed 3.28 % (6) 3. Avalon Station 250 – Dedham, MA 285 98,189 53,229 Fixed 3.73 % Sep 2022 4. Avalon Grosvenor Tower – Bethesda, MD 237 80,591 41,261 Fixed 3.74 % Sep 2022Total U.S. Fund 28.6 % 741 293,414 149,059 3.58 % Multifamily Partners AC JV LP (the “AC JV”)
1. Avalon North Point – Cambridge, MA (7) 426
190,173 111,653 Fixed 6.00 % Aug 2021 2. Avalon North Point Lofts – Cambridge, MA 103 26,888 – N/A N/A N/A
Total AC JV 20.0 % 529 217,061 111,653 6.00 % Other Operating Joint Ventures
1. MVP I, LLC 25.0 % 313
126,906 103,000 Fixed 3.24 % Jul 2025 2. Brandywine Apartments of Maryland, LLC 28.7 % 305 19,383 21,310 Fixed 3.40 % Jun 2028Total Other Joint Ventures 618 146,289 124,310 3.27 % Total Unconsolidated Investments 3,189 $ 1,416,425$ 780,961 4.03 % _____________________________(1) Represents total capitalized cost as of June 30, 2020. (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 June 30, 2020.(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) The original maturity date of the borrowing was July 2020, which was extended to September 2020 through a forbearance agreement. (7) Borrowing is comprised of loans made by the equity investors in the venture in proportion to their equity interests. 42——————————————————————————–Table of Contents In July 2020, we entered into a joint venture which will develop, own and
operate AVA Arts District. AVA Arts District is expected to be a 475 apartment
home community in Los Angeles, CA, that will be developed for a projected total
capitalized cost to the joint venture of $279,000,000. We own a 25.0% interest
in the venture, and the venture partner owns the remaining 75.0% interest. The
venture expects to obtain a $167,000,000 construction loan to fund the
development of AVA Arts District. Our total expected equity investment is
approximately $28,000,000, of which $13,000,000 has already been spent.
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 Condensed
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 We currently have contractual obligations consisting primarily of long-term debt
obligations and lease obligations for certain land parcels and regional and
administrative office space. As of June 30, 2020, other than as discussed in
this Form 10-Q, there have been no other material changes in our scheduled
contractual obligations as disclosed in our Form 10-K.
Development Communities As of June 30, 2020, we owned or held a direct or indirect interest in 19
Development Communities under construction. We expect these Development
Communities, when completed, to add a total of 6,198 apartment homes and 64,000
square feet of retail space to our portfolio for a total capitalized cost,
including land acquisition costs, of approximately $2,399,000,000. We cannot
assure you that we will meet our schedule for construction completion or that we
will meet our budgeted costs, either individually or in the aggregate. You
should carefully review Part I, Item 1A. “Risk Factors” of our Form 10-K, as
well as the discussion under Part II, Item 1A. “Risk Factors” in this report,
for a discussion of the risks associated with development activity.
The following table presents a summary of the Development Communities. We hold a fee simple ownership interest in these communities (directly or through a wholly-owned subsidiary) unless otherwise noted in the table. 43——————————————————————————– Table of Contents Initial projected Estimated Number of Projected total or actual stabilized apartment capitalized cost (1) Construction occupancy Estimated operations homes ($ millions) start (2) completion (3)
1. Avalon Public Market 289 $ 175 Q4 2016 Q3 2019 Q3 2020 Q4 2020 Emeryville, CA
2. Avalon Yonkers 590 196 Q4 2017 Q3 2019 Q2 2021 Q4 2021 Yonkers, NY
3. AVA Hollywood (4) 695 375 Q4 2016 Q4 2019 Q1 2021 Q3 2021 Hollywood, CA
4. Avalon Towson 371 114 Q4 2017 Q1 2020 Q4 2020 Q2 2021 Towson, MD
5. Avalon Walnut Creek II 200 113 Q4 2017 Q3 2020 Q4 2020 Q2 2021 Walnut Creek, CA
6. Avalon Doral 350 116 Q2 2018 Q3 2020 Q4 2020 Q3 2021 Doral, FL
7. Avalon 555 President 400 139 Q3 2018 Q3 2020 Q3 2021 Q4 2021 Baltimore, MD
8. Avalon Old Bridge 252 72 Q3 2018 Q3 2020 Q2 2021 Q3 2021 Old Bridge, NJ
9. Avalon Newcastle Commons II 293 107 Q4 2018 Q4 2020 Q3 2021 Q1 2022 Newcastle, WA
10. Twinbrook Station 238 66 Q4 2018 Q4 2020 Q2 2021 Q4 2021 Rockville, MD
11. Avalon Harrison (4) 143 77 Q4 2018 Q2 2021 Q2 2022 Q3 2022 Harrison, NY
12. Avalon Brea Place 653 290 Q2 2019 Q1 2021 Q2 2022 Q3 2022 Brea, CA
13. Avalon Foundry Row 437 100 Q2 2019 Q1 2021 Q1 2022 Q3 2022 Owings Mill, MD
14. Avalon Marlborough II 123 42 Q2 2019 Q3 2020 Q4 2020 Q1 2021 Marlborough, MA
15. Avalon Acton II 86 31 Q4 2019 Q3 2020 Q1 2021 Q1 2021 Acton, MA
16. Avalon Woburn 350 121 Q4 2019 Q3 2021 Q2 2022 Q3 2022 Woburn, MA
17. AVA RiNo 246 87 Q4 2019 Q1 2022 Q2 2022 Q4 2022 Denver, CO
18. Avalon Monrovia 154 68 Q4 2019 Q1 2021 Q3 2021 Q4 2021 Monrovia, CA
19. Avalon Alderwood Mall (5) 328 110 Q4 2019 Q4 2021 Q2 2022 Q4 2022 Lynnwood, WA Total 6,198 $ 2,399
_________________________________(1) Projected total capitalized cost includes all capitalized costs projected tobe 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 otherregulatory fees, as well as costs incurred for first generation retailtenants 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 assurancethat we will pursue to completion any or all of these proposed developments.(3) Stabilized operations is defined as the earlier of (i) attainment of 90% orgreater physical occupancy or (ii) the one-year anniversary of completion ofdevelopment.(4) Development Communities containing at least 10,000 square feet of retailspace include AVAHollywood (19,000 square feet) and Avalon Harrison (27,000square 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. During the three months ended June 30, 2020, we did not complete any developments. 44——————————————————————————–Table of ContentsDevelopment Rights At June 30, 2020, we had $39,829,000 in acquisition and related capitalized
costs for direct interests in land parcels we own, and $81,395,000 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 28 Development Rights for which we expect
to develop new apartment communities in the future. The cumulative capitalized
costs for land held for development as of June 30, 2020 includes $28,900,000 in
original land acquisition costs, net of any impairment loss recognized. 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 9,786 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. For the other six Development Rights,
we own the land, of which four are additional development phases of existing
stabilized operating communities we own and which will be constructed on land
currently adjacent to or directly associated with those operating communities. 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 the six months
ended June 30, 2020, we incurred a charge of $3,722,000 for expensed
transaction, development and other pursuit costs, net of recoveries, which
include development pursuits that were not yet probable of future development at
the time incurred, or for pursuits that we determined were no longer probable of
being developed. You should carefully review Part I, Item 1A. “Risk Factors” of our Form 10-K, as
well as the discussion under Part II, Item 1A. “Risk Factors” in this report,
for a discussion of the risks associated with Development Rights.
The following presents a summary of the Development Rights as of June 30, 2020:Estimated Projected total number capitalized cost
Market Number of rights of homes ($ millions) (1) New England 3 394 $ 156
Metro NY/NJ 13 5,366 2,246
Mid-Atlantic – – –
Pacific Northwest 3 1,121 441
Northern California 4 1,198 661
Southern California 1 475 278
Southeast Florida 1 254 95
Denver, CO 3 978 325
Total 28 9,786 $ 4,202
____________________________________(1) Projected total capitalized cost includes all capitalized costs incurred todate (if any) and projected to be incurred to develop the respectivecommunity, determined in accordance with GAAP, including land acquisitioncosts, construction costs, real estate taxes, capitalized interest and loanfees, 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. 45——————————————————————————–Table of ContentsInsurance 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, pandemic 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 Part I, Item 1A. “Risk Factors” of our
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) 100% of the first $25,000,000 of losses (per
occurrence) and 10% of the second $25,000,000 of losses (per occurrence)
incurred by the master property insurance policy and (ii) covered liability
claims arising out of our primary commercial 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 46
——————————————————————————–Table of Contents remediation activities, please refer to the discussion under Part I, Item 1A. “Risk Factors – We may incur costs due to environmental contamination or
non-compliance” of our Form 10-K. 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. 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. Forward-Looking Statements
This Form 10-Q 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-Q, 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 theMid-Atlantic, New England, Metro New York/New Jersey and Pacific Northwestregions of the United States and in general;• the availability of debt and equity financing; 47——————————————————————————– Table of Contents • interest rates; • general economic conditions including the potential impacts from currenteconomic conditions and the COVID-19 pandemic;• 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 Part I, Item 1A. “Risk Factors” of our Form 10-K and Part II, Item 1A. “Risk Factors” in this
report, for further discussion of risks associated with forward-looking
statements. Risks and uncertainties that might cause such differences include those related
to the COVID-19 pandemic, about which there are many uncertainties, including
(i) the duration and severity of the pandemic and (ii) the effect on the
multifamily industry and the general economy of measures taken by businesses and
the government to prevent the spread of the novel coronavirus and relieve
economic distress of consumers, such as governmental limitations on the ability
of multifamily owners to evict residents who are delinquent in the payment of
their rent. Due to this uncertainty we are not able at this time to estimate the
effect of these factors on our business, but the adverse impact of the pandemic
on our business, results of operations, cash flows and financial condition could
be material. In addition, the effects of the pandemic are likely to heighten the
following risks, which we routinely face in our business:
• we may fail to secure development opportunities due to an inability toreach 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 underdevelopment 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 competitionand 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 principaland 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; • we may be unsuccessful in our management of joint ventures and the REIT vehicles that are used with certain joint ventures; • we may be unsuccessful in managing changes in our portfolio composition; 48
——————————————————————————–Table of Contents• laws and regulations implementing rent control or rent stabilization, orotherwise limiting our ability to increase rents, charge fees or evict tenants, may impact our revenue or increase our costs; • our expectations, estimates and assumptions as of the date of this filing regarding outstanding legal proceedings are subject to change; and • the likelihood that we may choose to pay dividends in our stock instead ofcash, which may result in stockholders having to pay taxes with respect tosuch dividends in excess of the cash received, if any.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. Our critical accounting
policies consist of the following: (i) cost capitalization and (ii) abandoned
pursuit costs and asset impairment. Our critical accounting policies and
estimates have not changed materially from the discussion of our significant
accounting policies found in Management’s Discussion and Analysis and Results of
Operations in our Form 10-K. 49
——————————————————————————–Table of Contents© Edgar Online, source Glimpses

Source: marketscreener.com

Our Score
Click to rate this post!
[Total: 0 Average: 0]

Upgrade Your Listing

Add images, video, and more details to your listing! More information means more clicks. More clicks means more quotes!

Free listing includes: business name, address, phone, website, google map

Upgraded listing includes: business name, address, phone, website, EMAIL ADDRESS, COMPANY LOGO, VIDEO, IMAGE SLIDE SHOW, FEATURED LISTING PLACEMENT