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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended March 31, 2019  
Commission file number 1-12672
AVALONBAY COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
 
Maryland
 
77-0404318
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
Ballston Tower
671 N. Glebe Rd, Suite 800
Arlington, Virginia  22203
(Address of principal executive offices, including zip code)
(703) 329-6300
(Registrant's telephone number, including area code)  
(Former name, if changed since last report) 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days.
Yes ý                    No o

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ý                    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o                    No ý

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $0.01 per share
AVB
New York Stock Exchange

APPLICABLE ONLY TO CORPORATE ISSUERS
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date:

139,403,273 shares of common stock, par value $0.01 per share, were outstanding as of April 30, 2019.


Table of Contents

AVALONBAY COMMUNITIES, INC.
FORM 10-Q
INDEX
 
 
PAGE
PART I - FINANCIAL INFORMATION
 
 
 
ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




Table of Contents



AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
 
3/31/2019
 
12/31/2018
 
(unaudited)
 
 
ASSETS
 

 
 

Real estate:
 

 
 

Land and improvements
$
4,070,275

 
$
4,077,090

Buildings and improvements
15,783,433

 
15,651,035

Furniture, fixtures and equipment
733,341

 
696,200

 
20,587,049

 
20,424,325

Less accumulated depreciation
(4,748,578
)
 
(4,601,447
)
Net operating real estate
15,838,471

 
15,822,878

Construction in progress, including land
1,856,294

 
1,768,132

Land held for development
104,963

 
84,712

Real estate assets held for sale, net
76,362

 
55,208

Total real estate, net
17,876,090

 
17,730,930

 
 
 
 
Cash and cash equivalents
62,999

 
91,659

Cash in escrow
132,208

 
126,205

Resident security deposits
32,747

 
31,816

Investments in unconsolidated real estate entities
212,639

 
217,432

Deferred development costs
55,419

 
47,443

Prepaid expenses and other assets
143,511

 
134,715

Right of use lease assets
124,370

 

Total assets
$
18,639,983

 
$
18,380,200

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Unsecured notes, net
$
5,907,327

 
$
5,905,993

Variable rate unsecured credit facility

 

Mortgage notes payable, net
1,132,740

 
1,134,270

Dividends payable
212,750

 
204,191

Payables for construction
102,427

 
96,983

Accrued expenses and other liabilities
279,941

 
297,700

Lease liabilities
140,436

 

Accrued interest payable
65,472

 
46,648

Resident security deposits
60,461

 
58,415

Liabilities related to real estate assets held for sale
1,034

 
150

Total liabilities
7,902,588

 
7,744,350

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Redeemable noncontrolling interests
3,396

 
3,244

 
 
 
 
Equity:
 

 
 

Preferred stock, $0.01 par value; $25 liquidation preference; 50,000,000 shares authorized at March 31, 2019 and December 31, 2018; zero shares issued and outstanding at March 31, 2019 and December 31, 2018

 

Common stock, $0.01 par value; 280,000,000 shares authorized at March 31, 2019 and December 31, 2018; 139,403,222 and 138,508,424 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively
1,394

 
1,385

Additional paid-in capital
10,457,651

 
10,306,588

Accumulated earnings less dividends
306,861

 
350,777

Accumulated other comprehensive loss
(31,907
)
 
(26,144
)
Total equity
10,733,999

 
10,632,606

Total liabilities and equity
$
18,639,983

 
$
18,380,200

 
See accompanying notes to Condensed Consolidated Financial Statements.

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AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(Dollars in thousands, except per share data)
 
For the three months ended
 
3/31/2019
 
3/31/2018
Revenue:
 

 
 

Rental and other income
$
565,045

 
$
559,906

Management, development and other fees
1,139

 
886

Total revenue
566,184

 
560,792

 
 
 
 
Expenses:
 

 
 

Operating expenses, excluding property taxes
123,455

 
131,257

Property taxes
61,329

 
59,896

Interest expense, net
47,892

 
55,113

Loss on extinguishment of debt, net
280

 
397

Depreciation expense
162,057

 
159,059

General and administrative expense
13,688

 
14,431

Expensed transaction, development and other pursuit costs, net of recoveries
1,095

 
800

Casualty and impairment gain, net

 
(58
)
Total expenses
409,796

 
420,895

 
 
 
 
Equity in (loss) income of unconsolidated real estate entities
(1,060
)
 
1,740

Gain on sale of communities
14,835

 

Gain (loss) on other real estate transactions, net
267

 
(47
)
 
 
 
 
Income before income taxes
170,430

 
141,590

Income tax expense
12

 

 
 
 
 
Net income
170,418

 
141,590

Net (income) loss attributable to noncontrolling interests
(52
)
 
53

 
 
 
 
Net income attributable to common stockholders
$
170,366

 
$
141,643

 
 
 
 
Other comprehensive income (loss):
 

 
 

(Loss) gain on cash flow hedges
(7,231
)
 
11,501

Cash flow hedge losses reclassified to earnings
1,468

 
1,756

Comprehensive income
$
164,603

 
$
154,900

 
 
 
 
Earnings per common share - basic:
 

 
 

Net income attributable to common stockholders
$
1.23

 
$
1.03

 
 
 
 
Earnings per common share - diluted:
 

 
 

Net income attributable to common stockholders
$
1.23

 
$
1.03


See accompanying notes to Condensed Consolidated Financial Statements.

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AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in thousands)
 
For the year ended
 
3/31/2019
 
3/31/2018
Cash flows from operating activities:
 
 
 
Net income
$
170,418

 
$
141,590

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation expense
162,057

 
159,059

Amortization of deferred financing costs
1,692

 
2,007

Amortization of debt discount
394

 
419

Loss on extinguishment of debt, net
280

 
397

Amortization of stock-based compensation
5,621

 
4,029

Equity in loss of, and return on, unconsolidated real estate entities and noncontrolling interests, net of eliminations
5,517

 
1,486

Casualty and impairment gain, net

 
(58
)
Abandonment of development pursuits
208

 
112

Cash flow hedge losses reclassified to earnings
1,468

 
1,756

(Gain) loss on sale of real estate assets
(15,102
)
 
47

Increase in resident security deposits, prepaid expenses and other assets
(3,087
)
 
(6,608
)
Increase in accrued expenses, other liabilities and accrued interest payable
32,587

 
11,677

Net cash provided by operating activities
362,053

 
315,913

 
 
 
 
Cash flows from investing activities:
 
 
 
Development/redevelopment of real estate assets including land acquisitions and deferred development costs
(278,075
)
 
(301,299
)
Acquisition of real estate assets, including partnership interest
(91,548
)
 

Capital expenditures - existing real estate assets
(20,069
)
 
(15,240
)
Capital expenditures - non-real estate assets
(488
)
 
(1,735
)
Increase (decrease) in payables for construction
5,444

 
(2,168
)
Proceeds from sale of real estate, net of selling costs
71,455

 
603

Insurance proceeds for property damage claims

 
58

Mortgage note receivable lending
(159
)
 
(2,006
)
Mortgage note receivable payments
978

 
4,862

Distributions from unconsolidated real estate entities

 
2,013

Investments in unconsolidated real estate entities
(724
)
 
(4,368
)
Net cash used in investing activities
(313,186
)
 
(319,280
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Issuance of common stock, net
155,561

 

Dividends paid
(203,499
)
 
(195,999
)
Repayments of mortgage notes payable, including prepayment penalties
(1,668
)
 
(28,584
)
Issuance of unsecured notes

 
299,442

Payment of deferred financing costs
(6,841
)
 
(3,244
)
Payment of financing lease obligation
(267
)
 
(267
)
Receipts for termination of forward interest rate swaps

 
12,598

Payments related to tax withholding for share-based compensation
(14,206
)
 
(10,483
)
Distributions to DownREIT partnership unitholders
(11
)
 
(11
)
Distributions to joint venture and profit-sharing partners
(113
)
 
(104
)
Preferred interest obligation redemption and dividends
(480
)
 
(480
)
Net cash (used in) provided by financing activities
(71,524
)
 
72,868

 
 
 
 
Net (decrease) increase in cash and cash equivalents
(22,657
)
 
69,501

 
 
 
 
Cash and cash equivalents and restricted cash, beginning of period
217,864

 
201,906

Cash and cash equivalents and restricted cash, end of period
$
195,207

 
$
271,407

 
 
 
 
Cash paid during the period for interest, net of amount capitalized
$
25,513

 
$
33,936

See accompanying notes to Condensed Consolidated Financial Statements.

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Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the Condensed Consolidated Statements of Cash Flows (dollars in thousands):
 
 
For the year ended
 
 
3/31/2019
 
3/31/2018
Cash and cash equivalents
 
$
62,999

 
$
137,244

Cash in escrow
 
132,208

 
134,163

Cash, cash equivalents and restricted cash reported in the Condensed Consolidated Statements of Cash Flows
 
$
195,207

 
$
271,407


Supplemental disclosures of non-cash investing and financing activities:

During the three months ended March 31, 2019:

As described in Note 4, "Equity," 148,004 shares of common stock were issued as part of the Company's stock-based compensation plans, of which 73,072 shares related to the conversion of performance awards to restricted shares, and the remaining 74,932 shares valued at $14,666,000 were issued in connection with new stock grants; 602 shares valued at $108,000 were issued through the Company's dividend reinvestment plan; 75,195 shares valued at $14,206,000 were withheld to satisfy employees' tax withholding and other liabilities; and 616 restricted shares with an aggregate value of $102,000 previously issued in connection with employee compensation were canceled upon forfeiture.

Common stock dividends declared but not paid totaled $212,166,000.

The Company recorded an increase of $224,000 in redeemable noncontrolling interest with a corresponding decrease to accumulated earnings less dividends to adjust the redemption value associated with the put options held by joint venture partners and DownREIT partnership units. For further discussion of the nature and valuation of these items, see Note 11, "Fair Value."

The Company recorded an increase to other liabilities of $7,231,000, and a corresponding adjustment to accumulated other comprehensive loss, and reclassified $1,468,000 of cash flow hedge losses from other comprehensive income (loss) to interest expense, net, to record the impact of the Company's derivative and hedge accounting activity.

The Company recorded $122,276,000 of lease liabilities and offsetting right of use lease assets for its ground and office leases, upon the adoption of ASU 2016-02, Leases, as of January 1, 2019. For further discussion on the adoption of the guidance, see Note 1, "Organization, Basis of Presentation and Significant Accounting Policies."

During the three months ended March 31, 2018:

The Company issued 182,998 shares of common stock as part of the Company's stock-based compensation plans, of which 88,297 shares related to the conversion of performance awards to restricted shares, and the remaining 94,701 shares valued at $15,277,000 were issued in connection with new stock grants; 566 shares valued at $96,000 were issued through the Company's dividend reinvestment plan; 67,609 shares valued at $10,483,000 were withheld to satisfy employees' tax withholding and other liabilities; and 1,829 restricted shares with an aggregate value of $234,000 previously issued in connection with employee compensation were canceled upon forfeiture.

Common stock dividends declared but not paid totaled $203,166,000.

The Company recorded an increase of $63,000 in redeemable noncontrolling interest with a corresponding decrease to accumulated earnings less dividends to adjust the redemption value associated with the put options held by joint venture partners and DownREIT partnership units.

The Company reclassified $1,756,000 of cash flow hedge losses from other comprehensive income (loss) to interest expense, net, to record the impact of the Company's derivative and hedge accounting activity.


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Table of Contents

AVALONBAY COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.  Organization, Basis of Presentation and Significant Accounting Policies

Organization and Basis of Presentation

AvalonBay Communities, Inc. (the "Company," which term, unless the context otherwise requires, refers to AvalonBay Communities, Inc. together with its subsidiaries), is a Maryland corporation that has elected to be treated as a real estate investment trust ("REIT") for federal income tax purposes under the Internal Revenue Code of 1986 (the "Code"). The Company focuses on the development, redevelopment, acquisition, ownership and operation of multifamily communities primarily in New England, the New York/New Jersey metro area, the Mid-Atlantic, the Pacific Northwest, and Northern and Southern California.

At March 31, 2019, the Company owned or held a direct or indirect ownership interest in 272 operating apartment communities containing 79,143 apartment homes in 12 states and the District of Columbia, of which nine communities containing 3,396 apartment homes were under redevelopment. In addition, the Company owned or held a direct or indirect ownership interest in 19 communities under development that are expected to contain an aggregate of 6,170 apartment homes when completed, as well as a mixed-use project being developed in which the Company is currently pursuing a potential for-sale strategy of individual condominium units. The Company also owned or held a direct or indirect ownership interest in land or rights to land on which the Company expects to develop an additional 29 communities that, if developed as expected, will contain an estimated 10,050 apartment homes.

The interim unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements required by GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited financial statements should be read in conjunction with the financial statements and notes included in the Company's 2018 Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the operating results for the full year. Management believes the disclosures are adequate to ensure the information presented is not misleading.  In the opinion of management, all adjustments and eliminations, consisting only of normal, recurring adjustments necessary for a fair presentation of the financial statements for the interim periods, have been included.

Capitalized terms used without definition have meanings provided elsewhere in this Form 10-Q.

Earnings per Common Share

Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted average number of shares outstanding during the period. All outstanding unvested restricted share awards contain rights to non-forfeitable dividends and participate in undistributed earnings with common shareholders and, accordingly, are considered participating securities that are included in the two-class method of computing basic earnings per share ("EPS"). Both the unvested restricted shares and other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis. The Company's earnings per common share are determined as follows (dollars in thousands, except per share data):

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For the three months ended
 
3/31/2019
 
3/31/2018
Basic and diluted shares outstanding
 

 
 

Weighted average common shares - basic
138,331,248

 
137,764,468

Weighted average DownREIT units outstanding
7,500

 
7,500

Effect of dilutive securities
493,453

 
381,202

Weighted average common shares - diluted
138,832,201

 
138,153,170

 
 
 
 
Calculation of Earnings per Share - basic
 

 
 

Net income attributable to common stockholders
$
170,366

 
$
141,643

Net income allocated to unvested restricted shares
(501
)
 
(430
)
Net income attributable to common stockholders, adjusted
$
169,865

 
$
141,213

 
 
 
 
Weighted average common shares - basic
138,331,248

 
137,764,468

 
 
 
 
Earnings per common share - basic
$
1.23

 
$
1.03

 
 
 
 
Calculation of Earnings per Share - diluted
 

 
 

Net income attributable to common stockholders
$
170,366

 
$
141,643

Add: noncontrolling interests of DownREIT unitholders in consolidated partnerships
11

 
11

Adjusted net income attributable to common stockholders
$
170,377

 
$
141,654

 
 
 
 
Weighted average common shares - diluted
138,832,201

 
138,153,170

 
 
 
 
Earnings per common share - diluted
$
1.23

 
$
1.03

 

All options to purchase shares of common stock outstanding as of March 31, 2019 are included in the computation of diluted earnings per share. Certain options to purchase shares of common stock in the amount of 6,995 were outstanding as of March 31, 2018, but were not included in the computation of diluted earnings per share because such options were anti-dilutive for the period.

Derivative Instruments and Hedging Activities

The Company enters into interest rate swap and interest rate cap agreements (collectively, "Hedging Derivatives") for interest rate risk management purposes and in conjunction with certain variable rate secured debt to satisfy lender requirements. The Company does not enter into Hedging Derivative transactions for trading or other speculative purposes. The Company assesses the effectiveness of qualifying cash flow and fair value hedges, both at inception and on an on-going basis. Hedge ineffectiveness is reported as a component of interest expense, net. The fair values of Hedging Derivatives that are in an asset position are recorded in prepaid expenses and other assets. The fair value of Hedging Derivatives that are in a liability position are included in accrued expenses and other liabilities. The Company does not present or disclose the fair value of Hedging Derivatives on a net basis. Fair value changes for derivatives that are not in qualifying hedge relationships are reported as a component of interest expense, net.  For the Hedging Derivative positions that the Company has determined qualify as effective cash flow hedges, the Company has recorded the cumulative changes in the fair value of Hedging Derivatives in other comprehensive loss.  Amounts recorded in accumulated other comprehensive loss will be reclassified into earnings in the periods in which earnings are affected by the hedged cash flow. The effective portion of the change in fair value of the Hedging Derivatives that the Company has determined qualified as effective fair value hedges is reported as an adjustment to the carrying amount of the corresponding debt being hedged. See Note 11, "Fair Value," for further discussion of derivative financial instruments.

Legal and Other Contingencies

The Company is involved in various other claims and/or administrative proceedings that arise in the ordinary course of its business. While no assurances can be given, the Company does not currently believe that any of these other outstanding litigation matters, individually or in the aggregate, will have a material adverse effect on its financial condition or results of operations.


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Acquisitions of Investments in Real Estate

The Company accounts for acquisitions of investments in real estate in accordance with the authoritative guidance for the initial measurement, which first requires that the Company determine if the real estate investment is the acquisition of an asset or a business combination. Under either model, the Company must identify and determine the fair value of any assets acquired, liabilities assumed and any noncontrolling interest in the acquiree. Typical assets acquired and liabilities assumed include land, building, furniture, fixtures and equipment, debt and identified intangible assets and liabilities, consisting of the value of above or below market leases and in-place leases. In making estimates of fair values for purposes of allocating purchase price, the Company utilizes various sources, including its own analysis of recently acquired and existing comparable properties in its portfolio and other market data. Consideration for acquisitions is typically in the form of cash unless otherwise disclosed. For a business combination, the Company records the assets acquired and liabilities assumed based on the fair value of each respective item. For an asset acquisition, the allocation of the purchase price is based on the relative fair value of the net assets. The Company expenses all applicable acquisition costs for a business combination and capitalizes all applicable acquisition costs for an asset acquisition. The Company expects that acquisitions of individual operating communities will generally be viewed as asset acquisitions.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods.  Actual results could differ from those estimates.

Reclassifications

Certain reclassifications have been made to amounts in prior years' notes to financial statements to conform to current year presentations as a result of changes in held for sale classification, disposition activity and segment classification.

Leases

The Company is party to leases as both a lessor and a lessee, primarily as follows:

lessor of residential and retail space within its apartment communities; and
lessee under (i) ground leases for land underlying current operating or development communities, (ii) office leases for its corporate headquarters and regional offices and (iii) leases of equipment.

The Company adopted ASU 2016-02, Leases, as of January 1, 2019 using the prospective adoption approach, applying the provisions of the new standard to existing leases as of the date of adoption.

Lessee Considerations

The Company assessed whether a contract is or contains a lease based on whether the contract conveys the right to control the use of an identified asset, including specified portions of larger assets, for a period of time in exchange for consideration. The Company identified leases as contracts in which it has the right to direct the use of the property and obtain all of the economic benefits.

The Company’s leases include both fixed and variable lease payments, which are based on an index or rate such as the consumer price index (CPI) or percentage rents based on total sales. When evaluating what payments to include in the measurement of the lease liability, the Company included lease payments that depend on an index or rate only. Variable lease payments that are not based on an index or rate including changes in CPI, percentage rents based on total sales, fair market value resets and others are not included in the measurement of the lease liability, but will be recognized as variable lease expense in the period in which they are incurred.

For leases that have options to extend the term or terminate the lease early, the Company considered whether these options are reasonably certain to be exercised, taking into account physical improvements, installation or relocation costs, rent during the option periods and the cost of returning the assets to a contractually specified condition. The Company only factored the impact of options into the lease term if the option was considered reasonably certain to be exercised.

The Company determined the discount rate associated with its ground and office leases using the Company’s actual borrowing rates as well as indicative market pricing for longer term rates. The Company determined the discount rates on a lease by lease basis using the incremental borrowing rate and taking into consideration the remaining term of each of the lease agreements.

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Lessor Considerations

The Company evaluated leases in which it is the lessor, which are composed of residential and retail leases at its apartment communities. The accounting model for lessors did not significantly change as a result of ASU 2016-02, with the impacts primarily related to the accounting for sales-type and direct financing leases. The Company evaluated its residential and retail leases determining that they continue to be considered to be operating leases. For lease agreements that provide for rent concessions and/or scheduled fixed and determinable rent increases, rental income is recognized on a straight-line basis over the noncancellable term of the lease. The Company’s residential lease term is generally one year. Some of the Company’s retail leases have fixed-price renewal options, and the lessee may be able to exercise its renewal option at an amount less than the fair value of the rent at such time. The Company only includes renewal options in the lease term, if at the commencement of the lease, the option period rent is reasonably certain to be less than the base period rent and therefore exercised by the lessee.

Additionally, for the Company’s residential and retail leases, which are comprised of the lease component and common area maintenance as a non-lease component, the Company determined that (i) the leases are operating leases, (ii) the lease component is the predominant component and (iii) that all components of its operating leases share the same timing and pattern of transfer.

The Company changed its presentation of charges for uncollectible lease revenue associated with its residential and retail leasing activity, reflecting those amounts as a component of rental and other income on the accompanying Condensed Consolidated Statement of Comprehensive Income for the three months ended March 31, 2019. However, in accordance with its prospective adoption of the standard, the Company did not adjust the prior year period presentation of charges for uncollectible lease revenue associated with its residential and retail leasing activity as a component of operating expenses, excluding property taxes, on the on the accompanying Condensed Consolidated Statement of Comprehensive Income for the three months ended March 31, 2018.

Implementation Considerations and Impact

As discussed above, the Company used the prospective adoption approach for the standard. Additionally, in conjunction with the implementation of the standard, the Company elected to apply certain lessee practical expedients allowed under the standard including:

not reassessing (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) the accounting for initial direct costs for any existing leases;
not evaluating short term leases;
not assessing whether existing land easements are, or contain leases; and
making an accounting policy election by class of underlying asset, to not separate non-lease components from lease components and instead to account for each separate lease and non-lease component as a single lease component.

Also in conjunction with the implementation of the standard, the Company elected to apply the following practical expedients for lessors, making an accounting policy election:

by class of underlying asset for retail and residential leases, to not separate non-lease components from lease components and instead to account for each separate lease and non- lease component as a single lease component;
to exclude costs paid by lessees directly to third parties on behalf of the Company; and
to exclude sales taxes and other similar taxes assessed by a government authority and collected by the Company from the lessee.

Upon adoption, the Company recorded lease liabilities and offsetting right of use lease assets for its ground and office leases of $122,276,000. In addition, the Company made certain other reclassifications in the current year period of lease related amounts on its Condensed Consolidated Balance Sheet to conform to the presentation under the new standard. The adoption of the standard did not have a material impact on the accompanying Condensed Consolidated Statements of Comprehensive Income.

Revenue and Gain Recognition

The majority of the Company’s revenue is derived from residential and retail rental income and other lease income, which are accounted for under ASU 2016-02, Leases, discussed above. The Company's revenue streams that are not accounted for under ASU 2016-02 include:


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Management fees - The Company has investment interests in real estate joint ventures, for which the Company may manage (i) the venture, (ii) the associated operating communities owned by the ventures and/or (iii) the development or redevelopment of those operating communities. For these activities, the Company receives asset management, property management, development and/or redevelopment fee revenue. The performance obligation is the management of the venture, community or other defined task such as the development or redevelopment of the community. While the individual activities that comprise the performance obligation of the management fees can vary day to day, the nature of the overall performance obligation to provide management service is the same and considered by the Company to be a series of services that have the same pattern of transfer to the customer and the same method to measure progress toward satisfaction of the performance obligation. The Company recognizes revenue for fees as earned on a monthly basis.

Rental and non-rental related income - The Company recognizes revenue for new rental related income not included as components of a lease, such as reservation and application fees, as well as for non-rental related income, as earned.

Gains or losses on sales of real estate - The Company accounts for the sale of real estate assets and any related gain recognition in accordance with the accounting guidance applicable to sales of real estate, which establishes standards for recognition of profit on all real estate sales transactions, other than retail land sales. The Company recognizes the sale, and associated gain or loss from the disposition, provided that the earnings process is complete and the Company does not have significant continuing involvement. Subsequent to the adoption of the new standard, a gain or loss is recognized when the criteria for an asset to be derecognized are met, which include when (i) a contract exists and (ii) the buyer obtained control of the nonfinancial asset that was sold. As a result, the Company may recognize a gain on a real estate disposition transaction that previously did not qualify as a sale or for full profit recognition due to the timing of the transfer of control or certain forms of continuing involvement. In addition, a gain or loss recognized on the sale of a nonfinancial asset to an unconsolidated entity will be recognized at 100%, and not the Company’s proportionate ownership percentage.

The following table provides details of the Company’s revenue streams disaggregated by the Company’s reportable operating segments, further discussed in Note 8, “Segment Reporting,” for the three months ended March 31, 2019 and 2018. Segment information for total revenue has been adjusted to exclude the real estate assets that were sold from January 1, 2018 through March 31, 2019, or otherwise qualify as held for sale as of March 31, 2019, as described in Note 6, "Real Estate Disposition Activities." Additionally, as discussed above, the Company changed its presentation of charges for uncollectible lease revenue for the three months ended March 31, 2019 and future periods, including it as an adjustment to revenue and not as a component of operating expenses, as it is presented for prior periods on the accompanying Condensed Consolidated Statement of Comprehensive Income. In order to provide comparability between periods presented in the Company's segment reporting, the Company has included charges for uncollectible lease revenue for its segment results as a component of revenue for all periods presented. See Note 8, "Segment Reporting," for further discussion (dollars in thousands):


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Table of Contents

 
 
For the three months ended
 
 
Established
Communities
 
Other
Stabilized
Communities
 
Development/
Redevelopment
Communities
 
Non-
allocated (1)
 
Total
For the period ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
Management, development and other fees
 
$

 
$

 
$

 
$
1,139

 
$
1,139

Rental and non-rental related income (2)
 
1,913

 
666

 
158

 

 
2,737

Total non-lease revenue (3)
 
1,913

 
666

 
158

 
1,139

 
3,876

 
 
 
 
 
 
 
 
 
 
 
Lease income (4)
 
458,206

 
66,114

 
35,422

 

 
559,742

Business interruption insurance proceeds
 
154

 
18

 

 

 
172

 
 
 
 
 
 
 
 
 
 
 
Total revenue
 
$
460,273

 
$
66,798


$
35,580


$
1,139


$
563,790

 
 
 
 
 
 
 
 
 
 
 
For the period ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
Management, development and other fees
 
$

 
$

 
$

 
$
886

 
$
886

Rental and non-rental related income (2)
 
2,527

 
745

 
153

 

 
3,425

Total non-lease revenue (3)
 
2,527

 
745

 
153

 
886

 
4,311

 
 
 
 
 
 
 
 
 
 
 
Lease income (4)
 
442,154

 
49,352

 
31,293

 

 
522,799

 
 
 
 
 
 
 
 
 
 
 
Total revenue
 
$
444,681

 
$
50,097

 
$
31,446

 
$
886

 
$
527,110

__________________________________

(1)
Revenue represents third-party management, asset management and developer fees and miscellaneous income which are not allocated to a reportable segment.
(2)
Amounts include revenue streams related to leasing activities that are not considered components of a lease, including but not limited to, apartment hold fees and application fees, as well as revenue streams not related to leasing activities, including but not limited to, vendor revenue sharing, building advertising, vending and dry cleaning revenue.
(3)
Represents all revenue accounted for under ASC 2014-09.
(4)
Amounts include all revenue streams derived from residential and retail rental income and other lease income, which are accounted for under ASU 2016-02.

Due to the nature and timing of the Company’s identified revenue streams, there are no material amounts of outstanding or unsatisfied performance obligations as of March 31, 2019.

2.  Interest Capitalized

The Company capitalizes interest during the development and redevelopment of real estate assets. Capitalized interest associated with the Company's development or redevelopment activities totaled $17,589,000 and $13,164,000 for the three months ended March 31, 2019 and 2018, respectively.

3.  Mortgage Notes Payable, Unsecured Notes and Credit Facility

The Company's mortgage notes payable, unsecured notes, variable rate unsecured term loans ("Term Loans") and Credit Facility, as defined below, as of March 31, 2019 and December 31, 2018 are summarized below. The following amounts and discussion do not include the mortgage notes related to the communities classified as held for sale, if any, as of March 31, 2019 and December 31, 2018, as shown in the accompanying Condensed Consolidated Balance Sheets (dollars in thousands) (see Note 6, "Real Estate Disposition Activities").

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Table of Contents

 
3/31/2019
 
12/31/2018
 
 
 
 
Fixed rate unsecured notes (1)
$
5,400,000

 
$
5,400,000

Variable rate unsecured notes (1)
300,000

 
300,000

Term Loans (1)
250,000

 
250,000

Fixed rate mortgage notes payable - conventional and tax-exempt (2)
531,771

 
533,215

Variable rate mortgage notes payable - conventional and tax-exempt (2)
618,914

 
619,140

Total mortgage notes payable, unsecured notes and Term Loans
7,100,685

 
7,102,355

Credit Facility

 

Total mortgage notes payable, unsecured notes, Term Loans and Credit Facility
$
7,100,685

 
$
7,102,355

_____________________________________

(1)
Balances at March 31, 2019 and December 31, 2018 exclude $9,515 and $9,879, respectively, of debt discount, and $33,158 and $34,128, respectively, of deferred financing costs, as reflected in unsecured notes, net on the accompanying Condensed Consolidated Balance Sheets.
(2)
Balances at March 31, 2019 and December 31, 2018 exclude $14,559 and $14,590, respectively, of debt discount, and $3,386 and $3,495, respectively, of deferred financing costs, as reflected in mortgage notes payable on the accompanying Condensed Consolidated Balance Sheets.

The following debt activity occurred during the three months ended March 31, 2019:

The Company amended and restated the $250,000,000 variable rate unsecured term loan that it originally entered into in February 2017, of which $100,000,000 matures in February 2022 with stated pricing of LIBOR plus 0.90%, which remained the same, and $150,000,000 matures in February 2024 with stated pricing of LIBOR plus 0.85% that decreased from LIBOR plus 1.50%.

The Company entered into a $1,750,000,000 Fifth Amended and Restated Revolving Loan Agreement (the “Credit Facility”) with a syndicate of banks, which replaces its prior $1,500,000,000 credit facility dated as of January 14, 2016. The term of the Credit Facility ends on February 28, 2024.
 
The Credit Facility bears interest at varying levels based on (i) the London Interbank Offered Rate (“LIBOR”) applicable to the period of borrowing for a particular draw of funds from the facility (e.g., one month to maturity, three months to maturity, etc.) and (ii) the rating levels issued for our unsecured notes. The current stated pricing for drawn borrowings is LIBOR plus 0.775% per annum (3.27% at March 31, 2019), assuming a one month borrowing rate. The stated spread over LIBOR can vary from LIBOR plus 0.70% to LIBOR plus 1.45% based upon the rating of the Company's unsecured notes. Under the prior credit facility, the stated pricing for drawn borrowings was LIBOR plus 0.825% per annum, and the stated spread over LIBOR could vary from LIBOR plus 0.80% to LIBOR plus 1.55% based upon the rating of the Company's unsecured notes. The Credit Facility also provides a competitive bid option that is available for borrowings of up to 65% of the Credit Facility amount. This option allows banks that are part of the lender consortium to bid to provide the Company loans at a rate that is lower than the stated pricing provided by the unsecured credit facility. The competitive bid option may result in lower pricing than the stated rate if market conditions allow. The annual facility fee for the Credit Facility remained 0.125%, resulting in a fee of $2,188,000 annually based on the $1,750,000,000 facility size and based on the Company's current credit rating.

The Company had no borrowings outstanding under the Credit Facility as of March 31, 2019 and December 31, 2018. The Company had $39,055,000 and $39,810,000 outstanding in letters of credit that reduced the borrowing capacity as of March 31, 2019 and December 31, 2018, respectively.

In the aggregate, secured notes payable mature at various dates from April 2019 through July 2066, and are secured by certain apartment communities (with a net carrying value of $1,816,856,000, excluding communities classified as held for sale, as of March 31, 2019).

The weighted average interest rate of the Company's fixed rate secured notes payable (conventional and tax-exempt) was both 3.8% at March 31, 2019 and December 31, 2018, respectively. The weighted average interest rate of the Company's variable rate secured notes payable (conventional and tax-exempt) including the effect of certain financing related fees, was 3.2% and 3.4% at March 31, 2019 and December 31, 2018, respectively.


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Scheduled payments and maturities of secured notes payable and unsecured notes outstanding at March 31, 2019 are as follows (dollars in thousands):
Year
 
Secured notes payments
 
Secured notes maturities
 
Unsecured notes and Term Loans maturities
 
Stated interest rate of unsecured notes and Term Loans
2019
 
2,874

 
114,003

 

 
N/A

2020
 
2,682

 
140,430

 
400,000

 
3.625
%
2021
 
2,204

 
27,843

 
250,000

 
3.950
%
 
 
 
 
 
 
300,000

 
LIBOR + 0.43%

2022
 
2,318

 

 
450,000

 
2.950
%
 
 
 
 
 
 
100,000

 
LIBOR + 0.90%

2023
 
2,439

 

 
350,000

 
4.200
%
 
 
 
 
 
 
250,000

 
2.850
%
2024
 
2,577

 

 
300,000

 
3.500
%
 
 
 
 
 
 
150,000

 
LIBOR + 0.85%

2025
 
2,708

 
84,835

 
525,000

 
3.450
%
 
 
 
 
 
 
300,000

 
3.500
%
2026
 
2,845

 

 
475,000

 
2.950
%
 
 
 
 
 
 
300,000

 
2.900
%
2027
 
2,270

 
185,100

 
400,000

 
3.350
%
2028
 
912

 

 
450,000

 
3.200
%
Thereafter
 
30,296

 
544,349

 
350,000

 
3.900
%
 
 
 
 
 
 
300,000

 
4.150
%
 
 
 
 
 
 
300,000

 
4.350
%
 
 
$
54,125

 
$
1,096,560

 
$
5,950,000

 
 

 

The Company was in compliance at March 31, 2019 with customary financial and other covenants under the Credit Facility, the Term Loans and the Company's fixed rate unsecured notes.

4.  Equity

The following summarizes the changes in equity for the three months ended March 31, 2019 (dollars in thousands):
 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
earnings
less
dividends
 
Accumulated
other
comprehensive
loss
 
Total
equity
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
$
1,385

 
$
10,306,588

 
$
350,777

 
$
(26,144
)
 
$
10,632,606

Net income attributable to common stockholders

 

 
170,366

 

 
170,366

Loss on cash flow hedges, net

 

 

 
(7,231
)
 
(7,231
)
Cash flow hedge losses reclassified to earnings

 

 

 
1,468

 
1,468

Change in redemption value of redeemable noncontrolling interest

 

 
(224
)
 

 
(224
)
Dividends declared to common stockholders ($1.52 per share)

 

 
(212,166
)
 

 
(212,166
)
Issuance of common stock, net of withholdings
9

 
143,202

 
(1,892
)
 

 
141,319

Amortization of deferred compensation

 
7,861

 

 

 
7,861

Balance at March 31, 2019
$
1,394

 
$
10,457,651

 
$
306,861

 
$
(31,907
)
 
$
10,733,999



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Table of Contents

The following summarizes the changes in equity for the three months ended March 31, 2018 (dollars in thousands):
 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
earnings
less
dividends
 
Accumulated
other
comprehensive
loss
 
Total
equity
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
$
1,381

 
$
10,235,475

 
$
188,609

 
$
(37,419
)
 
$
10,388,046

Net income attributable to common stockholders

 

 
141,643

 

 
141,643

Gain on cash flow hedges, net

 

 

 
11,501

 
11,501

Cash flow hedge losses reclassified to earnings

 

 

 
1,756

 
1,756

Change in redemption value of redeemable noncontrolling interest

 

 
(63
)
 

 
(63
)
Dividends declared to common stockholders ($1.47 per share)

 

 
(203,166
)
 

 
(203,166
)
Issuance of common stock, net of withholdings
1

 
(12,286
)
 
1,143

 

 
(11,142
)
Amortization of deferred compensation

 
6,549

 

 

 
6,549

Balance at March 31, 2018
$
1,382

 
$
10,229,738

 
$
128,166

 
$
(24,162
)
 
$
10,335,124


As of March 31, 2019 and December 31, 2018, the Company's charter had authorized for issuance a total of 280,000,000 shares of common stock and 50,000,000 shares of preferred stock.

During the three months ended March 31, 2019, the Company:

i.
issued 66,949 shares of common stock in connection with stock options exercised;
ii.
issued 602 common shares through the Company's dividend reinvestment plan;
iii.
issued 148,004 common shares in connection with restricted stock grants and the conversion of performance awards to restricted shares;
iv.
issued 755,054 shares under CEP IV, as discussed below;
v.
withheld 75,195 common shares to satisfy employees' tax withholding and other liabilities; and
vi.
canceled 616 common shares of restricted stock upon forfeiture.

Any deferred compensation related to the Company's stock option, restricted stock and performance award grants during the three months ended March 31, 2019 is not reflected on the accompanying Condensed Consolidated Balance Sheets as of March 31, 2019, and will not be reflected until recognized as compensation cost.

In December 2015, the Company commenced a fourth continuous equity program ("CEP IV") under which the Company may sell (and/or enter into forward sale agreements for the sale of) up to $1,000,000,000 of its common stock from time to time. Actual sales will depend on a variety of factors to be determined by the Company, including market conditions, the trading price of the Company's common stock and determinations by the Company of the appropriate sources of funding for the Company. In conjunction with CEP IV, the Company engaged sales agents who will receive compensation of up to 2.0% of the gross sales price for shares sold. The Company expects that, if entered into, it will physically settle each forward sale agreement on one or more dates specified by the Company on or prior to the maturity date of that particular forward sale agreement, in which case the Company will expect to receive aggregate net cash proceeds at settlement equal to the number of shares underlying the particular forward agreement multiplied by the relevant forward sale price. However, the Company may also elect to cash settle or net share settle a forward sale agreement. In connection with each forward sale agreement, the Company will pay the relevant forward seller, in the form of a reduced initial forward sale price, a commission of up to 2.0% of the sales prices of all borrowed shares of common stock sold. As of March 31, 2019, there are no outstanding forward sales agreements. During the three months ended March 31, 2019, the Company sold 755,054 shares at an average sales price of $198.26 per share, for net proceeds of $147,450,000. As of March 31, 2019, the Company had $696,895,000 remaining authorized for issuance under this program.


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5.  Investments in Real Estate Entities

Investments in Unconsolidated Real Estate Entities

As of March 31, 2019, the Company had investments in six unconsolidated real estate entities with ownership interest percentages ranging from 20.0% to 55.0%, excluding joint ventures formed with Equity Residential as part of the Archstone acquisition. The Company accounts for its investments in unconsolidated real estate entities under the equity method of accounting. The significant accounting policies of the Company's unconsolidated real estate entities are consistent with those of the Company in all material respects.

The following is a combined summary of the financial position of the entities accounted for using the equity method discussed above as of the dates presented (dollars in thousands):
 
3/31/2019
 
12/31/2018
 
(unaudited)
 
 
Assets:
 

 
 

Real estate, net
$
1,386,041

 
$
1,420,039

Other assets
206,359

 
45,142

Total assets
$
1,592,400

 
$
1,465,181

 
 
 
 
Liabilities and partners' capital:
 

 
 

Mortgage notes payable, net and credit facility
$
835,889

 
$
837,311

Other liabilities
161,688

 
15,624

Partners' capital
594,824

 
612,246

Total liabilities and partners' capital
$
1,592,401

 
$
1,465,181

 

The following is a combined summary of the operating results of the entities accounted for using the equity method discussed above for the periods presented (dollars in thousands):
 
For the three months ended
 
3/31/2019
 
3/31/2018
 
(unaudited)
Rental and other income
$
35,311

 
$
21,801

Operating and other expenses
(13,969
)
 
(8,305
)
Interest expense, net
(8,552
)
 
(5,618
)
Depreciation expense
(21,696
)
 
(5,880
)
Net (loss) income
$
(8,906
)
 
$
1,998


In conjunction with the acquisition of the Archstone Multifamily Partners AC LP (the "U.S. Fund"), Multifamily Partners AC JV LP (the "AC JV") and Brandywine Apartments of Maryland, LLC ("Brandywine"), the Company incurred costs in excess of its equity in the underlying net assets of the respective investments. These costs represent $30,866,000 and $31,188,000 at March 31, 2019 and December 31, 2018, respectively, of the Company's respective investment balances. These amounts are being amortized over the lives of the underlying assets as a component of equity in income of unconsolidated real estate entities on the accompanying Condensed Consolidated Statements of Comprehensive Income.

Investments in Consolidated Real Estate Entities

In February 2019, the Company acquired Ridge at Wheatlands, a consolidated community, located in Aurora, CO. Ridge at Wheatlands contains 338 apartment homes and was acquired for a purchase price of $91,250,000. The Company accounted for this as an asset acquisition and recorded the acquired assets and assumed liabilities, including identifiable intangibles, at their relative fair values based on the purchase price and acquisition costs incurred. The Company used third party pricing or internal models for the values of the land, a valuation model for the values of the buildings, and an internal model to determine the fair values of the remaining real estate assets and in-place leases. Given the heterogeneous nature of multifamily real estate, the fair values for the land, debt, real estate assets and in-place leases incorporated significant unobservable inputs and therefore are considered to be Level 3 prices within the fair value hierarchy.


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In conjunction with the development of Avalon Brooklyn Bay, the Company entered into a joint venture agreement to construct a mixed-use building that contains rental apartments, for-sale residential condominium units and related common elements. The Company owns a 70.0% interest in the venture, which represents a 100% interest in the rental apartments, and the venture partner owns the remaining 30.0% interest, which represents a 100% interest in the for-sale residential condominium units. The Company was responsible for the development and construction of the structure, and provided a loan to the venture partner for the venture partner's share of costs. The venture is considered a VIE, and the Company consolidates its interest in the rental apartments and common areas, which are included in total real estate, net on the accompanying Condensed Consolidated Balance Sheets. The development of Avalon Brooklyn Bay was completed during 2018. The Company has a receivable from the venture partner in the form of a variable rate mortgage note, secured by the remaining for-sale residential condominium units. Beginning in 2018, the mortgage note is being repaid by the venture partner with the proceeds the venture partner receives from the sales of the residential condominium units. The balances as of March 31, 2019 and December 31, 2018 were $11,925,000 and $12,819,000, respectively, representing outstanding principal and interest, net of repayments, These amounts are reported as a component of prepaid expenses and other assets on the accompanying Condensed Consolidated Balance Sheets. The Company recognizes interest income on the accrual basis.

Expensed Transaction, Development and Other Pursuit Costs and Casualty and Impairment of Long-Lived Assets

The Company capitalizes pre-development costs incurred in pursuit of new development opportunities for which the Company currently believes future development is probable ("Development Rights"). Future development of these Development Rights is dependent upon various factors, including zoning and regulatory approval, rental market conditions, construction costs and the availability of capital. Initial pre-development costs incurred for pursuits for which future development is not yet considered probable are expensed as incurred. In addition, if the status of a Development Right changes, making future development by the Company no longer probable, any capitalized pre-development costs are expensed. The Company expensed costs related to the abandonment of Development Rights and costs for pursuits where development is not yet considered probable, as well as costs incurred in pursuing the acquisition or disposition of assets for which such acquisition and disposition activity did not occur, in the amounts of $1,095,000 and $800,000 for the three months ended March 31, 2019 and 2018, respectively. These costs are included in expensed transaction, development and other pursuit costs, net of recoveries on the accompanying Condensed Consolidated Statements of Comprehensive Income. Abandoned pursuit costs can vary greatly, and the costs incurred in any given period may be significantly different in future periods.

The Company evaluates its real estate and other long-lived assets for impairment when potential indicators of impairment exist. Such assets are stated at cost, less accumulated depreciation and amortization, unless the carrying amount of the asset is not recoverable. If events or circumstances indicate that the carrying amount of a property or long-lived asset may not be recoverable, the Company assesses its recoverability by comparing the carrying amount of the property or long-lived asset to its estimated undiscounted future cash flows. If the carrying amount exceeds the aggregate undiscounted future cash flows, the Company recognizes an impairment loss to the extent the carrying amount exceeds the estimated fair value of the property or long-lived asset. Based on periodic tests of recoverability of long-lived assets, the Company did not recognize any impairment losses for the three months ended March 31, 2019 and 2018.

The Company assesses its portfolio of land held for both development and investment for impairment if the intent of the Company changes with respect to either the development of, or the expected holding period for, the land. During the three months ended March 31, 2019 and 2018, the Company did not recognize any impairment charges on its investment in land.

The Company evaluates its unconsolidated investments for other than temporary impairment, considering both the extent and amount by which the carrying value of the investment exceeds the fair value, and the Company's intent and ability to hold the investment to recover its carrying value. The Company also evaluates its proportionate share of any impairment of assets held by unconsolidated investments. There were no other than temporary impairment losses recognized by any of the Company's investments in unconsolidated real estate entities during the three months ended March 31, 2019 and 2018.


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Table of Contents

6.  Real Estate Disposition Activities

The following real estate sales occurred during the three months ended March 31, 2019:

The Company sold Oakwood Arlington, located in Arlington, VA, containing an aggregate of 184 apartment homes for $70,000,000. The Company's gain on disposition was $16,382,000, reported in gain on sale of communities on the accompanying Condensed Consolidated Statements of Comprehensive Income.

The Company sold two undeveloped land parcels for an aggregate sale price of $3,680,000. The Company recognized a gain on disposition of $224,000, reported in gain (loss) on sale of other real estate on the accompanying Condensed Consolidated Statements of Comprehensive Income.

At March 31, 2019, the Company had one community that qualified as held for sale.

7. Commitments and Contingencies

Lease Obligations

The Company owns 11 apartment communities, one community under development, and two commercial properties, located on land subject to land leases expiring between October 2026 and March 2142. All of the ground leases, except for one of the apartment communities, are accounted for as operating leases, for which the Company recognizes rental expense on a straight-line basis over the lease term. These operating leases have varying rental escalation terms, primarily based on variables determined at future dates such as changes in the Consumer Price Index, and five of these leases have purchase options exercisable through 2095. In addition, the Company is party to 14 leases for its corporate and regional offices with varying terms through 2031, all of which are accounted for as operating leases. Further, the Company has one corporate office lease that has been executed that does not commence until 2020.

As of March 31, 2019, the Company has total operating lease assets of $102,312,000 and lease obligations of $120,202,000, reported as components of right of use lease assets and lease liabilities, respectively, on the accompanying Condensed Consolidated Balance Sheets. The Company incurred costs of $3,537,000 for the three months ended March 31, 2019 related to operating leases.

One apartment community is located on land subject to a land lease which is accounted for as a financing lease and has the option for the Company to purchase the land at some point during the lease term which expires in 2046. In addition to the leases described above, the Company is party to a lease for a portion of the parking garage adjacent to an apartment community, accounted for as a financing lease and subject to the Company's lease accounting policies discussed in Note 1, “Organization, Basis of Presentation and Significant Accounting Policies.” The Company has total financing lease assets of $22,057,000 and lease obligations of $20,234,000, reported as components of right of use lease assets and lease liabilities, respectively, on the accompanying Condensed Consolidated Balance Sheets.

The following table details the weighted average remaining lease term and discount rates for the Company’s ground and office leases:
Weighted-average remaining lease term - financing leases
27 years

Weighted-average remaining lease term - operating leases
53 years

Weighted-average discount rate - financing leases
4.63
%
Weighted-average discount rate - operating leases
4.97
%

The following tables details the future minimum lease payments under the Company's current leases and a reconciliation of undiscounted and discounted cash flows for operating and financing leases (dollars in thousands):


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Table of Contents

 
Payments due by period
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
Operating Lease Obligations
$
10,283

 
$
11,433

 
$
13,015

 
$
12,936

 
$
12,385

 
$
369,954

Financing Lease Obligations
806

 
1,077

 
1,080

 
1,082

 
1,084

 
41,220

 
$
11,089

 
$
12,510

 
$
14,095

 
$
14,018

 
$
13,469

 
$
411,174

 
Total undiscounted
cash flows
 
Total lease
liabilities
 
Difference between
discounted and
undiscounted cash flows
Operating Lease Obligations
$
430,006

 
$
120,202

 
$
309,804

Financing Lease Obligations
46,349

 
20,234

 
26,115

 
$
476,355

 
$
140,436

 
$
335,919


8.  Segment Reporting

The Company's reportable operating segments include Established Communities, Other Stabilized Communities, and Development/Redevelopment Communities.  Annually as of January 1, the Company determines which of its communities fall into each of these categories and generally maintains that classification throughout the year for the purpose of reporting segment operations, unless disposition or redevelopment plans regarding a community change. In addition, the Company owns land for future development and has other corporate assets that are not allocated to an operating segment.

The Company's segment disclosures present the measure(s) used by the chief operating decision maker for purposes of assessing each segment's performance. The Company's chief operating decision maker ("CODM") is comprised of several members of its executive management team who use net operating income ("NOI") as the primary financial measure for Established Communities and Other Stabilized Communities. NOI is defined by the Company as total property revenue less direct property operating expenses (including property taxes), and excluding corporate-level income (including management, development and other fees), corporate-level property management and other indirect operating expenses, expensed transaction, development and other pursuit costs, net of recoveries, interest expense, net, loss 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 and net operating income from real estate assets sold or held for sale. Although the Company considers NOI a useful measure of a community's or communities' operating performance, NOI should not be considered an alternative to net income or net cash flow from operating activities, as determined in accordance with GAAP. NOI excludes a number of income and expense categories as detailed in the reconciliation of NOI to net income.

A reconciliation of NOI to net income for the three months ended March 31, 2019 and 2018 is as follows (dollars in thousands):
 
For the three months ended
 
3/31/2019
 
3/31/2018
Net income
$
170,418

 
$
141,590

Indirect operating expenses, net of corporate income
19,722

 
18,958

Expensed transaction, development and other pursuit costs, net of recoveries
1,095

 
800

Interest expense, net
47,892

 
55,113

Loss on extinguishment of debt, net
280

 
397

General and administrative expense
13,688

 
14,431

Equity in loss (income) of unconsolidated real estate entities
1,060

 
(1,740
)
Depreciation expense
162,057

 
159,059

Income tax expense
12

 

Casualty and impairment gain, net

 
(58
)
Gain on sale of communities
(14,835
)
 

(Gain) loss on other real estate transactions, net
(267
)
 
47

Net operating income from real estate assets sold or held for sale
(1,238
)
 
(19,311
)
        Net operating income
$
399,884

 
$
369,286


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The following is a summary of NOI from real estate assets sold or held for sale for the periods presented (dollars in thousands):
 
For the three months ended
 
3/31/2019
 
3/31/2018
Rental income from real estate assets sold or held for sale
$
2,394

 
$
29,647

Operating expenses from real estate assets sold or held for sale
(1,156
)
 
(10,336
)
Net operating income from real estate assets sold or held for sale
$
1,238

 
$
19,311


The primary performance measure for communities under development or redevelopment depends on the stage of completion.  While under development, management monitors actual construction costs against budgeted costs as well as lease-up pace and rent levels compared to budget.

The following table provides details of the Company's segment information as of the dates specified (dollars in thousands). The segments are classified based on the individual community's status at January 1, 2019. Segment information for the three months ended March 31, 2019 and 2018 has been adjusted to exclude the real estate assets that were sold from January 1, 2018 through March 31, 2019, or otherwise qualify as held for sale as of March 31, 2019, as described in Note 6, "Real Estate Disposition Activities."

In addition to NOI, the Company's CODM considers total revenue in assessing each segment's performance. As discussed in Note 1, "Organization, Basis of Presentation and Significant Accounting Policies," the Company changed its presentation of charges for uncollectible lease revenue beginning with the three months ended March 31, 2019, including it as an adjustment to revenue and not as a component of operating expenses, as it is presented for prior periods on the accompanying Condensed Consolidated Statement of Comprehensive Income. Consistent with how the Company's CODM evaluates total revenue, and to provide comparability between periods presented in the Company's segment reporting, the Company has included charges for uncollectible lease revenue for its segment results as a component of revenue for all periods presented in the following table. Total revenue for the three months ended March 31, 2018 as presented in the following table includes $4,035,000 of uncollectible lease revenue.

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Table of Contents

 
For the three months ended
 
 
 
Total
revenue
 
NOI
 
Gross real estate (1)
For the period ended March 31, 2019
 
 

Established
 

 
 

 
 

New England
$
65,481

 
$
43,152

 
$
2,188,523

Metro NY/NJ
101,202

 
71,843

 
3,527,401

Mid-Atlantic
72,008

 
51,052

 
2,671,426

Pacific Northwest
27,802

 
20,210

 
986,190

Northern California
93,239

 
72,501

 
3,007,739

Southern California
100,541

 
72,695

 
3,580,160

Total Established
460,273

 
331,453

 
15,961,439

 
 
 
 
 
 
Other Stabilized
66,798

 
44,948

 
3,026,411

Development / Redevelopment
35,580

 
23,483

 
3,360,656

Land Held for Development
N/A

 
N/A

 
104,963

Non-allocated (2)
1,139

 
N/A

 
94,837

 
 
 
 
 
 
Total
$
563,790

 
$
399,884

 
$
22,548,306

 
 
 
 
 
 
For the period ended March 31, 2018
 
 

Established
 

 
 

 
 

New England
$
63,395

 
$
41,077

 
$
2,181,597

Metro NY/NJ
98,029

 
69,017

 
3,513,387

Mid-Atlantic
69,769

 
48,855

 
2,659,288

Pacific Northwest
26,488

 
18,623

 
981,609

Northern California
90,086

 
68,916

 
2,994,116

Southern California
96,914

 
69,600

 
3,556,516

Total Established
444,681

 
316,088

 
15,886,513

 
 
 
 
 
 
Other Stabilized
50,097

 
32,121

 
2,476,331

Development / Redevelopment
31,446

 
21,077

 
2,365,808

Land Held for Development
N/A

 
N/A

 
136,771

Non-allocated (2)
886

 
N/A

 
80,011

 
 
 
 
 
 
Total
$
527,110

 
$
369,286

 
$
20,945,434

__________________________________

(1)
Does not include gross real estate assets held for sale of $90,153 as of March 31, 2019 and gross real estate sold or classified as held for sale subsequent to March 31, 2018 of $1,316,472.
(2)
Revenue represents third-party management, asset management and developer fees and miscellaneous income which are not allocated to a reportable segment.


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Table of Contents

9.  Stock-Based Compensation Plans

As part of its long term compensation plans, the Company has granted stock options, performance awards and restricted stock. Details of the outstanding awards and activity are presented below.

Information with respect to stock options granted under the Company's Second Amended and Restated 2009 Equity Incentive Plan (the "2009 Plan") for the three months ended March 31, 2019, is as follows:
 
 
2009 Plan
shares
 
Weighted average
exercise price
per share
Options Outstanding, December 31, 2018
 
124,212

 
$
128.84

Exercised
 
(66,949
)
 
129.06

Granted
 

 

Forfeited
 

 

Options Outstanding, March 31, 2019
 
57,263

 
$
128.58

Options Exercisable, March 31, 2019
 
52,598

 
$
125.70


Information with respect to performance awards granted is as follows:
 
 
Performance awards
 
Weighted average grant date fair value per award
Outstanding at December 31, 2018
 
267,129

 
$
157.21

  Granted (1)
 
79,840

 
200.69

  Change in awards based on performance (2)
 
(16,760
)
 
142.03

  Converted to restricted stock or options
 
(73,072
)
 
142.03

  Forfeited
 
(248
)
 
167.71

Outstanding at March 31, 2019
 
256,889

 
$
176.03

__________________________________

(1)
The amount of restricted stock that ultimately may be earned is based on the total shareholder return metrics related to the Company's common stock for 47,091 performance awards and financial metrics related to operating performance and leverage metrics of the Company for 32,749 performance awards.
(2)
Represents the change in the number of performance awards earned based on actual performance achievement for the performance period.

The Company used a Monte Carlo model to assess the compensation cost associated with the portion of the performance awards granted in 2019 for which achievement will be determined by using total shareholder return measures. The assumptions used are as follows:
 
 
2019
Dividend yield
 
3.1%
Estimated volatility over the life of the plan (1)
 
13.9% - 18.8%
Risk free rate
 
2.46% - 2.57%
Estimated performance award value based on total shareholder return measure
 
$204.15
__________________________________

(1)
Estimated volatility over the life of the plan is using 50% historical volatility and 50% implied volatility.

For the portion of the performance awards granted in 2019 for which achievement will be determined by using financial metrics, the compensation cost was based on the grant date fair value of $195.72, and the Company's estimate of corporate achievement for the financial metrics.


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Table of Contents

Information with respect to restricted stock granted is as follows:
 
 
Restricted stock shares
 
Restricted stock shares weighted average grant date fair value per share
 
Restricted stock shares converted from performance awards
Outstanding at December 31, 2018
 
160,411

 
$
166.33

 
209,238

  Granted - restricted stock shares
 
74,932

 
195.72

 
73,072

  Vested - restricted stock shares
 
(76,396
)
 
166.53

 
(110,366
)
  Forfeited
 
(616
)
 
165.33

 

Outstanding at March 31, 2019
 
158,331

 
$
180.14

 
171,944


Total employee stock-based compensation cost recognized in income was $5,471,000 and $3,846,000 for the three months ended March 31, 2019 and 2018, respectively, and total capitalized stock-based compensation cost was $2,096,000 and $2,086,000 for the three months ended March 31, 2019 and 2018, respectively. At March 31, 2019, there was a total unrecognized compensation cost of $51,331,000 for unvested restricted stock and performance awards, which does not include forfeitures, and is expected to be recognized over a weighted average period of 2.6 years.

10.  Related Party Arrangements

Unconsolidated Entities

The Company manages unconsolidated real estate entities for which it receives asset management, property management, development and redevelopment fee revenue. From these entities, the Company earned fees of $1,139,000 and $886,000 during the three months ended March 31, 2019 and 2018, respectively. In addition, the Company has outstanding receivables associated with its property and construction management role of $5,208,000 and $2,519,000 as of March 31, 2019 and December 31, 2018, respectively.

Director Compensation

The Company recorded non-employee director compensation expense relating to restricted stock grants and deferred stock awards in the amount of $426,000 and $389,000 in the three months ended March 31, 2019 and 2018, respectively, as a component of general and administrative expense. Deferred compensation relating to these restricted stock grants and deferred stock awards to non-employee directors was $213,000 and $571,000 on March 31, 2019 and December 31, 2018, respectively, reported as a component of prepaid expenses and other assets on the accompanying Condensed Consolidated Balance Sheets.

11.  Fair Value

Financial Instruments Carried at Fair Value

Derivative Financial Instruments

The Company uses interest rate swap and interest rate cap agreements to manage its interest rate risk. These instruments are carried at fair value in the Company's financial statements. In adjusting the fair value of its derivative contracts for the effect of counterparty nonperformance risk, the Company has considered the impact of its net position with a given counterparty, as well as any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees. The Company minimizes its credit risk on these transactions by dealing with major, creditworthy financial institutions which have an A or better credit rating by the Standard & Poor's Ratings Group. As part of its on-going control procedures, the Company monitors the credit ratings of counterparties and the exposure of the Company to any single entity, thus reducing credit risk concentration. The Company believes the likelihood of realizing losses from counterparty nonperformance is remote. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, such as interest rate, term to maturity and volatility, the credit valuation adjustments associated with its derivatives use Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. As of March 31, 2019, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined it is not significant.  As a result, the Company has determined that its derivative valuations are classified in Level 2 of the fair value hierarchy.



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Table of Contents

The following table summarizes the consolidated derivative positions at March 31, 2019 (dollars in thousands):
 
Non-designated
Hedges
 
Cash Flow
Hedges
 
Cash Flow
Hedges
Interest Rate Swaps
 
 
 
 
 
 
Notional balance
$
587,272

 
$
33,929

 
$
250,000

Weighted average interest rate (1)
3.1
%
 
4.8
%
 
N/A

Weighted average swapped/capped interest rate
6.6
%
 
5.9
%
 
3.0
%
Earliest maturity date
Apr 2020

 
Apr 2019

 
Sep 2019

Latest maturity date
Sep 2022

 
Apr 2019

 
Sep 2019

____________________________________

(1)
Represents the weighted average interest rate on the hedged debt.

As of March 31, 2019, the Company had $250,000,000 in aggregate outstanding forward interest rate swap agreements. At maturity of the swap agreements, the Company expects to cash settle the contracts and either pay or receive cash for the then current fair value. Assuming that the Company issues the hedged forecasted debt as expected, the hedging impact from these positions will then be recognized over the life of the issued debt as a yield adjustment.

The Company had four derivatives designated as cash flow hedges and 10 derivatives not designated as hedges at March 31, 2019. Fair value changes for derivatives not in qualifying hedge relationships for the three months ended March 31, 2019 and 2018 were not material. During the three months ended March 31, 2019, the Company deferred $7,231,000 of losses for cash flow hedges reported as a component of accumulated other comprehensive loss.

The following table summarizes the deferred losses reclassified from accumulated other comprehensive loss as a component of interest expense, net (dollars in thousands):
 
For the three months ended
 
3/31/2019
 
3/31/2018
 
 
 
 
Cash flow hedge losses reclassified to earnings
$
1,468

 
$
1,756


The Company anticipates reclassifying approximately $5,752,000 of net hedging losses from accumulated other comprehensive loss into earnings within the next 12 months as an offset to the hedged item during this period. The Company did not have any derivatives designated as fair value hedges as of March 31, 2019 and 2018.

Redeemable Noncontrolling Interests

The Company is party to investments in two consolidated ventures, which contain redemption options (the "Puts") that allow joint venture partners of the Company to require the Company to purchase their interests in the investment at a guaranteed minimum amount. The Puts are payable in cash. The Company determines the fair value of the Puts based on unobservable inputs considering the assumptions that market participants would make in pricing the obligations, applying a guaranteed rate of return to the joint venture partners' net capital contribution balances as of period end. Given the significance of the unobservable inputs, the valuations are classified in Level 3 of the fair value hierarchy.

The Company issued units of limited partnership interest in DownREITs which provide the DownREIT limited partners the ability to present all or some of their units for redemption for cash as determined by the partnership agreement. Under the DownREIT agreements, for each limited partnership unit, the limited partner is entitled to receive cash in the amount equal to the fair value of the Company's common stock on or about the date of redemption.  In lieu of cash redemption, the Company may elect to exchange such units for an equal number of shares of the Company's common stock. The limited partnership units in the DownREITs are valued using the market price of the Company's common stock, a Level 1 price under the fair value hierarchy.


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Table of Contents

Financial Instruments Not Carried at Fair Value

Cash and Cash Equivalents

Cash and cash equivalent balances are held with various financial institutions within accounts designed to preserve principal. The Company monitors credit ratings of these financial institutions and the concentration of cash and cash equivalent balances with any one financial institution and believes the likelihood of realizing material losses related to cash and cash equivalent balances is remote.  Cash and cash equivalents are carried at their face amounts, which reasonably approximate their fair values and are Level 1 within the fair value hierarchy.

Other Financial Instruments

Rents and other receivables and prepaid expenses, accounts and construction payable and accrued expenses and other liabilities are carried at their face amounts, which reasonably approximate their fair values.

The Company values its unsecured notes using quoted market prices, a Level 1 price within the fair value hierarchy. The Company values its notes payable and outstanding amounts under the Credit Facility and Term Loans using a discounted cash flow analysis on the expected cash flows of each instrument. This analysis reflects the contractual terms of the instrument, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The process also considers credit valuation adjustments to appropriately reflect the Company's nonperformance risk. The Company has concluded that the value of its notes payable and amounts outstanding under its Credit Facility and Term Loans are Level 2 prices as the majority of the inputs used to value its positions fall within Level 2 of the fair value hierarchy.

Financial Instruments Measured/Disclosed at Fair Value on a Recurring Basis

The following tables summarize the classification between the three levels of the fair value hierarchy of the Company's financial instruments measured/disclosed at fair value on a recurring basis (dollars in thousands):
 
 
3/31/2019
Description
 
Total Fair Value
 
Quoted Prices
in Active
Markets for Identical Asset
(Level 1)
 
Significant
Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
 
 
 
 
Cash Flow Hedges
 
 
 
 
 
 
 
 
Interest Rate Swaps - Liabilities
 
$
(13,600
)
 
$

 
$
(13,600
)
 
$

Puts
 
(417
)
 

 

 
(417
)
DownREIT units
 
(1,506
)
 
(1,506
)
 

 

Indebtedness
 
 
 
 
 
 
 
 
Fixed rate unsecured notes
 
(5,466,171
)
 
(5,466,171
)
 

 

Secured notes and variable rate unsecured indebtedness
 
(1,519,569
)
 

 
(1,519,569
)
 

Total
 
$
(7,001,263
)
 
$
(5,467,677
)
 
$
(1,533,169
)
 
$
(417
)


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Table of Contents

 
 
12/31/2018
Description
 
Total Fair Value
 
Quoted Prices
in Active
Markets for Identical Asset
(Level 1)
 
Significant
Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
 
 
 
 
Non-Designated Hedges
 
 
 
 
 
 
 
 
Interest Rate Caps
 
$
2

 
$

 
$
2

 
$

Cash Flow Hedges
 
 
 
 
 
 
 
 
Interest Rate Swaps - Liabilities
 
(6,366
)
 

 
(6,366
)
 

Puts
 
(465
)
 

 

 
(465
)
DownREIT units
 
(1,305
)
 
(1,305
)
 

 

Indebtedness
 
 
 
 
 
 
 
 
Fixed rate unsecured notes
 
(5,268,277
)
 
(5,268,277
)
 

 

Secured notes and variable rate unsecured indebtedness
 
(1,505,876
)
 

 
(1,505,876
)
 

Total
 
$
(6,782,287
)
 
$
(5,269,582
)
 
$
(1,512,240
)
 
$
(465
)

12.  Subsequent Events

The Company has evaluated subsequent events through the date on which this Form 10-Q was filed, the date on which these financial statements were issued, and identified the items below for discussion.

In April 2019, the Company had the following activity.

The Company sold Archstone Toscano, a wholly-owned operating community, located in Houston, TX. Archstone Toscano contains 474 apartment homes, was sold for $98,000,000 and was classified as held for sale as of March 31, 2019.

The Company acquired Avalon Cerritos located in Cerritos, CA, containing 132 apartment homes, for a purchase price of $60,500,000.

The Company repaid $13,394,000 of 4.64% fixed rate debt and $33,929,000 of variable debt secured by Avalon Natick at par on its maturity date.

As of May 3, 2019, the Company has $211,000,000 outstanding under the Credit Facility.

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Table of Contents

ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help provide an understanding of our business, financial condition and results of operations. This MD&A should be read in conjunction with our 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 Item 1A. "Risk Factors" of our Form 10-K for the year ended December 31, 2018 (the "Form 10-K").

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 primarily in New England, the New York/New Jersey metro area, the Mid-Atlantic, the Pacific Northwest, and Northern and Southern California. We focus on leading metropolitan areas that we believe are characterized by growing employment in high wage sectors of the economy, lower housing affordability and a diverse and vibrant quality of life. We believe these market characteristics offer the opportunity for superior risk-adjusted returns on apartment community investments relative to other markets that do not have these characteristics. We believe that the Denver, Colorado, and Southeast Florida markets share these characteristics, and in 2017 we began to invest in these markets through acquisitions and developments. We seek to create long-term shareholder value by accessing capital on cost effective terms; deploying that capital to develop, redevelop and acquire apartment communities in our selected markets; operating apartment communities; and selling communities when they no longer meet our long-term investment strategy or when pricing is attractive.

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.

First Quarter 2019 Highlights

Net income attributable to common stockholders for the three months ended March 31, 2019 was $170,366,000, an increase of $28,723,000, or 20.3%, as compared to the prior year period. The increase is primarily due to increases in real estate sales and related gains and NOI from communities across the portfolio, over the prior year period.

Established Communities NOI for the three months ended March 31, 2019 was $331,453,000, an increase of $15,365,000, or 4.9%, over the prior year period.

At March 31, 2019, we owned or held a direct or indirect interest in:

19 communities under construction, which are expected to contain 6,170 apartment homes with a projected total capitalized cost of $2,233,000,000; and

land or rights to land on which we expect to develop an additional 29 apartment communities that, if developed as expected, will contain 10,050 apartment homes, and will be developed for an aggregate total capitalized cost of $4,197,000,000.

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Table of Contents

During the three months ended March 31, 2019, we sold Oakwood Arlington, a wholly-owned operating community located in Arlington, VA, containing 184 apartment homes. Oakwood Arlington was sold for $70,000,000, and our gain in accordance with GAAP was $16,382,000.

During the three months ended March 31, 2019, we acquired Ridge at Wheatlands, a wholly-owned operating community located in Aurora, CO. Ridge at Wheatlands contains 338 apartment homes and was acquired for a purchase price of $91,250,000.

In April 2019, we sold one wholly-owned operating community containing 474 apartment homes for $98,000,000, and acquired one wholly-owned operating community containing 132 apartment homes for $60,500,000.

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 including the activity discussed above. See the discussion under "Liquidity and Capital Resources".

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 distinguished as Established Communities, Other Stabilized Communities, Lease-Up Communities, Redevelopment Communities and Unconsolidated Communities. While we generally establish the classification of communities on an annual basis, we 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) are consolidated communities in the markets where we have a significant presence (New England, New York/New Jersey, Mid-Atlantic, Pacific Northwest, and Northern and Southern California) and where a comparison of operating results from the prior year to the current year is meaningful, as these communities were owned and had stabilized occupancy as of the beginning of the respective prior year period. For the three month periods ended March 31, 2019 and 2018, the Established Communities are communities that are consolidated for financial reporting purposes, had stabilized occupancy as of January 1, 2018, are not conducting or are not probable to conduct substantial redevelopment activities and are not held for sale as of March 31, 2019 or probable for disposition to unrelated third parties within the current year. A community is considered to have stabilized occupancy at the earlier of (i) attainment of 95% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment.

Other Stabilized Communities are all other completed consolidated communities that have stabilized occupancy, as defined above, as of January 1, 2019, or which were acquired as of the beginning of the current calendar year. Other Stabilized Communities includes stabilized operating communities in our expansion markets of Denver, Colorado and Southeast Florida, but excludes communities that are conducting or are probable to conduct substantial redevelopment activities within the current year. 

Lease-Up Communities are consolidated communities where construction has been complete for less than one year and where physical occupancy has not reached 95%.

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 capital invested during the reconstruction effort is expected to exceed the lesser of $5,000,000 or 10% of the community's pre-redevelopment basis and is expected to have a material impact on the operations of the community, including occupancy levels and future rental rates.

Unconsolidated Communities are communities that we have an indirect ownership interest in through our investment interest in an unconsolidated joint venture.


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Table of Contents

Development 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 March 31, 2019, communities that we owned or held a direct or indirect interest in were classified as follows:
 
 
Number of
communities
 
Number of
apartment homes
Current Communities
 
 

 
 

 
 
 
 
 
Established Communities:
 
 

 
 

New England
 
36

 
8,878

Metro NY/NJ
 
40

 
11,463

Mid-Atlantic
 
32

 
11,232

Pacific Northwest
 
16

 
4,116

Northern California
 
36

 
10,701

Southern California
 
53

 
14,689

Total Established
 
213

 
61,079

 
 
 
 
 
Other Stabilized Communities:
 
 

 
 

New England
 
3

 
1,087

Metro NY/NJ
 
8

 
2,021

Mid-Atlantic
 
5

 
1,477

Pacific Northwest
 

 

Northern California
 
5

 
1,534

Southern California
 
3

 
1,690

Expansion Markets
 
6

 
1,746

Non Core
 
3

 
1,014

Total Other Stabilized
 
33

 
10,569

 
 
 
 
 
Lease-Up Communities
 
2

 
440

 
 
 
 
 
Redevelopment Communities
 
9

 
3,396

 
 
 
 
 
Unconsolidated Communities
 
15

 
3,659

 
 
 
 
 
Total Current Communities
 
272

 
79,143

 
 
 
 
 
Development Communities (1)
 
19

 
6,170

 
 
 
 
 
Total Communities
 
291

 
85,313

 
 
 
 
 
Development Rights
 
29

 
10,050

_________________________

(1)
Development Communities excludes the development of 15 West 61st Street, containing 172 residential units and 67,000 square feet of retail space. We are pursuing a potential for-sale strategy of individual condominium units for the residential portion, while we expect to maintain ownership of the retail portion.

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Table of Contents

Results of Operations

Our year-over-year operating performance is primarily affected by both overall and individual geographic market conditions and apartment fundamentals and is reflected in changes in NOI of our Established Communities; NOI derived from acquisitions and development completions; the loss of NOI related to disposed communities; and capital market and financing activity.  A comparison of our operating results for the three months ended March 31, 2019 and 2018 follows (unaudited, dollars in thousands):
    
 
For the three months ended
 
3/31/2019
 
3/31/2018
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
Revenue:
 

 
 

 
 

 
 

Rental and other income (1)