AVALONBAY COMMUNITIES, INC. 
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to help provide an understanding of our
business, financial condition and results of operations. This MD&A should be
read in conjunction with our Condensed Consolidated Financial Statements and the
accompanying Notes to Condensed Consolidated Financial Statements included
elsewhere in this report. This report, including the following MD&A, contains
forward-looking statements regarding future events or trends that should be read
in conjunction with the factors described under "Forward-Looking Statements"
included in this report. Actual results or developments could differ materially
from those projected in such statements as a result of the factors described
under "Forward-Looking Statements" as well as the risk factors described in Part
I, Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the year ended
December 31, 2019 (the "Form 10-K") and in Part II, Item 1A. "Risk Factors" in
this report.
Capitalized terms used without definition have the meanings provided elsewhere in this Form 10-Q.
Executive Overview Business Description We develop, redevelop, acquire, own and operate multifamily apartment communities inNew England , theNew York /New Jersey metro area, the Mid-Atlantic, thePacific Northwest , and Northern andSouthern California , as well as in our expansion markets inSoutheast Florida andDenver, Colorado (the "Expansion Markets"). We focus on leading metropolitan areas that we believe historically have been characterized by growing employment in high wage sectors of the economy, higher cost of home ownership and a diverse and vibrant quality of life. We believe these market characteristics have offered and will continue in the future to offer the opportunity for superior risk-adjusted returns over the long-term on apartment community investments relative to other markets that do not have these characteristics. We seek to create long-term shareholder value by accessing capital on cost effective terms; deploying that capital to develop, redevelop and acquire apartment communities in our selected markets; operating apartment communities; and selling communities when they no longer meet our long-term investment strategy or when pricing is attractive. Our strategic vision is to be the leading apartment company in selectU.S. markets, providing a range of distinctive living experiences that customers value. We pursue this vision by targeting what we believe are among the best markets and submarkets, leveraging our strategic capabilities in market research and consumer insight and being disciplined in our capital allocation and balance sheet management. Our communities are predominately upscale and generally command among the highest rents in their markets. However, we also pursue the ownership and operation of apartment communities that target a variety of customer segments and price points, consistent with our goal of offering a broad range of products and services. We regularly evaluate the allocation of our investments by the amount of invested capital and by product type within our individual markets.
Second Quarter 2020 Highlights
• Net income attributable to common stockholders for the three months ended
June 30, 2020 was$170,828,000 , an increase of$2,547,000 , or 1.5%, as compared to the prior year period. The increase is primarily due to an
increase in NOI from Development and Other Stabilized Communities, as well
as increases in gains on real estate dispositions in the current year
period. These amounts were partially offset by a decrease in NOI fromEstablished Communities, and increases in depreciation expense, property
taxes and interest expense in the current year period.
• Established Communities NOI for the three months ended
$368,191,000 , a decrease of$14,225,000 , or 3.7%, from the prior year period, due primarily to a reduction in revenues from uncollectible lease revenue, which increased$14,214,000 over the prior year period.
COVID-19 Pandemic
The Company has taken various actions in response to the COVID-19 pandemic to adjust our business operations and to address the needs of our residents and associates. We are committed to the health and safety of our residents and associates. During the first and second quarters of 2020 we adopted certain measures to help mitigate the financial impact arising from the national emergency on our residents, including providing flexible lease renewal options at no rent increase for leases expiring throughJune 30, 2020 , creating payment plans for residents who are unable to pay their rent because they are impacted by this national emergency and waiving late fees and certain other customary fees associated with apartment rentals. We may discontinue these measures at any time except where required by law. 26
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The ultimate impact on our consolidated results of operations from COVID-19 for
2020 and periods beyond will depend on the duration and severity of the
pandemic, the duration and nature of governmental responses to contain the
spread of the disease and cushion the impact on consumers, and how quickly and
to what extent normal economic and operating conditions can resume. The current
and potential future impacts of the COVID-19 pandemic on our business,
particularly on (i) rent levels, collectibility of rents, occupancy and the
extent to which we waive certain other customary fees associated with our
apartment rental business and (ii) development timing and volume, mean that our
historical results of operations and financial condition are not necessarily
indicative of future results of operations and financial condition. Because
those factors are beyond our control and knowledge, the adverse impact of the
pandemic on our results of operations for 2020 and beyond cannot be reasonably
estimated, and could be material.
The COVID-19 pandemic has impacted our rental operations including (i) revenues
and expenses, as well as (ii) our collections and associated outstanding
receivables. For further discussion of the impact on revenues and expenses see
"Results of Operations." The following table presents the percentage of (i)
apartment base rent charged to residents and (ii) other rentable items,
including parking and storage rent, along with pet and other fees in accordance
with residential leases, that has been collected ("Collected Residential
Revenue") for Established Communities for the three months ended June 30, 2020
(unaudited). Collected Residential Revenue excludes transactional and other
fees.
At month end (1)(2) At July 31, 2020 (3)
April 2020 93.9 % 97.7 %
May 2020 92.8 % 96.4 %
June 2020 93.6 % 95.5 %
July 2020 93.9 % 93.9 %
_________________________
(1) Excludes retail revenue, which was 1.4% of our 2019 Established
Communities' total revenue. As of June 30, 2020 , we collected 56.5% of
billed retail revenue for the three months ended June 30, 2020 .
(2) The percentage of Collected Residential Revenue as of the last calendar
day for each month.
(3) The percentage of Collected Residential Revenue as of July 31, 2020 for
each month.
The collection rates are based on individual resident and retail tenant activity
as reflected in our property management systems, and are presented to provide
information about collections trends during the COVID-19 pandemic. Prior to the
COVID-19 pandemic, the collections information provided was not routinely
produced for internal use by senior management or publicly disclosed by the
Company and is a result of analysis that is not subject to internal controls
over financial reporting. This information is not prepared in accordance with
GAAP, does not reflect GAAP revenue or cash flow metrics and may be subject to
adjustment in preparing GAAP revenue and cash flow metrics. Additionally, this
information should not be interpreted as predicting the Company's financial
performance, results of operations or liquidity for any period. At June 30,
2020 , our outstanding rent receivable balance for residential and retail
tenants, net of reserves, increased to $20,197,000 from $11,594,000 at December
31, 2019 . The net receivable at June 30, 2020 includes $4,643,000 of residential
receivables subject to payment plans.
Second Quarter 2020 Development Highlights
At
• 19 communities under construction, which are expected to contain 6,198
apartment homes with a projected total capitalized cost of
During the three months endedJune 30, 2020 , construction at six of these Development Communities had been temporarily suspended after considering state and local regulations and/or advisories and the construction at many of the remaining Development Communities had been slowed due to the impact of safety precautions on labor availability and inspection constraints. As ofJune 30, 2020 , construction has been restarted at all six Development Communities that had been temporarily suspended, and construction work at our remaining sites that had been slowed was largely back to normal pace. We may be required to, or may at our discretion, temporarily suspend ongoing construction at one or more of our Development Communities as a result of either governmental actions or social or economic conditions arising as a result of the COVID-19 pandemic. 27
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• Land or rights to land on which we expect to develop an additional 28
apartment communities that, if developed as expected, will contain 9,786apartment homes, and will be developed for an aggregate total capitalized
cost of
In response to the COVID-19 pandemic, we have not started the construction of any new development communities throughJune 30, 2020 . InJuly 2020 we entered into a joint venture to developAVA Arts District , as discussed under "Unconsolidated Real Estate Investments and Off-Balance Sheet Arrangements." We will evaluate future starts on an individual basis, based on evolving economic and market conditions. In addition, we have substantially reduced our planned redevelopment and other non-essential capex investment. We expect to be able to meet our reasonably foreseeable liquidity needs, as they arise, through a combination of one or more of the following sources: existing cash on hand; operating cash flows; borrowings under our Credit Facility; secured debt; the issuance of corporate securities which could include unsecured debt, preferred equity and/or common equity; the sale of apartment communities; or through the formation of joint ventures. See the discussion under "Liquidity and Capital Resources." During the three months endedJune 30, 2020 , we sold one wholly-owned operating community containing 216 apartment homes for$64,900,000 , and our gain in accordance with GAAP was$35,297,000 . In addition, we sold 16 residential condominiums at The Park Loggia, for gross proceeds of$61,207,000 , resulting in a gain in accordance with GAAP of$2,544,000 .
Communities Overview
Our real estate investments consist primarily of current operating apartment
communities, communities in various stages of development ("Development
Communities") and Development Rights (as defined below). Our current operating
communities are further classified as Established Communities, Other Stabilized
Communities, Lease-Up Communities, Redevelopment Communities and Unconsolidated
Communities. While we generally establish the classification of communities on
an annual basis, we update the classification of communities during the calendar
year to the extent that our plans with regard to the disposition or
redevelopment of a community change. The following is a description of each
category:
Current Communities are categorized as Established, Other Stabilized, Lease-Up, Redevelopment, or Unconsolidated according to the following attributes:
• Established Communities (also known as Same Store Communities) are
consolidated communities in the markets where we have a significant
presence (
Northwest, Northern and
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 six month periods ended
Communities are communities that are consolidated for financial
reporting purposes, had stabilized occupancy as of
not conducting or are not probable to conduct substantial redevelopment
activities and are not held for sale as of June 30, 2020 or probable
for disposition to unrelated third parties within the current year. Acommunity is considered to have stabilized occupancy at the earlier of
(i) attainment of 90% physical occupancy or (ii) the one-year
anniversary of completion of development or redevelopment.
• Other Stabilized Communities are all other completed consolidated
communities that have stabilized occupancy, as defined above, as of
January 1, 2020 , or which were acquired subsequent to January 1, 2019 .Other Stabilized Communities excludes communities that are conducting
or are probable to conduct substantial redevelopment activities within
the current year, as defined below.
• Lease-Up Communities are consolidated communities where construction
has been complete for less than one year and that do not have
stabilized occupancy.
• Redevelopment Communities are consolidated communities where
substantial redevelopment is in progress or is probable to begin during
the current year. Redevelopment is considered substantial when (i)
capital invested during the reconstruction effort is expected to exceed
the lesser of
gross cost basis and (ii) physical occupancy is below or is expected to
be below 90% during, or as a result of, the redevelopment activity. We
had no Redevelopment Communities at June 30, 2020 .
• Unconsolidated Communities are communities that we have an indirect
ownership interest in through our investment interest in an
unconsolidated joint venture.
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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
As of
Number of Number of
communities apartment homes
Current Communities
Established Communities:
New England 40 10,055
Metro NY/NJ 47 13,268
Mid-Atlantic 39 13,838
Pacific Northwest 16 4,116
Northern California 40 11,362
Southern California 56 16,379
Expansion Markets 3 912
Total Established 241 69,930
Other Stabilized Communities:
New England 3 705
Metro NY/NJ 2 854
Mid-Atlantic 1 151
Pacific Northwest 2 745
Northern California 1 873
Southern California 2 681
Expansion Markets 5 1,388
Total Other Stabilized 16 5,397
Lease-Up Communities 6 1,666
Redevelopment Communities - -
Unconsolidated Communities 13 3,189
Total Current Communities 276 80,182
Development Communities (1) 19 6,198
Total Communities 295 86,380
Development Rights (2) 28 9,786
_________________________(1) Development Communities includesAvalon Alderwood Mall , expected to contain 328 apartment homes, which is being developed within an unconsolidated joint venture. (2) Development Rights includesAVA Arts District , expected to contain 475 apartments homes, which will be developed within an unconsolidated joint venture. 29
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Results of Operations
As discussed above under "Executive Overview - COVID-19 Pandemic" and elsewhere in this report, the COVID-19 pandemic has affected our business, and may continue to do so. See also Part II, Item 1A, "Risk Factors." Our year-over-year operating performance is primarily affected by both overall and individual geographic market conditions and apartment fundamentals and is reflected in changes in NOI of our Established Communities; NOI derived from acquisitions, development completions and development under construction and in lease-up; the loss of NOI related to disposed communities; and capital market and financing activity. A comparison of our operating results for the three and six months endedJune 30, 2020 and 2019 follows (unaudited, dollars in thousands). For the three months ended For the six months ended 6/30/2020 6/30/2019 $ Change % Change 6/30/2020 6/30/2019 $ Change % Change Revenue: Rental and other income$ 575,479 $ 576,149 $ (670 ) (0.1 )%$ 1,176,123 $ 1,141,194 $ 34,929 3.1 % Management, development and other fees 926 1,114 (188 ) (16.9 )% 1,933 2,252 (319 ) (14.2 )% Total revenue 576,405 577,263 (858 ) (0.1 )% 1,178,056 1,143,446 34,610 3.0 % Expenses: Direct property operating expenses, excluding property taxes 106,753 108,777 (2,024 ) (1.9 )% 214,934 211,362 3,572 1.7 % Property taxes 67,013 62,187 4,826 7.8 % 134,039 123,516 10,523 8.5 % Total community operating expenses 173,766 170,964 2,802 1.6 % 348,973 334,878 14,095 4.2 % Corporate-level property management and other indirect operating expenses 24,337 24,147 190 0.8 % 48,149 45,016 3,133 7.0 % Expensed transaction, development and other pursuit costs, net of recoveries 388 1,766 (1,378 ) (78.0 )% 3,722 2,388 1,334 55.9 %
Interest expense, net 53,399 50,010 3,389 6.8 % 109,313 97,902 11,411 11.7 % Loss on extinguishment of debt, net
268 229 39 17.0 % 9,438 509 8,929 1,754.2 %
Depreciation expense 176,249 162,693 13,556 8.3 % 354,160 324,749 29,411 9.1 %
General and administrative
expense 15,573 18,965 (3,392 ) (17.9 )% 32,893 32,671 222 0.7 %
Total other expenses 270,214 257,810 12,404 4.8 % 557,675 503,235 54,440 10.8 %
Equity in income (loss) of
unconsolidated real estate
entities 512 197 315 159.9 % 1,687 (863 ) 2,550 N/A (1)
Gain on sale of communities 35,295 20,530 14,765 71.9 % 59,731 35,365 24,366 68.9 %
Gain on other real estate
transactions, net 156 34 122 358.8 % 199 300 (101 ) (33.7 )%
Gain on for-sale
condominiums, net of
marketing and
administrative costs 1,348 (945 ) 2,293 N/A (1) 4,808 (1,418 ) 6,226 N/A (1)
Income before income taxes 169,736 168,305 1,431 0.9 % 337,833 338,717 (884 ) (0.3 )%
Income tax benefit 1,133 - 1,133 100.0 % 1,042 6 1,036 N/A (1)
Net income 170,869 168,305 2,564 1.5 % 338,875 338,723 152 - %
Net income attributable to noncontrolling interests (41 ) (24 ) (17 ) 70.8 %
(76 ) (76 ) - - %
Net income attributable to
common stockholders
- %
_________________________
(1) Percent change is not meaningful.
Net income attributable to common stockholders increased$2,547,000 , or 1.5%, to$170,828,000 for the three months endedJune 30, 2020 and increased$152,000 to$338,799,000 for the six months endedJune 30, 2020 as compared to the prior year periods. The increases for the three and six months endedJune 30, 2020 are primarily due to increases in NOI from Development and Other Stabilized Communities, as well as increases in gains on real estate dispositions in the current year periods. These amounts were partially offset by decreases in NOI from Established Communities, and increases in depreciation expense, property taxes and interest expense in the current year periods. 30
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NOI is considered by management to be an important and appropriate supplemental performance measure to net income because it helps both investors and management to understand the core operations of a community or communities prior to the allocation of any corporate-level or financing-related costs. NOI reflects the operating performance of a community and allows for an easier comparison of the operating performance of individual assets or groups of assets. In addition, because prospective buyers of real estate have different financing and overhead structures, with varying marginal impact to overhead as a result of acquiring real estate, NOI is considered by many in the real estate industry to be a useful measure for determining the value of a real estate asset or group of assets. We define NOI as total property revenue less direct property operating expenses (including property taxes), and excluding corporate-level income (including management, development and other fees), corporate-level property management and other indirect operating expenses, expensed transaction, development and other pursuit costs, net of recoveries, interest expense, net, loss on extinguishment of debt, net, general and administrative expense, equity in income of unconsolidated real estate entities, depreciation expense, corporate income tax expense, casualty and impairment (gain) loss, net, gain on sale of communities, (gain) loss on other real estate transactions, net, gain on for-sale condominiums, net of marketing and administrative costs and net operating income from real estate assets sold or held for sale. NOI does not represent cash generated from operating activities in accordance with GAAP, and NOI should not be considered an alternative to net income as an indication of our performance. NOI should also not be considered an alternative to net cash flow from operating activities, as determined by GAAP, as a measure of liquidity, nor is NOI indicative of cash available to fund cash needs. Reconciliations of NOI for the three and six months endedJune 30, 2020 and 2019 to net income for each period are as follows (unaudited, dollars in thousands): For the three months ended For the six months ended 6/30/2020 6/30/2019 6/30/2020 6/30/2019 Net income$ 170,869 $ 168,305 $ 338,875 $ 338,723 Indirect operating expenses, net of corporate income 23,407 23,018 46,206 42,740 Expensed transaction, development and other pursuit costs, net of recoveries 388 1,766 3,722 2,388 Interest expense, net 53,399 50,010 109,313 97,902 Loss on extinguishment of debt, net 268 229 9,438 509 General and administrative expense 15,573 18,965 32,893 32,671 Equity in (income) loss of unconsolidated real estate entities (512 ) (197 ) (1,687 ) 863 Depreciation expense 176,249 162,693 354,160 324,749 Income tax benefit (1,133 ) - (1,042 ) (6 )
Gain on sale of real estate assets (35,295 ) (20,530 )
(59,731 ) (35,365 ) Gain on other real estate transactions, net (156 ) (34 ) (199 ) (300 ) Gain on for-sale condominiums, net of marketing and administrative costs (1,348 ) 945 (4,808 ) 1,418 Net operating income from real estate assets sold or held for sale (336 ) (5,075 ) (1,232 ) (11,281 ) Net operating income$ 401,373 $ 400,095 $
825,908
The NOI changes for the three and six months ended
For the three months ended For the six months ended
6/30/2020 6/30/2020
Established Communities $ (14,225 ) $ (2,917 )
Other Stabilized Communities 5,871 14,638
Development / Redevelopment (1) 9,632 19,176
Total $ 1,278 $ 30,897
_________________________
(1) We had no Redevelopment Communities at
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Rental and other income decreased$670,000 , or 0.1%, and increased$34,929,000 , or 3.1%, for the three and six months endedJune 30, 2020 compared to the prior year periods. The decrease for the three months endedJune 30, 2020 is primarily due to an increase of$16,791,000 in residential and retail uncollectible lease revenue as a result of the COVID-19 pandemic, as well as decreased occupancy and rental rates at our Established Communities, partially offset by additional rental income generated from development completions, development under construction and in lease-up and acquired operating communities. The increase for the six months endedJune 30, 2020 is due to additional rental income generated from development completions, development under construction and in lease-up and acquired operating communities and an increase in rental rates at our Established Communities, partially offset by an increase of$18,159,000 in residential and retail uncollectible lease revenue as a result of the COVID-19 pandemic. As discussed elsewhere in this report, the COVID-19 impact and related economic, regulatory and operating impacts are likely to continue to adversely affect our rental revenue, and comparisons to prior year periods, during the COVID-19 pandemic. If job losses in our markets and nationally continue, this would likely continue to decrease our ability to maintain and/or increase rents and/or maintain occupancy at our historical levels. Deteriorating financial conditions among our residents and retail tenants, as well as regulations that limit our ability to quickly evict residents and tenants, may continue to result in higher than normal uncollectible lease revenue. The pandemic may also continue to depress demand among consumers for our apartments for a variety of other reasons, including the following: consumers whose income has declined, who are working from home remotely or who cannot freely access neighborhood amenities like restaurants, gyms and entertainment venues, may decide during the pandemic to live in markets or submarkets that are less costly than ours; and low interest rates that are caused by government response to the pandemic may encourage consumers who would otherwise rent to seek out single family ownership; and various sources of demand for our apartments (e.g., students, corporate apartment homes, seasonal job-related demand as in the entertainment industry) may remain below pre-pandemic levels if institutions of higher learning turn to online education or business activity and travel remain at lower levels than before the pandemic. Consolidated Communities - The weighted average number of occupied apartment homes increased to 74,079 apartment homes for the six months endedJune 30, 2020 , compared to 72,323 homes for the prior year period. The weighted average monthly revenue per occupied apartment home increased to$2,642 for the six months endedJune 30, 2020 compared to$2,626 in the prior year period. For Established Communities, rental revenue decreased$15,670,000 , or 2.9%, and increased$540,000 , or 0.1%, for the three and six months endedJune 30, 2020 compared to the prior year periods. Residential and retail uncollectible lease revenue contributed an aggregate of$14,214,000 and$15,227,000 to the changes in rental revenue for the three and six months endedJune 30, 2020 , respectively, compared to the prior year periods.
The following table presents the change in rental revenue, including the
attribution of the change between rental rates and Economic Occupancy, for
Established Communities for the six months ended
For the six months ended June 30, 2020
Rental revenue (000s) Average rental rates Economic Occupancy (1)
$ Change % Change % Change % Change
2020 to 2020 to 2020 to 2020 to
2020 2019 2019 2019 2020 2019 2019 2020 2019 2019
New England $ 161,542 $ 158,369 $ 3,173 2.0 % $ 2,821 $ 2,758 2.3 % 94.9 % 95.2 % (0.3 )%
Metro NY/NJ 234,472 238,351 (3,879 ) (1.6 )% 3,085 3,116 (1.0 )% 95.5 % 96.1 % (0.6 )%
Mid-Atlantic 179,507 178,181 1,326 0.7 % 2,264 2,232 1.4 % 95.5 % 96.2 % (0.7 )%
Pacific
Northwest 56,178 55,807 371 0.7 % 2,361 2,343 0.8 % 96.3 % 96.4 % (0.1 )%
Northern
California 205,342 203,473 1,869 0.9 % 3,133 3,100 1.1 % 96.1 % 96.3 % (0.2 )%
Southern
California 221,675 224,004 (2,329 ) (1.0 )% 2,358 2,381 (1.0 )% 95.7 % 95.7 % - %
Expansion
Markets 11,790 11,781 9 0.1 %
2,307 2,270 1.6 % 93.4 % 94.9 % (1.5 )%
Total
Established
_________________________________
(1) Economic occupancy takes into account the fact that apartment homes of
different sizes and locations within a community have different economic
impacts on a community's gross revenue. Economic occupancy is defined as
gross potential revenue less vacancy loss, as a percentage of gross
potential revenue. Gross potential revenue is determined by valuing
occupied homes at leased rates and vacant homes at market rents. Vacancy
loss is determined by valuing vacant units at current market rents.
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The following table presents the change in rental revenue for Established
Communities for the three and six months ended
For the three months
ended For the six months ended
6/30/2020 6/30/2020
Residential rental revenue
Lease rates 1.8 % 2.2 %
Concessions and other discounts (0.2 )% - %
Economic occupancy (1.2 )% (0.4 )%
Other rental revenue (0.6 )% (0.3 )%
Uncollectible lease revenue (2.0 )% (1.1 )%
Total residential rental revenue (2.2 )% 0.4 %
Retail rental revenue (1) (0.7 )% (0.3 )%
Total Established Communities change in
rental revenue (2.9 )% 0.1 %
_________________________________
(1) Consists primarily of the impact of uncollectible retail lease revenue.
Direct property operating expenses, excluding property taxes, decreased$2,024,000 , or 1.9%, and increased$3,572,000 , or 1.7%, for the three and six months endedJune 30, 2020 compared to the prior year periods. The decrease for the three months endedJune 30, 2020 is primarily due to the deferral or cancellation of repairs and maintenance projects due to the COVID-19 pandemic. The increase for the six months endedJune 30, 2020 is primarily due to the addition of newly developed and acquired apartment communities, partially offset by decreased costs related to the deferral or cancellation of repairs and maintenance projects due to the COVID-19 pandemic. For Established Communities, direct property operating expenses, excluding property taxes, decreased$4,113,000 , or 4.1%, and$2,327,000 , or 1.2%, for the three and six months endedJune 30, 2020 compared to the prior year periods. The decreases are primarily due to decreased costs related to the deferral or cancellation of repairs and maintenance projects due to the COVID-19 pandemic, partially offset by an increase in COVID-19 related costs for personal protective equipment and cleaning. The decrease for the three months endedJune 30, 2020 is also due to decreased compensation expense. Property taxes increased$4,826,000 , or 7.8%, and$10,523,000 , or 8.5%, for the three and six months endedJune 30, 2020 , compared to the prior year periods. The increases for the three and six months endedJune 30, 2020 are primarily due to the addition of newly developed and acquired apartment communities and increased assessments for the Company's stabilized portfolio, partially offset by decreased property taxes from dispositions. For Established Communities, property taxes increased$2,365,000 , or 4.1%, and$5,397,000 , or 4.7%, for the three and six months endedJune 30, 2020 , compared to the prior year periods. The increases for the three and six months endedJune 30, 2020 are primarily due to increased assessments and rates across the portfolio in the current year periods. The increase for the six months endedJune 30, 2020 is also due to successful appeals in the prior year period in excess of those in the current year period. For communities inCalifornia , property tax changes are determined by the change in the California Consumer Price Index, with increases limited by law (Proposition 13). We evaluate property tax increases internally and also engage third-party consultants to assist in our evaluations. We appeal property tax increases when appropriate. Corporate-level property management and other indirect operating expenses increased$3,133,000 , or 7.0%, for the six months endedJune 30, 2020 , compared to the prior year period, primarily due to increased compensation related costs and advocacy contributions in the current year period. Expensed transaction, development and other pursuit costs, net of recoveries primarily reflect costs incurred for development pursuits not yet considered probable for development, as well as the abandonment of Development Rights or abandoned acquisition and disposition pursuits. These costs can be volatile, particularly in periods of increased acquisition pursuit activity, periods of economic downturn or when there is limited access to capital, and therefore may vary significantly from year to year. Expensed acquisition, development and other pursuit costs, net of recoveries, decreased$1,378,000 , or 78.0%, and increased$1,334,000 , or 55.9%, respectively, for the three and six months endedJune 30, 2020 as compared to the prior year periods. 33
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Interest expense, net increased$3,389,000 , or 6.8%, and$11,411,000 , or 11.7%, for the three and six months endedJune 30, 2020 , compared to the prior year periods. This category includes interest costs offset by capitalized interest pertaining to development and redevelopment activity, amortization of premium/discount on debt and interest income. The increases for the three and six months endedJune 30, 2020 were primarily due to a decrease in capitalized interest. The increase for the three months endedJune 30, 2020 is partially offset by lower overall effective rates on unsecured indebtedness, and a combination of a decrease in variable rates on, and amounts of, secured indebtedness. The increase for the six months endedJune 30, 2020 was also due to an increase in outstanding unsecured indebtedness, partially offset by a decrease in variable rates on, and amounts of, outstanding secured indebtedness. Loss on extinguishment of debt, net reflects prepayment penalties, the write-off of unamortized deferred financing costs and premiums and discounts from our debt repurchase and retirement activity, and payments to acquire our outstanding debt at amounts above or below the carrying basis of the debt acquired. The losses of$268,000 and$9,438,000 for the three and six months endedJune 30, 2020 were due to the repayments of unsecured debt during the periods. Depreciation expense increased$13,556,000 , or 8.3%, and$29,411,000 , or 9.1%, for the three and six months endedJune 30, 2020 , compared to the prior year periods, primarily due to the addition of newly developed and acquired apartment communities, partially offset by dispositions. General and administrative expense decreased$3,392,000 , or 17.9%, for the three months endedJune 30, 2020 , compared to the prior year period, primarily due to a decrease in compensation related expenses, including severance costs. Equity in income (loss) of unconsolidated real estate entities increased$315,000 , or 159.9%, and$2,550,000 for the three and six months endedJune 30, 2020 , compared to the prior year periods. The increases for the three and six months endedJune 30, 2020 are primarily due non-cash charges for the depreciation of in-place leases associated with purchase accounting within theNYTA MF Investors LLC unconsolidated venture (the "NYC Joint Venture") in the prior year periods.
Gain on sale of communities increased for the three and six months ended
Gain on for-sale condominiums, net of marketing and administrative costs is a gain of$1,348,000 and$4,808,000 for the three and six months endedJune 30, 2020 and a loss of$945,000 and$1,418,000 for the three and six months endedJune 30, 2019 , and is comprised of the net gain before taxes on the sale of condominiums at The Park Loggia, net of marketing and administrative costs associated with the for-sale condominiums. During the three and six months endedJune 30, 2020 , we sold 16 and 52 residential condominiums at The Park Loggia, for gross proceeds of$61,207,000 and$166,814,000 , resulting in a gain in accordance with GAAP of$2,544,000 and$7,447,000 , respectively. In addition, we incurred$1,196,000 and$945,000 for the three months endedJune 30, 2020 and 2019, respectively, and$2,639,000 and$1,418,000 for the six months endedJune 30, 2020 and 2019, respectively, in marketing and administrative costs associated with The Park Loggia.
Income tax benefit of
Reconciliation of Non-GAAP Financial Measures
Consistent with the definition adopted by theBoard of Governors of the National Association of Real Estate Investment Trusts® ("NAREIT"), we calculate Funds from Operations Attributable to Common Stockholders ("FFO") as net income or loss attributable to common stockholders computed in accordance with GAAP, adjusted for:
• gains or losses on sales of previously depreciated operating communities;
• cumulative effect of change in accounting principle;
• impairment write-downs of depreciable real estate assets;
• write-downs of investments in affiliates due to a decrease in the value of
depreciable real estate assets held by those affiliates;
• depreciation of real estate assets; and
• similar adjustments for unconsolidated partnerships and joint ventures,
including those from a change in control.
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FFO and FFO adjusted for non-core items, or "Core FFO," as defined below, are generally considered by management to be appropriate supplemental measures of our operating and financial performance. In calculating FFO, we exclude gains or losses related to dispositions of previously depreciated property and exclude real estate depreciation, which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates. FFO can help one compare the operating performance of a real estate company between periods or as compared to different companies. By further adjusting for items that are not considered part of our core business operations, Core FFO allows one to compare the core operating performance of the Company between periods. We believe that in order to understand our operating results, FFO and Core FFO should be examined with net income as presented in our Condensed Consolidated Financial Statements included elsewhere in this report.
We calculate Core FFO as FFO, adjusted for:
• joint venture gains (if not adjusted through FFO), non-core costs and
promoted interests;
• casualty and impairment losses or gains, net on non-depreciable real estate;
• gains or losses from early extinguishment of consolidated borrowings;
• abandoned pursuits;
• business interruption insurance proceeds and the related lost NOI that is
covered by the expected business interruption insurance proceeds;
• property and casualty insurance proceeds and legal settlements;
• gains or losses on sales of assets not subject to depreciation;
• advocacy contributions, representing payments to promote our business
interests;
• hedge ineffectiveness;
• severance related costs;
• expensed transaction costs;
• for-sale condominium activity, including gains, marketing and
administrative costs and imputed carry cost;
• income taxes; and
• other non-core items.
FFO and Core FFO do not represent net income in accordance with GAAP, and
therefore should not be considered an alternative to net income, which remains
the primary measure, as an indication of our performance. In addition, FFO and
Core FFO as calculated by other REITs may not be comparable to our calculations
of FFO and Core FFO.
The following is a reconciliation of net income attributable to common stockholders to FFO attributable to common stockholders and to Core FFO attributable to common stockholders (unaudited, dollars in thousands, except per share amounts):
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For the three months ended For the six months ended
6/30/2020 6/30/2019 6/30/2020 6/30/2019
Net income attributable to common
stockholders $ 170,828 $ 168,281 $ 338,799 $ 338,647
Depreciation - real estate assets,
including joint venture adjustments 175,558 164,830 352,986 329,576
Distributions to noncontrolling
interests 12 12 24 23
Gain on sale of previously depreciated
real estate (35,295 ) (20,530 ) (59,731 ) (35,365 )
FFO attributable to common
stockholders 311,103 312,593 632,078 632,881
Adjusting items:
Business interruption insurance
proceeds (103 ) (435 ) (103 ) (607 )
Lost NOI from casualty losses covered
by business interruption insurance 48 - 48 -
Loss on extinguishment of consolidated
debt 268 229 9,438 509
Advocacy contributions 1,465 - 1,766 -
Severance related costs 89 1,353 2,040 1,372
Development pursuit write-offs and
expensed transaction costs, net 269 1,327 3,389 1,604
Gain on for-sale condominiums (1)(2) (2,544 ) - (7,447 ) -
For-sale condominium marketing and
administrative costs (2) 1,196 945 2,639 1,418
For-sale condominium imputed carry
cost (3) 2,824 506 6,433 506
Gain on other real estate transactions (156 ) (34 ) (199 ) (301 )
Legal settlements (67 ) 38 (24 ) (978 )
Income tax benefit (1,133 ) - (1,042 ) (6 )
Core FFO attributable to common
stockholders $ 313,259 $ 316,522 Weighted average common shares outstanding - diluted 140,738,160 139,618,231
140,752,331 139,227,376
EPS per common share - diluted
$ 2.41 $ 2.43 FFO per common share - diluted$ 2.21 $ 2.24$ 4.49 $ 4.55 Core FFO per common share - diluted$ 2.23 $ 2.27
_________________________
(1) Amount for the three and six months ended
of 16 and 52 residential condominiums, respectively, at The Park Loggia.
(2) The aggregate impact of (i) gain on for-sale condominiums and (ii)
for-sale condominium marketing and administrative costs for the three and
six months ended June 30, 2020 are gains of $1,348 and $4,808 ,
respectively, and for the three and six months ended June 30, 2019 are
losses of $945 and $1,418 , respectively.
(3) Represents the imputed carry cost of for-sale residential condominiums at
The Park Loggia. We compute this adjustment by multiplying the total
capitalized cost of completed and unsold for-sale residential condominiums
by our weighted average unsecured debt rate.
FFO and Core FFO also do not represent cash generated from operating activities
in accordance with GAAP, and therefore should not be considered an alternative
to net cash flows from operating activities, as determined by GAAP, as a measure
of liquidity. Additionally, it is not necessarily indicative of cash available
to fund cash needs.
A presentation of GAAP based cash flow metrics is as follows (unaudited, dollars
in thousands) and a discussion of "Liquidity and Capital Resources" can be found
later in this report:
For the three months ended For the six months ended
6/30/2020 6/30/2019 6/30/2020 6/30/2019
Net cash provided by operating
activities $ 287,213 $ 275,946 $ 628,917 $ 637,732
Net cash used in investing
activities $ (49,061 ) $ (276,838 ) $ (185,128 ) $ (590,024 )
Net cash (used in) provided by
financing activities $ (690,879 ) $ 135,729 $ (155,709 ) $ 64,472
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Liquidity and Capital Resources
We employ a disciplined approach to our liquidity and capital management. When we source capital, we take into account both our view of the most cost effective alternative available and our desire to maintain a balance sheet that provides us with flexibility. Our principal focus on near-term and intermediate-term liquidity is to ensure we have adequate capital to fund:
• development and redevelopment activity in which we are currently engaged
or in which we plan to engage;
• the minimum dividend payments on our common stock required to maintain our
REIT qualification under the Code;
• debt service and principal payments either at maturity or
opportunistically before maturity; and
• normal recurring operating expenses and corporate overhead expenses.
Factors affecting our liquidity and capital resources are our cash flows from operations, financing activities and investing activities (including dispositions) as well as general economic and market conditions. Cash flows from operations are determined by operating activities and factors including but not limited to (i) the number of apartment homes currently owned, (ii) rental rates, (iii) occupancy levels, (iv) uncollectible lease revenue levels or interruptions in collections caused by market conditions and (iv) operating expenses with respect to apartment homes. The timing and type of capital markets activity in which we engage is affected by changes in the capital markets environment, such as changes in interest rates or the availability of cost-effective capital. Our plans for development, redevelopment, non-routine capital expenditure, acquisition and disposition activity are affected by market conditions and capital availability. We frequently review our liquidity needs, especially in periods with volatile market conditions, as well as the adequacy of cash flows from operations and other expected liquidity sources to meet these needs. We had cash and cash equivalents and restricted cash of$415,694,000 atJune 30, 2020 , an increase of$288,080,000 from$127,614,000 atDecember 31, 2019 . As presented in our Condensed Consolidated Statements of Cash Flows included elsewhere in this report, the following discussion relates to changes in cash and cash equivalents and restricted cash due to operating, investing and financing activities. Operating Activities - Net cash provided by operating activities decreased to$628,917,000 for the six months endedJune 30, 2020 from$637,732,000 for the six months endedJune 30, 2019 .
Investing Activities - Net cash used in investing activities totaled
• investment of$383,139,000 in the development and redevelopment of communities; and • capital expenditures of$66,319,000 for our operating communities and non-real estate assets.
These amounts are partially offset by:
•net proceeds from the sale of for-sale residential condominiums of
Financing Activities - Net cash used in financing activities totaled
• repayments of unsecured notes in the amount of
• payment of cash dividends in the amount of
• repayment of a mortgage note payable in the amount of$56,852,000 that was subsequently refinanced, as discussed below.
These amounts are partially offset by:
• proceeds from the issuance of unsecured notes in the amount of
$1,296,581,000 ; and
• the issuance of a secured note that was part of a refinancing, as
discussed above, in the amount of $51,000,000 .
Variable Rate Unsecured Credit Facility
We have a$1,750,000,000 revolving variable rate unsecured credit facility with a syndicate of banks (the "Credit Facility") which matures inFebruary 2024 . The Credit Facility bears interest at varying levels based on (i) theLondon Interbank Offered Rate ("LIBOR") applicable to the period of borrowing for a particular draw of funds from the facility (e.g., one month to maturity, three months to maturity, etc.) and (ii) the rating levels issued for our unsecured notes. The current stated pricing for drawn borrowings 37
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is LIBOR plus 0.775% per annum (0.93% atJuly 31, 2020 ), assuming a one month borrowing rate. The annual facility fee is 0.125% (or approximately$2,188,000 annually based on the$1,750,000,000 facility size and based on our current credit rating). We had no borrowings outstanding under the Credit Facility and had$4,852,000 outstanding in letters of credit that reduced our borrowing capacity as ofJuly 31, 2020 . In addition, we had$32,322,000 outstanding in additional letters of credit on a separate facility unrelated to the Credit Facility as ofJuly 31, 2020 . Financial Covenants
We are subject to financial covenants contained in the Credit Facility, Term Loans and the indentures under which our unsecured notes were issued. The principal financial covenants include the following:
• limitations on the amount of total and secured debt in relation to our
overall capital structure;
• limitations on the amount of our unsecured debt relative to the
undepreciated basis of real estate assets that are not encumbered by
property-specific financing; and
• minimum levels of debt service coverage.
We were in compliance with these covenants at
In addition, some of our secured borrowings include yield maintenance, defeasance, or prepayment penalty provisions, which would result in us incurring an additional charge in the event of a full or partial prepayment of outstanding principal before the scheduled maturity. These provisions in our secured borrowings are generally consistent with other similar types of debt instruments issued during the same time period in which our borrowings were secured.
Continuous Equity Offering Program
InMay 2019 , we commenced a fifth continuous equity program ("CEP V") under which we may sell (and/or enter into forward sale agreements for the sale of) up to$1,000,000,000 of our common stock from time to time. Actual sales will depend on a variety of factors to be determined, including market conditions, the trading price of our common stock and determinations of the appropriate sources of funding. In conjunction with CEP V, we engaged sales agents who will receive compensation of up to 1.5% of the gross sales price for shares sold. We expect that, if entered into, we will physically settle each forward sale agreement on one or more dates prior to the maturity date of that particular forward sale agreement, in which case we will expect to receive aggregate net cash proceeds at settlement equal to the number of shares underlying the particular forward agreement multiplied by the relevant forward sale price. However, we may also elect to cash settle or net share settle a forward sale agreement. In connection with each forward sale agreement, we will pay the relevant forward seller, in the form of a reduced initial forward sale price, a commission of up to 1.5% of the sales prices of all borrowed shares of common stock sold. As ofJuly 31, 2020 , there are no outstanding forward sales agreements. As ofJuly 31, 2020 , we had$752,878,000 remaining authorized for issuance under this program.
Forward Interest Rate Swap Agreements
The following activity occurred during the six months ended
• We settled an aggregate of
agreements, making aggregate payments of
settled,
during 2020.
• In conjunction with the issuance of our $700,000,000 unsecured notes
due 2030 in February 2020 , we settled $350,000,000 of forward
interest rate swap agreements designated as cash flow hedges of the
interest rate variability on the issuance of the unsecured notes,
making a payment of $20,314,000 .
• In conjunction with the issuance of our $600,000,000 unsecured notes
due 2031 in May 2020 , we settled $250,000,000 of forward interest
rate swap agreements designated as cash flow hedges of the interest
rate variability on the issuance of the unsecured notes, making a
payment of $4,821,000 .
• We entered into an additional $100,000,000 of new forward interest rateswap agreements executed to reduce the impact of variability of interest
rates on a portion of our expected debt issuance activity in 2021.
In
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At maturity of the outstanding swap agreements, we expect to cash settle the contracts and either pay or receive cash for the then current fair value. Assuming that we issue the debt as expected, the hedging impact from these positions will then be recognized over the life of the issued debt as a yield adjustment. Stock Repurchase Program InJuly 2020 , our Board of Directors voted to terminate our prior$500,000,000 Stock Repurchase Program (the "Amended 2005 Stock Repurchase Program") and approved a new stock repurchase program under which we may acquire shares of our common stock in open market or negotiated transactions up to an aggregate purchase price of$500,000,000 (the "2020 Stock Repurchase Program"). Purchases of common stock under the 2020 Stock Repurchase Program may be exercised from time to time in our discretion and in such amounts as market conditions warrant. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions and other corporate liquidity requirements and priorities. The 2020 Stock Repurchase Program does not have an expiration date and may be suspended or terminated at any time without prior notice. We intend that funds used for the stock repurchase program will be matched over time with the proceeds from sales of existing apartment communities and in some cases with newly issued debt, but initially may be funded from existing cash balances, retained cash flow and/or our Credit Facility. There have been no stock repurchases under this program through the date on which this report was filed.
Future Financing and Capital Needs - Debt Maturities
One of our principal long-term liquidity needs is the repayment of long-term debt at maturity. For both our unsecured and secured notes, a portion of the principal of these notes may be repaid prior to maturity. Early retirement of our unsecured or secured notes could result in gains or losses on extinguishment. If we do not have funds on hand sufficient to repay our indebtedness as it becomes due, it will be necessary for us to refinance or otherwise provide liquidity to satisfy the debt at maturity. This refinancing may be accomplished by uncollateralized private or public debt offerings, equity issuances, additional debt financing that is secured by mortgages on individual communities or groups of communities or borrowings under our Credit Facility. Although we believe we will have the capacity to meet our currently anticipated liquidity needs, we cannot assure you that capital from additional debt financing or debt or equity offerings will be available or, if available, that they will be on terms we consider satisfactory, especially in light of the uncertain impacts of the COVID-19 pandemic on capital markets.
The following debt activity occurred during the six months ended
• In
notes in a public offering under our existing shelf registration statement
for net proceeds of approximately $694,701,000 . The notes mature in March
2030 and were issued at a 2.30% interest rate.
• In
III. The secured borrowing had a fixed interest rate of 3.08% and was
refinanced for a principal balance of
rate of 2.38% and maturity date of March 2027 .
• In
unsecured notes in advance of the
the
we recognized a loss on debt extinguishment of
penalties and the non-cash write-off of unamortized deferred financing
costs.
• In
a public offering under our existing shelf registration statement for net
proceeds of approximately $593,430,000 . The notes mature in January 2031
and were issued at a 2.45% interest rate.
• In May 2020 , we repaid $300,000,000 principal amount of variable rate
unsecured notes in advance of the January 2021 scheduled maturity,
recognizing a charge of
financing costs.
The following table details our consolidated debt maturities for the next five
years, excluding our Credit Facility and amounts outstanding related to
communities classified as held for sale, for debt outstanding at June 30, 2020
and December 31, 2019 (dollars in thousands). We are not directly or indirectly
(as borrower or guarantor) obligated in any material respect to pay principal or
interest on the indebtedness of any unconsolidated entities in which we have an
equity or other interest.
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All-In Principal Balance Outstanding (2) Scheduled Maturities
interest maturity
Community rate (1) date 12/31/2019 6/30/2020 2020 2021 2022 2023 2024 Thereafter
Tax-exempt bonds
Fixed rate
Avalon at Chestnut
Hill 6.16 % Oct-2047 $ 36,995 $
36,701
$ 33,671 Avalon Westbury 3.86 % Nov-2036 (3) 62,200 62,200 - - - - - 62,200 99,195 98,901 302 629 663 699 737 95,871 Variable rate Avalon Acton 1.13 % Jul-2040 (4) 45,000 45,000 - - - - - 45,000 Avalon Clinton North 1.78 % Nov-2038 (4) 147,000 147,000 - - - - - 147,000 Avalon Clinton South 1.78 % Nov-2038 (4) 121,500 121,500 - - - - - 121,500
- 5,200 5,600 6,100 6,800 69,800
Avalon San Bruno I 1.67 % Dec-2037 (4) 64,450 64,450 1,400 1,900 2,000 2,200 2,200 54,750
476,150 471,450 1,400 7,100 7,600 8,300 9,000 438,050
Conventional loans
Fixed rate
$250 million
unsecured notes 4.04 % Jan-2021 (5) 250,000 - - - - - - -
$450 million
unsecured notes 4.30 % Sep-2022 450,000 450,000 - - 450,000 - - -
$250 million
unsecured notes 3.00 % Mar-2023 250,000 250,000 - - - 250,000 - -
$400 million
unsecured notes 3.78 % Oct-2020 (5) 400,000 - - - - - - -
$350 million
unsecured notes 4.30 % Dec-2023 350,000 350,000 - - - 350,000 - -
$300 million
unsecured notes 3.66 % Nov-2024 300,000 300,000 - - - - 300,000 -
$525 million
unsecured notes 3.55 % Jun-2025 525,000 525,000 - - - - - 525,000
$300 million
unsecured notes 3.62 % Nov-2025 300,000 300,000 - - - - - 300,000
$475 million
unsecured notes 3.35 % May-2026 475,000 475,000 - - - - - 475,000
$300 million
unsecured notes 3.01 % Oct-2026 300,000 300,000 - - - - - 300,000
$350 million
unsecured notes 3.95 % Oct-2046 350,000 350,000 - - - - - 350,000
$400 million
unsecured notes 3.50 % May-2027 400,000 400,000 - - - - - 400,000
$300 million
unsecured notes 4.09 % Jul-2047 300,000 300,000 - - - - - 300,000
$450 million
unsecured notes 3.32 % Jan-2028 450,000 450,000 - - - - - 450,000
$300 million
unsecured notes 3.97 % Apr-2048 300,000 300,000 - - - - - 300,000
$450 million
unsecured notes 3.66 % Jun-2029 450,000 450,000 - - - - - 450,000
$700 million
unsecured notes 2.69 % Mar-2030 - 700,000 - - - - - 700,000
$600 million
unsecured notes 2.65 % Jan-2031 - 600,000 - - - - - 600,000
Avalon Walnut Creek 4.00 % Jul-2066 3,847 3,847 - - - - - 3,847
Eaves Los Feliz 3.68 % Jun-2027 41,400 41,400 - - - - -
41,400
Eaves Woodland Hills 3.67 % Jun-2027 111,500 111,500 - - - - -
111,500
Avalon Russett 3.77 % Jun-2027 32,200 32,200 - - - - -
32,200
Avalon San Bruno II 3.85 % Apr-2021 28,435 28,143 299 27,844 - - - -
5,360
Avalon San Bruno
III 3.18 % Jun-2020 (6) 50,825 - - - - - - -
Avalon San Bruno
III 2.38 % Mar-2027 (6) - 51,000 - - - - - 51,000
Avalon Hoboken 3.55 % Dec-2020 67,904 67,904 67,904 - - - - -
Avalon Cerritos 3.35 % Aug-2029 30,250 30,250 - - - - - 30,250
6,230,026 6,879,169 68,958 29,419 451,655 601,740 301,840 5,425,557
Variable rate
Term Loan - $100
million 2.03 % Feb-2022 100,000 100,000 - - 100,000 - - -
Term Loan - $150
million 1.96 % Feb-2024 150,000 150,000 - - - - 150,000 -
$300 million
unsecured notes 2.45 % Jan-2021 (7) 300,000 - - - - - - -
550,000 250,000 - - 100,000 - 150,000 -
Total indebtedness
- excluding Credit
Facility $ 7,355,371 $ 7,699,520 $ 70,660 $ 37,148 $ 559,918 $ 610,739 $ 461,577 $ 5,959,478 _________________________
(1) Rates are given as of
facility fees, trustees' fees, the impact of interest rate hedges, offering
costs, mark to market amortization and other fees.
(2) Balances outstanding represent total amounts due at maturity, and exclude
deferred financing costs and debt discount for the unsecured notes of
$51,562 and $41,352 as of June 30, 2020 and December 31, 2019 ,
respectively, and deferred financing costs and debt discount
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associated with secured notes of$17,748 and$17,729 as ofJune 30, 2020 andDecember 31, 2019 , respectively, as reflected on our Condensed Consolidated Balance Sheets included elsewhere in this report. (3) Maturity date reflects the contractual maturity of the underlying bond. There is also an associated earlier credit enhancement maturity date. (4) Financed by variable rate debt, but interest rate is capped through an interest rate protection agreement.
(5) In
maturity date.
(6) In February 2020 , we repaid a borrowing secured by this community and
subsequently refinanced the secured borrowing.
(7) In
date.
Future Financing and Capital Needs - Portfolio and Capital Markets Activity
In light of the COVID-19 pandemic, we continue to monitor the availability of our various capital raising alternatives. During the remainder of 2020, we expect to meet our liquidity needs from one or more of a variety of internal and external sources, which may include (i) real estate dispositions, (ii) cash balances on hand as well as cash generated from our operating activities, (iii) borrowing capacity under our Credit Facility and (iv) secured and unsecured debt financings. Additional sources of liquidity in 2020 may include the issuance of common and preferred equity. Our ability to obtain additional financing will depend on a variety of factors, such as market conditions, the general availability of credit, the overall availability of credit to the real estate industry, our credit ratings and credit capacity, as well as the perception of lenders regarding our long or short-term financial prospects. In addition, the impacts of the COVID-19 pandemic on capital markets, including the availability and costs of debt and equity capital, remain uncertain and may have material adverse effects on our access to capital on attractive terms. As discussed in this Form 10-Q, as ofJune 30, 2020 , construction has been restarted at all six Development Communities where construction previously had been temporarily suspended, and construction work at our remaining sites that had been slowed is largely back to normal pace. Before beginning new construction or reconstruction activity in 2020, including activity related to communities owned by unconsolidated joint ventures, we intend to plan adequate financing to complete these undertakings, although we cannot assure you that we will be able to obtain such financing. In the event that financing cannot be obtained, we may have to abandon Development Rights, write-off associated pre-development costs that were capitalized and/or forego reconstruction activity. In such instances, we will not realize the increased revenues and earnings that we expected from such Development Rights or reconstruction activity and significant losses could be incurred. From time to time we use joint ventures to hold or develop individual real estate assets. We generally employ joint ventures primarily to mitigate asset concentration or market risk and secondarily as a source of liquidity. We may also use joint ventures related to mixed-use land development opportunities and new markets where our partners bring development and operational expertise and/or experience to the venture. Each joint venture or partnership agreement has been individually negotiated, and our ability to operate and/or dispose of a community in our sole discretion may be limited to varying degrees depending on the terms of the joint venture or partnership agreement. We cannot assure you that we will achieve our objectives through joint ventures. In evaluating our allocation of capital within our markets, we sell assets that do not meet our long-term investment criteria or when capital and real estate markets allow us to realize a portion of the value created over our ownership periods and redeploy the proceeds from those sales to develop and redevelop communities. Because the proceeds from the sale of communities may not be immediately redeployed into revenue generating assets that we develop, redevelop or acquire, the immediate effect of a sale of a community for a gain is to increase net income, but reduce future total revenues, total expenses and NOI until such time as the proceeds have been redeployed into revenue generating assets. We believe that the temporary absence of future cash flows from communities sold will not have a material impact on our ability to fund future liquidity and capital resource needs. 41
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Unconsolidated Real Estate Investments and Off-Balance Sheet Arrangements
Unconsolidated Investments
As ofJune 30, 2020 , we had investments in unconsolidated real estate entities accounted for under the equity method of accounting shown in the following table, excluding development joint ventures. Refer to Note 5, "Investments in Real Estate Entities," of the Condensed Consolidated Financial Statements included elsewhere in this report, which includes information on the aggregate assets, liabilities and equity, as well as operating results, and our proportionate share of their operating results. For ventures holding operating apartment communities as ofJune 30, 2020 , detail of the real estate and associated indebtedness underlying our unconsolidated investments is presented in the following table (dollars in thousands). Company # of Total Debt (2) ownership Apartment capitalized Interest Maturity
Unconsolidated Real Estate Investments percentage homes
cost (1) Amount Type rate (3) date
NYC Joint Venture 1.Avalon Bowery Place I -New York, NY 206
90 90,775 39,639 Fixed 4.01 % Jan 2029
Jan
2029/May
3. Avalon Morningside - New York, NY (4) 295
210,847 112,500 Fixed 3.55 % 2046
4.
305
127,740 66,000 Fixed 4.01 %
405
121,223 84,000 Fixed 4.01 %
20.0 % 1,301 759,661 395,939 3.88 %
149
57,179 27,324 Fixed 3.34 %
Sep 2020 2.Avalon Venice on Rose -Venice, CA 70
57,455 27,245 Fixed 3.28 % (6)
3.
285
98,189 53,229 Fixed 3.73 %
237
80,591 41,261 Fixed 3.74 %
28.6 % 741 293,414 149,059 3.58 %
Multifamily Partners AC JV LP (the "AC JV")
1. Avalon North Point - Cambridge, MA (7) 426
190,173 111,653 Fixed 6.00 %
103 26,888 - N/A N/A N/A
Total AC JV 20.0 % 529 217,061 111,653 6.00 %
Other Operating Joint Ventures
1. MVP I, LLC 25.0 % 313
126,906 103,000 Fixed 3.24 %
305
19,383 21,310 Fixed 3.40 %
618 146,289 124,310 3.27 %
Total Unconsolidated Investments 3,189 $ 1,416,425 $ 780,961 4.03 %
_____________________________
(1) Represents total capitalized cost as of
(2) We have not guaranteed the debt of unconsolidated investees and bear no
responsibility for the repayment.
(3) Represents weighted average rate on outstanding debt as of
(4) Borrowing on this community is comprised of two mortgage loans.
(5) Borrowing on this dual-branded community is comprised of a single mortgage
loan.
(6) The original maturity date of the borrowing was July 2020 , which was
extended to September 2020 through a forbearance agreement.
(7) Borrowing is comprised of loans made by the equity investors in the venture
in proportion to their equity interests.
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InJuly 2020 , we entered into a joint venture which will develop, own and operateAVA Arts District .AVA Arts District is expected to be a 475 apartment home community inLos Angeles, CA , that will be developed for a projected total capitalized cost to the joint venture of$279,000,000 . We own a 25.0% interest in the venture, and the venture partner owns the remaining 75.0% interest. The venture expects to obtain a$167,000,000 construction loan to fund the development ofAVA Arts District . Our total expected equity investment is approximately$28,000,000 , of which$13,000,000 has already been spent.
Off-Balance Sheet Arrangements
In addition to our investment interests in consolidated and unconsolidated real estate entities, we have certain off-balance sheet arrangements with the entities in which we invest. Additional discussion of these entities can be found in Note 5, "Investments in Real Estate Entities," of our Condensed Consolidated Financial Statements included elsewhere in this report. We have not guaranteed the debt of our unconsolidated real estate entities, as referenced in the table above, nor do we have any obligation to fund this debt should the unconsolidated real estate entities be unable to do so. In the future, in the event the unconsolidated real estate entities were unable to meet their obligations under a loan, we cannot predict at this time whether we would provide any voluntary support, or take any other action, as any such action would depend on a variety of factors, including the amount of support required and the possibility that such support could enhance the return of the unconsolidated real estate entities and/or our returns by providing time for performance to improve. There are no other material lines of credit, side agreements, financial guarantees or any other derivative financial instruments related to or between our unconsolidated real estate entities and us. In evaluating our capital structure and overall leverage, management takes into consideration our proportionate share of the indebtedness of unconsolidated entities in which we have an interest. Contractual Obligations We currently have contractual obligations consisting primarily of long-term debt obligations and lease obligations for certain land parcels and regional and administrative office space. As ofJune 30, 2020 , other than as discussed in this Form 10-Q, there have been no other material changes in our scheduled contractual obligations as disclosed in our Form 10-K.
Development Communities
As ofJune 30, 2020 , we owned or held a direct or indirect interest in 19 Development Communities under construction. We expect these Development Communities, when completed, to add a total of 6,198 apartment homes and 64,000 square feet of retail space to our portfolio for a total capitalized cost, including land acquisition costs, of approximately$2,399,000,000 . We cannot assure you that we will meet our schedule for construction completion or that we will meet our budgeted costs, either individually or in the aggregate. You should carefully review Part I, Item 1A. "Risk Factors" of our Form 10-K, as well as the discussion under Part II, Item 1A. "Risk Factors" in this report, for a discussion of the risks associated with development activity.
The following table presents a summary of the Development Communities. We hold a fee simple ownership interest in these communities (directly or through a wholly-owned subsidiary) unless otherwise noted in the table.
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Initial
projected Estimated
Number of Projected total or actual stabilized
apartment capitalized cost (1) Construction occupancy Estimated operations
homes ($ millions) start (2) completion (3)
1. Avalon Public Market 289 $ 175 Q4 2016 Q3 2019 Q3 2020 Q4 2020
Emeryville, CA
2. Avalon Yonkers 590 196 Q4 2017 Q3 2019 Q2 2021 Q4 2021
Yonkers, NY
3. AVA Hollywood (4) 695 375 Q4 2016 Q4 2019 Q1 2021 Q3 2021
Hollywood, CA
4. Avalon Towson 371 114 Q4 2017 Q1 2020 Q4 2020 Q2 2021
Towson, MD
5. Avalon Walnut Creek II 200 113 Q4 2017 Q3 2020 Q4 2020 Q2 2021
Walnut Creek, CA
6. Avalon Doral 350 116 Q2 2018 Q3 2020 Q4 2020 Q3 2021
Doral, FL
7. Avalon 555 President 400 139 Q3 2018 Q3 2020 Q3 2021 Q4 2021
Baltimore, MD
8. Avalon Old Bridge 252 72 Q3 2018 Q3 2020 Q2 2021 Q3 2021
Old Bridge, NJ
9. Avalon Newcastle Commons II 293 107 Q4 2018 Q4 2020 Q3 2021 Q1 2022
Newcastle, WA
10. Twinbrook Station 238 66 Q4 2018 Q4 2020 Q2 2021 Q4 2021
Rockville, MD
11. Avalon Harrison (4) 143 77 Q4 2018 Q2 2021 Q2 2022 Q3 2022
Harrison, NY
12. Avalon Brea Place 653 290 Q2 2019 Q1 2021 Q2 2022 Q3 2022
Brea, CA
13. Avalon Foundry Row 437 100 Q2 2019 Q1 2021 Q1 2022 Q3 2022
Owings Mill , MD
14. Avalon Marlborough II 123 42 Q2 2019 Q3 2020 Q4 2020 Q1 2021
Marlborough, MA
15. Avalon Acton II 86 31 Q4 2019 Q3 2020 Q1 2021 Q1 2021
Acton, MA
16. Avalon Woburn 350 121 Q4 2019 Q3 2021 Q2 2022 Q3 2022
Woburn, MA
17. AVA RiNo 246 87 Q4 2019 Q1 2022 Q2 2022 Q4 2022
Denver, CO
18. Avalon Monrovia 154 68 Q4 2019 Q1 2021 Q3 2021 Q4 2021
Monrovia, CA
19. Avalon Alderwood Mall (5) 328 110 Q4 2019 Q4 2021 Q2 2022 Q4 2022
Lynnwood, WA
Total 6,198 $ 2,399
_________________________________
(1) Projected total capitalized cost includes all capitalized costs projected to
be or actually incurred to develop the respective
determined in accordance with GAAP, including land acquisition costs,
construction costs, real estate taxes, capitalized interest and loan fees,
permits, professional fees, allocated development overhead and other
regulatory fees, as well as costs incurred for first generation retail
tenants such as tenant improvements and leasing commissions. Projected total
capitalized cost for communities identified as having joint venture
ownership, either during construction or upon construction completion,
represents the total projected joint venture contribution amount unless
otherwise noted.
(2) Initial projected occupancy dates are estimates. There can be no assurance
that we will pursue to completion any or all of these proposed developments.
(3) Stabilized operations is defined as the earlier of (i) attainment of 90% or
greater physical occupancy or (ii) the one-year anniversary of completion of
development.
(4) Development Communities containing at least 10,000 square feet of retail
space include
square feet).
(5) We are developing this project within an unconsolidated joint venture that
was formed in December 2019 , in which we own a 50.0% interest. The
information above represents the total cost for the venture.
During the three months ended
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Development Rights
AtJune 30, 2020 , we had$39,829,000 in acquisition and related capitalized costs for direct interests in land parcels we own, and$81,395,000 in capitalized costs (including legal fees, design fees and related overhead costs) related to Development Rights for which we control the land parcel, typically through a conditional agreement or option to purchase or lease the land. Collectively, the land held for development and associated costs for deferred development rights relate to 28 Development Rights for which we expect to develop new apartment communities in the future. The cumulative capitalized costs for land held for development as ofJune 30, 2020 includes$28,900,000 in original land acquisition costs, net of any impairment loss recognized. The Development Rights range from those beginning design and architectural planning to those that have completed site plans and drawings and can begin construction almost immediately. We estimate that the successful completion of all of these communities would ultimately add approximately 9,786 apartment homes to our portfolio. Substantially all of these apartment homes will offer features like those offered by the communities we currently own. For 22 Development Rights, we control the land through a conditional agreement or option to purchase or lease the parcel. For the other six Development Rights, we own the land, of which four are additional development phases of existing stabilized operating communities we own and which will be constructed on land currently adjacent to or directly associated with those operating communities. The properties comprising the Development Rights are in different stages of the due diligence and regulatory approval process. The decisions as to which of the Development Rights to invest in, if any, or to continue to pursue once an investment in a Development Right is made, are business judgments that we make after we perform financial, demographic and other analyses. In the event that we do not proceed with a Development Right, we generally would not recover any of the capitalized costs incurred in the pursuit of those communities, unless we were to recover amounts in connection with the sale of land; however, we cannot guarantee a recovery. Pre-development costs incurred in the pursuit of Development Rights for which future development is not yet considered probable are expensed as incurred. In addition, if the status of a Development Right changes, making future development no longer probable, any unrecoverable capitalized pre-development costs are charged to expense. During the six months endedJune 30, 2020 , we incurred a charge of$3,722,000 for expensed transaction, development and other pursuit costs, net of recoveries, which include development pursuits that were not yet probable of future development at the time incurred, or for pursuits that we determined were no longer probable of being developed. You should carefully review Part I, Item 1A. "Risk Factors" of our Form 10-K, as well as the discussion under Part II, Item 1A. "Risk Factors" in this report, for a discussion of the risks associated with Development Rights.
The following presents a summary of the Development Rights as of
Estimated Projected total
number capitalized cost
Market Number of rights of homes ($ millions) (1)
New England 3 394 $ 156
Metro NY/NJ 13 5,366 2,246
Mid-Atlantic - - -
Pacific Northwest 3 1,121 441
Northern California 4 1,198 661
Southern California 1 475 278
Southeast Florida 1 254 95
Denver, CO 3 978 325
Total 28 9,786 $ 4,202
____________________________________
(1) Projected total capitalized cost includes all capitalized costs incurred to
date (if any) and projected to be incurred to develop the respective
community, determined in accordance with GAAP, including land acquisition
costs, construction costs, real estate taxes, capitalized interest and loan
fees, permits, professional fees, allocated development overhead and other
regulatory fees, as well as costs incurred for first generation retail
tenants such as tenant improvements and leasing commissions.
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Insurance and Risk of Uninsured Losses
We maintain commercial general liability insurance and property insurance with respect to all of our communities. These policies, along with other insurance policies we maintain, have policy specifications, insured and self-insured limits, exclusions and deductibles that we consider commercially reasonable. There are, however, certain types of losses (including, but not limited to, losses arising from nuclear liability, pandemic or acts of war) that are not insured, in full or in part, because they are either uninsurable or the cost of insurance makes it, in management's view, economically impractical. You should carefully review the discussion under Part I, Item 1A. "Risk Factors" of our Form 10-K for a discussion of risks associated with an uninsured property or casualty loss. Many of ourWest Coast communities are located in the general vicinity of active earthquake faults. Many of our communities are near, and thus susceptible to, the major fault lines inCalifornia , including the San Andreas Fault, the Hayward Fault or other geological faults that are known or unknown. We cannot assure you that an earthquake would not cause damage or losses greater than our current insured levels. We procure property damage and resulting business interruption insurance coverage with a loss limit of$175,000,000 for any single occurrence and in the annual aggregate for losses resulting from earthquakes. However, for any losses resulting from earthquakes at communities located inCalifornia orWashington , the loss limit is$200,000,000 for any single occurrence and in the annual aggregate. The deductible applicable to losses resulting from earthquakes occurring inCalifornia is five percent of the insured value of each damaged building subject to a minimum of$100,000 and a maximum of$25,000,000 per loss. Limits, deductibles, self-insured retentions and coverages may increase or decrease annually during the insurance renewal process which occurs on different dates throughout the calendar year. Our communities are insured for certain property damage and business interruption losses through a combination of community specific insurance policies and/or a master property insurance program which covers the majority of our communities. This master property program provides a$400,000,000 limit for any single occurrence, subject to certain sublimits and exclusions. Under the master property program, we are subject to a$100,000 deductible per occurrence, as well as additional self-insured retention for the next$350,000 of loss, per occurrence, until the aggregate incurred self-insured retention exceeds$1,500,000 for the policy year. Our communities are insured for third-party liability losses through a combination of community specific insurance policies and/or coverage provided under a master commercial general liability and umbrella/excess insurance program. The master commercial general liability and umbrella/excess insurance policies cover the majority of our communities and are subject to certain coverage limitations and exclusions, and they require a self-insured retention of$500,000 per occurrence. We also maintain certain casualty policies (general liability, umbrella/excess and workers compensation) for construction related risks which have various exclusions and deductibles that, in management's view, are commercially reasonable. Certain projects are insured through our master insurance policies while others are insured through project-specific insurance policies. The limits vary by project and may be subject to deductibles up to$1,500,000 per occurrence. We utilize a wholly-owned captive insurance company to insure certain types and amounts of risks, which includes property damage and resulting business interruption losses, general liability insurance and other construction related liability risks. In addition to our potential liability for the various policy self-insured retentions and deductibles, our captive insurance company is directly responsible for (i) 100% of the first$25,000,000 of losses (per occurrence) and 10% of the second$25,000,000 of losses (per occurrence) incurred by the master property insurance policy and (ii) covered liability claims arising out of our primary commercial general liability policy, subject to a$2,000,000 per occurrence loss limit. The captive is utilized to insure other limited levels of risk, which may be in part reinsured by third party insurance. Just as with office buildings, transportation systems and government buildings, there have been reports that apartment communities could become targets of terrorism. Our communities are insured for terrorism related losses through the Terrorism Risk Insurance Program Reauthorization Act ("TRIPRA") program. This coverage extends to most of our casualty exposures (subject to deductibles and insured limits) and certain property insurance policies. We have also purchased private-market insurance for property damage due to terrorism with limits of$600,000,000 per occurrence and in the annual aggregate that includes certain coverages (not covered under TRIPRA) such as domestic-based terrorism. This insurance, often referred to as "non-certified" terrorism insurance, is subject to deductibles, limits and exclusions. An additional consideration for insurance coverage and potential uninsured losses is mold growth or other environmental contamination. Mold growth may occur when excessive moisture accumulates in buildings or on building materials, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. If a significant mold problem arises at one of our communities, we could be required to undertake a costly remediation program to contain or remove the mold from the affected community and could be exposed to other liabilities. For further discussion of the risks and our related prevention and 46
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remediation activities, please refer to the discussion under Part I, Item 1A. "Risk Factors - We may incur costs due to environmental contamination or non-compliance" of our Form 10-K. We cannot provide assurance that we will have coverage under our existing policies for property damage or liability to third parties arising as a result of exposure to mold or a claim of exposure to mold at one of our communities. We also carry crime policies (also commonly referred to as a fidelity policy or employee dishonesty policy) and limited cyber liability insurance. The crime policies protect us, up to$30,000,000 per occurrence (subject to sublimits and exclusions), from employee theft of money, securities or property. The limited cyber liability insurance is part of our professional liability coverage and has limits of$15,000,000 per occurrence and in the annual aggregate. The cyber liability coverage protects us from certain claims arising out of data breach, wrongful acts, data privacy issues and media liability.
The amount or types of insurance we maintain may not be sufficient to cover all losses.
Inflation and Deflation Substantially all of our apartment leases are for a term of one year or less. In an inflationary environment, this may allow us to realize increased rents upon renewal of existing leases or the beginning of new leases. Short-term leases generally minimize our risk from the adverse effect of inflation, although these leases generally permit residents to leave at the end of the lease term and therefore expose us to the effect of a decline in market rents. Similarly, in a deflationary rent environment, we may be exposed to declining rents more quickly under these shorter-term leases. Forward-Looking Statements This Form 10-Q contains "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by our use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume," "project," "plan," "may," "shall," "will" and other similar expressions in this Form 10-Q, that predict or indicate future events and trends and that do not report historical matters. These statements include, among other things, statements regarding our intent, belief or expectations with respect to:
• our potential development, redevelopment, acquisition or disposition of
communities;
• the timing and cost of completion of apartment communities under
construction, reconstruction, development or redevelopment;
• the timing of lease-up, occupancy and stabilization of apartment communities;
• the timing and net sales proceeds of condominium sales;
• the pursuit of land on which we are considering future development;
• the anticipated operating performance of our communities;
• cost, yield, revenue, NOI and earnings estimates;
• the impact of landlord-tenant laws and rent regulations;
• our declaration or payment of dividends;
• our joint venture and discretionary fund activities;
• our policies regarding investments, indebtedness, acquisitions,
dispositions, financings and other matters;
• our qualification as a REIT under the Internal Revenue Code;
• the real estate markets in Northern and
Mid-
regions of
• the availability of debt and equity financing;
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Table of Contents • interest rates;
• general economic conditions including the potential impacts from current
economic conditions and the COVID-19 pandemic;
• trends affecting our financial condition or results of operations; and
• the impact of outstanding legal proceedings.
We cannot assure the future results or outcome of the matters described in these statements; rather, these statements merely reflect our current expectations of the approximate outcomes of the matters discussed. We do not undertake a duty to update these forward-looking statements, and therefore they may not represent our estimates and assumptions after the date of this report. You should not rely on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. These risks, uncertainties and other factors may cause our actual results, performance or achievements to differ materially from the anticipated future results, performance or achievements expressed or implied by these forward-looking statements. You should carefully review the discussion under Part I, Item 1A. "Risk Factors" of our Form 10-K and Part II, Item 1A. "Risk Factors" in this report, for further discussion of risks associated with forward-looking statements. Risks and uncertainties that might cause such differences include those related to the COVID-19 pandemic, about which there are many uncertainties, including (i) the duration and severity of the pandemic and (ii) the effect on the multifamily industry and the general economy of measures taken by businesses and the government to prevent the spread of the novel coronavirus and relieve economic distress of consumers, such as governmental limitations on the ability of multifamily owners to evict residents who are delinquent in the payment of their rent. Due to this uncertainty we are not able at this time to estimate the effect of these factors on our business, but the adverse impact of the pandemic on our business, results of operations, cash flows and financial condition could be material. In addition, the effects of the pandemic are likely to heighten the following risks, which we routinely face in our business:
• we may fail to secure development opportunities due to an inability to
reach agreements with third-parties to obtain land at attractive prices or
to obtain desired zoning and other local approvals;
• we may abandon or defer development opportunities for a number of reasons,
including changes in local market conditions which make development less
desirable, increases in costs of development, increases in the cost of
capital or lack of capital availability, resulting in losses;
• construction costs of a community may exceed our original estimates;
• we may not complete construction and lease-up of communities under
development or redevelopment on schedule, resulting in increased interest
costs and construction costs and a decrease in our expected rental
revenues;
• the timing and net proceeds of condominium sales may not equal our current
expectations;
• occupancy rates and market rents may be adversely affected by competition
and local economic and market conditions which are beyond our control;
• financing may not be available on favorable terms or at all, and our cash
flows from operations and access to cost effective capital may be
insufficient for the development of our pipeline which could limit our
pursuit of opportunities;
• the impact of new landlord-tenant laws and rent regulations may be greater
than we expected;
• our cash flows may be insufficient to meet required payments of principal
and interest, and we may be unable to refinance existing indebtedness or
the terms of such refinancing may not be as favorable as the terms of
existing indebtedness;
• we may be unsuccessful in our management of joint ventures and the REIT
vehicles that are used with certain joint ventures;
• we may be unsuccessful in managing changes in our portfolio composition;
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• laws and regulations implementing rent control or rent stabilization, or
otherwise limiting our ability to increase rents, charge fees or evict
tenants, may impact our revenue or increase our costs;
• our expectations, estimates and assumptions as of the date of this filing
regarding outstanding legal proceedings are subject to change; and
• the likelihood that we may choose to pay dividends in our stock instead of
cash, which may result in stockholders having to pay taxes with respect to
such dividends in excess of the cash received, if any.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires
management to use judgment in the application of accounting policies, including
making estimates and assumptions. If our judgment or interpretation of the facts
and circumstances relating to various transactions had been different, or
different assumptions were made, it is possible that different accounting
policies would have been applied, resulting in different financial results or a
different presentation of our financial statements. Our critical accounting
policies consist of the following: (i) cost capitalization and (ii) abandoned
pursuit costs and asset impairment. Our critical accounting policies and
estimates have not changed materially from the discussion of our significant
accounting policies found in Management's Discussion and Analysis and Results of
Operations in our Form 10-K.
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