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, 2021 (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 ofRaleigh-Durham andCharlotte, North Carolina ,Southeast Florida ,Dallas andAustin, Texas , andDenver, Colorado . We focus on leading metropolitan areas that we believe historically have been characterized by growing employment in high wage sectors of the economy, higher home ownership cost and a diverse and vibrant quality of life. We believe these market characteristics have offered and will continue to offer the opportunity for superior long-term risk-adjusted returns on apartment community investments relative to other markets that do not have these characteristics. We seek to create long-term shareholder value by accessing cost effective capital; deploying that capital to develop, redevelop and acquire apartment communities in our markets; leveraging our scale and competencies in technology and data science to operate 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 with disciplined 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 market allocation of our investments by current market value and share of total revenue and NOI, as well as relative asset value and submarket positioning.
Second Quarter 2022 Operating Highlights
•Net income attributable to common stockholders for the three months endedJune 30, 2022 was$138,691,000 , a decrease of$309,262,000 , or 69.0%, from the prior year period. The decrease is primarily due to decreases in real estate sales and related gains, partially offset by an increase in NOI from communities, over the prior year period. •Same Store NOI attributable to our apartment rental operations, including parking and other ancillary residential revenue ("Residential"), for the three months endedJune 30, 2022 was$391,626,000 , an increase of$56,763,000 , or 17.0%, over the prior year period. The increase over the prior year period was due to an increase in Residential rental revenues of$64,397,000 , or 12.9%, partially offset by an increase in Residential property operating expenses of$7,760,000 , or 4.8%. 25
-------------------------------------------------------------------------------- Table of Contents COVID-19 Pandemic The impact on our consolidated results of operations from the Pandemic for future periods will depend, among other factors, on (i) the effect of the Pandemic on the multifamily industry and the general economy, including from measures taken by businesses and the government, such as governmental limitations on the ability of multifamily owners to evict residents who are delinquent in the payment of their rent, and (ii) the preferences of consumers and businesses for living and working arrangements both during and after the Pandemic.
Second Quarter 2022 Development Highlights
At
•16 wholly-owned communities under construction, which are expected to contain 4,919 apartment homes with a projected total capitalized cost of$2,069,000,000 , and one unconsolidated community under construction, which is expected to contain 475 apartment homes with a projected total capitalized cost of$276,000,000 . •Land or rights to land on which we expect to develop an additional 32 apartment communities that, if developed as expected, will contain 10,913 apartment homes and will be developed for an aggregate projected total capitalized cost of$4,717,000,000 .
Second Quarter 2022 Real Estate Transaction Highlights
During the three months endedJune 30, 2022 , we sold 13 residential condominiums at The Park Loggia for gross proceeds of$41,002,000 , resulting in a gain in accordance with GAAP of$467,000 .
During the three months ended
In addition, in
•We sold
•We acquired
Communities Overview
Our real estate investments consist primarily of current operating apartment
communities ("Current Communities"), consolidated and unconsolidated communities
in various stages of development ("Development" communities and "Unconsolidated
Development " communities) and Development Rights (as defined below). Our Current
Communities are further classified as Same Store 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 Same Store, Other Stabilized, Lease-Up, Redevelopment, or Unconsolidated according to the following attributes:
•Same Store is composed of consolidated communities 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 six month periods endedJune 30, 2022 and 2021, Same Store communities are consolidated for financial reporting purposes, had stabilized occupancy as ofJanuary 1, 2021 , are not conducting or are not probable to conduct substantial redevelopment activities and are not held for sale as ofJune 30, 2022 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 90% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment. 26
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•Other Stabilized is composed of completed consolidated communities that we own and that are not Same Store but that had stabilized occupancy, as defined above, as ofJanuary 1, 2022 , or which were acquired subsequent toJanuary 1, 2021 . Other Stabilized includes stabilized wholly-owned communities inCharlotte, North Carolina andDallas, Texas , the two new expansion markets we entered in 2021, but excludes communities that are conducting or are probable to conduct substantial redevelopment activities within the current year, as defined below.
•Lease-Up is composed of consolidated communities where construction has been complete for less than one year and that do not have stabilized occupancy.
•Redevelopment is composed of 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$5,000,000 or 10% of the community's pre-redevelopment basis and (ii) physical occupancy is below or is expected to be below 90% during, or as a result of, the redevelopment activity.
•Unconsolidated is composed of communities that we have an indirect ownership interest in through our investment interest in an unconsolidated joint venture.
Development is composed of consolidated communities that are either currently under construction, or were under construction and were completed during the current year. These communities may be partially or fully complete and operating.Unconsolidated Development is composed of communities that are either currently under construction, or were under construction and were completed during the current year, in which we have an indirect ownership interest through our investment interest in an unconsolidated joint venture. These communities may be partially or fully 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
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As of
Number of Number of
communities apartment homes
Current Communities
Same Store:
New England 38 9,774
Metro NY/NJ 39 11,641
Mid-Atlantic 38 12,931
Southeast Florida 4 1,214
Denver, CO 4 1,086
Pacific Northwest 18 4,807
Northern California 40 12,126
Southern California 57 16,768
Total Same Store 238 70,347
Other Stabilized:
New England 3 253
Metro NY/NJ 6 1,971
Mid-Atlantic 3 993
North Carolina 3 500
Southeast Florida 3 973
Texas 2 621
Denver, CO 1 207
Pacific Northwest 2 667
Northern California 1 200
Southern California 2 849
Total Other Stabilized 26 7,234
Lease-Up 5 2,086
Redevelopment 2 1,058
Unconsolidated (1) 11 2,918
Total Current 282 83,643
Development 16 4,919
Unconsolidated Development 1 475
Total Communities 299 89,037
Development Rights 32 10,913
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(1)In July 2022 , the U.S. Fund sold Avalon Grosvenor Tower . Refer to Note 12,
"Subsequent Events," of the Condensed Consolidated Financial Statements included
elsewhere in this report.
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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 Same Store NOI; NOI derived from acquisitions,
development completions and development under construction and in lease-up; loss
of NOI related to disposed communities; and capital market and financing
activity. As discussed above under "Executive Overview - COVID-19 Pandemic" and
elsewhere in this report, the Pandemic continues to affect our business, and may
continue to do so. See also Part II, Item 1A. "Risk Factors." A comparison of
our operating results for the three and six months ended June 30, 2022 and 2021
follows (unaudited, dollars in thousands).
For the three months ended For the six months ended
6/30/2022 6/30/2021 $ Change % Change 6/30/2022 6/30/2021 $ Change % Change
Revenue:
Rental and other income $ 643,655 $ 560,935 $ 82,720 14.7 % $ 1,256,830 $ 1,111,194 $ 145,636 13.1 %
Management, development and other fees 904 808 96 11.9 % 1,656 1,685 (29) (1.7) %
Total revenue 644,559 561,743 82,816 14.7 % 1,258,486 1,112,879 145,607 13.1 %
Expenses:
Direct property operating expenses,
excluding property taxes 124,848 116,506 8,342 7.2 % 247,309 231,214 16,095 7.0 %
Property taxes 70,865 70,776 89 0.1 % 141,603 140,186 1,417 1.0 %
Total community operating expenses 195,713 187,282 8,431 4.5 % 388,912 371,400 17,512 4.7 %
Corporate-level property management and
other indirect operating expenses (31,541) (25,116) (6,425) 25.6 % (60,392) (50,459) (9,933) 19.7 %
Expensed transaction, development and
other pursuit costs, net of recoveries (2,364) (1,653) (711) 43.0 % (3,351) (1,483) (1,868) 126.0 %
Interest expense, net (58,797) (56,104) (2,693) 4.8 % (115,323) (108,717) (6,606) 6.1 %
Gain on extinguishment of debt, net - - - - % - 122 (122) (100.0) %
Depreciation expense (199,302) (184,472) (14,830) 8.0 % (401,088) (367,769) (33,319) 9.1 %
General and administrative expense (21,291) (18,465) (2,826) 15.3 % (38,712) (35,817) (2,895) 8.1 %
Casualty and impairment loss - (1,177) 1,177 100.0 % - (1,177) 1,177 100.0 %
Income from investments in
unconsolidated entities 2,480 26,559 (24,079) (90.7) % 2,797 26,092 (23,295) (89.3) %
Gain on sale of communities 404 334,569 (334,165) (99.9) % 149,204 388,296 (239,092) (61.6) %
Gain on other real estate transactions,
net 43 32 11 34.4 % 80 459 (379) (82.6) %
Net for-sale condominium activity (71) (647) 576 (89.0) % 165 (1,560) 1,725 N/A (1)
Income before income taxes 138,407 447,987 (309,580) (69.1) % 402,954 589,466 (186,512) (31.6) %
Income tax benefit (expense) 159 (10) 169 N/A (1) (2,312) 745 (3,057) N/A (1)
Net income 138,566 447,977 (309,411) (69.1) % 400,642 590,211 (189,569) (32.1) %
Net loss (income) attributable to
noncontrolling interests 125 (24) 149 N/A (1) 93 (35) 128 N/A (1)
Net income attributable to common
stockholders $ 138,691 $ 447,953 $ (309,262) (69.0) % $ 400,735 $ 590,176 $ (189,441) (32.1) %
_________________________
(1)Percent change is not meaningful.
Net income attributable to common stockholders decreased$309,262,000 , or 69.0%, to$138,691,000 and$189,441,000 , or 32.1%, to$400,735,000 for the three and six months endedJune 30, 2022 , respectively, as compared to the prior year periods. The decreases for the three and six months endedJune 30, 2022 are primarily due to decreases in real estate sales and related gains, partially offset by increases in NOI from communities, over the prior year periods. 29 -------------------------------------------------------------------------------- Table of Contents NOI is considered by management to be an important and appropriate supplemental performance measure to net income because it helps both investors and management to understand the core operations of a community or communities prior to the allocation of any corporate-level or financing-related costs. NOI reflects the operating performance of a community and allows for an easier comparison of the operating performance of individual assets or groups of assets. In addition, because prospective buyers of real estate have different financing and overhead structures, with varying marginal impact to overhead as a result of acquiring real estate, NOI is considered by many in the real estate industry to be a useful measure for determining the value of a real estate asset or group of assets. We define NOI as total property revenue less direct property operating expenses (including property taxes), and excluding corporate-level income (including management, development and other fees), corporate-level property management and other indirect operating expenses, expensed transaction, development and other pursuit costs, net of recoveries, interest expense, net, gain on extinguishment of debt, net, general and administrative expense, income from investments in unconsolidated entities, depreciation expense, income tax (benefit) expense, casualty and impairment loss, gain on sale of communities, gain on other real estate transactions, net, net for-sale condominium activity 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. Residential NOI represents results attributable to our apartment rental operations, including parking and other ancillary residential revenue. Reconciliations of NOI and Residential NOI for the three and six months endedJune 30, 2022 and 2021 to net income for each period are as follows (unaudited, dollars in thousands): For the three months ended For the six months ended 6/30/2022 6/30/2021 6/30/2022 6/30/2021 Net income$ 138,566 $ 447,977 $ 400,642 $ 590,211 Property management and other indirect operating expenses, net of corporate income 30,632 24,318 58,745 48,788
Expensed transaction, development and other pursuit costs, net of recoveries
2,364 1,653 3,351 1,483
Interest expense, net 58,797 56,104 115,323 108,717
Gain on extinguishment of debt, net - - - (122)
General and administrative expense 21,291 18,465 38,712 35,817
Income from investments in unconsolidated entities (2,480) (26,559) (2,797) (26,092)
Depreciation expense 199,302 184,472 401,088 367,769
Income tax (benefit) expense (159) 10 2,312 (745)
Casualty and impairment loss - 1,177 - 1,177
Gain on sale of communities (404) (334,569) (149,204) (388,296)
Gain on other real estate transactions, net (43) (32) (80) (459)
Net for-sale condominium activity 71 647 (165) 1,560
Net operating income from real estate assets sold or
held for sale (3,650) (13,893) (8,916) (28,472)
NOI 444,287 359,770 859,011 711,336
Commercial NOI (1) (7,763) (5,620) (16,083) (10,931)
Residential NOI $ 436,524 $ 354,150 $ 842,928 $ 700,405 _________________________
(1)Represents results attributable to the retail and other non-residential operations at our communities ("Commercial").
The Residential NOI changes for the three and six months endedJune 30, 2022 as compared to the three and six months endedJune 30, 2021 consist of changes in the following categories (unaudited, dollars in thousands): For the three months ended For the six months ended 6/30/2022 6/30/2022 Same Store $ 56,763 $ 91,211 Other Stabilized 16,257 33,292 Development / Redevelopment 9,354 18,020 Total $ 82,374 $ 142,523 30
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The increase in our Same Store Residential NOI for the three and six months endedJune 30, 2022 is due to increases in Residential rental revenue of$64,397,000 , or 12.9%, and$106,366,000 , or 10.7%, respectively, partially offset by increases in Residential property operating expenses of$7,760,000 , or 4.8%, and$15,294,000 , or 4.7%, over the three and six months endedJune 30, 2021 , respectively. Rental and other income increased$82,720,000 , or 14.7%, and$145,636,000 , or 13.1%, for the three and six months endedJune 30, 2022 , respectively, compared to the prior year periods, primarily due to the increased rental revenue from our stabilized wholly-owned communities, discussed below. The Pandemic, and direct and indirect related economic, regulatory and operating impacts, may adversely affect our rental revenue in future periods. If the financial condition of our residents and commercial tenants deteriorates, and/or regulations that limit our ability to evict residents and tenants continue or are adopted, that may result in higher than normal uncollectible lease revenue. The Pandemic may also depress consumer demand for our apartments for a variety of reasons, including (i) if consumers decide to live in markets that are less costly than ours for one or more reasons, such as a decline in their income, remote working arrangements, or if they cannot freely access neighborhood amenities like restaurants, gyms and entertainment venues; (ii) that consumers who would otherwise rent may seek home ownership; and (iii) ongoing downward pressures on demand for certain types of housing (e.g., corporate apartment homes) or by certain consumers (e.g., students or consumers who require seasonal job-related demand such as in the entertainment industry). Consolidated Communities - The weighted average number of occupied apartment homes for consolidated communities increased to 77,225 apartment homes for the six months endedJune 30, 2022 , compared to 74,999 homes for the prior year period. The weighted average monthly rental revenue per occupied apartment home increased to$2,709 for the six months endedJune 30, 2022 compared to$2,466 in the prior year period. Same Store rental revenue increased$65,838,000 , or 13.1%, and$109,121,000 , or 10.9% for the three and six months endedJune 30, 2022 , respectively, compared to the prior year periods. •Residential rental revenue increased$64,397,000 , or 12.9%, and$106,366,000 , or 10.7%, for the three and six months endedJune 30, 2022 , respectively, compared to the prior year periods. The increases for the three and six months endedJune 30, 2022 was partially due to a reduction in uncollectible lease revenue of$8,883,000 and$13,885,000 , respectively. See below for a table detailing the change in Same Store Residential rental revenue by market for the six months endedJune 30, 2022 , including the attribution of the change between rental rates and Economic Occupancy. •During the Pandemic we increased our use of residential concessions relative to concessions granted prior to 2020. While concessions granted remained slightly elevated relative to periods prior to 2020, concessions for our Same Store communities granted in the six months endedJune 30, 2022 decreased from the prior year period by$25,621,000 to$4,012,000 . We amortize concessions on a straight-line basis over the life of the respective leases (generally one year), reducing the income recognized over the lease term. With the decreased amount of concessions granted, the amortization of residential concessions for our Same Store communities also decreased. For the six months endedJune 30, 2022 , amortized concessions decreased by$18,499,000 contributing to the increase in revenue as compared to the prior year period. The remaining net unamortized balance of Same Store residential concessions atJune 30, 2022 was$4,679,000 . •Commercial rental revenue increased$1,441,000 , or 31.6%, and$2,755,000 , or 29.4%, for the three and six months endedJune 30, 2022 , respectively, compared to the prior year periods due to the improved financial performance of our commercial tenants. 31 -------------------------------------------------------------------------------- Table of Contents The following table presents the increase in Same Store Residential rental revenue by component, for the three and six months endedJune 30, 2022 , compared to the prior year periods (unaudited): For the three months
ended For the six months ended
6/30/2022 6/30/2022
Residential rental revenue
Lease rates 7.6 % 6.3 %
Concessions and other discounts 2.3 % 1.7 %
Economic Occupancy 0.2 % 0.5 %
Other rental revenue 1.0 % 0.8 %
Uncollectible lease revenue (excluding rent
relief) (0.6) % (1.1) %
Rent relief 2.4 % 2.5 %
Total Residential rental revenue 12.9 % 10.7 %
Adjusting to remove the impact of rent relief, uncollectible lease revenue as a
percentage of Same Store Residential rental revenue increased to 3.27% in the
three months ended June 30, 2022 from 3.10% in the three months ended June 30,
2021 . Adjusting to remove the impact of rent relief, uncollectible lease revenue
as a percentage of Same Store Residential rental revenue increased to 3.79% in
the six months ended June 30, 2022 from 3.19% in the six months ended June 30,
2021 . The Company recognized $14,973,000 and $2,997,000 from government rent
relief programs during the three months ended June 30, 2022 and 2021,
respectively. The Company recognized $28,272,000 and $3,755,000 from government
rent relief programs during the six months ended June 30, 2022 and 2021,
respectively.
The following table presents the change in Same Store Residential rental
revenue, including the attribution of the change between rental rates and
Economic Occupancy for the six months ended June 30, 2022 (unaudited, dollars in
thousands).
For the six months ended June 30, 2022
Residential rental revenue Average rental rates Economic Occupancy (1)
$ Change % Change % Change % Change
2022 to 2022 to 2022 to 2022 to
2022 2021 2021 2021 2022 2021 2021 2022 2021 2021
New England $ 167,440 $ 150,700 $ 16,740 11.1 % $ 2,935 $ 2,684 9.4 % 97.3 % 95.6 % 1.7 %
Metro NY/NJ 221,385 200,614 20,771 10.4 % 3,282 2,987 9.9 % 96.6 % 96.1 % 0.5 %
Mid-Atlantic 165,773 155,941 9,832 6.3 % 2,236 2,115 5.7 % 95.6 % 95.0 % 0.6 %
Southeast Florida 18,481 14,918 3,563 23.9 % 2,642 2,134 23.8 % 96.0 % 95.9 % 0.1 %
Denver, CO 12,975 11,503 1,472 12.8 % 2,074 1,832 13.2 % 96.0 % 96.4 % (0.4) %
Pacific Northwest 68,199 59,580 8,619 14.5 % 2,471 2,170 13.9 % 95.7 % 95.1 % 0.6 %
Northern California 195,183 183,297 11,886 6.5 % 2,793 2,619 6.6 % 96.1 % 96.2 % (0.1) %
Southern California 247,042 213,559 33,483 15.7 % 2,541 2,199 15.6 % 96.6 % 96.5 % 0.1 %
Total Same Store $ 1,096,478 $ 990,112 $ 106,366 10.7 % $ 2,695 $ 2,446 10.2 % 96.4 % 95.9 % 0.5 %
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(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. Direct property operating expenses, excluding property taxes, increased$8,342,000 , or 7.2%, and$16,095,000 , or 7.0%, for the three and six months endedJune 30, 2022 , respectively, compared to the prior year periods. The increases for the three and six months endedJune 30, 2022 are primarily due to the addition of newly developed and acquired apartment communities as well as increased operating expenses at our Same Store communities as discussed below. Same Store Residential direct property operating expenses, excluding property taxes, represents substantially all of total Same Store operating expenses for the three and six months endedJune 30, 2022 . Same Store Residential direct property operating expenses, excluding property taxes, increased$7,536,000 , or 7.3%, and$13,422,000 , or 6.6%, for the three and six months endedJune 30, 2022 , respectively, compared to the prior year periods. The increases for the three and six months endedJune 30, 2022 are primarily due to increased utilities and maintenance costs as well as bad debt associated with resident expense reimbursements. 32
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Property taxes increased$1,417,000 , or 1.0%, for the six months endedJune 30, 2022 , compared to the prior year period. The increase for the six months endedJune 30, 2022 is primarily due to the addition of newly developed and acquired apartment communities and increased assessments for our stabilized portfolio, partially offset by decreased property taxes from dispositions. Same Store Residential property taxes represents substantially all of total Same Store property taxes for the three and six months endedJune 30, 2022 . Same Store Residential property taxes increased$1,872,000 , or 1.6%, for the six months endedJune 30, 2022 , compared to the prior year period. The increase for the six months endedJune 30, 2022 is due to increased assessments across the portfolio and the expiration of property tax incentive programs at certain of our properties inNew York City , partially offset by successful appeals in the current year period in excess of the prior year period. Corporate-level property management and other indirect operating expenses increased$6,425,000 , or 25.6%, and$9,933,000 , or 19.7%, for the three and six months endedJune 30, 2022 , respectively, compared to the prior year periods, primarily due to increased compensation related costs as well as costs related to increased investment in technology initiatives in the current year periods to improve future efficiency in services for residents and prospects. 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 and costs related to abandoned acquisition and disposition pursuits and any recoveries of costs incurred. 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. In addition, the timing for potential recoveries will not always align with the timing for expensing an abandoned pursuit. Expensed transaction, development and other pursuit costs, net of recoveries, increased$711,000 and$1,868,000 for the three and six months endedJune 30, 2022 , respectively, compared to the prior year periods. Interest expense, net increased$2,693,000 , or 4.8%, and$6,606,000 , or 6.1%, for the three and six months endedJune 30, 2022 , respectively, 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, interest income, any mark to market impact from derivatives not in qualifying hedge relationships and the recognition of expected credit losses for the SIP. The increases for the three and six months endedJune 30, 2022 are primarily due to a decrease in capitalized interest, an increase in the amount of unsecured indebtedness and the recognition of the expected credit losses from our SIP, partially offset by a combination of a decrease in variable rates on, and amounts of, secured indebtedness. Depreciation expense increased$14,830,000 , or 8.0%, and$33,319,000 , or 9.1%, for the three and six months endedJune 30, 2022 , respectively, 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 ("G&A") increased$2,826,000 , or 15.3%, and$2,895,000 , or 8.1%, for the three and six months endedJune 30, 2022 , as compared to the prior year periods, primarily due to increases in compensation related expenses in the current year periods. Casualty and impairment loss for the three and six months endedJune 30, 2021 consists of a$1,177,000 charge recognized for the property and casualty damages resulting from a fire at a wholly-owned community that occurred during the three months endedJune 30, 2021 . Income from investments in unconsolidated entities decreased$24,079,000 and$23,295,000 for the three and six months endedJune 30, 2022 , respectively, compared to the prior year periods, primarily due to the gain from the sale of the final two communities in theMultifamily Partners AC JV LP (the "AC JV") in the prior year periods. Gain on sale of communities decreased$334,165,000 and$239,092,000 for the three and six months endedJune 30, 2022 , respectively, compared to the prior year periods. The amount of gain realized in a given period depends on many factors, including the number of communities sold, the size and carrying value of the communities sold and the market conditions in the local area. The gain of$149,204,000 for the six months endedJune 30, 2022 was primarily due to the sale of three wholly-owned communities. The gains of$334,569,000 and$388,296,000 for the three and six months endedJune 30, 2021 , respectively, were primarily due to the sale of six and seven wholly-owned communities, respectively. 33 -------------------------------------------------------------------------------- Table of Contents Net for-sale condominium activity is a net expense of$71,000 and net gain of$165,000 for the three and six months endedJune 30, 2022 and a net expense of$647,000 and$1,560,000 for the three and six months endedJune 30, 2021 , respectively, and is comprised of the net gain before taxes on the sale of condominiums at The Park Loggia and associated marketing, operating and administrative costs. During the three and six months endedJune 30, 2022 , we sold 13 and 28 residential condominiums at The Park Loggia, for gross proceeds of$41,002,000 and$81,338,000 , respectively, resulting in a gain in accordance with GAAP of$467,000 and$1,469,000 , respectively. During the three and six months endedJune 30, 2021 , we sold 16 and 26 residential condominiums at The Park Loggia for gross proceeds of$38,392,000 and$53,001,000 , respectively, resulting in a gain in accordance with GAAP of$575,000 and$706,000 , respectively. In addition, we incurred$538,000 and$1,222,000 for the three months endedJune 30, 2022 and 2021, respectively, and$1,304,000 and$2,266,000 for the six months endedJune 30, 2022 and 2021, respectively, in marketing, operating and administrative costs.
Reconciliation of FFO and Core FFO
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. 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 with the comparison of the operating and financial performance of a real estate company between periods or as compared to different companies. By further adjusting for items that are not considered by us to be part of our core business operations, Core FFO can help with the comparison of the core operating performance year over year. We believe that in order to understand our operating results, FFO and Core FFO should be considered in conjunction 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 from partnerships;
•casualty and impairment losses or gains, net on non-depreciable real estate;
•gains or losses from early extinguishment of consolidated borrowings;
•development pursuit write-offs and expensed transaction costs, net of
recoveries;
•third-party business interruption insurance proceeds and the related lost NOI
that is covered by the expected third party business interruption insurance
proceeds;
•property and casualty insurance proceeds and legal settlement activity;
•gains or losses on sales of assets not subject to depreciation and other
investment gains or losses;
•advocacy contributions, representing payments to promote our business
interests;
•hedge ineffectiveness or gains or losses from derivatives not designated as
hedges for accounting purposes;
•expected credit losses associated with the lending commitments under the SIP;
•severance related costs;
•executive transition compensation costs;
•net for-sale condominium activity, including gains, marketing, operating 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.
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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):
For the three months ended For the six months ended
6/30/2022 6/30/2021 6/30/2022 6/30/2021
Net income attributable to common stockholders
$ 590,176
Depreciation - real estate assets, including joint venture adjustments
198,493 183,257 399,145 365,571
Distributions to noncontrolling interests 12 12 24 24
Gain on sale of unconsolidated entities holding
previously depreciated real estate - (23,305) - (23,305)
Gain on sale of previously depreciated real estate (404) (334,569) (149,204) (388,296)
Casualty and impairment loss on real estate - 1,177 - 1,177
FFO attributable to common stockholders 336,792 274,525 650,700 545,347
Adjusting items:
Unconsolidated entity gains, net (1) (2,040) (2,233) (2,295) (2,132)
Structured Investment Program loan reserve (2) 1,608 - 1,608 -
Gain on extinguishment of consolidated debt - - - (122)
Loss (gain) on interest rate contract 297 - (432) (2,654)
Advocacy contributions 384 - 534 -
Executive transition compensation costs 407 407 809 2,188
Severance related costs 24 102 65 102
Development pursuit write-offs and expensed
transaction costs, net of recoveries 1,839 527 1,998 302
Gain on for-sale condominiums (3) (467) (575) (1,469) (706)
For-sale condominium marketing, operating and
administrative costs (3) 538 1,222 1,304 2,266
For-sale condominium imputed carry cost (4) 716 1,979 1,635 4,131
Gain on other real estate transactions, net (43) (32) (80) (459)
Legal settlements 129 1,018 259 1,078
Income tax (benefit) expense (159) 10 2,312 (745)
Core FFO attributable to common stockholders
$ 548,596 Weighted average common shares outstanding - diluted 139,934,478 139,650,639 139,955,280 139,601,526 EPS per common share - diluted $ 0.99$ 3.21 $ 2.86 $ 4.23 FFO per common share - diluted $ 2.41$ 1.97 $ 4.65 $ 3.91 Core FFO per common share - diluted $ 2.43$ 1.98 $ 4.69 $ 3.93 _________________________ (1)Amounts for the three and six months endedJune 30, 2022 andJune 30, 2021 include unrealized gains on property technology investments of$2,040 and$3,272 , respectively. Amounts for three and six months endedJune 30, 2021 were partially offset by the write-off of asset management fee intangibles associated with the disposition of the final two AC JV communities.
(2)Amounts represent the expected credit losses associated with the lending commitments under our SIP. The timing and amount of actual losses that will be incurred, if any, is to be determined.
(3)The aggregate impact of (i) gain on for-sale condominiums and (ii) for-sale condominium marketing, operating and administrative costs is a net expense of$71 and net gain of$165 for the six months endedJune 30, 2022 and a net expense of$647 and$1,560 for the three and six months endedJune 30, 2021 , respectively. (4)Represents the imputed carry cost of for-sale residential condominiums at The Park Loggia. We computed 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. 35
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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
6/30/2022 6/30/2021 6/30/2022 6/30/2021
Net cash provided by operating activities $ 296,368 $ 238,484 $ 640,048 $ 568,629
Net cash (used in) provided by investing
activities $ (266,308) $ 245,157 $ (356,508) $ 89,205
Net cash used in financing activities $ (227,280) $ (226,268) $ (567,137) $ (484,261) 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; •funding requests for borrowers under our SIP; •normal recurring operating expenses and corporate overhead expenses; and •investment in our operating platform, including strategic investments. 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 (v) 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, cash equivalents and cash in escrow of$260,191,000 atJune 30, 2022 , a decrease of$283,597,000 from$543,788,000 atDecember 31, 2021 . The following discussion relates to changes in cash, cash equivalents and cash in escrow due to operating, investing and financing activities, which are presented in our Condensed Consolidated Statements of Cash Flows included elsewhere in this report. Operating Activities - Net cash provided by operating activities increased to$640,048,000 for the six months endedJune 30, 2022 from$568,629,000 for the six months endedJune 30, 2021 , primarily due to increases in rental income, including the impact of uncollectible lease revenue.
Investing Activities - Net cash used in investing activities totaled
•investment of
These amounts were partially offset by:
•net proceeds from the disposition of three wholly-owned communities and
ancillary real estate of
Financing Activities - Net cash used in financing activities totaled
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•payment of cash dividends in the amount of
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) the 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 for our unsecured notes. The current stated pricing for drawn borrowings is LIBOR plus 0.775% per annum (3.14% atJuly 29, 2022 ), assuming a one month borrowing rate. The annual facility fee for the Credit Facility remained at 0.125%, resulting in a fee of$2,188,000 annually based on the$1,750,000,000 facility size and based on our current credit rating. We had no borrowings outstanding under the Credit Facility and had$6,914,000 outstanding in letters of credit that reduced our borrowing capacity as ofJuly 29, 2022 . In addition, we had$41,432,000 outstanding in additional letters of credit unrelated to the Credit Facility as ofJuly 29, 2022 .
Commercial Paper Program
InMarch 2022 , we established the Commercial Paper Program. Under the terms of the Commercial Paper Program, we may issue, from time to time, unsecured commercial paper notes with varying maturities of less than one year. Amounts available under the Commercial Paper Program may be issued, repaid and re-issued from time to time, with the maximum aggregate face or principal amount outstanding at any one time not to exceed$500,000,000 . The Commercial Paper Program is backstopped by our commitment to maintain available borrowing capacity under the Credit Facility in an amount equal to actual borrowings under the Commercial Paper Program. As ofJuly 29, 2022 , we had$175,000,000 outstanding under the Commercial Paper Program.
Financial Covenants
We are subject to financial covenants contained in the Credit Facility and the Commercial Paper Program, Term Loan 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 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 our determinations of the appropriate funding sources. We engaged sales agents for CEP V who 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 and to receive aggregate net cash proceeds at settlement equal to the number of shares underlying the particular forward agreement multiplied by the 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 forward seller, in the form of a reduced initial forward sale price, a commission of up to 1.5% of the sales prices of all borrowed shares of common stock sold. During the three and six months endedJune 30, 2022 and throughJuly 29, 2022 , we had no sales under this program. InDecember 2021 , we entered into a forward contract under CEP V to sell 68,577 shares of common stock for approximate proceeds of$16,000,000 net of offering fees and discounts and based on the initial forward price, with settlement of the forward contract to occur on one or more dates not later thanDecember 31, 2022 . The final proceeds will be determined 37 -------------------------------------------------------------------------------- Table of Contents on the date(s) of settlement after adjustments for our dividends and a daily interest factor. As ofJuly 29, 2022 , we had$705,961,000 remaining authorized for issuance under this program, after consideration of the forward contract.
Forward Equity Offering
In addition to CEP V, during the three months endedJune 30, 2022 , we completed an underwritten public offering of 2,000,000 shares of common stock offered in connection with forward contracts entered into with certain financial institutions acting as forward purchasers. Assuming full physical settlement of the forward contracts, which we expect to occur no later thanDecember 31, 2023 , we will receive approximate proceeds of$494,200,000 net of offering fees and discounts and based on the initial forward price. The final proceeds will be determined on the date(s) of settlement and are subject to certain customary adjustments for our dividends and a daily interest factor during the term of the forward contracts.
Interest Rate Swap Agreements
As ofJune 30, 2022 , we had$150,000,000 in aggregate outstanding pay fixed interest rate swap agreements that were entered into as hedges of changes in interest rates for our anticipated debt issuance activity. At the time of the future debt issuance activity, we expect to cash settle the swaps 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 approved the 2020 Stock Repurchase Program. Purchases of common stock under the 2020 Stock Repurchase Program may be exercised at our discretion with the timing and number of shares repurchased depending on a variety of factors including price, corporate and regulatory requirements 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. During the three and six months endedJune 30, 2022 and throughJuly 29, 2022 , we had no repurchases of shares under this program. As ofJuly 29, 2022 , we had$316,148,000 remaining authorized for purchase under this program.
Future Financing and Capital Needs - Debt Maturities and Material Obligations
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 or Commercial Paper Program. In addition, to the extent we have amounts outstanding under the Commercial Paper Program, we are obligated to repay the short-term indebtedness at maturity through either current cash on hand or by incurring other indebtedness, including by way of borrowing 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.
During the six months ended
The following table details our consolidated debt obligations, including the effective interest rate and contractual maturity dates, and principal payments for periodic amortization and maturities for the next five years, excluding our Credit Facility and Commercial Paper Program and amounts outstanding related to communities classified as held for sale, for debt outstanding atJune 30, 2022 andDecember 31, 2021 (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 other than as disclosed related to theAVA Arts District construction loan. 38
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All-In Principal Balance Outstanding (2) Scheduled Maturities
interest maturity
Community rate (1) date 12/31/2021 6/30/2022 2022 2023 2024 2025 2026 Thereafter
Tax-exempt bonds
Fixed rate
Avalon at Chestnut Hill 6.16 % Oct-2047 $ 35,770 $ 35,442 $ 337 $ 699 $ 737 $ 778 $ 820 $ 32,071
35,770 35,442 337 699 737 778 820 32,071
Variable rate
Avalon Acton 1.95 % Jul-2040 (3) 45,000 45,000 - - - - - 45,000
Avalon Clinton North 2.60 % Nov-2038 (3) 147,000 147,000 - - - - - 147,000
Avalon Clinton South 2.60 % Nov-2038 (3) 121,500 121,500 - - - - - 121,500
Avalon Midtown West 2.54 % May-2029 (3) 88,300 82,700 - 6,100 6,800 7,300 8,100 54,400
Avalon San Bruno I 2.49 % Dec-2037 (3) 62,350 61,850 1,500 2,200 2,300 2,400 2,500 50,950
464,150 458,050 1,500 8,300 9,100 9,700 10,600 418,850
Conventional loans
Fixed rate
$250 million unsecured notes 3.00 % Mar-2023 250,000 250,000 - 250,000 - - - -
$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 - - - - - 700,000
$600 million unsecured notes 2.65 % Jan-2031 600,000 600,000 - - - - - 600,000
$700 million unsecured notes 2.16 % Jan-2032 700,000 700,000 - - - - - 700,000
$400 million unsecured notes 2.03 % Dec-2028 400,000 400,000 - - - - - 400,000
Avalon Walnut Creek 4.00 % Jul-2066 4,161 4,161 - - - - - 4,161
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 III 2.38 % Mar-2027 51,000 51,000 - - - - - 51,000
Avalon Cerritos 3.35 % Aug-2029 30,250 30,250 - - - - - 30,250
7,420,511 7,420,511 - 600,000 300,000 825,000 775,000 4,920,511
Variable rate
Term Loan - $100 million - % Feb-2022 (4) 100,000 - - - - - - -
Term Loan - $150 million 2.07 % Feb-2024 150,000 150,000 - - 150,000 - - -
250,000 150,000 - - 150,000 - - -
Total indebtedness - excluding
Credit Facility and Commercial
Paper $ 8,170,431 $ 8,064,003 $ 1,837 $ 608,999 $ 459,837 $ 835,478 $ 786,420 $ 5,371,432
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(1)Rates are given as of
(2)Balances outstanding represent total amounts due at maturity, and exclude deferred financing costs and debt discount for the unsecured notes of$47,215 and$50,606 as ofJune 30, 2022 andDecember 31, 2021 , respectively, and deferred financing costs and debt discount associated with secured notes of$15,595 and$16,278 as ofJune 30, 2022 andDecember 31, 2021 , respectively, as reflected on our Condensed Consolidated Balance Sheets included elsewhere in this report.
(3)Financed by variable rate debt, but interest rate is capped through an interest rate protection agreement.
(4)During 2022, we repaid this borrowing at its scheduled maturity date.
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In addition to consolidated debt, we have scheduled contractual obligations
associated with (i) ground leases for land underlying current operating or
development communities and commercial and parking facilities and (ii) office
leases for our corporate headquarters and regional offices. As of June 30, 2022 ,
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.
Future Financing and Capital Needs - Portfolio and Capital Markets Activity
We invest in various real estate and real estate related investments, which
include (i) the acquisition, development and redevelopment of communities both
wholly-owned and through the formation of joint ventures, (ii) investments in
other real estate-related ventures through direct and indirect investments in
property technology and environmentally focused companies and investment
management funds and (iii) other indirect investments in real estate through the
SIP, all as further discussed below.
In 2022, 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 the Credit Facility, (iv) issuances
under the Commercial Paper Program and (v) secured and unsecured debt
financings. Additional sources of liquidity in 2022 may include the issuance of
common and preferred equity, including the issuance of shares of our common
stock under CEP V. Our ability to obtain additional financing will depend on a
variety of factors, such as market conditions, the general availability of
credit, the overall availability of credit to the real estate industry, our
credit ratings and credit capacity, as well as the perception of lenders
regarding our long or short-term financial prospects.
Before beginning new construction or reconstruction activity in 2022, including
activity related to communities owned by unconsolidated joint ventures, we plan
to source sufficient capital 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 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 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.
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Unconsolidated Real Estate Investments and Off-Balance Sheet Arrangements
Unconsolidated Investments - Operating Communities
As ofJune 30, 2022 , we had investments in the following unconsolidated real estate entities accounted for under the equity method of accounting, excluding development joint ventures. See Note 5, "Investments," 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 joint ventures holding operating apartment communities as ofJune 30, 2022 , detail of the real estate and associated indebtedness underlying our unconsolidated investments is presented in the following table (dollars in thousands). Company Total Debt (1) ownership capitalized Unconsolidated Real Estate Investments percentage # of apartment homes cost Amount Type Interest rate
Maturity date
NYTA MF Investors LLC 1.Avalon Bowery Place I -New York, NY 206$ 213,499 $ 93,800 Fixed 4.01 %Jan 2029 2. Avalon Bowery Place II -New York, NY 90 91,074 39,639 Fixed 4.01 %Jan 2029 3.Avalon Morningside -New York, NY (2) 295 211,365 111,960 Fixed 3.55 % Jan 2029/May 2046 4.Avalon West Chelsea -New York, NY (3) 305 128,736 66,000 Fixed 4.01 %Jan 2029 5.AVA High Line -New York, NY (3) 405 121,670 84,000 Fixed 4.01 %
Jan 2029 Total NYTA MF Investors LLC 20.0 % 1,301 766,344 395,399 3.88 %Archstone Multifamily Partners AC LP 1.Avalon Studio 4121 -Studio City, CA 149 57,287 25,945 Fixed 3.34 %Nov 2022 2.Avalon Station 250 -Dedham, MA (4) 285 99,888 50,505 Fixed 3.73 %Sep 2022 3.Avalon Grosvenor Tower -Bethesda, MD (5) 237 81,137 39,153 Fixed 3.74 %Sep 2022 Total Archstone Multifamily Partners AC LP 28.6 % 671 238,312 115,603 3.65 %Other Operating Joint Ventures 1.MVP I, LLC - Avalon at Mission Bay II -San Francisco, CA 25.0 % 313 129,265 103,000 Fixed 3.24 %Jul 2025 2.Brandywine Apartments of Maryland, LLC - Brandywine -Washington, D.C. 28.7 % 305 19,383 20,058 Fixed 3.40 %Jun 2028 3.Avalon Alderwood MF Member, LLC -Avalon Alderwood Place -Lynnwood, WA (6) 50.0 % 328 106,263 - N/A N/A N/ATotal Other Joint Ventures 946 254,911 123,058 3.27 % Total Unconsolidated Investments 2,918$ 1,259,567 $ 634,060 3.72 %
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(1)We have not guaranteed the debt of these unconsolidated investees and bear no responsibility for the repayment unless otherwise disclosed.
(2)Borrowing on this community is comprised of two mortgage loans. The interest
rate is the weighted average interest rate as of
(3)Borrowing on this dual-branded community is comprised of a single mortgage loan.
(4)In
(5)In
(6)Development of this community, which contains 284,000 square feet of rentable
space, was completed during the three months ended
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Unconsolidated Investments - Development Communities
The following table presents a summary of the Unconsolidated Development
Communities.
Company Projected total
Unconsolidated ownership capitalized cost (1) Construction Initial projected Estimated
Development Community percentage # of apartment homes ($ millions) start occupancy completion
1. AVA Arts District
(2)(3)
Los Angeles, CA 25.0 % 475 $ 276 Q3 2020 Q1 2023 Q4 2023
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(1)Projected total capitalized cost includes all capitalized costs projected to be incurred to develop the respectiveUnconsolidated Development Community , determined in accordance with GAAP, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees and other regulatory fees, as well as costs incurred for first generation commercial tenants such as tenant improvements and leasing commissions. Projected total capitalized cost is the total projected joint venture amount.
(2)
(3)As ofJune 30, 2022 , we have contributed our total equity investment inAVA Arts District of$28,088 . The venture has secured a variable rate construction loan with a maximum borrowing of$167,147 to fund approximately 60% of the development ofAVA Arts District , of which$37,947 has been drawn as ofJune 30, 2022 . The venture commenced draws under the loan subsequent to required equity contributions by the venture partners. We guarantee the construction loan on behalf of the venture, and any obligations we may incur under the guarantee, except for those due to our misconduct, are required capital contributions of the partners based on ownership interest. 42 -------------------------------------------------------------------------------- Table of Contents Development Communities As ofJune 30, 2022 , we owned or held a direct interest in 16 Development Communities under construction. We expect these Development Communities, when completed, to add a total of 4,919 apartment homes and 56,000 square feet of commercial space to our portfolio for a total capitalized cost, including land acquisition costs, of approximately$2,069,000,000 . We cannot assure you that we will meet our schedule for construction completion or that we will meet our budgeted costs, either individually, or in the aggregate.
The following table presents a summary of the Development Communities.
Number of Projected total Estimated
apartment capitalized cost (1) Construction Initial projected Estimated stabilized operations
homes ($ millions) start or actual occupancy completion (2)
1. Avalon Harrison (3) 143 $ 93 Q4 2018 Q3 2021 Q1 2023 Q3 2023
Harrison, NY
2. Avalon Harbor Isle 172 92 Q4 2020 Q2 2022 Q4 2022 Q2 2023
Island Park, NY
3. Avalon Somerville Station 374 118 Q4 2020 Q2 2022 Q3 2023 Q1 2024
Somerville, NJ
4. Avalon North Andover (4) 221 78 Q2 2021 Q4 2022 Q3 2023 Q4 2023
North Andover, MA
5. Avalon Brighton 180 89 Q2 2021 Q1 2023 Q2 2023 Q4 2023
Boston, MA
6. Avalon Merrick Park 254 101 Q2 2021 Q1 2023 Q2 2023 Q4 2023
Miami, FL
7. Avalon Amityville I 338 131 Q2 2021 Q3 2023 Q2 2024 Q1 2025
Amityville, NY
8. Avalon Bothell Commons I 467 235 Q2 2021 Q3 2023 Q2 2024 Q1 2025
Bothell, WA
9. Avalon Westminster Promenade 312 110 Q3 2021 Q4 2023 Q1 2023 Q3 2024
Denver, CO
10. Avalon West Dublin 499 270 Q3 2021 Q4 2023 Q1 2025 Q2 2025
Dublin, CA
11. Avalon Princeton Circle 221 84 Q4 2021 Q1 2023 Q4 2023 Q1 2024
Princeton, NJ
12. Avalon Montville 349 127 Q4 2021 Q3 2023 Q3 2024 Q4 2024
Montville, NJ
13. Avalon Redmond Campus (5) 214 80 Q4 2021 Q3 2023 Q1 2024 Q2 2024
Redmond, WA
14. Avalon Governor's Park 304 135 Q1 2022 Q2 2024 Q3 2024 Q1 2025
Denver, CO
15. Avalon West Windsor (3) 535 201 Q2 2022 Q3 2024 Q4 2025 Q2 2026
West Windsor, NJ
16. Avalon Durham 336 125 Q2 2022 Q2 2024 Q3 2024 Q2 2025
Durham, NC
Total 4,919 $ 2,069
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(1)Projected total capitalized cost includes all capitalized costs projected to be or actually incurred to develop the respectiveDevelopment 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 commercial tenants such as tenant improvements and leasing commissions. (2)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.
(3)Development Communities containing at least 10,000 square feet of commercial
space include
(4)During Q2 2022, the Company expanded its existing
(5)Avalon Redmond Campus is a densification of the existing eaves Redmond Campus
wholly-owned community, where 48 existing older apartment homes were demolished
and will be replaced by a new Avalon branded 214 apartment home community.
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During the three months ended June 30, 2022 , we completed the development of the
following wholly-owned communities:
Number of Total capitalized
apartment cost (1) Approximate rentable area Total capitalized
homes ($ millions) (sq. ft.) cost per sq. ft.
1. Avalon Brea Place
Brea, CA 653 $ 293 557,454 $ 526
2. AVA RiNo
Denver, CO 246 87 187,733 $ 463
Total 899 $ 380
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(1)Total capitalized cost is as of
Development Rights AtJune 30, 2022 , we had$194,458,000 in acquisition and related capitalized costs for direct interests in eight land parcels we own. In addition, we had$51,227,000 in capitalized costs (including legal fees, design fees and related overhead costs) related to (i) 20 Development Rights for which we control the land parcel, typically through a conditional agreement or option to purchase or lease the land, as well as (ii) costs incurred for four Development Rights that 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 for which we own the land. Collectively, the land held for development and associated costs for deferred development rights relate to 32 Development Rights for which we expect to develop new apartment communities in the future. The Development Rights range from those beginning design and architectural planning to those that have completed site plans and drawings and can begin construction almost immediately. We estimate that the successful completion of all of these communities would ultimately add approximately 10,913 apartment homes to our portfolio. Substantially all of these apartment homes will offer features like those offered by the communities we currently own. 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 three and six months endedJune 30, 2022 , we incurred a charge of$2,364,000 and$3,351,000 , respectively, 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.
Structured Investment Program
During the three months endedJune 30, 2022 , we entered into the first commitments under the SIP, through which we provide mezzanine loans or preferred equity to third-party multifamily developers. The initial commitments under the SIP are for two mezzanine loans of up to$79,575,000 in the aggregate, to fund multifamily development projects inDenver, CO andPleasant Hill, CA. As ofJuly 29, 2022 , we have funded$8,188,000 of these commitments. 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 our investment activity. 44 -------------------------------------------------------------------------------- Table of Contents Insurance and Risk of Uninsured Losses We maintain commercial general liability insurance and property insurance with respect to all of our communities, with insurance policies issued by a combination of third party insurers as well as a wholly-owned captive insurance company. 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. We utilize a wholly-owned captive insurance company to insure certain types and amounts of risks, which include property damage and resulting business interruption losses, general liability insurance and other construction related liability risks. The captive is utilized to insure other limited levels of risk, which may be in part reinsured by third party insurance. 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. 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 and annually in the aggregate, subject to certain sub-limits and exclusions. Under the master property program, we are subject to various deductibles per occurrence, as well as additional self-insured retentions. In addition to our potential liability for the various policy self-insured retentions and deductibles, our captive insurance company is directly responsible for 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. Our master property insurance program includes coverage for losses resulting from customary perils, including but not limited to wildfires and windstorms. 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. Many of ourWest Coast communities are located within 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 subject to deductibles and self-insured retentions. 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 subject to deductibles and self-insured retentions. OurSoutheast Florida communities could be impacted by significant storm events like hurricanes. We include coverage for losses arising from these types of weather events within our master property insurance program. We cannot assure you that a significant storm event would not cause damage or losses greater than our current insured levels. Our communities and construction sites 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 construction sites and are subject to certain coverage limitations and exclusions, which the Company believes are commercially reasonable. After applicable self-insured retentions borne by us, our captive insurance company is directly responsible for the first$2,000,000 of losses (per occurrence) covered by the master general liability insurance policy. Just as with office buildings, transportation systems and government buildings, apartment communities could become targets of terrorism. Our communities are insured for terrorism related losses through theTerrorism 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. 45 -------------------------------------------------------------------------------- Table of Contents An additional consideration for insurance coverage and potential uninsured losses is mold growth or other environmental contamination. Mold growth may occur when excessive moisture accumulates in buildings or on building materials, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. If a significant mold problem arises at one of our communities, we could be required to undertake a costly remediation program to contain or remove the mold from the affected community and could be exposed to other liabilities. For further discussion of the risks and our related prevention and remediation activities, please refer to the discussion under 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 maintain other insurance programs that provide coverage for events including but not limited to employee dishonesty, loss of data, and liability associated with management of certain employee benefit plans. These policies are subject to maximum loss limits and include coverage limitations or exclusion that may preclude us from fully recovering.
The amount or types of insurance we maintain may not be sufficient to cover all losses and we may change our policy limits, coverages, and self-insured retentions or deductibles at any time.
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," "pursue" 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:
•the impact of the Pandemic on our business, results of operations and financial condition;
•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 expansion into new markets;
•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 Code;
•the real estate markets in Metro New York/New Jersey , Northern andSouthern California ,Denver, Colorado ,Southeast Florida ,Dallas andAustin, Texas andCharlotte andRaleigh-Durham, North Carolina , and markets in selected states in the Mid-Atlantic,New England andPacific Northwest regions ofthe United States and in general;
•the availability of debt and equity financing;
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•interest rates;
•general economic conditions including the potential impacts from current economic conditions, including rising interest rates and general price inflation, and the 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 Pandemic, including, among other factors, (i) the Pandemic's effect on the multifamily industry and the general economy, including from measures taken by businesses and the government, such as governmental limitations on the ability of multifamily owners to evict residents who are delinquent in the payment of their rent and (ii) the preferences of consumers and businesses for living and working arrangements both during and after the Pandemic. In addition, the effects of the Pandemic are likely to heighten the following risks, which we routinely face in our business.
Some of the factors that could cause our actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements include, but are not limited to, the following:
•we may fail to secure development opportunities due to an inability to reach agreements with third-parties to obtain land at attractive prices or to obtain desired zoning and other local approvals; •we may abandon or defer development opportunities for a number of reasons, including changes in local market conditions which make development less desirable, increases in costs of development, increases in the cost of capital or lack of capital availability, resulting in losses;
•construction costs of a community may exceed our original estimates;
•we may not complete construction and lease-up of communities under development or redevelopment on schedule, resulting in increased interest costs and construction costs and a decrease in our expected rental revenues;
•the timing and net proceeds of condominium sales at The Park Loggia 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 expect;
•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;
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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;
•the possibility 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; and •investments made under the SIP in either mezzanine debt or preferred equity of third-party multifamily development may not be repaid as expected or the development may not be completed on schedule, which could require us to engage in litigation, foreclosure actions, and/or first party project completion to recover our investment, which may not be recovered in full or at all in such event.
Critical Accounting Policies and Estimates
Preparing financial statements in conformity with GAAP requires management
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 Part II, Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our Form 10-K.
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