Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help provide an understanding of our business, financial condition and results of operations. This MD&A should be read in conjunction with our Condensed Consolidated Financial Statements and the accompanying Notes to Condensed Consolidated Financial Statements included elsewhere in this report. This report, including the following MD&A, contains forward-looking statements regarding future events or trends that should be read in conjunction with the factors described under "Forward-Looking Statements" included in this report. Actual results or developments could differ materially from those projected in such statements as a result of the factors described under "Forward-Looking Statements" as well as the risk factors described in Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the year endedDecember 31, 2019 (the "Form 10-K").
Capitalized terms used without definition have the meanings provided elsewhere in this Form 10-Q.
Executive Overview Business Description We develop, redevelop, acquire, own and operate multifamily apartment communities 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. First Quarter 2020 Highlights
• Net income attributable to common stockholders for the three months ended
the prior year period. The decrease is primarily due to increases in
depreciation expense, loss on extinguishment of debt and interest expense
in the current year period. These amounts were partially offset by an
increase in NOI from communities across the portfolio, as well as
increases in gains on real estate dispositions in the current year period.
• Established Communities NOI for the three months ended
$391,645,000 , an increase of$11,308,000 , or 3.0%, 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 associates and residents and have 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. 23
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The impact on our consolidated results of operations from COVID-19 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 cannot be reasonably estimated, and could be material. Our rental operations are being and will likely continue to be impacted by the COVID-19 pandemic. ThroughApril 30, 2020 , we have collected approximately 94% of our Established Communities'April 2020 billed residential rents from market rate, affordable and corporate apartments, representing 96% of our average collections rate at month end (which was 98% for the twelve months endedMarch 31, 2020 ). These amounts exclude certain fees waived during the month ofApril 2020 , such as amenity fees for closed amenities, late fees and credit card fees, which in the aggregate have averaged$1,400,000 per month over the twelve months endedMarch 31, 2020 . While our collections rates early in the month vary from month to month depending on where weekends fall during the month and other factors, in earlyMay 2020 , Established Communities' residential rent collections as a percentage of billed rents (consistent with the description above) are trending approximately 1.5% below the 96% relative collections rate that we achieved for the full monthApril 2020 . Retail revenue accounted for 1.4% of our Established Communities' revenue during 2019, and collections from retail tenants were 44% for the month ofApril 2020 at month end. The collection rates above 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. The collections information provided above is not routinely produced for internal use by senior management or publicly disclosed by the Company and is a result of analysis that was 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, may be subject to adjustment in preparing GAAP revenue and cash flow metrics at the end of the three months endedJune 30, 2020 , and is not and should not be interpreted as predicting the Company's financial performance, results of operations or liquidity for any period.
At
• 19 communities under construction, which are expected to contain 6,198
apartment homes with a projected total capitalized cost of
As ofMarch 31, 2020 , construction at six of these Development Communities has been temporarily suspended after considering state and local regulations and/or advisories and the construction at many of the remaining Development Communities has been slowed due to the impact of safety precautions on labor availability and inspection constraints. As ofMay 4, 2020 , we are in the process of restarting construction at four of these six communities after changes in state and local advisories inWashington state andNorthern California . We may be required to, or may in our discretion, temporarily suspend ongoing construction at one or more of these remaining Development Communities as a result of either governmental actions or social or economic conditions arising as a result of the COVID-19 pandemic. • Land or rights to land on which we expect to develop an additional 28 apartment communities that, if developed as expected, will contain 9,720
apartment 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 in 2020, and we will evaluate future starts on an individual basis, based on evolving economic and market conditions. In addition, we have begun taking action to substantially reduce 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 endedMarch 31, 2020 , we sold one wholly-owned operating community containing 250 apartment homes for$64,750,000 , and our gain in accordance with GAAP was$24,413,000 . In addition, we sold 36 residential condominiums at The Park Loggia, for gross proceeds of$105,607,000 , resulting in a gain in accordance with GAAP of$4,903,000 . 24
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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 three 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 ofMarch 31, 2020 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.
• Other Stabilized Communities are all other completed consolidated
communities that have stabilized occupancy, as defined above, as ofJanuary 1, 2020 , or which were acquired subsequent toJanuary 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 atMarch 31, 2020 .
• Unconsolidated Communities are communities that we have an indirect
ownership interest in through our investment interest in an unconsolidated joint venture.
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
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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 3 1,070 Mid-Atlantic 1 151 Pacific Northwest 2 745 Northern California 1 873 Southern California 2 681 Expansion Markets 5 1,388 Total Other Stabilized 17 5,613 Lease-Up Communities 6 1,666 Redevelopment Communities - - Unconsolidated Communities 13 3,189 Total Current Communities 277 80,398 Development Communities (1) 19 6,198 Total Communities 296 86,596 Development Rights 28 9,720 _________________________
(1) Development Communities includesAvalon Alderwood Mall , expected to contain 328 apartment homes, which is being developed within an unconsolidated joint venture. 26
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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 NOI of our Established Communities; NOI derived from acquisitions and development completions; the loss of NOI related to disposed communities; and capital market and financing activity. A comparison of our operating results for the three months endedMarch 31, 2020 and 2019 follows (unaudited, dollars in thousands). For the three months ended 3/31/2020 3/31/2019 $ Change % Change Revenue: Rental and other income$ 600,644 $ 565,045 $ 35,599 6.3 % Management, development and other fees 1,007 1,139 (132 ) (11.6 )% Total revenue 601,651 566,184 35,467 6.3 % Expenses: Direct property operating expenses, excluding property taxes 108,181 102,586 5,595 5.5 % Property taxes 67,026 61,329
5,697 9.3 % Total community operating expenses 175,207 163,915 11,292 6.9 %
Corporate-level property management and other indirect operating expenses 23,812 20,869 2,943 14.1 % Expensed transaction, development and other pursuit costs, net of recoveries 3,334 622 2,712 436.0 % Interest expense, net 55,914 47,892 8,022 16.8 % Loss on extinguishment of debt, net 9,170 280 8,890 3,175.0 % Depreciation expense 177,911 162,057 15,854 9.8 % General and administrative expense 17,320 13,706 3,614 26.4 % Total other expenses 287,461 245,426
42,035 17.1 %
Equity in income (loss) of unconsolidated real estate entities 1,175 (1,060 ) 2,235 N/A (1) Gain on sale of communities 24,436 14,835 9,601 64.7 % Gain on other real estate transactions, net 43 267 (224 ) (83.9 )% Gain on for-sale condominiums, net of marketing and administrative costs 3,460 (473 ) 3,933 N/A (1) Income before income taxes 168,097 170,412 (2,315 ) (1.4 )% Income tax expense (benefit) 91 (6 ) 97 N/A (1) Net income 168,006 170,418 (2,412 ) (1.4 )% Net income attributable to noncontrolling interests (35 ) (52 )
17 (32.7 )%
Net income attributable to common stockholders$ 167,971 $ 170,366 $ (2,395 ) (1.4 )% _________________________
(1) Percent change is not meaningful.
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Net income attributable to common stockholders decreased$2,395,000 , or 1.4%, to$167,971,000 for the three months endedMarch 31, 2020 as compared to the prior year period. The decrease for the three months endedMarch 31, 2020 is primarily due to increases in depreciation expense, loss on extinguishment of debt and interest expense in the current year period. These amounts were partially offset by an increase in NOI from communities across the portfolio, as well as increases in gains on real estate dispositions in the current year period. 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 months endedMarch 31, 2020 and 2019 to net income for each period are as follows (unaudited, dollars in thousands): For the three months ended 3/31/2020 3/31/2019 Net income$ 168,006 $ 170,418 Indirect operating expenses, net of corporate income 22,799
19,722
Expensed transaction, development and other pursuit costs, net of recoveries
3,334
622
Interest expense, net 55,914
47,892
Loss on extinguishment of debt, net 9,170
280
General and administrative expense 17,320
13,706
Equity in (income) loss of unconsolidated real estate entities (1,175 ) 1,060 Depreciation expense 177,911 162,057 Income tax expense (benefit) 91 (6 ) Gain on sale of real estate assets (24,436 ) (14,835 ) Gain on other real estate transactions, net (43 )
(267 ) Gain on for-sale condominiums, net of marketing and administrative costs
(3,460 )
473
Net operating income from real estate assets sold or held for sale (896 ) (6,205 ) Net operating income$ 424,535 $ 394,917 The NOI changes for the three months endedMarch 31, 2020 , compared to the prior year period, consist of changes in the following categories (unaudited, dollars in thousands): For the three months ended 3/31/2020 Established Communities $ 11,308 Other Stabilized Communities 8,767 Development / Redevelopment (1) 9,543 Total $ 29,618
_________________________
(1) We had no Redevelopment Communities at
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Rental and other income increased in the three months endedMarch 31, 2020 compared to the prior year period due to additional rental income generated from newly developed, acquired and existing operating communities and an increase in rental rates at our Established Communities, discussed below. As discussed elsewhere in this report, the COVID-19 impact and related economic, regulatory and operating impacts are likely to adversely affect our rental revenue in future quarters. Consolidated Communities - The weighted average number of occupied apartment homes increased to 74,491 apartment homes for the three months endedMarch 31, 2020 , compared to 71,994 homes for the prior year period. The weighted average monthly revenue per occupied apartment home increased to$2,684 for the three months endedMarch 31, 2020 compared to$2,612 in the prior year period.
The following table presents the year to date change in rental revenue, including the attribution of the change between rental rates and Economic Occupancy, for Established Communities.
For the three months ended March 31, 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
3,098 1.7 % 96.2 % 95.9 % 0.3 % Mid-Atlantic 91,638 88,310 3,328 3.8 % 2,290
2,213 3.5 % 96.4 % 96.1 % 0.3 %
2,326 2.5 % 97.2 % 96.4 % 0.8 %
3,081 2.3 % 97.0 % 96.3 % 0.7 %
2,369 2.2 % 96.5 % 95.7 % 0.8 % Expansion Markets 5,933 5,865 68 1.2 % 2,304
2,248 2.5 % 94.1 % 95.4 % (1.4 )%
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. Direct property operating expenses, excluding property taxes, increased$5,595,000 , or 5.5%, for the three months endedMarch 31, 2020 compared to the prior year period. The increase for the three months endedMarch 31, 2020 is primarily due to the addition of newly developed and acquired apartment communities.
For Established Communities, direct property operating expenses, excluding
property taxes, increased
Property taxes increased$5,697,000 , or 9.3%, for the three months endedMarch 31, 2020 , compared to the prior year period. The increase for the three months endedMarch 31, 2020 is 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$3,032,000 , or 5.3%, for the three months endedMarch 31, 2020 , compared to the prior year period. The increase for the three months endedMarch 31, 2020 is primarily due to increased assessments and rates across the portfolio in the current year period, as well as a successful appeal in theNorthern California in the prior 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
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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, increased$2,712,000 , or 436.0%, for the three months endedMarch 31, 2020 as compared to the prior year period. Interest expense, net increased$8,022,000 , or 16.8%, for the three months endedMarch 31, 2020 , compared to the prior year period. 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 increase for the three months endedMarch 31, 2020 is primarily due to a decrease in capitalized interest and an increase in outstanding unsecured indebtedness, partially offset by a decrease in 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 loss of$9,170,000 for the three months endedMarch 31, 2020 is due to the repayments of unsecured debt during the period. Depreciation expense increased$15,854,000 , or 9.8%, for the three months endedMarch 31, 2020 , compared to the prior year period, primarily due to the addition of newly developed and acquired apartment communities, partially offset by dispositions. General and administrative expense increased$3,614,000 , or 26.4%, for the three months endedMarch 31, 2020 , compared to the prior year period. The increase for the three months endedMarch 31, 2020 is primarily due to an increase in compensation related expenses in the current year period including severance costs, as well as legal recoveries recognized in the prior year period. Equity in income (loss) of unconsolidated real estate entities increased$2,235,000 for the three months endedMarch 31, 2020 , compared to the prior year period. The increase for the three months endedMarch 31, 2020 is 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 period. Gain on sale of communities increased for the three months endedMarch 31, 2020 compared to the prior year period. The amount of gain realized in a given period depends on many factors, including the number of communities sold, the size and carrying value of the communities sold and the market conditions in the local area. Gain on for-sale condominiums, net of marketing and administrative costs is a gain of$3,460,000 for the three months endedMarch 31, 2020 and a loss of$473,000 for the three months endedMarch 31, 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 months endedMarch 31, 2020 , we sold 36 residential condominiums at The Park Loggia, for gross proceeds of$105,607,000 , resulting in a gain in accordance with GAAP of$4,903,000 . In addition, during the three months endedMarch 31, 2020 and 2019, we incurred$1,443,000 and$473,000 , respectively, in marketing and administrative costs associated with The Park Loggia. 30
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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.
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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Table of Contents For the three months ended 3/31/2020 3/31/2019 Net income attributable to common stockholders$ 167,971
177,428
164,746
Distributions to noncontrolling interests 12 11 Gain on sale of unconsolidated entities holding previously depreciated real estate - - Gain on sale of previously depreciated real estate (24,436 ) (14,835 ) FFO attributable to common stockholders 320,975
320,288
Adjusting items: Business interruption insurance proceeds - (172 ) Loss on extinguishment of consolidated debt 9,170 280 Advocacy contributions 301 - Severance related costs 1,951 19
Development pursuit write-offs and expensed transaction costs, net
3,120 277 Gain on for-sale condominiums (1)(2) (4,903 ) -
For-sale condominium marketing and administrative costs (2)
1,443 473 For-sale condominium imputed carry cost (3) 3,609 - Gain on other real estate transactions (43 ) (267 ) Legal settlements 43 (1,016 ) Income tax expense (benefit) 91 (6 ) Core FFO attributable to common stockholders$ 335,757
Weighted average common shares outstanding - diluted 140,777,873
138,832,201
EPS per common share - diluted$ 1.19 $ 1.23 FFO per common share - diluted$ 2.28 $ 2.31 Core FFO per common share - diluted$ 2.39 $ 2.30 _________________________
(1) Amount for the three months endedMarch 31, 2020 includes the sale of 36 residential condominiums at The Park Loggia. (2) The aggregate impact of (i) gain on for-sale condominiums and (ii) for-sale condominium marketing and administrative costs is a gain of$3,460 for the three months endedMarch 31, 2020 and a loss of$473 for the three months endedMarch 31, 2019 .
(3) Represents the imputed carry cost of for-sale residential condominiums at
The Park Loggia. We compute this adjustment by multiplying the total
capitalized cost of completed and unsold for-sale residential condominiums
by our weighted average unsecured debt rate.
FFO and Core FFO also do not represent cash generated from operating activities in accordance with GAAP, and therefore should not be considered an alternative to net cash flows from operating activities, as determined by GAAP, as a measure of liquidity. Additionally, it is not necessarily indicative of cash available to fund cash needs. A presentation of GAAP based cash flow metrics is as follows (unaudited, dollars in thousands) and a discussion of "Liquidity and Capital Resources" can be found later in this report: For the three months ended 3/31/2020 3/31/2019 Net cash provided by operating activities$ 341,704 $
361,786
Net cash used in investing activities$ (136,067 ) $
(313,186 )
Net cash provided by (used in) financing activities
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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) bad debt 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$868,421,000 atMarch 31, 2020 , an increase of$740,807,000 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$341,704,000 for the three months endedMarch 31, 2020 from$361,786,000 for the three months endedMarch 31, 2019 .
Investing Activities - Net cash used in investing activities totaled
• investment of$245,789,000 in the development and redevelopment of communities; and • capital expenditures of$43,585,000 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$98,790,000 ; and •net proceeds from the disposition of one operating community of$63,073,000 .
Financing Activities - Net cash provided by financing activities totaled
• borrowings under the Credit Facility of
• proceeds from the issuance of unsecured notes in the amount of$699,252,000 ; and • the issuance of a secured note that was part of a refinancing, as discussed below, in the amount of$51,000,000 .
These amounts are partially offset by:
• 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$51,484,000 that was subsequently refinanced, as discussed above. 33
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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 is LIBOR plus 0.775% per annum (1.10% atApril 30, 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 borrowings of$215,000,000 outstanding under the Credit Facility and had$5,032,000 outstanding in letters of credit that reduced our borrowing capacity as ofApril 30, 2020 . In addition, we had$29,867,000 outstanding in additional letters of credit on a separate facility unrelated to the Credit Facility as ofApril 30, 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 ofApril 30, 2020 , there are no outstanding forward sales agreements. As ofApril 30, 2020 , we had$752,878,000 remaining authorized for issuance under this program.
Forward Interest Rate Swap Agreements
During the three months endedMarch 31, 2020 , in conjunction with the issuance of our 2.30% unsecured notes due 2030 inFebruary 2020 we settled$350,000,000 of forward interest rate swap agreements designated as cash flow hedges of the interest rate variability on the forecasted issuance of the unsecured notes, making a payment of$20,314,000 . During the three months endedMarch 31, 2020 , we entered into$150,000,000 of new forward interest rate swap agreements executed to reduce the impact of variability in interest rates on a portion of our expected debt issuance activity in 2020, which are outstanding as ofMarch 31, 2020 . InApril 2020 , we entered into$200,000,000 of forward interest rate swap agreements executed to reduce the impact of variability of interest rates on a portion of our expected debt issuance activity, of which$100,000,000 is expected to be in 2020 and$100,000,000 is expected to be in 2021. 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. 34
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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 three months ended
• In
notes in a public offering under its existing shelf registration statement
for net proceeds of approximately$694,701,000 . The notes mature inMarch 2030 and were issued at a 2.30% interest rate.
• In
III. The secured borrowing had a fixed interest rate of 3.08% and was
refinanced for a principal balance of
rate of 2.38% and maturity date ofMarch 2027 .
• In
unsecured notes in advance of the
the
we recognized a loss on debt extinguishment of
penalties and the non-cash write-off of unamortized deferred financing
costs. The following table details our consolidated debt maturities for the next five years, excluding our Credit Facility and amounts outstanding related to communities classified as held for sale, for debt outstanding atMarch 31, 2020 andDecember 31, 2019 (dollars in thousands). We are not directly or indirectly (as borrower or guarantor) obligated in any material respect to pay principal or interest on the indebtedness of any unconsolidated entities in which we have an equity or other interest. 35
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Table of Contents All-In Principal Balance Outstanding (2) Scheduled Maturities interest maturity Community rate (1) date 12/31/2019 3/31/2020 2020 2021 2022 2023 2024 Thereafter Tax-exempt bonds Fixed rate Avalon at Chestnut Hill 6.16 % Oct-2047$ 36,995 $
36,849
$ 33,671 Avalon Westbury 3.86 % Nov-2036 (3) 62,200 62,200 - - - - - 62,200 99,195 99,049 450 629 663 699 737 95,871 Variable rate Avalon Acton 2.87 % Jul-2040 (4) 45,000 45,000 - - - - -
45,000
- - - -
- 147,000 Avalon Clinton South 3.52 % Nov-2038 (4) 121,500 121,500
- - - -
- 121,500
69,800
Avalon San Bruno I 3.41 % Dec-2037 (4) 64,450 64,450 1,400 1,900 2,000 2,200 2,200 54,750 476,150 476,150 6,100 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 2.68 % Mar-2030 - 700,000 - - - - - 700,000 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 28,288 444 27,844 - - - - Avalon Westbury 4.88 % Nov-2036 (3) 13,665
13,300 1,130 1,575 1,655 1,740 1,840
5,360
Avalon San Bruno III 3.18 % Jun-2020 (6) 50,825 - - - - - - - Avalon San Bruno III 2.38 % Mar-2027 (6) - 51,000 - - - - -
51,000
Avalon Hoboken 3.55 % Dec-2020 67,904 67,904 67,904 - - - - - Avalon Cerritos 3.35 % Aug-2029 30,250 30,250 - - - - - 30,250 6,230,026 6,279,689 69,478 29,419 451,655 601,740 301,840 4,825,557 Variable rate Term Loan -$100 million 2.69 % Feb-2022 100,000 100,000 - - 100,000 - - - Term Loan -$150 million 2.62 % Feb-2024 150,000 150,000 - - - - 150,000 -$300 million unsecured notes 2.45 % Jan-2021 300,000 300,000 - 300,000 - - - - 550,000 550,000 - 300,000 100,000 - 150,000 - Total indebtedness - excluding Credit Facility$ 7,355,371 $ 7,404,888 $ 76,028 $ 337,148 $ 559,918 $ 610,739 $ 461,577 $ 5,359,478 _________________________
(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. 36
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(2) Balances outstanding represent total amounts due at maturity, and exclude
deferred financing costs and debt discount for the unsecured notes of
respectively, and deferred financing costs and debt discount associated
with secured notes of
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) InFebruary 2020 , we repaid a borrowing secured by this community and subsequently refinanced the secured borrowing.
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, we have temporarily suspended or slowed our construction activity and have not started construction of any new Development Communities in 2020. Before beginning new construction or reconstruction activity, including activity related to communities owned by unconsolidated joint ventures, we intend to plan adequate financing to complete these undertakings, although we cannot assure you that we will be able to obtain such financing. In the event that financing cannot be obtained, we may have to abandon Development Rights, write-off associated pre-development costs that were capitalized and/or forego reconstruction activity. In such instances, we will not realize the increased revenues and earnings that we expected from such Development Rights or reconstruction activity and significant losses could be incurred. From time to time we use joint ventures to hold or develop individual real estate assets. We generally employ joint ventures primarily to mitigate asset concentration or market risk and secondarily as a source of liquidity. We may also use joint ventures related to mixed-use land development opportunities and new markets where our partners bring development and operational expertise and/or experience to the venture. Each joint venture or partnership agreement has been individually negotiated, and our ability to operate and/or dispose of a community in our sole discretion may be limited to varying degrees depending on the terms of the joint venture or partnership agreement. We cannot assure you that we will achieve our objectives through joint ventures. In evaluating our allocation of capital within our markets, we sell assets that do not meet our long-term investment criteria or when capital and real estate markets allow us to realize a portion of the value created over our ownership periods and redeploy the proceeds from those sales to develop and redevelop communities. Because the proceeds from the sale of communities may not be immediately redeployed into revenue generating assets that we develop, redevelop or acquire, the immediate effect of a sale of a community for a gain is to increase net income, but reduce future total revenues, total expenses and NOI until such time as the proceeds have been redeployed into revenue generating assets. We believe that the temporary absence of future cash flows from communities sold will not have a material impact on our ability to fund future liquidity and capital resource needs. 37
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Unconsolidated Real Estate Investments and Off-Balance Sheet Arrangements
Unconsolidated Investments
As ofMarch 31, 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 and limited liability company agreements we entered into, through subsidiaries, with Equity Residential in conjunction with the Archstone Acquisition (collectively, the "Residual JV"). Refer to Note 5, "Investments in Real Estate Entities," of the 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 ofMarch 31, 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 $
208,598
90
90,756 39,639 Fixed 4.01 %
Jan 3 .Avalon Morningside -New York, NY 2029/May (4) 295
210,809 112,500 Fixed 3.55 % 2046
4.
305
127,658 66,000 Fixed 4.01 %
405
121,212 84,000 Fixed 4.01 %
20.0 % 1,301 759,033 395,939 3.88 %Archstone Multifamily Partners AC LP (the "U.S. Fund ") 1. Avalon Studio 4121 - Studio City, CA 149
57,176 27,488 Fixed 3.34 %
70
57,453 27,435 Fixed 3.28 %
285 98,107 53,551 Fixed 3.73 % Sep 2022 4.Avalon Grosvenor Tower - Bethesda, MD 237 80,481 41,510 Fixed 3.74 % Sep 2022Total U.S. Fund 28.6 % 741 293,217 149,984 3.58 %Multifamily Partners AC JV LP (the "AC JV") 1.Avalon North Point -Cambridge, MA (6) 426 190,149 111,653 Fixed 6.00 % Aug 2021 2.Avalon North Point Lofts - Cambridge, MA 103 26,872 - N/A N/A N/A Total AC JV 20.0 % 529 217,021 111,653 6.00 %Other Operating Joint Ventures 1. MVP I, LLC 25.0 % 313
126,073 103,000 Fixed 3.24 %
28.7 % 305
19,383 21,461 Fixed 3.40 %
618 145,456 124,461 3.27 % Total Unconsolidated Investments 3,189$ 1,414,727 $ 782,037 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) Borrowing is comprised of loans made by the equity investors in the venture
in proportion to their equity interests. 38
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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 ofMarch 31, 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 ofMarch 31, 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$2,378,000,000 . We cannot assure you that we will meet our schedule for construction completion or that we will meet our budgeted costs, either individually or in the aggregate. You should carefully review Item 1A. "Risk Factors" of our Form 10-K, as well as the discussion under Item 1A. "Risk Factors" in this report, for a discussion of the risks associated with development activity.
The following table presents a summary of the Development Communities. We hold a fee simple ownership interest in these communities (directly or through a wholly-owned subsidiary) unless otherwise noted in the table.
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Table of Contents Initial projected Estimated Number of Projected total or actual stabilized apartment capitalized cost (1) (2) Construction occupancy Estimated operations homes ($ millions) start (1) (3) completion (1) (1) (4) 1. Avalon Public Market 289 $ 175 Q4 2016 Q3 2019 Q3 2020 Q4 2020Emeryville, CA 2. Avalon Yonkers 590 189 Q4 2017 Q3 2019 Q1 2021 Q3 2021 Yonkers, NY 3. AVA Hollywood (5) 695 373 Q4 2016 Q4 2019 Q1 2021 Q1 2021 Hollywood, CA 4. Avalon Towson 371 114 Q4 2017 Q1 2020 Q4 2020 Q2 2021 Towson, MD 5. Avalon Walnut Creek II 200 111 Q4 2017 Q2 2020 Q4 2020 Q2 2021Walnut Creek, CA 6. Avalon Doral 350 114 Q2 2018 Q2 2020 Q3 2020 Q4 2021 Doral, FL 7. Avalon 555 President 400 139 Q3 2018 Q3 2020 Q3 2021 Q4 2021 Baltimore, MD 8. Avalon Old Bridge 252 66 Q3 2018 Q3 2020 Q2 2021 Q4 2021Old Bridge, NJ 9. Avalon Newcastle Commons II 293 106 Q4 2018 Q4 2020 Q2 2021 Q4 2021 Newcastle, WA 10. Twinbrook Station 238 66 Q4 2018 Q4 2020 Q2 2021 Q4 2021 Rockville, MD 11. Avalon Harrison (5) 143 76 Q4 2018 Q1 2021 Q1 2022 Q2 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 2022Owings Mill , MD 14. Avalon Marlborough II 123 42 Q2 2019 Q3 2020 Q4 2020 Q1 2021Marlborough, 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 (6) 328 110 Q4 2019 Q3 2021 Q2 2022 Q3 2022 Lynnwood, WA Total 6,198 $ 2,378
_________________________________
(1) The information above contains estimates and projections that may be
materially impacted by the COVID-19 pandemic. Where possible, particularly
for developments nearing completion or in lease-up, we have updated the
information above with revised estimates, but in other cases the information
has not been updated due to uncertainties as to the duration and severity of
the pandemic and its related impacts, such as stay-at-home orders and other
regulations, adjusted operating protocols and other economic developments. We
do not believe the estimates above should be relied upon for the purpose of
estimating our future financial performance, but we believe the information
is still meaningful as it is an indicator of the relative magnitude and
construction schedule of developments currently underway. See the disclosure
concerning the impact of the COVID-19 pandemic on our development activities
elsewhere in this report.
(2) 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.
(3) Initial projected occupancy dates are estimates. There can be no assurance
that we will pursue to completion any or all of these proposed developments.
(4) 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.
(5) Development Communities containing at least 10,000 square feet of retail
space include
square feet). 40
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(6) We are developing this project within an unconsolidated joint venture that
was formed inDecember 2019 , in which we own a 50.0% interest. The information above represents the total cost for the venture. During the three months endedMarch 31, 2020 , we completed the development of the following communities: Total Number of Total capitalized Approximate capitalized apartment cost (1) rentable area cost per sq. homes ($ millions) (sq. ft.) ft. 1. Avalon Teaneck Teaneck, NJ 248 $ 73 242,988 $ 300 2. Avalon North Creek Bothwell, WA 316 83 304,083 $ 273 3. Avalon Norwood Norwood, MA 198 61 244,361 $ 250 Total 762 $ 217
__________________________________
(1) Total capitalized cost is as of
incurring additional costs associated with Development Communities that are
customary for new developments.
Development Rights
AtMarch 31, 2020 , we had$38,115,000 in acquisition and related capitalized costs for direct interests in land parcels we own, and$74,553,000 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 ofMarch 31, 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 9,720 apartment homes to our portfolio. Substantially all of these apartment homes will offer features like those offered by the communities we currently own. For 22 Development Rights, we control the land through a conditional agreement or option to purchase or lease the parcel. In addition, four Development Rights are additional development phases of existing stabilized operating communities we own and 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 three months endedMarch 31, 2020 , we incurred a charge of$3,334,000 for expensed transaction, development and other pursuit costs, net of recoveries, which include development pursuits that were not yet probable of future development at the time incurred, or for pursuits that we determined were no longer probable of being developed.
You should carefully review Item 1A. "Risk Factors" of our Form 10-K for a discussion of the risks associated with Development Rights.
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The following presents a summary of the Development Rights as of
Estimated Projected total
number capitalized cost Market Number of rights of homes ($ millions) (1) (2) New England 3 394 $ 148 Metro NY/NJ 13 5,391 2,222 Mid-Atlantic - - - Pacific Northwest 3 1,129 429 Northern California 4 1,198 648 Southern California 1 475 265 Southeast Florida 1 254 95 Denver, CO 3 879 280 Total 28 9,720 $ 4,087
____________________________________
(1) The information above contains estimates and projections that may be
materially impacted by the COVID-19 pandemic. Where possible, we have updated
the information above with revised estimates, but in other cases the
information has not been updated due to uncertainties as to the duration and
severity of the pandemic and its related impacts, such as stay-at-home
orders and other regulations, adjusted operating protocols and other economic
developments. We do not believe the estimates above should be relied upon for
the purpose of estimating our future financial performance, but we believe
the information is still meaningful as it is an indicator of the relative
magnitude of our Development Rights.
(2) 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.
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 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. 42
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Our communities are insured for third-party liability losses through a combination of community specific insurance policies and/or coverage provided under a master commercial general liability and umbrella/excess insurance program. The master commercial general liability and umbrella/excess insurance policies cover the majority of our communities and are subject to certain coverage limitations and exclusions, and they require a self-insured retention of$500,000 per occurrence. We also maintain certain casualty policies (general liability, umbrella/excess and workers compensation) for construction related risks which have various exclusions and deductibles that, in management's view, are commercially reasonable. Certain projects are insured through our master insurance policies while others are insured through project-specific insurance policies. The limits vary by project and may be subject to deductibles up to$1,500,000 per occurrence. We utilize a wholly-owned captive insurance company to insure certain types and amounts of risks, which includes property damage and resulting business interruption losses, general liability insurance and other construction related liability risks. In addition to our potential liability for the various policy self-insured retentions and deductibles, our captive insurance company is directly responsible for (i) 50% of the first$25,000,000 of losses (per occurrence) and 10% of the first$50,000,000 of losses (per occurrence) incurred by the master property insurance policy and (ii) covered liability claims arising out of our primary commercial general liability policy, subject to a$2,000,000 per occurrence loss limit. The captive is utilized to insure other limited levels of risk, which may be in part reinsured by third party insurance. Just as with office buildings, transportation systems and government buildings, there have been reports that apartment communities could become targets of terrorism. Our communities are insured for terrorism related losses through the Terrorism Risk Insurance Program Reauthorization Act ("TRIPRA") program. This coverage extends to most of our casualty exposures (subject to deductibles and insured limits) and certain property insurance policies. We have also purchased private-market insurance for property damage due to terrorism with limits of$600,000,000 per occurrence and in the annual aggregate that includes certain coverages (not covered under TRIPRA) such as domestic-based terrorism. This insurance, often referred to as "non-certified" terrorism insurance, is subject to deductibles, limits and exclusions. An additional consideration for insurance coverage and potential uninsured losses is mold growth or other environmental contamination. Mold growth may occur when excessive moisture accumulates in buildings or on building materials, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. If a significant mold problem arises at one of our communities, we could be required to undertake a costly remediation program to contain or remove the mold from the affected community and could be exposed to other liabilities. For further discussion of the risks and our related prevention and remediation activities, please refer to the discussion under Item 1A. "Risk Factors - We may incur costs due to environmental contamination or non-compliance" elsewhere in this report. We cannot provide assurance that we will have coverage under our existing policies for property damage or liability to third parties arising as a result of exposure to mold or a claim of exposure to mold at one of our communities. We also carry crime policies (also commonly referred to as a fidelity policy or employee dishonesty policy) and limited cyber liability insurance. The crime policies protect us, up to$30,000,000 per occurrence (subject to sublimits and exclusions), from employee theft of money, securities or property. The limited cyber liability insurance is part of our professional liability coverage and has limits of$15,000,000 per occurrence and in the annual aggregate. The cyber liability coverage protects us from certain claims arising out of data breach, wrongful acts, data privacy issues and media liability.
The amount or types of insurance we maintain may not be sufficient to cover all losses.
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. 43
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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;
• 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 Item 1A. "Risk Factors" in this report, for further discussion of risks associated with forward-looking statements. 44
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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 the
the REIT vehicles that are used with each respective joint venture;
• we may be unsuccessful in managing changes in our portfolio composition;
• laws and regulations implementing rent control or rent stabilization, or
otherwise limiting our ability to increase rents, charge fees or evict
tenants, may impact our revenue or increase our costs;
• 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. 45
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