UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934 

For the quarterly period ended June 30, 2019

Commission file number 1-12672

AVALONBAY COMMUNITIES, INC.

(Exact name of registrant as specified in its charter)

	Maryland	77-0404318
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

Ballston Tower

671 N. Glebe Rd, Suite 800

Arlington, Virginia  22203

(Address of principal executive offices, including zip code)

(703) 329-6300

(Registrant's telephone number, including area code)  

(Former name, if changed since last report) 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol		Name of each exchange on which registered
Common Stock, par value $0.01 per share		AVB	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days.

Yes ☒                    No ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒                    No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ☐                    No ☒

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date:

139,656,943 shares of common stock, par value $0.01 per share, were outstanding as of July 31, 2019.

AVALONBAY COMMUNITIES, INC.

FORM 10-Q

INDEX

		PAGE
PART I - FINANCIAL INFORMATION
ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2019 (UNAUDITED) AND DECEMBER 31, 2018	1
	CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018	2
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018	3
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		48
ITEM 4. CONTROLS AND PROCEDURES		48
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS		48
ITEM 1A. RISK FACTORS		48
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		49
ITEM 3. DEFAULTS UPON SENIOR SECURITIES		49
ITEM 4. MINE SAFETY DISCLOSURES		49
ITEM 5. OTHER INFORMATION		49
ITEM 6. EXHIBITS		50
SIGNATURES		51

AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

	6/30/2019			12/31/2018
	(unaudited)
ASSETS
Real estate:
Land and improvements	$	4,137,471		$	4,077,090
Buildings and improvements	15,988,751			15,651,035
Furniture, fixtures and equipment	757,243			696,200
	20,883,465			20,424,325
Less accumulated depreciation	(4,872,896		)	(4,601,447		)
Net operating real estate	16,010,569			15,822,878
Construction in progress, including land	1,939,808			1,768,132
Land held for development	18,606			84,712
Real estate assets held for sale, net	40,461			55,208
Total real estate, net	18,009,444			17,730,930
Cash and cash equivalents	243,576			91,659
Cash in escrow	86,468			126,205
Resident security deposits	35,084			31,816
Investments in unconsolidated real estate entities	208,519			217,432
Deferred development costs	60,217			47,443
Prepaid expenses and other assets	166,886			134,715
Right of use lease assets	122,381			—
Total assets	$	18,932,575		$	18,380,200
LIABILITIES AND EQUITY
Unsecured notes, net	$	6,355,132		$	5,905,993
Variable rate unsecured credit facility	—			—
Mortgage notes payable, net	997,085			1,134,270
Dividends payable	213,403			204,191
Payables for construction	104,545			96,983
Accrued expenses and other liabilities	258,486			297,700
Lease liabilities	138,163			—
Accrued interest payable	48,169			46,648
Resident security deposits	63,183			58,415
Liabilities related to real estate assets held for sale	541			150
Total liabilities	8,178,707			7,744,350
Commitments and contingencies
Redeemable noncontrolling interests	3,338			3,244
Equity:
Preferred stock, $0.01 par value; $25 liquidation preference; 50,000,000 shares authorized at June 30, 2019 and December 31, 2018; zero shares issued and outstanding at June 30, 2019 and December 31, 2018	—			—
Common stock, $0.01 par value; 280,000,000 shares authorized at June 30, 2019 and December 31, 2018; 139,656,557 and 138,508,424 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively	1,397			1,385
Additional paid-in capital	10,519,239			10,306,588
Accumulated earnings less dividends	262,548			350,777
Accumulated other comprehensive loss	(33,184		)	(26,144		)
Total stockholders' equity	10,750,000			10,632,606
Noncontrolling interests	530			—
Total equity	10,750,530			10,632,606
Total liabilities and equity	$	18,932,575		$	18,380,200

See accompanying notes to Condensed Consolidated Financial Statements.

1

AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(Dollars in thousands, except per share data)

	For the three months ended					For the six months ended
	6/30/2019			6/30/2018		6/30/2019			6/30/2018
Revenue:
Rental and other income	$	576,149		$	568,285	$	1,141,194		$	1,128,191
Management, development and other fees	1,114			954		2,252			1,841
Total revenue	577,263			569,239		1,143,446			1,130,032
Expenses:
Operating expenses, excluding property taxes	132,924			130,836		256,378			262,094
Property taxes	62,187			59,994		123,516			119,891
Interest expense, net	50,010			56,585		97,902			111,698
Loss on extinguishment of debt, net	229			642		509			1,039
Depreciation expense	162,693			156,685		324,749			315,743
General and administrative expense	18,965			15,209		32,671			29,640
Expensed transaction, development and other pursuit costs, net of recoveries	2,711			1,047		3,806			1,847
Casualty and impairment gain, net	—			—		—			(58		)
Total expenses	429,719			420,998		839,531			841,894
Equity in income (loss) of unconsolidated real estate entities	197			789		(863		)	2,529
Gain on sale of communities	20,530			105,201		35,365			105,201
Gain on other real estate transactions, net	34			370		300			323
Income before income taxes	168,305			254,601		338,717			396,191
Income tax expense (refund)	—			58		(6		)	58
Net income	168,305			254,543		338,723			396,133
Net (income) loss attributable to noncontrolling interests	(24		)	119		(76		)	172
Net income attributable to common stockholders	$	168,281		$	254,662	$	338,647		$	396,305
Other comprehensive income (loss):
(Loss) gain on cash flow hedges	(2,888		)	—		(10,119		)	11,499
Cash flow hedge losses reclassified to earnings	1,611			1,455		3,079			3,213
Comprehensive income	$	167,004		$	256,117	$	331,607		$	411,017
Earnings per common share - basic:
Net income attributable to common stockholders	$	1.21		$	1.84	$	2.43		$	2.87
Earnings per common share - diluted:
Net income attributable to common stockholders	$	1.21		$	1.84	$	2.43		$	2.87

See accompanying notes to Condensed Consolidated Financial Statements.

2

AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(Dollars in thousands)

	For the six months ended
	6/30/2019			6/30/2018
Cash flows from operating activities:
Net income	$	338,723		$	396,133
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation expense	324,749			315,743
Amortization of deferred financing costs	3,565			4,042
Amortization of debt discount	789			849
Loss on extinguishment of debt, net	509			1,039
Amortization of stock-based compensation	13,719			10,127
Equity in loss of, and return on, unconsolidated real estate entities and noncontrolling interests, net of eliminations	10,131			3,143
Casualty and impairment gain, net	—			(58		)
Abandonment of development pursuits	1,285			725
Cash flow hedge losses reclassified to earnings	3,079			3,213
Gain on sale of real estate assets	(35,665		)	(105,524		)
Increase in resident security deposits, prepaid expenses and other assets	(24,241		)	(3,875		)
Increase (decrease) in accrued expenses, other liabilities and accrued interest payable	1,624			(260		)
Net cash provided by operating activities	638,267			625,297
Cash flows from investing activities:
Development/redevelopment of real estate assets including land acquisitions and deferred development costs	(560,385		)	(604,540		)
Acquisition of real estate assets, including partnership interest	(152,260		)	—
Capital expenditures - existing real estate assets	(48,006		)	(37,081		)
Capital expenditures - non-real estate assets	(4,222		)	(1,896		)
Increase in payables for construction	7,562			7,421
Proceeds from sale of real estate, net of selling costs	168,034			299,226
Insurance proceeds for property damage claims	—			58
Mortgage note receivable lending	(507		)	(2,291		)
Mortgage note receivable payments	978			27,511
Distributions from unconsolidated real estate entities	—			2,013
Investments in unconsolidated real estate entities	(1,218		)	(7,102		)
Net cash used in investing activities	(590,024		)	(316,681		)
Cash flows from financing activities:
Issuance of common stock, net	206,193			833
Dividends paid	(415,295		)	(399,070		)
Repayments of mortgage notes payable, including prepayment penalties	(137,653		)	(59,314		)
Issuance of unsecured notes	449,803			299,442
Payment of deferred financing costs	(10,668		)	(3,345		)
Payment of finance lease obligation	(535		)	(535		)
(Payment) receipt for termination of forward interest rate swaps	(12,309		)	12,598
Contribution from noncontrolling interest	337			—
Payments related to tax withholding for share-based compensation	(14,286		)	(10,524		)
Distributions to DownREIT partnership unitholders	(23		)	(22		)
Distributions to joint venture and profit-sharing partners	(227		)	(208		)
Preferred interest obligation redemption and dividends	(1,400		)	(480		)
Net cash provided by (used in) financing activities	63,937			(160,625		)
Net increase in cash and cash equivalents	112,180			147,991
Cash and cash equivalents and restricted cash, beginning of period	217,864			201,906
Cash and cash equivalents and restricted cash, end of period	$	330,044		$	349,897
Cash paid during the period for interest, net of amount capitalized	$	88,948		$	95,204

See accompanying notes to Condensed Consolidated Financial Statements.

3

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the Condensed Consolidated Statements of Cash Flows (dollars in thousands):

	For the six months ended
	6/30/2019		6/30/2018
Cash and cash equivalents	$	243,576	$	101,565
Cash in escrow	86,468		248,332
Cash, cash equivalents and restricted cash reported in the Condensed Consolidated Statements of Cash Flows	$	330,044	$	349,897

Supplemental disclosures of non-cash investing and financing activities:

During the six months ended June 30, 2019:

• As described in Note 4, "Equity," 150,359 shares of common stock were issued as part of the Company's stock-based compensation plans, of which 73,072 shares related to the conversion of performance awards to restricted shares, and the remaining 77,287 shares valued at $15,145,000 were issued in connection with new stock grants; 1,092 shares valued at $208,000 were issued through the Company's dividend reinvestment plan; 75,195 shares valued at $14,206,000 were withheld to satisfy employees' tax withholding and other liabilities; and 1,438 restricted shares with an aggregate value of $250,000 previously issued in connection with employee compensation were canceled upon forfeiture.

• Common stock dividends declared but not paid totaled $212,822,000.

• The Company recorded an increase of $269,000 in redeemable noncontrolling interest with a corresponding decrease to accumulated earnings less dividends to adjust the redemption value associated with the put options held by joint venture partners and DownREIT partnership units. For further discussion of the nature and valuation of these items, see Note 11, "Fair Value."

• The Company recorded an increase to other liabilities of $4,198,000, an increase in prepaid expenses and other assets of $18,000 and a corresponding adjustment to accumulated other comprehensive loss, and reclassified $3,079,000 of cash flow hedge losses from other comprehensive income (loss) to interest expense, net, to record the impact of the Company's derivative and hedge accounting activity.

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

During the six months ended June 30, 2018:

• The Company issued 186,382 shares of common stock were issued as part of the Company's stock-based compensation plans, of which 88,297 shares related to the conversion of performance awards to restricted shares, and the remaining 98,085 shares valued at $15,837,000 were issued in connection with new stock grants; 1,135 shares valued at $190,000 were issued through the Company's dividend reinvestment plan; 67,854 shares valued at $10,524,000 were withheld to satisfy employees' tax withholding and other liabilities; and 4,434 restricted shares with an aggregate value of $648,000 previously issued in connection with employee compensation were canceled upon forfeiture.

• Common stock dividends declared but not paid totaled $203,472,000.

• The Company recorded an increase of $354,000 in redeemable noncontrolling interest with a corresponding decrease to accumulated earnings less dividends to adjust the redemption value associated with the put options held by joint venture partners and DownREIT partnership units. 

• The Company reclassified $3,213,000 of cash flow hedge losses from other comprehensive income to interest expense, net, to record the impact of the Company's derivative and hedge accounting activity.

4

AVALONBAY COMMUNITIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.  Organization, Basis of Presentation and Significant Accounting Policies

Organization and Basis of Presentation

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

At June 30, 2019, the Company owned or held a direct or indirect ownership interest in 273 operating apartment communities containing 79,161 apartment homes in 12 states and the District of Columbia, of which seven communities containing 3,026 apartment homes were under redevelopment. In addition, the Company owned or held a direct or indirect ownership interest in 21 communities under development that are expected to contain an aggregate of 7,023 apartment homes when completed, as well as a mixed-use project being developed in which the Company is currently pursuing a potential for-sale strategy of individual condominium units. The Company also owned or held a direct or indirect ownership interest in land or rights to land on which the Company expects to develop an additional 28 communities that, if developed as expected, will contain an estimated 9,004 apartment homes.

The interim unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements required by GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited financial statements should be read in conjunction with the financial statements and notes included in the Company's 2018 Annual Report on Form 10-K. The results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the operating results for the full year. Management believes the disclosures are adequate to ensure the information presented is not misleading.  In the opinion of management, all adjustments and eliminations, consisting only of normal, recurring adjustments necessary for a fair presentation of the financial statements for the interim periods, have been included.

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

Earnings per Common Share

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

5

	For the three months ended						For the six months ended
	6/30/2019			6/30/2018			6/30/2019			6/30/2018
Basic and diluted shares outstanding
Weighted average common shares - basic	139,113,390			137,840,045			138,724,479			137,802,461
Weighted average DownREIT units outstanding	7,500			7,500			7,500			7,500
Effect of dilutive securities	497,341			367,465			495,397			374,334
Weighted average common shares - diluted	139,618,231			138,215,010			139,227,376			138,184,295
Calculation of Earnings per Share - basic
Net income attributable to common stockholders	$	168,281		$	254,662		$	338,647		$	396,305
Net income allocated to unvested restricted shares	(435		)	(727		)	(935		)	(1,167		)
Net income attributable to common stockholders, adjusted	$	167,846		$	253,935		$	337,712		$	395,138
Weighted average common shares - basic	139,113,390			137,840,045			138,724,479			137,802,461
Earnings per common share - basic	$	1.21		$	1.84		$	2.43		$	2.87
Calculation of Earnings per Share - diluted
Net income attributable to common stockholders	$	168,281		$	254,662		$	338,647		$	396,305
Add: noncontrolling interests of DownREIT unitholders in consolidated partnerships	12			11			23			22
Adjusted net income attributable to common stockholders	$	168,293		$	254,673		$	338,670		$	396,327
Weighted average common shares - diluted	139,618,231			138,215,010			139,227,376			138,184,295
Earnings per common share - diluted	$	1.21		$	1.84		$	2.43		$	2.87

 

All options to purchase shares of common stock outstanding as of June 30, 2019 and 2018 are included in the computation of diluted earnings per share.

Derivative Instruments and Hedging Activities

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

Legal and Other Contingencies

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

6

Acquisitions of Investments in Real Estate

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

Use of Estimates

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

Reclassifications

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

Leases

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

• lessor of residential and retail space within its apartment communities; and

• lessee under (i) ground leases for land underlying current operating or development communities, (ii) office leases for its corporate headquarters and regional offices and (iii) leases of equipment.

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

Lessee Considerations

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

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

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

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

7

Lessor Considerations

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

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

The Company changed its presentation of charges for uncollectible lease revenue associated with its residential and retail leasing activity, reflecting those amounts as a component of rental and other income on the accompanying Condensed Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2019. However, in accordance with its prospective adoption of the lease standard, the Company did not adjust the prior year period presentation of charges for uncollectible lease revenue associated with its residential and retail leasing activity as a component of operating expenses, excluding property taxes, on the on the accompanying Condensed Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2018.

Implementation Considerations and Impact

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

• not reassessing (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) the accounting for initial direct costs for any existing leases;

• not evaluating short term leases;

• not assessing whether existing land easements are, or contain leases; and

• making an accounting policy election by class of underlying asset, to not separate non-lease components from lease components and instead to account for each separate lease and non-lease component as a single lease component.

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

• by class of underlying asset for retail and residential leases, to not separate non-lease components from lease components and instead to account for each separate lease and non- lease component as a single lease component;

• to exclude costs paid by lessees directly to third parties on behalf of the Company; and

• to exclude sales taxes and other similar taxes assessed by a government authority and collected by the Company from the lessee.

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

Revenue and Gain Recognition

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

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

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

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

The following table provides details of the Company’s revenue streams disaggregated by the Company’s reportable operating segments, further discussed in Note 8, “Segment Reporting,” for the three and six months ended June 30, 2019 and 2018. Segment information for total revenue has been adjusted to exclude the real estate assets that were sold from January 1, 2018 through June 30, 2019, or otherwise qualify as held for sale as of June 30, 2019, as described in Note 6, "Real Estate Disposition Activities." Additionally, as discussed above, the Company changed its presentation of charges for uncollectible lease revenue for the three and six months ended June 30, 2019, including it as an adjustment to revenue and not as a component of operating expenses, as it is presented for prior periods on the accompanying Condensed Consolidated Statement of Comprehensive Income. In order to provide comparability between periods presented in the Company's segment reporting, the Company has included charges for uncollectible lease revenue for its segment results as a component of revenue for all periods presented. See Note 8, "Segment Reporting," for further discussion (dollars in thousands):

	For the three months ended
	Established Communities		Other Stabilized Communities		Development/ Redevelopment Communities		Non- allocated (1)		Total
For the period ended June 30, 2019
Management, development and other fees	$	—	$	—	$	—	$	1,114	$	1,114
Rental and non-rental related income (2)	1,817		385		192		—		2,394
Total non-lease revenue (3)	1,817		385		192		1,114		3,508
Lease income (4)	455,732		75,126		39,871		—		570,729
Business interruption insurance proceeds	250		185		—		—		435
Total revenue	$	457,799	$	75,696	$	40,063	$	1,114	$	574,672
For the period ended June 30, 2018
Management, development and other fees	$	—	$	—	$	—	$	954	$	954
Rental and non-rental related income (2)	1,292		316		85		—		1,693
Total non-lease revenue (3)	1,292		316		85		954		2,647
Lease income (4)	442,294		58,818		31,880		—		532,992
Total revenue	$	443,586	$	59,134	$	31,965	$	954	$	535,639

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	For the six months ended
	Established Communities		Other Stabilized Communities		Development/ Redevelopment Communities		Non- allocated (1)		Total
For the period ended June 30, 2019
Management, development and other fees	$	—	$	—	$	—	$	2,252	$	2,252
Rental and non-rental related income (2)	3,373		1,047		332		—		4,752
Total non-lease revenue (3)	3,373		1,047		332		2,252		7,004
Lease income (4)	906,210		147,121		75,311		—		1,128,642
Business interruption insurance proceeds	404		203		—		—		607
Total revenue	$	909,987	$	148,371	$	75,643	$	2,252	$	1,136,253
For the period ended June 30, 2018
Management, development and other fees	$	—	$	—	$	—	$	1,841	$	1,841
Rental and non-rental related income (2)	2,218		907		148		—		3,273
Total non-lease revenue (3)	2,218		907		148		1,841		5,114
Lease income (4)	878,200		113,987		63,263		—		1,055,450
Total revenue	$	880,418	$	114,894	$	63,411	$	1,841	$	1,060,564

__________________________________

(1) Revenue represents third-party management, asset management and developer fees and miscellaneous income which are not allocated to a reportable segment.

(2) Amounts include revenue streams related to activities that are not considered components of a lease, including but not limited to, apartment hold fees and application fees, as well as revenue streams not related to leasing activities, including but not limited to, vendor revenue sharing, building advertising, vending and dry cleaning revenue.

(3) Represents all revenue accounted for under ASC 2014-09.

(4) Amounts include all revenue streams derived from residential and retail rental income and other lease income, which are accounted for under ASU 2016-02.

Due to the nature and timing of the Company’s identified revenue streams, there are no material amounts of outstanding or unsatisfied performance obligations as of June 30, 2019.

2.  Interest Capitalized

The Company capitalizes interest during the development and redevelopment of real estate assets. Capitalized interest associated with the Company's development or redevelopment activities totaled $17,127,000 and $14,567,000 for the three months ended June 30, 2019 and 2018, respectively, and $34,716,000 and $27,731,000 for the six months ended June 30, 2019 and 2018, respectively.

3.  Mortgage Notes Payable, Unsecured Notes and Credit Facility

The Company's mortgage notes payable, unsecured notes, variable rate unsecured term loans ("Term Loans") and Credit Facility, as defined below, as of June 30, 2019 and December 31, 2018 are summarized below. The following amounts and discussion do not include the mortgage notes related to the communities classified as held for sale, if any, as of June 30, 2019 and December 31, 2018, as shown in the accompanying Condensed Consolidated Balance Sheets (dollars in thousands) (see Note 6, "Real Estate Disposition Activities").

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	6/30/2019		12/31/2018
Fixed rate unsecured notes (1)	$	5,850,000	$	5,400,000
Variable rate unsecured notes (1)	300,000		300,000
Term Loans (1)	250,000		250,000
Fixed rate mortgage notes payable - conventional and tax-exempt (2)	517,039		533,215
Variable rate mortgage notes payable - conventional and tax-exempt (2)	497,850		619,140
Total mortgage notes payable, unsecured notes and Term Loans	7,414,889		7,102,355
Credit Facility	—		—
Total mortgage notes payable, unsecured notes, Term Loans and Credit Facility	$	7,414,889	$	7,102,355

_____________________________________

(1) Balances at June 30, 2019 and December 31, 2018 exclude $9,346 and $9,879, respectively, of debt discount, and $35,522 and $34,128, respectively, of deferred financing costs, as reflected in unsecured notes, net on the accompanying Condensed Consolidated Balance Sheets.

(2) Balances at June 30, 2019 and December 31, 2018 exclude $14,530 and $14,590, respectively, of debt discount, and $3,274 and $3,495, respectively, of deferred financing costs, as reflected in mortgage notes payable on the accompanying Condensed Consolidated Balance Sheets.

In addition to the Credit Facility discussed in this Form 10-Q, the following debt activity occurred during the six months ended June 30, 2019:

• In February 2019, the Company amended and restated the $250,000,000 variable rate unsecured term loan that it originally entered into in February 2017, of which $100,000,000 matures in February 2022 with stated pricing of LIBOR plus 0.90%, which remained the same, and $150,000,000 matures in February 2024 with stated pricing of LIBOR plus 0.85% that decreased from LIBOR plus 1.50%.

• In April 2019, the Company repaid $13,363,000 of 2.99% fixed rate debt and $33,854,000 of variable rate debt secured by Avalon Natick at par on its maturity date.

• In May 2019, the Company repaid $7,635,000 principal amount of variable rate debt secured by Eaves Mission Viejo at par in advance of its scheduled maturity date. The Company utilized $3,706,000 of restricted cash held in a principal reserve fund to repay a portion of the outstanding indebtedness.

• In May 2019, the Company repaid $20,800,000 principal amount of variable rate debt secured by AVA Nob Hill at par in advance of its scheduled maturity date. The Company utilized $10,584,000 of restricted cash held in a principal reserve fund to repay a portion of the outstanding indebtedness.

• In May 2019, the Company repaid $38,800,000 principal amount of variable rate debt secured by Avalon Campbell at par in advance of its scheduled maturity date. The Company utilized $22,622,000 of restricted cash held in a principal reserve fund to repay a portion of the outstanding indebtedness.

• In May 2019, the Company repaid $17,600,000 principal amount of variable rate debt secured by Eaves Pacifica at par in advance of its scheduled maturity date. The Company utilized $