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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended June 30, 2020
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.)
 
 
4040 Wilson Blvd., Suite 1000
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:

140,743,559 shares of common stock, par value $0.01 per share, were outstanding as of July 31, 2020.



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







AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
 
6/30/2020
 
12/31/2019
 
(unaudited)
 
 
ASSETS
 

 
 

Real estate:
 

 
 

Land and improvements
$
4,361,878

 
$
4,299,162

Buildings and improvements
16,916,054

 
16,668,496

Furniture, fixtures and equipment
888,633

 
829,242

 
22,166,565

 
21,796,900

Less accumulated depreciation
(5,489,485
)
 
(5,164,398
)
Net operating real estate
16,677,080

 
16,632,502

Construction in progress, including land
1,272,171

 
1,303,751

Land held for development
39,829

 

For-sale condominium inventory
311,236

 
457,809

Real estate assets held for sale, net

 
38,927

Total real estate, net
18,300,316

 
18,432,989

 
 
 
 
Cash and cash equivalents
322,817

 
39,687

Cash in escrow
92,877

 
87,927

Resident security deposits
33,805

 
34,224

Investments in unconsolidated real estate entities
176,352

 
165,806

Deferred development costs
81,395

 
70,486

Prepaid expenses and other assets
184,023

 
164,971

Right of use lease assets
159,905

 
124,961

Total assets
$
19,351,490

 
$
19,121,051

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Unsecured notes, net
$
6,698,438

 
$
6,358,648

Variable rate unsecured credit facility

 

Mortgage notes payable, net
931,772

 
937,642

Dividends payable
226,126

 
215,414

Payables for construction
80,588

 
92,135

Accrued expenses and other liabilities
252,627

 
274,013

Lease liabilities
183,507

 
140,468

Accrued interest payable
44,337

 
47,154

Resident security deposits
60,536

 
61,752

Liabilities related to real estate assets held for sale

 
375

Total liabilities
8,477,931

 
8,127,601

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Redeemable noncontrolling interests
2,754

 
3,252

 
 
 
 
Equity:
 

 
 

Preferred stock, $0.01 par value; $25 liquidation preference; 50,000,000 shares authorized at June 30, 2020 and December 31, 2019; zero shares issued and outstanding at June 30, 2020 and December 31, 2019

 

Common stock, $0.01 par value; 280,000,000 shares authorized at June 30, 2020 and December 31, 2019; 140,743,120 and 140,643,962 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively
1,407

 
1,406

Additional paid-in capital
10,742,796

 
10,736,733

Accumulated earnings less dividends
172,304

 
282,913

Accumulated other comprehensive loss
(46,317
)
 
(31,503
)
Total stockholders' equity
10,870,190

 
10,989,549

Noncontrolling interests
615

 
649

Total equity
10,870,805

 
10,990,198

Total liabilities and equity
$
19,351,490

 
$
19,121,051

 
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
 
6/30/2020
 
6/30/2019
 
6/30/2020
 
6/30/2019
Revenue:
 

 
 

 
 
 
 
Rental and other income
$
575,479

 
$
576,149

 
$
1,176,123

 
$
1,141,194

Management, development and other fees
926

 
1,114

 
1,933

 
2,252

Total revenue
576,405

 
577,263

 
1,178,056

 
1,143,446

 
 
 
 
 
 
 
 
Expenses:
 

 
 

 
 
 
 
Operating expenses, excluding property taxes
131,090

 
132,924

 
263,083

 
256,378

Property taxes
67,013

 
62,187

 
134,039

 
123,516

Interest expense, net
53,399

 
50,010

 
109,313

 
97,902

Loss on extinguishment of debt, net
268

 
229

 
9,438

 
509

Depreciation expense
176,249

 
162,693

 
354,160

 
324,749

General and administrative expense
15,573

 
18,965

 
32,893

 
32,671

Expensed transaction, development and other pursuit costs, net of recoveries
388

 
1,766

 
3,722

 
2,388

Total expenses
443,980

 
428,774

 
906,648

 
838,113

 
 
 
 
 
 
 
 
Equity in income (loss) of unconsolidated real estate entities
512

 
197

 
1,687

 
(863
)
Gain on sale of communities
35,295

 
20,530

 
59,731

 
35,365

Gain on other real estate transactions, net
156

 
34

 
199

 
300

Gain on for-sale condominiums, net of marketing and administrative costs
1,348

 
(945
)
 
4,808

 
(1,418
)
 
 
 
 
 
 
 
 
Income before income taxes
169,736

 
168,305

 
337,833

 
338,717

Income tax benefit
1,133

 

 
1,042

 
6

 
 
 
 
 
 
 
 
Net income
170,869

 
168,305

 
338,875

 
338,723

Net income attributable to noncontrolling interests
(41
)
 
(24
)
 
(76
)
 
(76
)
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
$
170,828

 
$
168,281

 
$
338,799

 
$
338,647

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 

 
 

 
 
 
 
Loss on cash flow hedges
(1,461
)
 
(2,888
)
 
(19,064
)
 
(10,119
)
Cash flow hedge losses reclassified to earnings
2,301

 
1,611

 
4,250

 
3,079

Comprehensive income
$
171,668

 
$
167,004

 
$
323,985

 
$
331,607

 
 
 
 
 
 
 
 
Earnings per common share - basic:
 

 
 

 
 
 
 
Net income attributable to common stockholders
$
1.21

 
$
1.21

 
$
2.41

 
$
2.43

 
 
 
 
 
 
 
 
Earnings per common share - diluted:
 

 
 

 
 
 
 
Net income attributable to common stockholders
$
1.21

 
$
1.21

 
$
2.41

 
$
2.43


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
 
6/30/2020
 
6/30/2019
Cash flows from operating activities:
 
 
 
Net income
$
338,875

 
$
338,723

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation expense
354,160

 
324,749

Amortization of deferred financing costs
3,720

 
3,565

Amortization of debt discount
833

 
789

Loss on extinguishment of debt, net
9,438

 
509

Amortization of stock-based compensation
11,870

 
13,719

Equity in loss of, and return on, unconsolidated real estate entities and noncontrolling interests, net of eliminations
3,705

 
10,131

Abandonment of development pursuits
2,095

 
1,285

Cash flow hedge losses reclassified to earnings
4,250

 
3,079

Gain on sale of real estate assets
(59,930
)
 
(35,665
)
Gain on for-sale condominiums
(7,446
)
 

Increase in resident security deposits, prepaid expenses and other assets
(13,595
)
 
(24,241
)
(Decrease) increase in accrued expenses, other liabilities and accrued interest payable
(19,058
)
 
1,089

Net cash provided by operating activities
628,917

 
637,732

 
 
 
 
Cash flows from investing activities:
 
 
 
Development/redevelopment of real estate assets including land acquisitions and deferred development costs
(383,139
)
 
(560,385
)
Acquisition of real estate assets, including partnership interest

 
(152,260
)
Capital expenditures - existing real estate assets
(51,858
)
 
(48,006
)
Capital expenditures - non-real estate assets
(14,461
)
 
(4,222
)
(Decrease) increase in payables for construction
(11,547
)
 
7,562

Proceeds from sale of real estate, net of selling costs
132,882

 
168,034

Proceeds from the sale of for-sale condominiums, net of selling costs
155,217

 

Mortgage note receivable lending
(209
)
 
(507
)
Mortgage note receivable payments
2,238

 
978

Investments in unconsolidated real estate entities
(14,251
)
 
(1,218
)
Net cash used in investing activities
(185,128
)
 
(590,024
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Issuance of common stock, net
1,613

 
206,193

Dividends paid
(437,326
)
 
(415,295
)
Issuance of mortgage notes payable
51,000

 

Repayments of mortgage notes payable, including prepayment penalties
(56,852
)
 
(137,653
)
Issuance of unsecured notes
1,296,581

 
449,803

Repayment of unsecured notes, including prepayment penalties
(958,680
)
 

Payment of deferred financing costs
(11,276
)
 
(10,668
)
Payment for termination of forward interest rate swaps
(25,135
)
 
(12,309
)
(Payment to) contribution from noncontrolling interest
(42
)
 
337

Payments related to tax withholding for share-based compensation
(14,750
)
 
(14,286
)
Distributions to DownREIT partnership unitholders
(24
)
 
(23
)
Distributions to joint venture and profit-sharing partners
(218
)
 
(227
)
Preferred interest obligation redemption and dividends
(600
)
 
(1,400
)
Net cash (used in) provided by financing activities
(155,709
)
 
64,472

 
 
 
 
Net increase in cash and cash equivalents
288,080

 
112,180

 
 
 
 
Cash and cash equivalents and restricted cash, beginning of period
127,614

 
217,864

Cash and cash equivalents and restricted cash, end of period
$
415,694

 
$
330,044

 
 
 
 
Cash paid during the period for interest, net of amount capitalized
$
103,328

 
$
88,948

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
 
 
6/30/2020
 
6/30/2019
Cash and cash equivalents
 
$
322,817

 
$
243,576

Cash in escrow
 
92,877

 
86,468

Cash, cash equivalents and restricted cash reported in the Condensed Consolidated Statements of Cash Flows
 
$
415,694

 
$
330,044


Supplemental disclosures of non-cash investing and financing activities:

During the six months ended June 30, 2020:

As described in Note 4, "Equity," 164,526 shares of common stock were issued as part of the Company's stock-based compensation plans, of which 96,317 shares related to the conversion of performance awards to restricted shares, and the remaining 68,209 shares valued at $15,150,000 were issued in connection with new stock grants; 1,183 shares valued at $217,000 were issued through the Company's dividend reinvestment plan; 73,089 shares valued at $14,750,000 were withheld to satisfy employees' tax withholding and other liabilities; and 4,050 restricted shares with an aggregate value of $685,000 previously issued in connection with employee compensation were canceled upon forfeiture.

Common stock dividends declared but not paid totaled $224,482,000.

The Company recorded a decrease of $325,000 in redeemable noncontrolling interest with a corresponding increase 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 accrued expenses and other liabilities of $98,000, an increase in prepaid expenses and other assets of $178,000 and a corresponding adjustment to accumulated other comprehensive loss, and reclassified $4,250,000 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 $46,875,000 of lease liabilities and offsetting right of use lease assets related to the execution of two new office leases.

During the six months ended June 30, 2019:

The Company issued 150,359 shares of common stock 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.  

The Company recorded an increase to accrued expenses and 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.

4



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.



5


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 in New England, the New York/New Jersey metro area, the Mid-Atlantic, the Pacific Northwest, and Northern and Southern California, as well as in the Company's expansion markets in Southeast Florida and Denver, Colorado (the "Expansion Markets").

At June 30, 2020, the Company owned or held a direct or indirect ownership interest in 276 operating apartment communities containing 80,182 apartment homes in 11 states and the District of Columbia. In addition, the Company owned or held a direct or indirect ownership interest in 19 communities under development that are expected to contain an aggregate of 6,198 apartment homes when completed, as well as The Park Loggia, which contains 172 for-sale residential condominiums, of which 52 have been sold as of June 30, 2020, and 67,000 square feet of retail space, of which 64% has been leased as of June 30, 2020. 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 9,786 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 2019 Annual Report on Form 10-K. The results of operations for the three and six months ended June 30, 2020 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):

6


 
For the three months ended
 
For the six months ended
 
6/30/2020
 
6/30/2019
 
6/30/2020
 
6/30/2019
Basic and diluted shares outstanding
 

 
 

 
 
 
 
Weighted average common shares - basic
140,450,744

 
139,113,390

 
140,413,857

 
138,724,479

Weighted average DownREIT units outstanding
7,500

 
7,500

 
7,500

 
7,500

Effect of dilutive securities
279,916

 
497,341

 
330,974

 
495,397

Weighted average common shares - diluted
140,738,160

 
139,618,231

 
140,752,331

 
139,227,376

 
 
 
 
 
 
 
 
Calculation of Earnings per Share - basic
 

 
 

 
 
 
 
Net income attributable to common stockholders
$
170,828

 
$
168,281

 
$
338,799

 
$
338,647

Net income allocated to unvested restricted shares
(390
)
 
(435
)
 
(817
)
 
(935
)
Net income attributable to common stockholders, adjusted
$
170,438

 
$
167,846

 
$
337,982

 
$
337,712

 
 
 
 
 
 
 
 
Weighted average common shares - basic
140,450,744

 
139,113,390

 
140,413,857

 
138,724,479

 
 
 
 
 
 
 
 
Earnings per common share - basic
$
1.21

 
$
1.21

 
$
2.41

 
$
2.43

 
 
 
 
 
 
 
 
Calculation of Earnings per Share - diluted
 

 
 

 
 
 
 
Net income attributable to common stockholders
$
170,828

 
$
168,281

 
$
338,799

 
$
338,647

Add: noncontrolling interests of DownREIT unitholders in consolidated partnerships
12

 
12

 
24

 
23

Adjusted net income attributable to common stockholders
$
170,840

 
$
168,293

 
$
338,823

 
$
338,670

 
 
 
 
 
 
 
 
Weighted average common shares - diluted
140,738,160

 
139,618,231

 
140,752,331

 
139,227,376

 
 
 
 
 
 
 
 
Earnings per common share - diluted
$
1.21

 
$
1.21

 
$
2.41

 
$
2.43

 

All options to purchase shares of common stock outstanding as of June 30, 2020 and 2019 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.


7


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.

For-Sale Condominium Inventory

The Company presents for-sale condominium inventory at historical cost and evaluates the condominium inventory for impairment when potential indicators exist, as further discussed in Note 6, "Real Estate Disposition Activities." 

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 and (ii) office leases for its corporate headquarters and regional offices.

Lessee Considerations

The Company assesses 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’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. Lease payments included in the lease liability include only payments that depend on an index or rate. For leases that have options to extend the term or terminate the lease early, the Company only factored the impact of such 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 on a lease by lease basis using the Company’s actual borrowing rates as well as indicative market pricing for longer term rates and taking into consideration the remaining term of each of the lease agreements.


8


Lessor Considerations

The Company evaluates leases in which it is the lessor, which are composed of residential and retail leases at its apartment communities, and determined these leases 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, which, for residential leases, 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, it is reasonably certain that the lessee will exercise this option.

Revenue and Gain Recognition

Revenue from contracts with customers is recognized in accordance with the transfer of goods and services to customers at an amount that reflects the consideration that the Company expects to be entitled to for those goods and services. The majority of the Company’s revenue is derived from residential and retail rental income and other lease income, which are accounted for under ASC 842, Leases, discussed above. The Company's revenue streams that are not accounted for under ASC 842 include (i) management fees, (ii) rental and non-rental related income and (iii) gains or losses on the sale of real estate.

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, 2020 and 2019. Segment information for total revenue has been adjusted to exclude the real estate assets that were sold from January 1, 2019 through June 30, 2020, or otherwise qualify as held for sale as of June 30, 2020, as described in Note 6, "Real Estate Disposition Activities" (dollars in thousands):
 
 
For the three months ended
 
 
Established
Communities
 
Other
Stabilized
Communities
 
Development/
Redevelopment
Communities (1)
 
Non-
allocated (2)
 
Total
For the period ended June 30, 2020
 
 
 
 
 
 
 
 
 
 
Management, development and other fees
 
$

 
$

 
$

 
$
926

 
$
926

Rental and non-rental related income (3)
 
1,870

 
317

 
295

 

 
2,482

Total non-lease revenue (4)
 
1,870

 
317

 
295

 
926

 
3,408

 
 
 
 
 
 
 
 
 
 
 
Lease income (5)
 
521,558

 
34,360

 
16,397

 

 
572,315

Business interruption insurance proceeds
 
103

 

 

 

 
103

 
 
 
 
 
 
 
 
 
 
 
Total revenue
 
$
523,531

 
$
34,677


$
16,692


$
926


$
575,826

 
 
 
 
 
 
 
 
 
 
 
For the period ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
Management, development and other fees
 
$

 
$

 
$

 
$
1,114

 
$
1,114

Rental and non-rental related income (3)
 
2,154

 
153

 
51

 

 
2,358

Total non-lease revenue (4)
 
2,154

 
153

 
51

 
1,114

 
3,472

 
 
 
 
 
 
 
 
 
 
 
Lease income (5)
 
536,916

 
25,369

 
2,359

 

 
564,644

Business interruption insurance proceeds
 
435

 

 

 

 
435

 
 
 
 
 
 
 
 
 
 
 
Total revenue
 
$
539,505

 
$
25,522

 
$
2,410

 
$
1,114

 
$
568,551



9


 
 
For the six months ended
 
 
Established
Communities
 
Other
Stabilized
Communities
 
Development/
Redevelopment
Communities (1)
 
Non-
allocated (2)
 
Total
For the period ended June 30, 2020
 
 
 
 
 
 
 
 
 
 
Management, development and other fees
 
$

 
$

 
$

 
$
1,933

 
$
1,933

Rental and non-rental related income (3)
 
3,478

 
793

 
527

 

 
4,798

Total non-lease revenue (4)
 
3,478

 
793

 
527

 
1,933

 
6,731

 
 
 
 
 
 
 
 
 
 
 
Lease income (5)
 
1,067,906

 
69,374

 
31,938

 

 
1,169,218

Business interruption insurance proceeds
 
103

 

 

 

 
103

 
 
 
 
 
 
 
 
 
 
 
Total revenue
 
$
1,071,487

 
$
70,167

 
$
32,465

 
$
1,933

 
$
1,176,052

 
 
 
 
 
 
 
 
 
 
 
For the period ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
Management, development and other fees
 
$

 
$

 
$

 
$
2,252

 
$
2,252

Rental and non-rental related income (3)
 
3,986

 
634

 
67

 

 
4,687

Total non-lease revenue (4)
 
3,986

 
634

 
67

 
2,252

 
6,939

 
 
 
 
 
 
 
 
 
 
 
Lease income (5)
 
1,066,742

 
46,914

 
2,892

 

 
1,116,548

Business interruption insurance proceeds
 
607

 

 

 

 
607

 
 
 
 
 
 
 
 
 
 
 
Total revenue
 
$
1,071,335

 
$
47,548

 
$
2,959

 
$
2,252

 
$
1,124,094

__________________________________
(1)
The Company had no Redevelopment Communities for the three and six months ended June 30, 2020 and 2019.
(2)
Revenue represents third-party management, asset management and developer fees and miscellaneous income which are not allocated to a reportable segment.
(3)
Amounts include revenue streams related to leasing activities that are not considered components of a lease, including but not limited to, apartment hold fees and application fees, as well as revenue streams not related to leasing activities, including but not limited to, vendor revenue sharing, building advertising, vending and dry cleaning revenue.
(4)
Represents all revenue accounted for under ASU 2014-09.
(5)
Amounts include all revenue streams derived from residential and retail rental income and other lease income, which are accounted for under ASC 842.

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, 2020.

COVID-19 Pandemic

In March 2020, the World Health Organization designated COVID-19 as a pandemic. While the Company has taken various actions in response to the COVID-19 pandemic, the ultimate impact on its consolidated results of operations, cash flows, financial condition and liquidity will depend on (i) the duration and severity of the pandemic, (ii) the duration and nature of governmental responses to contain the spread of the disease and assist consumers and businesses and (iii) how quickly and to what extent normal economic and operating conditions can resume. Because of this uncertainty, the Company is not able to estimate the expected impact of the COVID-19 pandemic on its results of operations, cash flows, financial condition, or liquidity for the year ending December 31, 2020 at this time.

As of June 30, 2020, the Company assessed the collectibility of the outstanding lease income receivables as a result of the impact of the COVID-19 pandemic on its residential and retail lease portfolios. The Company recorded an aggregate offset to income for uncollectible lease revenue for its residential and retail portfolios of $20,099,000 and $24,279,000 for the three and six months ended June 30, 2020, respectively, under ASC 842 and ASC 450, Contingencies.


10


Recently Issued and Adopted Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This ASU requires entities to estimate a lifetime expected credit loss for most financial assets, including (i) trade and other receivables, (ii) other long term financings including available for sale and held-to-maturity debt securities and (iii) loans. Subsequently, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which amends the scope of ASU 2016-13 and clarified that receivables arising from operating leases are not within the scope of the standard and should continue to be accounted for in accordance with the leases standard (Topic 842). The new standard was adopted on January 1, 2020 and does not have a material effect on the Company’s financial position or results of operations.

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 $11,019,000 and $17,127,000 for the three months ended June 30, 2020 and 2019, respectively, and $22,517,000 and $34,716,000 for the six months ended June 30, 2020 and 2019, respectively.

3.  Mortgage Notes Payable, Unsecured Notes and Credit Facility

The Company's mortgage notes payable, unsecured notes, variable rate unsecured term loans (the "Term Loans") and Credit Facility, as defined below, as of June 30, 2020 and December 31, 2019 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, 2020 and December 31, 2019, as shown in the accompanying Condensed Consolidated Balance Sheets (dollars in thousands) (see Note 6, "Real Estate Disposition Activities").
 
6/30/2020
 
12/31/2019
 
 
 
 
Fixed rate unsecured notes (1)
$
6,500,000

 
$
5,850,000

Variable rate unsecured notes (1)

 
300,000

Term Loans (1)
250,000

 
250,000

Fixed rate mortgage notes payable - conventional and tax-exempt (2)
478,070

 
479,221

Variable rate mortgage notes payable - conventional and tax-exempt (2)
471,450

 
476,150

Total mortgage notes payable and unsecured notes and Term Loans
7,699,520

 
7,355,371

Credit Facility

 

Total mortgage notes payable, unsecured notes, Term Loans and Credit Facility
$
7,699,520

 
$
7,355,371

_____________________________________
(1)
Balances at June 30, 2020 and December 31, 2019 exclude $11,183 and $8,610, respectively, of debt discount, and $40,379 and $32,742, respectively, of deferred financing costs, as reflected in unsecured notes, net on the accompanying Condensed Consolidated Balance Sheets.
(2)
Balances at June 30, 2020 and December 31, 2019 exclude $14,618 and $14,464, respectively, of debt discount, and $3,130 and $3,265, respectively, of deferred financing costs, as reflected in mortgage notes payable, net on the accompanying Condensed Consolidated Balance Sheets.

The following debt activity occurred during the six months ended June 30, 2020:

In February 2020, the Company issued $700,000,000 principal amount of unsecured notes in a public offering under its existing shelf registration statement for net proceeds of approximately $694,701,000. The notes mature in March 2030 and were issued at a 2.30% interest rate.

In February 2020, the Company refinanced the secured borrowing for Avalon San Bruno III. The secured borrowing had a fixed interest rate of 3.08% and was refinanced for a principal balance of $51,000,000, with a fixed interest rate of 2.38% and maturity date of March 2027.


11


In March 2020, the Company repaid (i) $400,000,000 principal amount of its 3.625% unsecured notes in advance of the October 2020 scheduled maturity and (ii) $250,000,000 principal amount of its 3.95% unsecured notes in advance of the January 2021 scheduled maturity. In conjunction with these repayments, the Company recognized a loss on debt extinguishment of $9,170,000 for prepayment penalties and the non-cash write-off of unamortized deferred financing costs.

In May 2020, the Company issued $600,000,000 principal amount of unsecured notes in a public offering under its existing shelf registration statement for net proceeds of approximately $593,430,000. The notes mature in January 2031 and were issued at a 2.45% interest rate.

In May 2020, the Company repaid $300,000,000 principal amount of its variable rate unsecured notes in advance of the January 2021 scheduled maturity, recognizing a charge of $268,000 for the non-cash write-off of deferred financing costs.

At June 30, 2020, the Company had a $1,750,000,000 revolving variable rate unsecured credit facility with a syndicate of banks (the “Credit Facility”) which matures in February 2024. The Credit Facility bears interest at varying levels based on (i) the London Interbank Offered Rate (“LIBOR”) applicable to the period of borrowing for a particular draw of funds from the facility (e.g., one month to maturity, three months to maturity, etc.) and (ii) the rating levels issued for our unsecured notes. The current stated pricing for drawn borrowings is LIBOR plus 0.775% per annum (0.94% at June 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 the Company's current credit rating).

The Company had no borrowings outstanding under the Credit Facility as of June 30, 2020 and December 31, 2019