Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

August 6, 2015


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, 2015
 
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) 
 
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 ý                    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes ý                    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Accelerated filer o
Non-accelerated filer (Do not check if a smaller reporting company) o
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o                    No ý

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:

132,902,193 shares of common stock, par value $0.01 per share, were outstanding as of July 31, 2015.


Table of Contents

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




Table of Contents



AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
 
6/30/2015
 
12/31/2014
 
(unaudited)
 
 
ASSETS
 

 
 

Real estate:
 

 
 

Land and improvements
$
3,524,350

 
$
3,432,769

Buildings and improvements
12,634,057

 
12,258,009

Furniture, fixtures and equipment
429,308

 
402,940

 
16,587,715

 
16,093,718

Less accumulated depreciation
(3,092,205
)
 
(2,874,578
)
Net operating real estate
13,495,510

 
13,219,140

Construction in progress, including land
1,536,368

 
1,417,246

Land held for development
487,205

 
180,516

Operating real estate assets held for sale, net
61,939

 
118,838

Total real estate, net
15,581,022

 
14,935,740

 
 
 
 
Cash and cash equivalents
65,126

 
509,460

Cash in escrow
103,679

 
95,625

Resident security deposits
31,290

 
29,617

Investments in unconsolidated real estate entities
264,616

 
298,315

Deferred financing costs, net
40,108

 
39,728

Deferred development costs
28,103

 
67,029

Prepaid expenses and other assets
206,532

 
201,209

Total assets
$
16,320,476

 
$
16,176,723

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Unsecured notes, net
$
3,567,831

 
$
2,993,265

Variable rate unsecured credit facility

 

Mortgage notes payable
2,919,299

 
3,532,587

Dividends payable
166,113

 
153,207

Payables for construction
109,158

 
101,946

Accrued expenses and other liabilities
242,133

 
244,549

Accrued interest payable
40,809

 
41,318

Resident security deposits
53,403

 
49,189

Liabilities related to real estate assets held for sale
657

 
1,492

Total liabilities
7,099,403

 
7,117,553

 
 
 
 
Redeemable noncontrolling interests
10,588

 
12,765

 
 
 
 
Equity:
 

 
 

Preferred stock, $0.01 par value; $25 liquidation preference; 50,000,000 shares authorized at June 30, 2015 and December 31, 2014; zero shares issued and outstanding at June 30, 2015 and December 31, 2014

 

Common stock, $0.01 par value; 280,000,000 shares authorized at June 30, 2015 and December 31, 2014; 132,888,167 and 132,050,382 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively
1,329

 
1,320

Additional paid-in capital
9,466,120

 
9,354,685

Accumulated earnings less dividends
(217,441
)
 
(267,085
)
Accumulated other comprehensive loss
(39,523
)
 
(42,515
)
Total equity
9,210,485

 
9,046,405

Total liabilities and equity
$
16,320,476

 
$
16,176,723

 
See accompanying notes to Condensed Consolidated Financial Statements.



1

Table of Contents

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
 
6/30/2015
 
6/30/2014
 
6/30/2015
 
6/30/2014
Revenue:
 

 
 

 
 
 
 
Rental and other income
$
454,517

 
$
411,134

 
$
894,273

 
$
808,131

Management, development and other fees
2,942

 
2,672

 
5,553

 
5,750

Total revenue
457,459

 
413,806

 
899,826

 
813,881

 
 
 
 
 
 
 
 
Expenses:
 

 
 

 
 
 
 
Operating expenses, excluding property taxes
112,069

 
101,059

 
224,845

 
199,601

Property taxes
45,913

 
42,439

 
93,089

 
86,924

Interest expense, net
44,590

 
43,722

 
90,164

 
86,255

(Gain) loss on extinguishment of debt, net
(7,749
)
 
412

 
(7,749
)
 
412

Depreciation expense
118,627

 
110,395

 
235,480

 
216,762

General and administrative expense
11,628

 
10,220

 
22,111

 
19,456

Expensed acquisition, development and other pursuit costs, net of recoveries
673

 
2,017

 
1,860

 
2,732

Casualty and impairment gain, net
(17,114
)
 

 
(11,326
)
 

Total expenses
308,637

 
310,264

 
648,474

 
612,142

 
 
 
 
 
 
 
 
Equity in income of unconsolidated real estate entities
13,806

 
7,710

 
48,371

 
12,933

Gain on sale of real estate
9,625

 

 
9,647

 

Gain on sale of communities

 
60,945

 
70,936

 
60,945

 
 
 
 
 
 
 
 
Income from continuing operations
172,253

 
172,197

 
380,306

 
275,617

 
 
 
 
 
 
 
 
Discontinued operations:
 

 
 

 
 
 
 
Income from discontinued operations

 

 

 
310

Gain on sale of discontinued operations

 

 

 
37,869

Total discontinued operations

 

 

 
38,179

 
 
 
 
 
 
 
 
Net income
172,253

 
172,197

 
380,306

 
313,796

Net loss (income) attributable to noncontrolling interests
71

 
(14,111
)
 
163

 
(13,971
)
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
$
172,324

 
$
158,086

 
$
380,469

 
$
299,825

 
 
 
 
 
 
 
 
Other comprehensive income:
 

 
 

 
 
 
 
Cash flow hedge losses reclassified to earnings
1,427

 
1,438

 
2,992

 
3,011

Comprehensive income
$
173,751

 
$
159,524

 
$
383,461

 
$
302,836

 
 
 
 
 
 
 
 
Earnings per common share - basic:
 

 
 

 
 
 
 
Income from continuing operations attributable to common stockholders
$
1.30

 
$
1.22

 
$
2.88

 
$
2.02

Discontinued operations attributable to common stockholders

 

 

 
0.29

Net income attributable to common stockholders
$
1.30

 
$
1.22

 
$
2.88

 
$
2.31

 
 
 
 
 
 
 
 
Earnings per common share - diluted:
 

 
 

 
 
 
 
Income from continuing operations attributable to common stockholders
$
1.29

 
$
1.21

 
$
2.86

 
$
2.02

Discontinued operations attributable to common stockholders

 

 

 
0.29

Net income attributable to common stockholders
$
1.29

 
$
1.21

 
$
2.86

 
$
2.31

 
 
 
 
 
 
 
 
Dividends per common share
$
1.25

 
$
1.16

 
$
2.50

 
$
2.32


See accompanying notes to Condensed Consolidated Financial Statements.



2

Table of Contents

AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in thousands)
 
For the six months ended
 
6/30/2015
 
6/30/2014
Cash flows from operating activities:
 
 
 
Net income
$
380,306

 
$
313,796

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation expense
235,480

 
216,762

Amortization of deferred financing costs
3,379

 
3,164

Amortization of debt premium
(14,815
)
 
(17,554
)
(Gain) loss on extinguishment of debt, net
(7,749
)
 
412

Amortization of stock-based compensation
8,255

 
6,190

Equity in loss (income) of, and return on, unconsolidated entities and noncontrolling interests, net of eliminations
8,432

 
(1,363
)
Casualty and impairment gain, net
(17,303
)
 

Abandonment of development pursuits

 
1,455

Cash flow hedge losses reclassified to earnings
2,992

 
3,011

Gain on sale of real estate assets
(91,456
)
 
(98,814
)
(Increase) decrease in cash in operating escrows
(9,357
)
 
3,489

Increase in resident security deposits, prepaid expenses and other assets
(3,439
)
 
(8,094
)
Decrease in accrued expenses, other liabilities and accrued interest payable
(2,823
)
 
(12,743
)
Net cash provided by operating activities
491,902

 
409,711

 
 
 
 
Cash flows from investing activities:
 
 
 
Development/redevelopment of real estate assets including land acquisitions and deferred development costs
(865,497
)
 
(547,800
)
Capital expenditures - existing real estate assets
(50,584
)
 
(20,617
)
Capital expenditures - non-real estate assets
(1,432
)
 
(5,187
)
Proceeds from sale of real estate, net of selling costs
135,841

 
186,651

Insurance recoveries for property damage claims
44,142

 

Mortgage note receivable payment

 
21,748

Increase in payables for construction
7,126

 
1,389

Distributions from unconsolidated real estate entities
36,858

 
55,096

Investments in unconsolidated real estate entities
(803
)
 
(2,796
)
Net cash used in investing activities
(694,349
)
 
(311,516
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Issuance of common stock
97,326

 
214,970

Dividends paid
(318,240
)
 
(288,610
)
Issuance of mortgage notes payable

 
53,000

Repayments of mortgage notes payable, including prepayment penalties
(588,226
)
 
(24,768
)
Issuance of unsecured notes
574,066

 
250,000

Repayment of unsecured notes

 
(150,000
)
Payment of deferred financing costs
(4,277
)
 
(3,414
)
Distributions to DownREIT partnership unitholders
(19
)
 
(17
)
Distributions to joint venture and profit-sharing partners
(187
)
 
(170
)
Redemption of preferred interest obligation
(2,330
)
 
(4,800
)
Net cash (used in) provided by financing activities
(241,887
)
 
46,191

 
 
 
 
Net (decrease) increase in cash and cash equivalents
(444,334
)
 
144,386

 
 
 
 
Cash and cash equivalents, beginning of period
509,460

 
281,355

Cash and cash equivalents, end of period
$
65,126

 
$
425,741

Cash paid during the period for interest, net of amount capitalized
$
91,572

 
$
94,343

 
See accompanying notes to Condensed Consolidated Financial Statements.

3

Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Supplemental disclosures of non-cash investing and financing activities:

During the six months ended June 30, 2015:

As described in Note 4, “Equity,” 157,779 shares of common stock were issued as part of the Company's stock based compensation plans, of which 95,826 shares related to the conversion of restricted stock units to restricted shares, and the remaining 61,953 shares valued at $10,721,000 were issued in connection with new stock grants; 46,589 shares valued at $3,552,000 were issued in conjunction with the conversion of deferred stock awards; 1,028 shares valued at $177,000 were issued through the Company’s dividend reinvestment plan; 36,104 shares valued at $5,793,000 were withheld to satisfy employees’ tax withholding and other liabilities; and 2,011restricted stock units with a value of $226,000 previously issued in connection with employee compensation were canceled upon forfeiture.

Common stock dividends declared but not paid totaled $166,113,000.

The Company recorded a decrease of $1,807,000 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 10, “Fair Value.”

The Company reclassified $2,992,000 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.

As discussed in Note 5, "Investments in Real Estate Entities," the Company recognized a charge of $21,844,000 to write off the net book value of the fixed assets destroyed by the Edgewater fire.

During the six months ended June 30, 2014:

The Company issued 113,822 shares of common stock as part of the Company's stock based compensation plan, of which 16,193 shares related to the conversion of restricted units to restricted shares, and the remaining 97,629 shares valued at $12,607,000 were issued in connection with new stock grants; 1,286 shares valued at $165,000 were issued through the Company’s dividend reinvestment plan; 50,105 shares valued at $4,689,000 were withheld to satisfy employees’ tax withholding and other liabilities; and restricted units valued at $1,284,000 previously issued in connection with employee compensation were canceled upon forfeiture.

Common stock dividends declared but not paid totaled $152,113,000.

The Company recorded a decrease of $626,000 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.

The Company reclassified $3,011,000 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.

The Company derecognized $17,816,000 in noncontrolling interest in conjunction with the deconsolidation of an AvalonBay Value Added Fund I, L.P. ("Fund I") subsidiary.



4

Table of Contents

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, 2015, the Company owned or held a direct or indirect ownership interest in 257 operating apartment communities containing 74,857 apartment homes in 11 states and the District of Columbia, of which seven communities containing 2,787 apartment homes were under reconstruction. In addition, the Company has 26 communities under construction that are expected to contain an aggregate of 8,117 apartment homes when completed. 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 34 communities that, if developed as expected, will contain an estimated 10,080 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 2014 Annual Report on Form 10-K. The results of operations for the three and six months ended June 30, 2015 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

Table of Contents

 
For the three months ended
 
For the six months ended
 
6/30/2015
 
6/30/2014
 
6/30/2015
 
6/30/2014
Basic and diluted shares outstanding
 

 
 

 
 
 
 
Weighted average common shares - basic
131,977,578

 
129,856,335

 
131,930,916

 
129,574,118

Weighted average DownREIT units outstanding
7,500

 
7,500

 
7,500

 
7,500

Effect of dilutive securities
1,101,361

 
384,486

 
1,192,947

 
356,614

Weighted average common shares - diluted
133,086,439

 
130,248,321

 
133,131,363

 
129,938,232

 
 
 
 
 
 
 
 
Calculation of Earnings per Share - basic
 

 
 

 
 
 
 
Net income attributable to common stockholders
$
172,324

 
$
158,086

 
$
380,469

 
$
299,825

Net income allocated to unvested restricted shares
(445
)
 
(254
)
 
(975
)
 
(487
)
Net income attributable to common stockholders, adjusted
$
171,879

 
$
157,832

 
$
379,494

 
$
299,338

 
 
 
 
 
 
 
 
Weighted average common shares - basic
131,977,578

 
129,856,335

 
131,930,916

 
129,574,118

 
 
 
 
 
 
 
 
Earnings per common share - basic
$
1.30

 
$
1.22

 
$
2.88

 
$
2.31

 
 
 
 
 
 
 
 
Calculation of Earnings per Share - diluted
 

 
 

 
 
 
 
Net income attributable to common stockholders
$
172,324

 
$
158,086

 
$
380,469

 
$
299,825

Add: noncontrolling interests of DownREIT unitholders in consolidated partnerships, including discontinued operations
9

 
9

 
19

 
17

Adjusted net income available to common stockholders
$
172,333

 
$
158,095

 
$
380,488

 
$
299,842

 
 
 
 
 
 
 
 
Weighted average common shares - diluted
133,086,439

 
130,248,321

 
133,131,363

 
129,938,232

 
 
 
 
 
 
 
 
Earnings per common share - diluted
$
1.29

 
$
1.21

 
$
2.86

 
$
2.31

 

All options to purchase shares of common stock outstanding as of June 30, 2015 are included in the computation of diluted earnings per share. Certain options to purchase shares of common stock in the amount of 243,326 were outstanding at June 30, 2014, but were not included in the computation of diluted earnings per share because such options were anti-dilutive for the quarter.

The Company is required to estimate the forfeiture of stock options and recognize compensation cost net of the estimated forfeitures.  The estimated forfeitures included in compensation cost are adjusted to reflect actual forfeitures at the end of the vesting period.  The forfeiture rate at June 30, 2015 was 1.0% and is based on the average forfeiture activity over a period equal to the estimated life of the stock options. The application of estimated forfeitures did not materially impact compensation expense for the three and six months ended June 30, 2015 or 2014.

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 Derivatives 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 general and administrative expenses. 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. Fair value changes for derivatives that are not in qualifying hedge relationships are reported as a component of interest expense, net.  For the Hedging Derivatives positions that the Company has determined qualify as effective cash flow hedges, the Company has recorded the effective portion of cumulative changes in the fair value of Hedging Derivatives in other comprehensive income.  Amounts recorded in other comprehensive income 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 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 10, "Fair Value," for further discussion of derivative financial instruments.

6

Table of Contents


Legal and Other Contingencies

In January 2015, a fire occurred at the Company’s Avalon at Edgewater apartment community located in Edgewater, New Jersey ("Edgewater"). Edgewater consisted of two residential buildings. One building, containing 240 apartment homes, was destroyed. The second building, containing 168 apartment homes, suffered minimal damage and has been repaired. The Company is still assessing the direct losses resulting from the fire as well as its potential liability to third parties who incurred damages as a result of the fire. The Company is also evaluating whether to rebuild and replace the building that was destroyed and does not believe that the outcome of this decision will have a material impact on the Company’s financial condition or results of operations.

The Company believes that the fire was caused by sparks from a torch used during repairs being performed by a Company employee who was not a licensed plumber. The Company’s insurers have begun to negotiate and settle claims made by third parties who incurred property damage and other losses. Four putative class action lawsuits have been filed on behalf of Edgewater residents and others who may have been harmed by the fire. In addition, 15 lawsuits representing over 120 individual plaintiffs have been filed against the Company. The Company believes that it has meritorious defenses to the extent of damages claimed. Additional lawsuits arising from the fire may be filed.

Following the fire, the Company received a civil citation for “failure to notify Fire Department of an active fire” from Bergen County, New Jersey. The Company has decided not to appeal this citation. The Company has also received two citations that were deemed serious by the Occupational Safety and Health Administration ("OSHA"); the Company has informed OSHA that it plans to appeal these citations. It is possible that additional governmental investigations are or may be ongoing. The Company is unable to evaluate the nature and potential materiality of any such investigations or actions.

Having incurred applicable deductibles and a self-insured amount equal to 12% of the first $50,000,000 of property damage, the Company currently believes that all of its remaining liability to third parties and all of the Company's additional cost for replacement cost coverage for property damage resulting from the fire will be substantially covered by its insurance policies. However, the Company can give no assurances in this regard and continues to evaluate this matter. See Note 5, "Investments in Real Estate Entities," and Part II, Item 1, "Legal Proceedings," for further discussion of the casualty gains and losses and lawsuits associated with the Edgewater fire.

The Company is involved in various other claims and/or administrative proceedings unrelated to the Edgewater fire 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 other outstanding litigation matters, individually or in the aggregate, will have a material adverse effect on its financial condition or results of operations.

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 requires the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree to be recognized at fair value. Typical assets and liabilities acquired include land, building, furniture, fixtures, and equipment, 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.

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’ financial statements to conform to current year presentations as a result of changes in held for sale classification as described in Note 6, “Real Estate Disposition Activities.”


7

Table of Contents

Recently Issued Accounting Standards

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, a revenue recognition standard that will result in companies recognizing revenue from contracts when control for the service or product that is the subject of the contract is transferred from the seller to the buyer. The guidance is effective in the first quarter of 2018, and the Company is assessing whether the new standard will have a material effect on its financial position or results of operations.

In February 2015, the FASB issued ASU 2015-02, Consolidation: Amendments to the Consolidation Analysis, which amends the criteria for determining variable interest entities (“VIEs”), amends the criteria for determining if a service provider possesses a variable interest in a VIE, and eliminates the presumption that a general partner should consolidate a limited partnership. The guidance is effective in the first quarter of 2016 and allows for early adoption. The Company is currently assessing the effect of adoption on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. The guidance requires debt issuance costs related to a recognized debt liability to be presented as a direct deduction from the carrying amount of that debt liability. The new guidance will only impact financial statement presentation. The guidance is effective in the first quarter of 2016 and allows for early adoption. The Company does not expect the adoption of this standard to materially impact its consolidated financial statements.

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 $19,800,000 and $18,626,000 for the three months ended June 30, 2015 and 2014, respectively, and $38,830,000 and $38,305,000 for the six months ended June 30, 2015 and 2014, respectively.

3.  Notes Payable, Unsecured Notes and Credit Facility

The Company’s mortgage notes payable, unsecured notes, Term Loan and Credit Facility, both as defined below, as of June 30, 2015 and December 31, 2014, are summarized below (dollars in thousands).  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, 2015 and December 31, 2014, as shown in the Condensed Consolidated Balance Sheets (dollars in thousands) (see Note 6, “Real Estate Disposition Activities”).
 
6/30/2015
 
12/31/2014
 
 
 
 
Fixed rate unsecured notes (1)
$
3,275,000

 
$
2,750,000

Term Loan
300,000

 
250,000

Fixed rate mortgage notes payable - conventional and tax-exempt (2)
1,812,557

 
2,400,677

Variable rate mortgage notes payable - conventional and tax-exempt (2)
1,046,332

 
1,047,461

Total mortgage notes payable and unsecured notes
6,433,889

 
6,448,138

Credit Facility

 

Total mortgage notes payable, unsecured notes and Credit Facility
$
6,433,889

 
$
6,448,138

_____________________________________

(1)
Balances at June 30, 2015 and December 31, 2014 exclude $7,169 and $6,735 of debt discount, respectively, as reflected in unsecured notes, net on the Company’s Condensed Consolidated Balance Sheets.
(2)
Balances at June 30, 2015 and December 31, 2014 exclude $60,410 and $84,449 of debt premium, respectively, as reflected in mortgage notes payable on the Company’s Condensed Consolidated Balance Sheets.

The following debt activity occurred during the six months ended June 30, 2015:

In January 2015, in conjunction with the disposition of Avalon on Stamford Harbor, another operating community, AVA Belltown, was substituted as collateral for the disposed community's outstanding fixed rate secured mortgage loan.

In March 2015, the Company borrowed the final $50,000,000 available under the $300,000,000 variable rate unsecured term loan (the “Term Loan”), maturing in March 2021.


8

Table of Contents

In April 2015, the Company repaid an aggregate of $481,582,000 principal amount of secured indebtedness, which includes eight fixed rate mortgage loans secured by eight wholly-owned operating communities, at par. The indebtedness had an aggregate effective interest rate of 3.12%, and a stated maturity date of November 2015. The Company incurred a gain on the early debt extinguishment of $8,724,000, representing the excess of the write-off of unamortized premium resulting from the debt assumed in the Archstone Acquisition, as defined in our Form 10-K for the year ended December 31, 2014.

In May 2015, the Company issued $525,000,000 principal amount of unsecured notes in a public offering under its existing shelf registration statement for net proceeds of approximately $520,653,000. The notes mature in June 2025 and were issued at a 3.45% coupon interest rate.

In June 2015, the Company repaid a $15,778,000 fixed rate secured mortgage note with an effective interest rate of 7.50% at par in advance of its February 2041 maturity date, recognizing a charge of $455,000 for a prepayment penalty and write-off of deferred financing costs.

In June 2015, the Company repaid a $7,805,000 fixed rate secured mortgage note with an effective interest rate of 7.84% at par and without penalty in advance of its May 2027 maturity date, recognizing a charge of $263,000 for the write-off of deferred financing costs.

In June 2015, the Company repaid the $74,531,000 fixed rate secured mortgage note secured by Edgewater with an effective interest rate of 5.95% at par and without penalty in advance of its May 2019 maturity date, recognizing a charge of $259,000 for the write-off of deferred financing costs.

The Company has a $1,300,000,000 revolving variable rate unsecured credit facility with a syndicate of banks (the “Credit Facility”) which matures in April 2017. The Company has the option to extend the maturity by up to one year under two, six month extension options for an aggregate fee of $1,950,000. The Credit Facility bears interest at varying levels based on the LIBOR rating levels achieved on the unsecured notes and on a maturity schedule selected by the Company. The current stated pricing is LIBOR plus 0.95% (1.14% at June 30, 2015), assuming a one month borrowing rate. The annual facility fee is approximately $1,950,000 based on the $1,300,000,000 facility size and based on the Company’s current credit rating.

The Company had no borrowings outstanding under the Credit Facility and had $46,119,000 and $49,407,000 outstanding in letters of credit that reduced the borrowing capacity as of June 30, 2015 and December 31, 2014, respectively.

In the aggregate, secured notes payable mature at various dates from December 2015 through July 2066, and are secured by certain apartment communities (with a net carrying value of $3,549,533,000, excluding communities classified as held for sale, as of June 30, 2015).

As of June 30, 2015, the Company has guaranteed approximately $234,500,000 of mortgage notes payable held by wholly-owned subsidiaries; all such mortgage notes payable are consolidated for financial reporting purposes. The weighted average interest rate of the Company’s fixed rate mortgage notes payable (conventional and tax-exempt) was 4.7% and 4.5% at June 30, 2015 and December 31, 2014, respectively.  The weighted average interest rate of the Company’s variable rate mortgage notes payable (conventional and tax exempt), the Term Loan and its Credit Facility, including the effect of certain financing related fees, was 1.8% at both June 30, 2015 and December 31, 2014.

Scheduled payments and maturities of mortgage notes payable and unsecured notes outstanding at June 30, 2015 are as follows (dollars in thousands):

9

Table of Contents

Year
 
Secured notes payments
 
Secured notes maturities
 
Unsecured notes maturities
 
Stated interest rate of unsecured notes
 
 
 
 
 
 
 
 
 
2015
 
$
8,443

 
$
104,198

 
$

 
%
 
 
 
 
 
 
 
 
 
2016
 
17,298

 
16,256

 
250,000

 
5.750
%
 
 
 
 
 
 
 
 
 
2017
 
18,365

 
710,091

 
250,000

 
5.700
%
 
 
 
 
 
 
 
 
 
2018
 
17,632

 
76,940

 

 
%
 
 
 
 
 
 
 
 
 
2019
 
6,440

 
588,428

 

 
%
 
 
 
 
 
 
 
 
 
2020
 
5,475

 
50,825

 
250,000

 
6.100
%
 
 
 
 
 
 
 
 
 
 
 
 

 
 

 
400,000

 
3.625
%
 
 
 
 
 
 
 
 
 
2021
 
5,516

 
27,844

 
250,000

 
3.950
%
 
 
 
 
 
 
 
 
 
 
 
 

 
 

 
300,000

 
LIBOR + 1.450%

 
 
 
 
 
 
 
 
 
2022
 
5,881

 

 
450,000

 
2.950
%
 
 
 
 
 
 
 
 
 
2023
 
6,255

 

 
350,000

 
4.200
%
 
 
 
 
 
 
 
 
 
 
 
 

 
 

 
250,000

 
2.850
%
 
 
 
 
 
 
 
 
 
2024
 
5,567

 

 
300,000

 
3.500
%
 
 
 
 
 
 
 
 
 
Thereafter
 

 
1,187,435

 
525,000

 
3.450
%
 
 
 
 
 
 
 
 
 
 
 
$
96,872

 
$
2,762,017

 
$
3,575,000

 
 

 

The Company was in compliance at June 30, 2015 with customary financial and other covenants under the Credit Facility, the Term Loan, and the Company’s fixed rate unsecured notes.

4.  Equity

The following summarizes the changes in equity for the six months ended June 30, 2015 (dollars in thousands):
 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
earnings
less
dividends
 
Accumulated
other
comprehensive
loss
 
Total
equity
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
$
1,320

 
$
9,354,685

 
$
(267,085
)
 
$
(42,515
)
 
$
9,046,405

Net income attributable to common stockholders

 

 
380,469

 

 
380,469

Cash flow hedge loss reclassified to earnings

 

 

 
2,992

 
2,992

Change in redemption value of redeemable noncontrolling interest

 

 
1,807

 

 
1,807

Dividends declared to common stockholders

 

 
(331,323
)
 

 
(331,323
)
Issuance of common stock, net of withholdings
9

 
96,337

 
(1,309
)
 

 
95,037

Amortization of deferred compensation

 
15,098

 

 

 
15,098

Balance at June 30, 2015
$
1,329

 
$
9,466,120

 
$
(217,441
)
 
$
(39,523
)
 
$
9,210,485


As of June 30, 2015 and December 31, 2014, the Company’s charter had authorized for issuance a total of 280,000,000 shares of common stock and 50,000,000 shares of preferred stock.

10

Table of Contents


During the six months ended June 30, 2015, the Company:

i.
issued 54,196 shares of common stock in connection with stock options exercised;
ii.
issued 1,028 common shares through the Company’s dividend reinvestment plan;
iii.
issued 157,779 common shares in connection with stock grants and the conversion of restricted stock units to restricted shares;
iv.
issued 46,589 common shares in conjunction with the conversion of deferred stock awards;
v.
withheld 36,104 common shares to satisfy employees’ tax withholding and other liabilities;
vi.
issued 5,022 common shares through the Employee Stock Purchase Program; and
vii.
issued 609,275 shares of common stock in partial settlement of the Forward.

Any deferred compensation related to the Company’s stock option, restricted stock and restricted stock unit grants during the six months ended June 30, 2015 is not reflected on the Company’s Condensed Consolidated Balance Sheet as of June 30, 2015, and will not be reflected until earned as compensation cost.

In August 2012, the Company commenced a third continuous equity program (“CEP III”), under which the Company was authorized by its Board of Directors to sell up to $750,000,000 of shares of its common stock from time to time during a 36-month period, which expired on August 3, 2015.  Actual sales depended on a variety of factors determined by the Company, including market conditions, the trading price of the Company’s common stock and determinations by the Company of the appropriate sources of funding for the Company. In conjunction with CEP III, the Company engaged sales agents who receive compensation of approximately 1.5% of the gross sales price for shares sold. During the three and six months ended June 30, 2015, the Company had no sales under CEP III and had $346,304,000 authorized for common stock issuance remaining under this program as of June 30, 2015.

On September 9, 2014, based on a market closing price of $155.83 per share on that date, the Company entered into a forward contract to sell 4,500,000 shares of common stock for an initial forward price of $151.74 per share, net of offering fees and discounts (the "Forward"). The sales price and proceeds achieved by the Company are determined on the date or dates of settlement, with adjustments during the term of the contract for the Company’s dividends as well as for a daily interest factor that varies with changes in the Fed Funds rate. The Company generally has the ability to determine the date(s) and method of settlement, subject to certain conditions and the right of the Forward counterparty to accelerate settlement under certain circumstances. Settlement may be (i) physical sale of shares of our common stock for cash, (ii) net cash settlement, whereby the Company will either pay or receive the difference between the forward contract price and the weighted average market price for its common stock at the time of settlement, or (iii) net share settlement, whereby the Company will either receive or issue shares of its common stock, with the number of shares issued or received determined by the difference between the Forward price and the weighted average market price for its common stock at the time of settlement. The Forward price and the weighted average market price would in both cases be determined under the applicable terms of the Forward. Under either of the net settlement provisions, the Company will pay to the counterparty either cash or shares of its common stock when the weighted average market price of its common stock at the time of settlement exceeds the Forward price, and will receive either cash or shares of its common stock to the extent that the weighted average market price of its common stock at the time of settlement is less than the price under the Forward. Settlement of the Forward will occur on one or more dates not later than September 8, 2015. The Company accounts for the Forward as equity. Before the issuance of shares of the Company’s common stock, if any, upon physical or net share settlement of the Forward, the Company expects that the shares issuable upon settlement of the Forward will be reflected in its diluted earnings per share calculations using the treasury stock method. Under this method, the number of shares of the Company’s common stock used in calculating diluted earnings per share is deemed to be increased by the excess, if any, of the number of shares of common stock that would be issued upon full physical settlement of the Forward over the number of shares of common stock that could be purchased by the Company in the market (based on the average market price during the period) using the proceeds receivable upon full physical settlement (based on the adjusted forward sale price at the end of the reporting period). If and when the Company physically or net share settles the Forward, the delivery of shares of our common stock would result in an increase in the number of shares outstanding and dilution to our earnings per share. During the three months ended June 30, 2015, the Company issued 609,275 shares of common stock at a sales price of $147.72 per share, for net proceeds of $90,000,000, in partial settlement of the Forward.


11

Table of Contents

5.  Investments in Real Estate Entities

Investment in Unconsolidated Real Estate Entities

As of June 30, 2015, the Company had investments in five unconsolidated real estate entities, excluding an interest in the Residual JV (as defined in this Form 10-Q), with ownership interest percentages ranging from 20.0% to 31.3%. The Company accounts for its investments in unconsolidated real estate entities under the equity method of accounting. The significant accounting policies of the Company’s unconsolidated real estate entities are consistent with those of the Company in all material respects.

During the six months ended June 30, 2015, AvalonBay Value Added Fund II, L.P. ("Fund II") sold Eaves Plainsboro, located in Plainsboro, NJ, containing 776 apartment homes. Eaves Plainsboro was sold for $117,000,000, and the Company's share of the gain for the disposition was $9,660,000. In conjunction with the disposition, during the six months ended June 30, 2015, Fund II repaid $9,395,000 of related secured indebtedness in advance of the scheduled maturity date.

During the six months ended June 30, 2015, the Company received $20,680,000 from the joint venture partner associated with MVP I, LLC, the entity that owns Avalon at Mission Bay North II, upon agreement with the partner to modify the joint venture agreement to eliminate the Company's promoted interest for future return calculations and associated distributions. Prospectively, earnings and distributions will be based on the Company's 25.0% equity interest in the venture. In addition, MVP I, LLC obtained a $103,000,000, 3.24% fixed rate loan, with a maturity date of July 2025, and used the proceeds and cash on hand to repay its existing $105,000,000, variable rate loan which was scheduled to mature in December 2015, at par.

The following is a combined summary of the financial position of the entities accounted for using the equity method as of the dates presented, excluding amounts associated with the Residual JV (dollars in thousands):
 
6/30/2015
 
12/31/2014
 
(unaudited)
 
(unaudited)
Assets:
 

 
 

Real estate, net
$
1,513,850

 
$
1,617,627

Other assets
60,793

 
72,290

Total assets
$
1,574,643

 
$
1,689,917

 
 
 
 
Liabilities and partners’ capital:
 

 
 

Mortgage notes payable and credit facility
$
964,246

 
$
980,128

Other liabilities
21,232

 
24,884

Partners’ capital
589,165

 
684,905

Total liabilities and partners’ capital
$
1,574,643

 
$
1,689,917

 

The following is a combined summary of the operating results of the entities accounted for using the equity method for the periods presented, excluding amounts associated with the Residual JV (dollars in thousands):
 
For the three months ended
 
For the six months ended
 
6/30/2015
 
6/30/2014
 
6/30/2015
 
6/30/2014
 
(unaudited)
 
(unaudited)
Rental and other income
$
43,395

 
$
52,270

 
$
88,650

 
$
104,646

Operating and other expenses
(17,375
)
 
(20,483
)
 
(34,712
)
 
(41,691
)
Gain on sale of communities

 
5,682

 
32,490

 
5,682

Interest expense, net
(10,334
)
 
(13,523
)
 
(20,811
)
 
(27,413
)
Depreciation expense
(11,942
)
 
(13,863
)
 
(23,845
)
 
(28,280
)
Net income
$
3,744

 
$
10,083

 
$
41,772

 
$
12,944


In conjunction with the formation of Fund II, the Company incurred costs in excess of its equity in the underlying net assets of the respective investments. These costs represent $3,312,000 at June 30, 2015 and $3,880,000 at December 31, 2014 of the respective investment balances.


12

Table of Contents

As part of the formation of Fund II, the Company provided a guarantee to one of the limited partners that provides if, upon final liquidation of Fund II, the total amount of all distributions to the guaranteed partner during the life of Fund II (whether from operating cash flow or property sales) does not equal the total capital contributions made by that partner, then the Company will pay the guaranteed partner an amount equal to the shortfall, but in no event more than 10% of the total capital contributions made by the guaranteed partner (maximum of approximately $8,910,000 for Fund II as of June 30, 2015).  As of June 30, 2015, the expected realizable value of the real estate assets owned by Fund II is considered adequate to cover the guaranteed distribution amount under a liquidation scenario.  The estimated fair value of, and the Company’s obligation under, this guarantee, both at inception and as of June 30, 2015, was not significant and therefore the Company has not recorded any obligation for this guarantee as of June 30, 2015.

In addition, through subsidiaries, the Company and Equity Residential are members in three limited liability company agreements (collectively, the “Residual JV”). The Company and Equity Residential jointly control the Residual JV and the Company holds a 40.0% economic interest in the assets and liabilities of the Residual JV. During the three and six months ended June 30, 2015, the Company recognized equity in income of unconsolidated real estate entities of $9,549,000 and $11,464,000, respectively, associated with the settlement of outstanding legal claims against third parties and planned and executed disposition activity in the Residual JV.

Expensed Acquisition, Development and Other Pursuit Costs and Impairment of Long-Lived Assets

The Company capitalizes pre-development costs incurred in pursuit of new development opportunities for which the Company currently believes future development is probable (“Development Rights”). Future development of these Development Rights is dependent upon various factors, including zoning and regulatory approval, rental market conditions, construction costs and the availability of capital. Initial pre-development costs incurred for pursuits 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 by the Company no longer probable, any capitalized pre-development costs are written off with a charge to expense. The Company expensed costs related to the abandonment of Development Rights as well as costs incurred in pursuing the acquisition of assets or costs incurred pursuing the disposition of assets for which such disposition activity did not occur, in the amounts of $673,000 and $2,017,000 for the three months ended June 30, 2015 and 2014, respectively, and $1,860,000 and $2,732,000 for the six months ended June 30, 2015 and 2014, respectively. These costs are included in expensed acquisition, development, and other pursuit costs, net of recoveries on the accompanying Condensed Consolidated Statements of Comprehensive Income. These costs can vary greatly, and the costs incurred in any given period may be significantly different in future periods.

The Company evaluates its real estate and other long-lived assets for impairment when potential indicators of impairment exist. Such assets are stated at cost, less accumulated depreciation and amortization, unless the carrying amount of the asset is not recoverable. If events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, the Company assesses its recoverability by comparing the carrying amount of the long-lived asset to its estimated undiscounted future cash flows. If the carrying amount exceeds the aggregate undiscounted future cash flows, the Company recognizes an impairment loss to the extent the carrying amount exceeds the estimated fair value of the long-lived asset. Based on periodic tests of recoverability of long-lived assets, the Company did not record any impairment losses for the three and six months ended June 30, 2015 and 2014, other than related to the casualty gains and losses from property damage discussed below.

The Company assesses its portfolio of land held for both development and investment for impairment if the intent of the Company changes with respect to either the development of, or the expected holding period for, the land. The Company did not recognize any impairment charges on its investment in land during the three months ended June 30, 2015. During the six months ended June 30, 2015, the Company recognized an impairment charge of $800,000 relating to a parcel of land to reduce the Company's basis to the contracted sales price less expected costs to sell. This charge is included in casualty and impairment gain, net on the accompanying Condensed Consolidated Statements of Comprehensive Income. The Company did not recognize any impairment charges on its investment in land for the three and six months ended June 30, 2014.

The Company also evaluates its unconsolidated investments for other than temporary impairment, considering both the extent and amount by which the carrying value of the investment exceeds the fair value, and the Company’s intent and ability to hold the investment to recover its carrying value. The Company also evaluates its proportionate share of any impairment of assets held by unconsolidated investments. Excluding amounts associated with the Residual JV, there was no impairment loss recognized by any of the Company’s investments in unconsolidated entities during the three and six months ended June 30, 2015 and 2014.


13

Table of Contents

Casualty Gains and Losses

The Company recorded net casualty gains related to Edgewater of $17,114,000 and $16,321,000 for the three and six months ended June 30, 2015, respectively, which are included in casualty and impairment gain, net on the accompanying Condensed Consolidated Statements of Comprehensive Income. During the three months ended June 30, 2015, the Company received $22,000,000 in insurance proceeds, which were partially offset by casualty charges of $4,886,000 relating to demolition and additional incident expenses. During the six months ended June 30, 2015, the Company received $44,142,000 in insurance proceeds, which were partially offset by casualty charges of $21,844,000 to write off the net book value of the building destroyed by the fire at Edgewater, and $5,977,000 to record demolition and additional incident expenses. See discussion in Note 1, "Organization, Basis of Presentation and Significant Accounting Policies, Legal and Other Contingencies," and Part II, Item 1, "Legal Proceedings," for further discussion of the Edgewater fire.

During the six months ended June 30, 2015, several of the Company's communities in its Northeast markets incurred property and casualty damages from severe winter storms experienced during this time. The Company has recorded an impairment due to a casualty loss of $4,195,000 to recognize the damages from the storms, included in casualty and impairment gain, net on the accompanying Condensed Consolidated Statements of Comprehensive Income.

6.  Real Estate Disposition Activities

During the six months ended June 30, 2015, the Company sold one wholly-owned operating community, two land parcels and air rights.

Avalon on Stamford Harbor, located in Stamford, CT, containing 323 homes and a marina with 74 boat slips, was sold for $115,500,000. The Company’s gain on the disposition was $70,936,000, reported in gain on sale of communities on the accompanying Condensed Consolidated Statements of Comprehensive Income.

Two undeveloped land parcels and air rights, representing the right to increase density for future residential development, in the New York Metro region were sold for an aggregate sales price of $23,820,000, resulting in an aggregate gain of $9,626,000, reported in gain on sale of real estate on the accompanying Condensed Consolidated Statements of Comprehensive Income. The Company had previously recognized impairment charges of $800,000 during the three months ended March 31, 2015, and $5,933,000 in 2008 for the land parcels.

The results of operations for Avalon on Stamford Harbor are included in income from continuing operations on the accompanying Condensed Consolidated Statements of Comprehensive Income.

The operations for any real estate assets sold from January 1, 2014 through June 30, 2015 and which were classified as held for sale and discontinued operations as of and for the period ended December 31, 2013, have been presented as income from discontinued operations in the accompanying Condensed Consolidated Statements of Comprehensive Income.

The following is a summary of income from discontinued operations for the periods presented (dollars in thousands):
 
 
For the three months ended
 
For the six months ended
 
 
6/30/2015
 
6/30/2014
 
6/30/2015
 
6/30/2014
 
 
(unaudited)
 
(unaudited)
Rental income
 
$

 
$

 
$

 
$
579

Operating and other expenses
 

 

 

 
(269
)
Depreciation expense
 

 

 

 

Income from discontinued operations
 
$

 
$

 
$

 
$
310


At June 30, 2015, the Company had one operating community that qualified as held for sale.


14

Table of Contents

7.  Segment Reporting

The Company’s reportable operating segments include Established Communities, Other Stabilized Communities, and Development/Redevelopment Communities.  Annually as of January 1st, the Company determines which of its communities fall into each of these categories and generally maintains that classification throughout the year for the purpose of reporting segment operations, unless disposition or redevelopment plans regarding a community change.

In addition, the Company owns land for future development and has other corporate assets that are not allocated to an operating segment.

The Company’s segment disclosures present the measure(s) used by the chief operating decision maker for purposes of assessing each segment’s performance.  The Company’s chief operating decision maker is comprised of several members of its executive management team who use net operating income (“NOI”) as the primary financial measure for Established Communities and Other Stabilized Communities. NOI is defined by the Company 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, investments and investment management expenses, expensed acquisition, development and other pursuit costs, net interest expense, gain (loss) on extinguishment of debt, general and administrative expense, joint venture income (loss), depreciation expense, casualty and impairment gain, net, gain on sale of real estate assets, income from discontinued operations and net operating income from real estate assets sold or held for sale, not classified as discontinued operations. Although the Company considers NOI a useful measure of a community’s or communities’ operating performance, NOI should not be considered an alternative to net income or net cash flow from operating activities, as determined in accordance with GAAP.  NOI excludes a number of income and expense categories as detailed in the reconciliation of NOI to net income.

A reconciliation of NOI to net income for the three and six months ended June 30, 2015 and 2014 is as follows (dollars in thousands):
 
For the three months ended
 
For the six months ended
 
6/30/2015
 
6/30/2014
 
6/30/2015
 
6/30/2014
Net income
$
172,253

 
$
172,197

 
$
380,306

 
$
313,796

Indirect operating expenses, net of corporate income
14,817

 
12,343

 
30,215

 
23,161

Investments and investment management expense
1,073

 
1,137

 
2,107

 
2,116

Expensed acquisition, development and other pursuit costs, net of recoveries
673

 
2,017

 
1,860

 
2,732

Interest expense, net (1)
44,590

 
43,722

 
90,164

 
86,255

(Gain) loss on extinguishment of debt, net
(7,749
)
 
412

 
(7,749
)
 
412

General and administrative expense
11,628

 
10,220

 
22,111

 
19,456

Equity in income of unconsolidated real estate entities
(13,806
)
 
(7,710
)
 
(48,371
)
 
(12,933
)
Depreciation expense (1)
118,627

 
110,395

 
235,480

 
216,762

Casualty and impairment gain, net
(17,114
)
 

 
(11,326
)
 

Gain on sale of real estate assets
(9,625
)
 
(60,945
)
 
(80,583
)
 
(60,945
)
Gain on sale of discontinued operations

 

 

 
(37,869
)
Income from discontinued operations

 

 

 
(310
)
Net operating income from real estate assets sold or held for sale, not classified as discontinued operations
(1,353
)
 
(6,240
)
 
(2,791
)
 
(12,522
)
        Net operating income
$
314,014

 
$
277,548

 
$
611,423

 
$
540,111

__________________________________

(1) Includes amounts associated with assets sold or held for sale, not classified as discontinued operations.

The following is a summary of NOI from real estate assets sold or held for sale, not classified as discontinued operations, for the periods presented (dollars in thousands):

15

Table of Contents

 
For the three months ended
 
For the six months ended
 
6/30/2015
 
6/30/2014
 
6/30/2015
 
6/30/2014
 
 
 
 
 
 
 
 
 Rental income from real estate assets sold or held for sale, not classified as discontinued operations
$
2,285

 
$
10,226

 
$
4,809

 
$
20,595

 Operating expenses from real estate assets sold or held for sale, not classified as discontinued operations
(932
)
 
(3,986
)
 
(2,018
)
 
(8,073
)
Net operating income from real estate assets sold or held for sale, not classified as discontinued operations
$
1,353

 
$
6,240

 
$
2,791

 
$
12,522


The primary performance measure for communities under development or redevelopment depends on the stage of completion.  While under development, management monitors actual construction costs against budgeted costs as well as lease-up pace and rent levels compared to budget.

The following table provides details of the Company’s segment information as of the dates specified (dollars in thousands). The segments are classified based on the individual community’s status at the beginning of the given calendar year, or April 1, 2014, when the Company updated its operating segments, primarily to include communities acquired as part of the Archstone Acquisition in its Established Community portfolio. Therefore, each year the composition of communities within each business segment is adjusted. Accordingly, the amounts between years are not directly comparable. Segment information for the three and six months ended June 30, 2015 and 2014 has been adjusted for the real estate assets that were sold from January 1, 2014 through June 30, 2015, or otherwise qualify as held for sale and/or discontinued operations as of June 30, 2015, as described in Note 6, “Real Estate Disposition Activities.”

16

Table of Contents

 
For the three months ended
 
For the six months ended
 
 
 
Total
revenue
 
NOI
 
% NOI  change from  prior year
 
Total
revenue
 
NOI
 
% NOI  change from  prior year
 
Gross
real estate (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the period ended June 30, 2015
 
 

 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Established
 

 
 

 
 

 
 
 
 
 
 
 
 

New England
$
49,000

 
$
30,985

 
2.3
 %
 
$
96,760

 
$
58,823

 
(0.7
)%
 
$
1,477,145

Metro NY/NJ
96,372

 
67,880

 
2.9
 %
 
190,704

 
132,989

 
2.9
 %
 
3,191,141

Mid-Atlantic
52,263

 
35,938

 
(0.9
)%
 
103,967

 
71,969

 
(0.8
)%
 
2,170,822

Pacific Northwest
19,047

 
13,657

 
7.9
 %
 
37,536

 
27,030

 
8.4
 %
 
719,366

Northern California
67,144

 
52,635

 
11.7
 %
 
132,658

 
102,369

 
11.6
 %
 
2,409,781

Southern California
63,169

 
43,046

 
6.7
 %
 
125,493

 
86,564

 
9.8
 %
 
2,503,327

Total Established
346,995

 
244,141

 
5.0
 %
 
687,118

 
479,744

 
5.1
 %
 
12,471,582

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Stabilized
54,681

 
36,536

 
N/A

 
108,764

 
71,353

 
N/A

 
2,028,096

Development / Redevelopment
50,556

 
33,337

 
N/A

 
93,582

 
60,326

 
N/A

 
3,581,408

Land Held for Future Development
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
487,205

Non-allocated (2)
2,942

 
N/A

 
N/A

 
5,553

 
N/A

 
N/A

 
42,997

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
455,174

 
$
314,014

 
13.1
 %
 
$
895,017

 
$
611,423

 
13.2
 %
 
$
18,611,288

 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the period ended June 30, 2014 (3)
 
 

 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Established
 

 
 

 
 

 
 
 
 
 
 
 
 

New England
$
45,523

 
$
29,179

 
(0.9
)%
 
$
88,125

 
$
55,620

 
(1.0
)%
 
$
1,356,000

Metro NY/NJ
92,325

 
64,724

 
0.9
 %
 
152,906

 
106,780

 
1.7
 %
 
2,294,169

Mid-Atlantic
46,990

 
32,531

 
(6.7
)%
 
49,260

 
34,784

 
(3.9
)%
 
645,172

Pacific Northwest
16,458

 
11,554

 
5.9
 %
 
26,683

 
18,591

 
4.8
 %
 
499,383

Northern California
62,319

 
47,498

 
13.7
 %
 
85,305

 
65,364

 
9.6
 %
 
1,400,573

Southern California
61,852

 
41,607

 
5.0
 %
 
68,658

 
47,198

 
4.5
 %
 
1,218,170

Total Established
325,467

 
227,093

 
2.9
 %
 
470,937

 
328,337

 
2.6
 %
 
7,413,467

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Stabilized
43,701

 
31,289

 
N/A

 
244,289

 
167,494

 
N/A

 
5,998,737

Development / Redevelopment
31,740

 
19,166

 
N/A

 
72,310

 
44,280

 
N/A

 
3,318,362

Land Held for Future Development
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
195,673

Non-allocated (2)
2,672

 
N/A

 
N/A

 
5,750

 
N/A

 
N/A

 
34,187

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
403,580

 
$
277,548

 
8.9
 %
 
$
793,286

 
$
540,111

 
18.1
 %
 
$
16,960,426

__________________________________

(1)
Does not include gross real estate assets held for sale of $79,128 and $244,805 as of June 30, 2015 and 2014, respectively.
(2)
Revenue represents third-party management, asset management and developer fees and miscellaneous income which are not allocated to a reportable segment.
(3)
Results for the three months ended June 30, 2014 reflect the operating segments updated as of April 1, 2014, which include most stabilized communities acquired as part of the Archstone Acquisition in the Established Communities segment. Results for the six months ended June 30, 2014 reflect the operating segments determined as of January 1, 2014, which include stabilized communities acquired as part of the Archstone Acquisition in the Other Stabilized segment.




17

Table of Contents

8.  Stock-Based Compensation Plans

Information with respect to stock options granted under the Company’s 1994 Stock Option and Incentive Plan (the “1994 Plan”) and its 2009 Stock Option and Incentive Plan (the “2009 Plan”) is as follows (dollars in thousands, other than per share amounts):
 
 
2009 Plan
shares
 
Weighted average
exercise price
per share
 
1994 Plan
shares
 
Weighted average
exercise price
per share
 
 
 
 
 
 
 
 
 
Options Outstanding, December 31, 2014
 
340,062

 
$
122.67

 
272,402

 
$
104.96

Exercised
 
(42,268
)
 
124.52

 
(11,928
)
 
138.82

Forfeited
 

 

 

 

Options Outstanding, June 30, 2015
 
297,794

 
$
122.40

 
260,474

 
$
103.41

Options Exercisable June 30, 2015
 
236,380

 
$
120.70

 
260,474

 
$
103.41


The Company granted 82,812 restricted stock units with an estimated aggregate compensation cost of $12,340,000, as part of its stock-based compensation plan, during the six months ended June 30, 2015. The amount of restricted stock ultimately earned is based on the total shareholder return metrics related to the Company’s common stock for 53,164 restricted stock units and financial metrics related to operating performance and leverage metrics of the Company for 29,648 restricted stock units. For the portion of the grant for which the award is determined by the total shareholder return of the Company’s common stock, the Company used a Monte Carlo model to assess the compensation cost associated with the restricted stock units.  The estimated compensation cost was derived using the following assumptions: baseline share value of $166.23; dividend yield of approximately 3.0%; estimated volatility figures ranging from 14.7% to 17.4% over the life of the plan for the Company using 50% historical volatility and 50% implied volatility; and risk free rates over the life of the plan ranging from 0.07% to 1.09%, resulting in an average estimated fair value per restricted stock unit of $139.18. For the portion of the grant for which the award is determined by financial metrics, the estimated compensation cost was based on the baseline share value of $166.23 and the Company's estimate of corporate achievement for the financial metrics.

During the six months ended June 30, 2015, the Company also issued 157,779 shares of restricted stock, of which 95,826 shares related to the conversion of restricted stock units to restricted shares, and the remaining 61,953 shares were new grants with a fair value of $10,721,000. The compensation cost was based on the share price at the grant date.

At June 30, 2015, the Company had 251,231 outstanding unvested restricted shares granted under the Company's restricted stock awards. Restricted stock vesting during the six months ended June 30, 2015 totaled 95,573 shares, of which 7,389 shares related to the conversion of restricted stock units and 88,184 shares related to restricted stock awards, which had fair values at the grant date ranging from $115.83 to $173.39 per share. The total grant date fair value of shares vested under restricted stock awards was $11,431,000 and $10,712,000 for the six months ended June 30, 2015 and 2014, respectively.

Total employee stock-based compensation cost recognized in income was $7,777,000 and $5,890,000 for the six months ended June 30, 2015 and 2014, respectively, and total capitalized stock-based compensation cost was $6,071,000 and $3,247,000 for the six months ended June 30, 2015 and 2014, respectively. At June 30, 2015, there was a total unrecognized compensation cost of $558,000 for unvested stock options and $29,554,000 for unvested restricted stock and restricted stock units, which does not include estimated forfeitures. The unrecognized compensation cost for unvested stock options and restricted stock and restricted stock units is expected to be recognized over a weighted average period of 0.6 years and 3.8 years, respectively.

9.  Related Party Arrangements

Unconsolidated Entities

The Company manages unconsolidated real estate entities for which it receives asset management, property management, development and redevelopment fee revenue.  From these entities, the Company earned fees of $2,942,000 and $2,672,000 during the three months ended June 30, 2015 and 2014, respectively and $5,553,000 and $5,750,000 during the six months ended June 30, 2015 and 2014, respectively.  These fees are included in management, development and other fees on the accompanying Condensed Consolidated Statements of Comprehensive Income. In addition, the Company has outstanding receivables associated with its management role of $5,088,000 and $6,868,000 as of June 30, 2015 and December 31, 2014, respectively.


18

Table of Contents

Director Compensation

The Company recorded non-employee director compensation expense relating to restricted stock grants and deferred stock awards in the amount of $278,000 and $250,000 in the three months ended June 30, 2015 and 2014, respectively, and $550,000 and $500,000 in the six months ended June 30, 2015 and 2014, respectively, as a component of general and administrative expense.  Deferred compensation relating to these restricted stock grants and deferred stock awards to non-employee directors was $1,073,000 and $452,000 on June 30, 2015 and December 31, 2014, respectively. During the six months ended June 30, 2015, the Company issued 46,589 shares in conjunction with the conversion of deferred stock awards.

10.  Fair Value

Financial Instruments Carried at Fair Value

Derivative Financial Instruments

Currently, the Company uses interest rate cap agreements to manage its interest rate risk.  These instruments are carried at fair value in the Company’s financial statements.  In adjusting the fair value of its derivative contracts for the effect of counterparty nonperformance risk, the Company has considered the impact of its net position with a given counterparty, as well as any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. The Company minimizes its credit risk on these transactions by dealing with major, creditworthy financial institutions which have an A or better credit rating by the Standard & Poor’s Ratings Group. As part of its on-going control procedures, the Company monitors the credit ratings of counterparties and the exposure of the Company to any single entity, thus reducing credit risk concentration. The Company believes the likelihood of realizing losses from counterparty nonperformance is remote. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, such as interest rate, term to maturity and volatility, the credit valuation adjustments associated with its derivatives use Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. As of June 30, 2015, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined it is not significant.  As a result, the Company has determined that its derivative valuations are classified in Level 2 of the fair value hierarchy.

Hedge ineffectiveness did not have a material impact on earnings of the Company for the three and six months ended June 30, 2015, or any prior period, and the Company does not anticipate that it will have a material effect in the future.

The following table summarizes the consolidated Hedging Derivatives at June 30, 2015 (dollars in thousands):
 
Non-designated
Hedges
 
Cash Flow
Hedges
 
 
 
 
Notional balance
$
727,474

 
$
37,138

Weighted average interest rate (1)
1.9
%
 
2.3
%
Weighted average capped interest rate
5.8
%
 
5.9
%
Earliest maturity date
Feb 2016

 
Apr 2019

Latest maturity date
Jun 2020

 
Apr 2019

____________________________________

(1)
Represents the weighted average interest rate on the hedged debt.

Excluding derivatives executed to hedge secured debt on communities classified as held for sale, the Company had one derivative designated as a cash flow hedge and 15 derivatives not designated as hedges at June 30, 2015. Fair value changes for derivatives not in qualifying hedge relationships for the three and six months ended June 30, 2015 and 2014 were not material. The Company reclassified $1,427,000 and $2,992,000 of deferred losses from accumulated other comprehensive income as a component of interest expense, net, for the three and six months ended June 30, 2015, respectively. The Company reclassified $1,438,000 and $3,011,000 of deferred losses from accumulated other comprehensive income as a component of interest expense, net, for the three and six months ended June 30, 2014, respectively. The Company anticipates reclassifying approximately $5,493,000 of hedging losses from accumulated other comprehensive loss into earnings within the next 12 months to offset the variability of cash flows of the hedged item during this period.


19

Table of Contents

Redeemable Noncontrolling Interests

The Company provided redemption options (the “Puts”) that allow joint venture partners of the Company to require the Company to purchase their interests in the investment at a guaranteed minimum amount related to three ventures.  The Puts are payable in cash. The Company determines the fair value of the Puts based on unobservable inputs considering the assumptions that market participants would make in pricing the obligations, applying a guaranteed rate of return to the joint venture partners’ net capital contribution balances as of period end. Given the significance of the unobservable inputs, the valuations are classified in Level 3 of the fair value hierarchy.

The Company issued units of limited partnership interest in DownREITs which provide the DownREIT limited partners the ability to present all or some of their units for redemption for cash as determined by the partnership agreement. Under the DownREIT agreements, for each limited partnership unit, the limited partner is entitled to receive cash in the amount equal to the fair value of the Company’s common stock on or about the date of redemption.  In lieu of cash redemption, the Company may elect to exchange such units for an equal number of shares of the Company’s common stock. The limited partnership units in the DownREITs are valued using the market price of the Company’s common stock, a Level 1 price under the fair value hierarchy.

Financial Instruments Not Carried at Fair Value

Cash and Cash Equivalents

Cash and cash equivalent balances are held with various financial institutions within principal protected accounts. The Company monitors credit ratings of these financial institutions and the concentration of cash and cash equivalent balances with any one financial institution and believes the likelihood of realizing material losses related to cash and cash equivalent balances is remote.  Cash and cash equivalents are carried at their face amounts, which reasonably approximate their fair values and are Level 1 within the fair value hierarchy.

Other Financial Instruments

Rents receivable, accounts and construction payable and accrued expenses and other liabilities are carried at their face amounts. Due to their short-term nature, this reasonably approximates their fair values.

The Company values its unsecured notes using quoted market prices, a Level 1 price within the fair value hierarchy. The Company values its notes payable and outstanding amounts under the Credit Facility and Term Loan using a discounted cash flow analysis on the expected cash flows of each instrument. This analysis reflects the contractual terms of the instrument, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The process also considers credit valuation adjustments to appropriately reflect the Company’s nonperformance risk. The Company has concluded that the value of its notes payable and amounts outstanding under its Credit Facility and Term Loan are Level 2 prices as the majority of the inputs used to value its positions fall within Level 2 of the fair value hierarchy.

Financial Instruments Measured/Disclosed at Fair Value on a Recurring Basis

The following table summarizes the classification between the three levels of the fair value hierarchy of the Company’s financial instruments measured/disclosed at fair value on a recurring basis (dollars in thousands):

20

Table of Contents

 
 
Total Fair Value
 
Quoted Prices
in Active
Markets for
 
Significant
Other
Observable
 
Significant
Unobservable
 
 
 
 
Identical Assets
 
Inputs
 
Inputs
Description
 
6/30/2015
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
 
 
 
 
 
 
 
Non-Designated Hedges
 
 
 
 
 
 
 
 
Interest Rate Caps
 
$
25

 
$

 
$
25

 
$

Cash Flow Hedges
 
 
 
 
 
 
 
 
Interest Rate Caps
 
17

 

 
17

 

Puts
 
(8,954
)
 

 

 
(8,954
)
DownREIT units
 
(1,199
)
 
(1,199
)
 

 

Indebtedness
 
 
 
 
 
 
 
 
Unsecured notes
 
(3,353,009
)
 
(3,353,009
)
 

 

Mortgage notes payable and unsecured term loan
 
(3,022,147
)
 

 
(3,022,147
)
 

Total
 
$
(6,385,267
)
 
$
(3,354,208
)
 
$
(3,022,105
)
 
$
(8,954
)

11.  Subsequent Events

The Company has evaluated subsequent events through the date on which this Form 10-Q was filed, the date on which these financial statements were issued, and identified the items below for discussion.

In July 2015:

The Company acquired one land parcel for development located in Los Angeles, CA for $99,000,000. If developed as expected, the development right related to this land will contain 695 apartment homes for a projected total capital cost of $374,727,000.

Using available capacity on its Credit Facility, the Company repaid a $140,346,000 fixed rate secured mortgage note with an effective interest rate of 5.56% in advance of its May 2053 maturity date, resulting in a recognized gain of $18,987,000, consisting of the write off of unamortized premium net of deferred financing costs of $30,215,000, partially offset by a prepayment penalty of $11,228,000.


21

Table of Contents

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 Form 10-K for the year ended December 31, 2014 (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 primarily in New England, the New York/New Jersey metro area, the Mid-Atlantic, the Pacific Northwest, and Northern and Southern California. We believe that apartment communities are an attractive long-term investment opportunity compared to other real estate investments because a broad potential resident base should help reduce demand volatility over a real estate cycle, and shorter lease terms allow for a better ability to take advantage of inflationary environments. We focus on leading metropolitan areas that we believe are characterized by growing employment in high wage sectors of the economy, lower housing affordability and a diverse and vibrant quality of life. We believe these market characteristics offer the opportunity for superior risk-adjusted returns on apartment community investment relative to other markets. 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 strategy is to be leaders in market research and capital allocation, delivering a range of multifamily offerings tailored to serve the needs of the most attractive customer segments in the best-performing submarkets of the United States. Our communities are predominately upscale and generally command among the highest rents in their markets. However, we also pursue the ownership and operation of apartment communities that target a variety of customer segments and price points, consistent with our goal of offering a broad range of products and services. We regularly evaluate the allocation of our investments by the amount of invested capital and by product type within our individual markets.

Second Quarter 2015 Highlights

We experienced favorable operating performance in the second quarter of 2015:

Net income attributable to common stockholders for the three months ended June 30, 2015 was $172,324,000, an increase of $14,238,000, or 9.0%, over the prior year period. The increase is primarily attributable to an increase in NOI from newly developed and existing operating communities, gains from net insurance recoveries and the extinguishment of debt, as well as an increase in equity in income of unconsolidated real estate entities, partially offset by a decrease in real estate sales and related gains.

Established Communities NOI for the three months ended June 30, 2015 increased by $11,520,000, or 5.0%, over the prior year period. This increase was primarily driven by an increase in rental revenue of 4.7%, partially offset by an increase in operating expenses of 3.9% compared to the prior year period.

The Company's overall increase in revenues was driven by both favorable operating performance from our stabilized operating communities and strong leasing activity for new development, which we expect to continue for the balance of 2015.


22

Table of Contents

During the three months ended June 30, 2015, we completed the construction of three communities with an aggregate of 874 apartment homes for a total capitalized cost of $275,500,000. We also started construction of four communities expected to contain 1,368 apartment homes with an expected aggregate total capitalized cost of $394,900,000. At June 30, 2015, 26 communities expected to contain 8,117 apartment homes were under construction with a projected total capitalized cost of approximately $2,788,800,000.  In addition, as of June 30, 2015, we held a direct or indirect ownership interest in land or rights to land on which we expect to develop an additional 34 apartment communities that, if developed as expected, will contain an estimated 10,080 apartment homes, and will be developed for an aggregate total capitalized cost of $3,668,000,000, an increase of $359,000,000 from our position as of March 31, 2015.

During the three months ended June 30, 2015, we sold two undeveloped land parcels and air rights, representing the right to increase density for future residential development, in the New York Metro region, for an aggregate sales price $23,820,000, resulting in an aggregate gain of $9,626,000. We had previously recognized impairment charges of $800,000 during the three months ended March 31, 2015, and $5,933,000 in 2008 for the land parcels.

We believe that our balance sheet strength, as measured by our current level of indebtedness, our current ability to service interest and other fixed charges, and our current moderate use of financial encumbrances (such as secured financing) provide us with adequate access to liquidity from the capital markets. 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, including common equity issued pursuant to the Forward); the sale of apartment communities; or through the formation of joint ventures. See the discussion under Liquidity and Capital Resources.

Edgewater Fire

In January 2015, a fire occurred at Edgewater. See Note 1 under Legal and Other Contingencies and Note 5 under Casualty Gains and Losses in the accompanying Condensed Consolidated Financial Statements, as well as Part II, Item 1, Legal Proceedings, of this report for additional discussions related to the Edgewater fire, including claims against the Company, insurance coverage, and existing and potential future civil and governmental lawsuits and investigations.

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 distinguished as Established Communities, Other Stabilized Communities, Lease-Up Communities and Redevelopment Communities, and exclude communities owned by the Residual JV.  While we generally establish the classification of communities on an annual basis, we intend to 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 during the year. The following is a description of each category:

Current Communities are categorized as Established, Other Stabilized, Lease-Up, or Redevelopment according to the following attributes:

Established Communities (also known as Same Store Communities) are consolidated communities where a comparison of operating results from the prior year to the current year is meaningful, as these communities were owned and had stabilized occupancy as of the beginning of the respective prior year period.  For the six month periods ended June 30, 2015 and 2014, the Established Communities are communities that are consolidated for financial reporting purposes, had stabilized occupancy as of January 1, 2014, are not conducting or planning to conduct substantial redevelopment activities and are not held for sale or planned for disposition within the current year. A community is considered to have stabilized occupancy at the earlier of (i) attainment of 95% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment.

Other Stabilized Communities are all other completed communities that we own or have a direct or indirect ownership interest in, and that have stabilized occupancy, as defined above. Other Stabilized Communities do not include communities that are conducting or planning to conduct substantial redevelopment activities within the current year. 

Lease-Up Communities are communities where construction has been complete for less than one year and where physical occupancy has not reached 95%.

Redevelopment Communities are communities where substantial redevelopment is in progress or is planned to begin during the current year.  Redevelopment is considered substantial when capital invested during the reconstruction

23

Table of Contents

effort is expected to exceed the lesser of $5,000,000 or 10% of the community’s pre-redevelopment basis and is expected to have a material impact on the operations of the community, including occupancy levels and future rental rates.