Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

May 3, 2016

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 March 31, 2016
 
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:

137,162,514 shares of common stock, par value $0.01 per share, were outstanding as of April 29, 2016.


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)
 
3/31/2016
 
12/31/2015
 
(unaudited)
 
 
ASSETS
 

 
 

Real estate:
 

 
 

Land and improvements
$
3,742,588

 
$
3,623,532

Buildings and improvements
13,433,401

 
13,056,292

Furniture, fixtures and equipment
481,036

 
458,224

 
17,657,025

 
17,138,048

Less accumulated depreciation
(3,430,592
)
 
(3,303,751
)
Net operating real estate
14,226,433

 
13,834,297

Construction in progress, including land
1,587,132

 
1,592,917

Land held for development
477,072

 
476,871

Real estate assets held for sale, net
20,341

 
38,224

Total real estate, net
16,310,978

 
15,942,309

 
 
 
 
Cash and cash equivalents
97,541

 
400,507

Cash in escrow
170,361

 
104,821

Resident security deposits
31,964

 
30,077

Investments in unconsolidated real estate entities
182,367

 
216,919

Deferred development costs
42,635

 
37,577

Prepaid expenses and other assets
207,544

 
199,095

Total assets
$
17,043,390

 
$
16,931,305

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Unsecured notes, net
$
3,846,854

 
$
3,845,674

Variable rate unsecured credit facility

 

Mortgage notes payable
2,655,726

 
2,611,274

Dividends payable
185,173

 
171,257

Payables for construction
99,644

 
98,802

Accrued expenses and other liabilities
304,612

 
260,005

Accrued interest payable
38,952

 
40,085

Resident security deposits
55,770

 
53,132

Liabilities related to real estate assets held for sale

 
553

Total liabilities
7,186,731

 
7,080,782

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Redeemable noncontrolling interests
10,127

 
9,997

 
 
 
 
Equity:
 

 
 

Preferred stock, $0.01 par value; $25 liquidation preference; 50,000,000 shares authorized at March 31, 2016 and December 31, 2015; zero shares issued and outstanding at March 31, 2016 and December 31, 2015

 

Common stock, $0.01 par value; 280,000,000 shares authorized at March 31, 2016 and December 31, 2015; 137,162,107 and 137,002,031 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively
1,372

 
1,370

Additional paid-in capital
10,069,729

 
10,068,532

Accumulated earnings less dividends
(146,799
)
 
(197,989
)
Accumulated other comprehensive loss
(77,770
)
 
(31,387
)
Total equity
9,846,532

 
9,840,526

Total liabilities and equity
$
17,043,390

 
$
16,931,305

 
See accompanying notes to Condensed Consolidated Financial Statements.

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AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(Dollars in thousands, except per share data)
 
For the three months ended
 
3/31/2016
 
3/31/2015
Revenue:
 

 
 

Rental and other income
$
506,974

 
$
439,756

Management, development and other fees
1,524

 
2,611

Total revenue
508,498

 
442,367

 
 
 
 
Expenses:
 

 
 

Operating expenses, excluding property taxes
116,626

 
112,777

Property taxes
50,067

 
47,177

Interest expense, net
43,410

 
45,573

Depreciation expense
127,216

 
116,853

General and administrative expense
11,404

 
10,468

Expensed acquisition, development and other pursuit costs, net of recoveries
3,462

 
1,187

Casualty and impairment (gain) loss, net
(2,202
)
 
5,788

Total expenses
349,983

 
339,823

 
 
 
 
Equity in income of unconsolidated real estate entities
27,969

 
34,566

Gain on sale of real estate

 
22

Gain on sale of communities
51,430

 
70,936

 
 
 
 
Income before taxes
237,914

 
208,068

Income tax expense
37

 
15

 
 
 
 
Net income
237,877

 
208,053

Net loss attributable to noncontrolling interests
54

 
91

 
 
 
 
Net income attributable to common stockholders
$
237,931

 
$
208,144

 
 
 
 
Other comprehensive income (loss):
 

 
 

Unrealized loss on cash flow hedges
(47,757
)
 
(30
)
Cash flow hedge losses reclassified to earnings
1,374

 
1,595

Comprehensive income
$
191,548

 
$
209,709

 
 
 
 
Earnings per common share - basic:
 

 
 

Net income attributable to common stockholders
$
1.73

 
$
1.57

 
 
 
 
Earnings per common share - diluted:
 

 
 

Net income attributable to common stockholders
$
1.73

 
$
1.56

 
 
 
 
Dividends per common share
$
1.35

 
$
1.25


See accompanying notes to Condensed Consolidated Financial Statements.

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AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in thousands)
 
For the three months ended
 
3/31/2016
 
3/31/2015
Cash flows from operating activities:
 
 
 
Net income
$
237,877

 
$
208,053

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation expense
127,216

 
116,853

Amortization of deferred financing costs
1,936

 
1,664

Amortization of debt premium
(4,779
)
 
(8,660
)
Amortization of stock-based compensation
3,835

 
4,038

Equity in loss of, and return on, unconsolidated entities and noncontrolling interests, net of eliminations
6,438

 
3,805

Casualty and impairment (gain) loss, net
(2,202
)
 
4,995

Cash flow hedge losses reclassified to earnings
1,374

 
1,565

Gain on sale of real estate assets
(81,055
)
 
(79,033
)
Decrease (increase) in cash in operating escrows
3,009

 
(7,815
)
Increase in resident security deposits, prepaid expenses and other assets
(8,559
)
 
(2,351
)
Decrease in accrued expenses, other liabilities and accrued interest payable
(7,308
)
 
(6,734
)
Net cash provided by operating activities
277,782

 
236,380

 
 
 
 
Cash flows from investing activities:
 
 
 
Development/redevelopment of real estate assets including land acquisitions and deferred development costs
(266,588
)
 
(578,632
)
Acquisition of real estate assets, including partnership interest
(170,022
)
 

Capital expenditures - existing real estate assets
(11,618
)
 
(7,820
)
Capital expenditures - non-real estate assets
(3,264
)
 
(859
)
Proceeds from sale of real estate, net of selling costs
68,709

 
112,504

Insurance proceeds for property damage claims
8,702

 

Increase (decrease) in payables for construction
842

 
(7,885
)
Increase in cash in deposit escrows
(69,227
)
 

Distributions from unconsolidated real estate entities
58,652

 
40,493

Investments in unconsolidated real estate entities
(913
)
 

Net cash used in investing activities
(384,727
)
 
(442,199
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Issuance of common stock, net
1,102

 
1,973

Dividends paid
(171,151
)
 
(153,095
)
Repayments of mortgage notes payable, including prepayment penalties
(19,682
)
 
(4,209
)
Issuance of unsecured notes

 
50,000

Payment of deferred financing costs
(6,176
)
 
(578
)
Distributions to DownREIT partnership unitholders
(10
)
 
(9
)
Distributions to joint venture and profit-sharing partners
(104
)
 
(91
)
Redemption of preferred interest obligation

 
(1,520
)
Net cash used in financing activities
(196,021
)
 
(107,529
)
 
 
 
 
Net decrease in cash and cash equivalents
(302,966
)
 
(313,348
)
 
 
 
 
Cash and cash equivalents, beginning of period
400,507

 
508,276

Cash and cash equivalents, end of period
$
97,541

 
$
194,928

 
 
 
 
Cash paid during the period for interest, net of amount capitalized
$
46,011

 
$
59,624

 
See accompanying notes to Condensed Consolidated Financial Statements.

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Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Supplemental disclosures of non-cash investing and financing activities:

During the three months ended March 31, 2016:

As described in Note 4, “Equity,” 193,171 shares of common stock were issued as part of the Company's stock based compensation plans, of which 115,618 shares related to the conversion of performance awards to restricted shares, and the remaining 77,553 shares valued at $12,529,000 were issued in connection with new stock grants; 576 shares valued at $101,000 were issued through the Company’s dividend reinvestment plan; 48,189 shares valued at $8,164,000 were withheld to satisfy employees’ tax withholding and other liabilities; and 499 restricted shares as well as performance awards with an aggregate value of $76,000 previously issued in connection with employee compensation were canceled upon forfeiture.

Common stock dividends declared but not paid totaled $185,173,000.

The Company recorded an increase of $299,000 in redeemable noncontrolling interest with a corresponding decrease to accumulated earnings less dividends to adjust the redemption value associated with the put options held by joint venture partners and DownREIT partnership units.  For further discussion of the nature and valuation of these items, see Note 10, “Fair Value.”

The Company recorded a decrease in prepaid expenses and other assets of $5,422,000 and an increase in accrued expenses and other liabilities of $42,335,000, and a corresponding loss to other comprehensive income of $47,757,000, and reclassified $1,374,000 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 assumed a fixed rate indebtedness with a principal amount of $67,904,000 in conjunction with the acquisition of Avalon Hoboken.

During the three months ended March 31, 2015:

The Company issued 154,645 shares of common stock as part of the Company's stock based compensation plan, of which 95,826 shares related to the conversion of performance awards to restricted shares, and the remaining 58,819 shares valued at $10,199,000 were issued in connection with new stock grants; 484 shares valued at $86,000 were issued through the Company’s dividend reinvestment plan; and 32,887 shares valued at $5,338,000 were withheld to satisfy employees’ tax withholding and other liabilities.

Common stock dividends declared but not paid totaled $165,241,000.

The Company recorded a decrease of $2,065,000 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 recorded a decrease in prepaid expenses and other assets and a corresponding loss to other comprehensive income of $30,000, and reclassified $1,595,000 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 recognized a charge of $26,039,000 to write off the net book value of the fixed assets destroyed by the fire that occurred in 2015 at Avalon at Edgewater ("Edgewater") and winter storm damage, and a corresponding recovery of loss of $22,000,000 for proceeds from insurance for the Edgewater casualty loss.


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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 March 31, 2016, the Company owned or held a direct or indirect ownership interest in 258 operating apartment communities containing 75,379 apartment homes in 10 states and the District of Columbia, of which eleven communities containing 3,429 apartment homes were under reconstruction. In addition, the Company owned or held a direct or indirect interest in 24 communities under construction that are expected to contain an aggregate of 7,670 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 30 communities that, if developed as expected, will contain an estimated 9,745 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 2015 Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2016 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):

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Table of Contents

 
For the three months ended
 
3/31/2016
 
3/31/2015
Basic and diluted shares outstanding
 

 
 

Weighted average common shares - basic
136,785,880

 
131,883,741

Weighted average DownREIT units outstanding
7,500

 
7,500

Effect of dilutive securities
589,664

 
1,284,532

Weighted average common shares - diluted
137,383,044

 
133,175,773

 
 
 
 
Calculation of Earnings per Share - basic
 

 
 

Net income attributable to common stockholders
$
237,931

 
$
208,144

Net income allocated to unvested restricted shares
(632
)
 
(529
)
Net income attributable to common stockholders, adjusted
$
237,299

 
$
207,615

 
 
 
 
Weighted average common shares - basic
136,785,880

 
131,883,741

 
 
 
 
Earnings per common share - basic
$
1.73

 
$
1.57

 
 
 
 
Calculation of Earnings per Share - diluted
 

 
 

Net income attributable to common stockholders
$
237,931

 
$
208,144

Add: noncontrolling interests of DownREIT unitholders in consolidated partnerships, including discontinued operations
10

 
9

Adjusted net income available to common stockholders
$
237,941

 
$
208,153

 
 
 
 
Weighted average common shares - diluted
137,383,044

 
133,175,773

 
 
 
 
Earnings per common share - diluted
$
1.73

 
$
1.56

 

All options to purchase shares of common stock outstanding as of March 31, 2016 and 2015 are included in the computation of diluted earnings per share.

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 March 31, 2016 was 0.8% 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 months ended March 31, 2016 or 2015.

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 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 Derivative 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 (loss).  Amounts recorded in other comprehensive income (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 10, "Fair Value," for further discussion of derivative financial instruments.

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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 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 aware that third parties incurred significant property damage and are claiming other losses, such as relocation costs, as a result of the fire. The Company has established protocols for processing claims and has encouraged any party who sustained a loss to contact the Company’s insurance carrier to file a claim.

To date, four putative class action lawsuits have been filed against the Company on behalf of Edgewater residents and others who may have been harmed by the fire. The court has consolidated these actions in the United States District Court for the District of New Jersey. In addition, 19 lawsuits representing approximately 138 individual plaintiffs have been filed in the Superior Court of New Jersey Bergen County - Law Division. Most of these cases have been consolidated by the court and the Company expects all of them to be consolidated shortly. The Company believes that it has meritorious defenses to the extent of damages claimed. Having incurred applicable deductibles, the Company currently believes that all of its remaining liability to third parties 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 casualty loss.

The Company is involved in various other claims and/or administrative proceedings unrelated to the Edgewater casualty loss 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.

Recently Issued Accounting Standards

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of share-based payment transactions, including income tax consequences, classification of awards as equity or liability, statement of cash flows classification and policy election options for forfeitures. The new standard requires either a prospective, retrospective or modified retrospective approach depending on the amendment type. The guidance will be effective in the first quarter of 2017 and allows for early adoption. The Company is assessing whether the new standard will have a material effect on its financial position or results of operations


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Table of Contents

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 $20,609,000 and $19,030,000 for the three months ended March 31, 2016 and 2015, respectively.

3.  Mortgage 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 March 31, 2016 and December 31, 2015 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 March 31, 2016 and December 31, 2015, as shown in the Condensed Consolidated Balance Sheets (dollars in thousands) (see Note 6, “Real Estate Disposition Activities”).
 
3/31/2016
 
12/31/2015
 
 
 
 
Fixed rate unsecured notes (1)
$
3,575,000

 
$
3,575,000

Term Loan
300,000

 
300,000

Fixed rate mortgage notes payable - conventional and tax-exempt (2)
1,609,236

 
1,561,109

Variable rate mortgage notes payable - conventional and tax-exempt (2)
1,044,598

 
1,045,182

Total mortgage notes payable and unsecured notes
6,528,834

 
6,481,291

Credit Facility

 

Total mortgage notes payable, unsecured notes and Credit Facility
$
6,528,834

 
$
6,481,291

_____________________________________

(1)
Balances at March 31, 2016 and December 31, 2015 exclude $7,310 and $7,601, respectively, of debt discount, and $20,836 and $21,725, respectively, of deferred financing costs, as reflected in unsecured notes, net on the Company’s Condensed Consolidated Balance Sheets.
(2)
Balances at March 31, 2016 and December 31, 2015 exclude $16,652 and $19,686, respectively, of debt premium, and $14,760 and $14,703, respectively, of deferred financing costs, as reflected in mortgage notes payable on the Company’s Condensed Consolidated Balance Sheets.

The following debt activity occurred during the three months ended March 31, 2016:

In January 2016, in conjunction with the disposition of Eaves Trumbull, Avalon at Stratford was substituted as collateral for the outstanding fixed rate mortgage note secured by Eaves Trumbull.

In January 2016, in conjunction with the acquisition of Avalon Hoboken, the Company assumed a fixed rate secured mortgage note with a principal balance of $67,904,000 and a contractual interest rate of 4.18% maturing in December 2020.

In February 2016, the Company repaid the $16,212,000 fixed rate mortgage note secured by Archstone Lexington, with an effective interest rate of 3.32% at par and without penalty in advance of its March 2016 maturity date. Upon repayment, Archstone Lexington was substituted as collateral for the outstanding fixed rate mortgage note secured by Avalon Walnut Ridge I.


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In January 2016, the Company extended the maturity of its revolving variable rate unsecured credit facility (the “Credit Facility”) from April 2017 to April 2020, and amended other provisions in the Credit Facility. In addition, pursuant to an option available under the terms of the Credit Facility, with the approval of the syndicate of lenders, the Company increased the aggregate facility size from $1,300,000,000 to $1,500,000,000 (the "Credit Facility Increase"). The Company may further extend the term for up to nine months, provided the Company is not in default and upon payment of a $1,500,000 extension fee. In connection with the Credit Facility Increase, the applicable margin over reference rates used to determine the applicable interest rates on the Company's borrowings from time to time decreased. The Credit Facility bears interest at varying levels based on the London Interbank Offered Rate ("LIBOR"), rating levels achieved on the Company's unsecured notes and on a maturity schedule selected by the Company. The current stated pricing is LIBOR plus 0.825% per annum (1.26% at March 31, 2016), assuming a one month borrowing rate. The stated spread over LIBOR can vary from LIBOR plus 0.80% to LIBOR plus 1.55% based on the Company's credit ratings. In addition, a competitive bid option is available for borrowings up to 65% of the Credit Facility amount, which allows banks that are part of the lender consortium to bid to make loans at a rate that is lower than the stated rate if market conditions allow. In connection with the Credit Facility Increase, the annual facility fee was also amended to lower the fee to 0.125% from 0.15%, resulting in a fee of approximately $1,875,000 annually based on the $1,500,000,000 facility size and based on the Company's current credit rating.

The Company had no borrowings outstanding under the Credit Facility and had $51,233,000 and $43,049,000 outstanding in letters of credit that reduced the borrowing capacity as of March 31, 2016 and December 31, 2015, respectively.

In the aggregate, secured notes payable mature at various dates from February 2017 through July 2066, and are secured by certain apartment communities (with a net carrying value of $3,364,440,000, excluding communities classified as held for sale, as of March 31, 2016).

As of March 31, 2016, 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 4.5% and 4.6% at March 31, 2016 and December 31, 2015, 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 1.9% and 1.8% at March 31, 2016 and December 31, 2015, respectively.

Scheduled payments and maturities of mortgage notes payable and unsecured notes outstanding at March 31, 2016 are as follows (dollars in thousands):

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Table of Contents

Year
 
Secured notes payments
 
Secured notes maturities
 
Unsecured notes maturities
 
Stated interest rate of unsecured notes
 
 
 
 
 
 
 
 
 
2016
 
12,156

 

 
250,000

 
5.750
%
 
 
 
 
 
 
 
 
 
2017
 
17,166

 
709,791

 
250,000

 
5.700
%
 
 
 
 
 
 
 
 
 
2018
 
16,236

 
76,950

 

 
N/A

 
 
 
 
 
 
 
 
 
2019
 
4,696

 
588,429

 

 
N/A

 
 
 
 
 
 
 
 
 
2020
 
3,624

 
118,729

 
250,000

 
6.100
%
 
 
 
 
 
 
 
 
 
 
 
 

 
 

 
400,000

 
3.625
%
 
 
 
 
 
 
 
 
 
2021
 
3,551

 
27,844

 
250,000

 
3.950
%
 
 
 
 
 
 
 
 
 
 
 
 

 
 

 
300,000

 
LIBOR + 1.450%

 
 
 
 
 
 
 
 
 
2022
 
3,795

 

 
450,000

 
2.950
%
 
 
 
 
 
 
 
 
 
2023
 
4,040

 

 
350,000

 
4.200
%
 
 
 
 
 
 
 
 
 
 
 
 

 
 

 
250,000

 
2.850
%
 
 
 
 
 
 
 
 
 
2024
 
4,310

 

 
300,000

 
3.500
%
 
 
 
 
 
 
 
 
 
2025
 
4,553

 
84,835

 
525,000

 
3.450
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
300,000

 
3.500
%
 
 
 
 
 
 
 
 
 
Thereafter
 
218,680

 
754,449

 

 
N/A

 
 
 
 
 
 
 
 
 
 
 
$
292,807

 
$
2,361,027

 
$
3,875,000

 
 

 

The Company was in compliance at March 31, 2016 with customary financial and other covenants under the Credit Facility, the Term Loan, and the Company’s fixed rate unsecured notes.


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Table of Contents

4.  Equity

The following summarizes the changes in equity for the three months ended March 31, 2016 (dollars in thousands):
 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
earnings
less
dividends
 
Accumulated
other
comprehensive
loss
 
Total
equity
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
$
1,370

 
$
10,068,532

 
$
(197,989
)
 
$
(31,387
)
 
$
9,840,526

Net income attributable to common stockholders

 

 
237,931

 

 
237,931

Unrealized loss on cash flow hedges

 

 

 
(47,757
)
 
(47,757
)
Cash flow hedge loss reclassified to earnings

 

 

 
1,374

 
1,374

Change in redemption value of redeemable noncontrolling interest

 

 
(299
)
 

 
(299
)
Dividends declared to common stockholders

 

 
(185,168
)
 

 
(185,168
)
Issuance of common stock, net of withholdings
2

 
(5,747
)
 
(1,274
)
 

 
(7,019
)
Amortization of deferred compensation

 
6,944

 

 

 
6,944

Balance at March 31, 2016
$
1,372

 
$
10,069,729

 
$
(146,799
)
 
$
(77,770
)
 
$
9,846,532


As of March 31, 2016 and December 31, 2015, 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.

During the three months ended March 31, 2016, the Company:

i.
issued 14,530 shares of common stock in connection with stock options exercised;

ii.
issued 576 common shares through the Company’s dividend reinvestment plan;

iii.
issued 193,171 common shares in connection with restricted stock grants and the conversion of performance awards to restricted shares;

iv.
withheld 48,189 common shares to satisfy employees’ tax withholding and other liabilities; and

v.
canceled 12 common shares of restricted stock upon forfeiture.

Any deferred compensation related to the Company’s stock option, restricted stock and performance award grants during the three months ended March 31, 2016 is not reflected on the Company’s Condensed Consolidated Balance Sheet as of March 31, 2016, and will not be reflected until recognized as compensation cost.

In December 2015, the Company commenced a fourth continuous equity program ("CEP IV") under which the Company may sell up to $1,000,000,000 of its common stock from time to time. Actual sales will depend on a variety of factors to be 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 IV, the Company engaged sales agents who will receive compensation of up to 2.0% of the gross sales price for shares sold. CEP IV also allows the Company to enter into forward sale agreements up to $1,000,000,000 in aggregate sales price of its common stock. The Company expects that it will physically settle each forward sale agreement on one or more dates specified by the Company on or prior to the maturity date of that particular forward sale agreement, in which case the Company will expect to receive aggregate net cash proceeds at settlement equal to the number of shares underlying the particular forward agreement multiplied by the relevant forward sale price. However, the Company may also elect to cash settle or net share settle a forward sale agreement. In connection with each forward sale agreement, the Company will pay the relevant forward seller, in the form of a reduced initial forward sale price, a commission of up to 2.0% of the sales prices of all borrowed shares of common stock sold. During the three months ended March 31, 2016, the Company had no sales under the program and did not enter into any forward sale agreements.


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Table of Contents

5.  Investments in Real Estate Entities

Investment in Unconsolidated Real Estate Entities

As of March 31, 2016, the Company had investments in five unconsolidated real estate entities with ownership interest percentages ranging from 20.0% to 31.3%, excluding development joint ventures. 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 three months ended March 31, 2016, AvalonBay Value Added Fund II, L.P. ("Fund II") sold Eaves Rancho San Diego, located in El Cajon, CA, containing 676 apartment homes for $158,000,000. The Company's share of the gain in accordance with GAAP for the disposition was $13,057,000. In conjunction with the disposition of this community during the three months ended March 31, 2016, Fund II repaid $68,091,000 of related secured indebtedness in advance of the scheduled maturity date. This resulted in a charge for a prepayment penalty and write-off of deferred financing costs, of which the Company's portion was $1,207,000, which was reported as a reduction of equity in income of unconsolidated real estate entities on the accompanying Condensed Consolidated Statements of Comprehensive Income.

During the three months ended March 31, 2016, Archstone Multifamily Partners AC LP (the "U.S. Fund") sold two communities:

Archstone Boca Town Center, located in Boca Raton, FL, containing 252 apartment homes for $56,300,000. The Company's share of the gain in accordance with GAAP for the disposition was $4,120,000.

Avalon Kips Bay, located in New York, NY, containing 209 apartments homes for $173,000,000. The Company's share of the gain in accordance with GAAP for the disposition was $12,448,000.

In conjunction with the disposition of these communities, during the three months ended March 31, 2016, the U.S. Fund repaid an aggregate of $94,822,000 of related secured indebtedness in advance of the scheduled maturity dates. This resulted in charges for prepayment penalties and write-offs of deferred financing costs, of which the Company's aggregate portion was $2,003,000, which was reported as a reduction of equity in income of unconsolidated real estate entities on the accompanying Condensed Consolidated Statements of Comprehensive Income.

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 joint ventures formed with Equity Residential as part of the Archstone acquisition (dollars in thousands):
 
3/31/2016
 
12/31/2015
 
(unaudited)
 
(unaudited)
Assets:
 

 
 

Real estate, net
$
1,111,906

 
$
1,392,833

Other assets
59,975

 
57,044

Total assets
$
1,171,881

 
$
1,449,877

 
 
 
 
Liabilities and partners’ capital:
 

 
 

Mortgage notes payable and credit facility
$
782,988

 
$
947,205

Other liabilities
21,250

 
20,471

Partners’ capital
367,643

 
482,201

Total liabilities and partners’ capital
$
1,171,881

 
$
1,449,877

 


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Table of Contents

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 joint ventures formed with Equity Residential as part of the Archstone acquisition (dollars in thousands):
 
For the three months ended
 
3/31/2016
 
3/31/2015
 
(unaudited)
Rental and other income
$
36,955

 
$
45,255

Operating and other expenses
(14,170
)
 
(17,337
)
Gain on sale of communities
103,321

 
32,490

Interest expense, net (1)
(20,001
)
 
(10,477
)
Depreciation expense
(9,240
)
 
(11,902
)
Net income
$
96,865

 
$
38,029

_____________________________________

(1)
Amount for 2016 includes charges for prepayment penalties and write-offs of deferred financing costs of $10,864.

In conjunction with the formation of Fund II, and the acquisition of the U.S. Fund, Multifamily Partners AC JV LP (the "AC JV") and Brandywine Apartments of Maryland, LLC ("Brandywine"), the Company incurred costs in excess of its equity in the underlying net assets of the respective investments. These costs represent $39,871,000 and $40,978,000 at March 31, 2016 and December 31, 2015, respectively, of the respective investment balances. These amounts are being amortized over the lives of the underlying assets as a component of equity in income of unconsolidated entities on the accompanying Condensed Consolidated Statements of Comprehensive Income.

Investments in Consolidated Real Estate Entities

During the three months ended March 31, 2016, the Company acquired two communities:

Avalon Hoboken, located in Hoboken, NJ. Avalon Hoboken contains 217apartment homes and was acquired for a purchase price of $129,700,000. In conjunction with the acquisition, the Company assumed a fixed rate secured mortgage note with a principal balance of $67,904,000 and a contractual interest rate of 4.18% maturing in December 2020.

Avalon Potomac Yard, located in Alexandria, VA. Avalon Potomac Yard contains 323 apartment homes and was acquired for a purchase price of $108,250,000.

The Company accounted for these acquisitions as business combinations and recorded the acquired assets and assumed liabilities, including identifiable intangibles, at their fair values. The Company used third party pricing or internal models for the values of the land, a valuation model for the values of the buildings and debt, and an internal model to determine the fair values of the remaining real estate assets and in-place leases. Given the heterogeneous nature of multifamily real estate, the fair values for the land, debt, real estate assets and in-place leases incorporated significant unobservable inputs and therefore are considered to be Level 3 prices within the fair value hierarchy.

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 acquisition and disposition activity did not occur, in the amounts of $1,846,000 and $1,187,000 for the three months ended March 31, 2016 and 2015, 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. Abandoned pursuit costs can vary greatly, and the costs incurred in any given period may be significantly different in future periods.


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Table of Contents

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 property or long-lived asset may not be recoverable, the Company assesses its recoverability by comparing the carrying amount of the property or 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 property or long-lived asset. Based on periodic tests of recoverability of long-lived assets for the three months ended March 31, 2016 and 2015, the Company did not recognize any impairment losses for wholly-owned operating real estate assets.

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. During the three months ended March 31, 2016, the Company recognized an aggregate impairment charge of $6,500,000 relating to two undeveloped land parcels which the Company now intends to sell. This charge is included in casualty and impairment (gain) loss, net on the accompanying Condensed Consolidated Statements of Comprehensive Income. The Company did not recognize any material impairment charges on its investment in land during the three months ended March 31, 2015.

The Company 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. There were no material other than temporary impairment losses recognized by any of the Company’s investments in unconsolidated real estate entities during the three months ended March 31, 2016 and 2015.

Casualty Gains and Losses

During the three months ended March 31, 2016, the Company reached a final insurance settlement for the property damage and lost income for the Edgewater casualty loss. In 2015 and 2016, the Company received aggregate insurance proceeds for Edgewater of $73,008,000, after self-insurance and deductibles. During the three months ended March 31, 2016, the Company received the final $29,008,000 of these proceeds, of which $8,702,000 was recognized as casualty and impairment (gain) loss, net on the accompanying Condensed Consolidated Statements of Comprehensive Income, and $20,306,000 as business interruption insurance proceeds, which is recorded as a component of rental and other income on the Condensed Consolidated Statements of Comprehensive Income.

During the three months ended March 31, 2015, the Company recorded a casualty charge of $21,844,000 to write-off the net book value of the building destroyed in the Edgewater fire. The write-off, coupled with additional incident response expenses, was partially offset by $22,142,000 in insurance proceeds received during the three months ended March 31, 2015, included in prepaid expenses and other assets on the accompanying Condensed Consolidated Balance Sheets. The net impact to casualty loss of $793,000 is included in casualty and impairment (gain) loss, net on the accompanying Condensed Consolidated Statements of Comprehensive Income. 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 casualty loss.

During the three months ended March 31, 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 recorded an impairment due to a casualty loss of $4,195,000 to recognize the damages from the storms as casualty and impairment (gain) loss, net on the accompanying Condensed Consolidated Statements of Comprehensive Income.

6.  Real Estate Disposition Activities

During the three months ended March 31, 2016, the Company sold one wholly-owned operating community.

Eaves Trumbull, located in Trumbull, CT, containing 340 homes, was sold for $70,250,000. The Company's gain in accordance with GAAP on the disposition was $51,430,000, reported in gain on sale of communities on the accompanying Condensed Consolidated Statements of Comprehensive Income. The sale of Eaves Trumbull is part of a tax deferred exchange under which the Company has restricted the cash proceeds, maintaining them in an escrow account, classified as cash in escrow on the accompanying Condensed Consolidated Balance Sheet. These proceeds will be available to the Company as unrestricted cash and cash equivalents by the third quarter of 2016.

At March 31, 2016, the Company had three undeveloped land parcels that qualified as held for sale.


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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 1, 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 of recoveries, interest expense, net, loss on extinguishment of debt, net, general and administrative expense, equity in income of unconsolidated real estate entities, depreciation expense, corporate income tax expense, casualty and impairment (gain) loss, net, gain on sale of real estate assets and net operating income from real estate assets sold or held for sale. 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 months ended March 31, 2016 and 2015 is as follows (dollars in thousands):
 
For the three months ended
 
3/31/2016
 
3/31/2015
Net income
$
237,877

 
$
208,053

Indirect operating expenses, net of corporate income
16,537

 
15,399

Investments and investment management expense
1,145

 
1,034

Expensed acquisition, development and other pursuit costs, net of recoveries
3,462

 
1,187

Interest expense, net
43,410

 
45,573

General and administrative expense
11,404

 
10,468

Equity in income of unconsolidated real estate entities
(27,969
)
 
(34,566
)
Depreciation expense
127,216

 
116,853

Income tax expense
37

 
15

Casualty and impairment (gain) loss, net
(2,202
)
 
5,788

Gain on sale of real estate assets
(51,430
)
 
(70,958
)
Net operating income from real estate assets sold or held for sale (1)
(721
)
 
(3,219
)
        Net operating income
$
358,766

 
$
295,627

__________________________________

(1)
Represents NOI from real estate assets sold or held for sale that are not otherwise classified as discontinued operations.

The following is a summary of NOI from real estate assets sold or held for sale for the periods presented (dollars in thousands):
 
For the three months ended
 
3/31/2016
 
3/31/2015
 
 
 
 
Rental income from real estate assets sold or held for sale
$
1,193

 
$
5,398

Operating expenses from real estate assets sold or held for sale
(472
)
 
(2,179
)
Net operating income from real estate assets sold or held for sale
$
721

 
$
3,219



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Table of Contents

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. 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 months ended March 31, 2016 and 2015 has been adjusted for the real estate assets that were sold from January 1, 2015 through March 31, 2016, or otherwise qualify as held for sale as of March 31, 2016, as described in Note 6, “Real Estate Disposition Activities.”
 
For the three months ended
 
 
 
Total
revenue
 
NOI
 
% NOI  change from  prior year
 
Gross
real estate (1)
For the period ended March 31, 2016
 
 

 
 

 
 
 
 
 
 
 
 
Established
 

 
 

 
 

 
 

New England
$
58,414

 
$
37,270

 
15.9
 %
 
$
1,860,863

Metro NY/NJ
87,789

 
59,764

 
3.2
 %
 
2,883,958

Mid-Atlantic
57,530

 
40,063

 
1.3
 %
 
2,330,106

Pacific Northwest
21,583

 
15,745

 
6.7
 %
 
795,228

Northern California
78,452

 
60,248

 
11.5
 %
 
2,651,741

Southern California
71,257

 
51,041

 
9.8
 %
 
2,633,553

Total Established
375,025

 
264,131

 
7.9
 %
 
13,155,449

 
 
 
 
 
 
 
 
Other Stabilized (2)
77,505

 
59,308

 
N/A

 
2,196,700

Development / Redevelopment
53,251

 
35,327

 
N/A

 
3,802,952

Land Held for Future Development
N/A

 
N/A

 
N/A

 
477,072

Non-allocated (3)
1,524

 
N/A

 
N/A

 
89,056

 
 
 
 
 
 
 
 
Total
$
507,305

 
$
358,766

 
21.4
 %
 
$
19,721,229

 
 
 
 
 
 
 
 
For the period ended March 31, 2015
 
 

 
 

 
 
 
 
 
 
 
 
Established
 

 
 

 
 

 
 

New England
$
46,034

 
$
26,800

 
(3.8
)%
 
$
1,429,727

Metro NY/NJ
93,183

 
64,366

 
2.8
 %
 
3,141,136

Mid-Atlantic
51,704

 
36,031

 
(0.8
)%
 
2,170,104

Pacific Northwest
18,489

 
13,373

 
9.0
 %
 
718,884

Northern California
65,515

 
49,734

 
11.5
 %
 
2,405,670

Southern California
62,324

 
43,517

 
13.1
 %
 
2,501,165

Total Established
337,249

 
233,821

 
5.3
 %
 
12,366,686

 
 
 
 
 
 
 
 
Other Stabilized
54,083

 
34,818

 
N/A

 
2,100,918

Development / Redevelopment
43,026

 
26,988

 
N/A

 
3,147,624

Land Held for Future Development
N/A

 
N/A

 
N/A

 
529,069

Non-allocated (3)
2,611

 
N/A

 
N/A

 
29,217

 
 
 
 
 
 
 
 
Total
$
436,969

 
$
295,627

 
13.4
 %
 
$
18,173,514

__________________________________

(1)
Does not include gross real estate assets held for sale of $20,341 and $201,829 as of March 31, 2016 and 2015, respectively.
(2)
Total revenue and NOI for the three months ended March 31, 2016 includes $20,306 in business interruption insurance proceeds.
(3)
Revenue represents third-party management, asset management and developer fees and miscellaneous income which are not allocated to a reportable segment.

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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:
 
 
2009 Plan
shares
 
Weighted average
exercise price
per share
 
1994 Plan
shares
 
Weighted average
exercise price
per share
Options Outstanding, December 31, 2015
 
249,178

 
$
122.17

 
82,195

 
$
103.27

Exercised
 
(6,660
)
 
126.99

 
(7,870
)
 
100.36

Forfeited
 

 

 

 

Options Outstanding, March 31, 2016
 
242,518

 
$
122.04

 
74,325

 
$
103.57

Options Exercisable, March 31, 2016
 
242,518

 
$
122.04

 
74,325

 
$
103.57


Information with respect to performance awards granted is as follows:
 
 
Performance awards
 
Weighted average grant date fair value per award
Outstanding at December 31, 2015
 
238,266

 
$
119.65

  Granted (1)
 
93,031

 
141.88

  Change in awards based on performance (2)
 
36,091

 
91.57

  Converted to restricted stock
 
(115,618
)
 
91.57

  Forfeited
 
(494
)
 
151.82

Outstanding at March 31, 2016
 
251,276

 
$
136.71

__________________________________

(1)
The amount of restricted stock ultimately earned is based on the total shareholder return metrics related to the Company’s common stock for 60,229 performance awards and financial metrics related to operating performance and leverage metrics of the Company for 32,802 performance awards.
(2)
Represents the change in the number of performance awards earned based on performance achievement.

The Company used a Monte Carlo model to assess the compensation cost associated with the portion of the performance awards determined by using total shareholder return measures. The assumptions used are as follows:
 
 
2016
Dividend yield
 
3.3%
Estimated volatility over the life of the plan (1)
 
15.2% - 22.8%
Risk free rate
 
0.44% - 0.88%
Estimated performance award value based on total shareholder return measure
 
$131.24
__________________________________

(1)
Estimated volatility over the life of the plan is using 50% historical volatility and 50% implied volatility.

For the portion of the performance awards determined by using financial metrics, the compensation cost was based on the grant date value of $161.56, and the Company's estimate of corporate achievement for the financial metrics.

Information with respect to restricted stock granted is as follows:
 
 
Restricted stock shares
 
Restricted stock shares weighted average grant date fair value per share
 
Restricted stock shares converted from performance awards
Outstanding at December 31, 2015
 
147,884

 
$
146.21

 
98,347

  Granted
 
77,553

 
161.56

 
115,618

  Vested
 
(79,408
)
 
140.65

 
(36,505
)
  Forfeited
 
(499
)
 
152.87

 

Outstanding at March 31, 2016
 
145,530

 
$
157.40

 
177,460



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Total employee stock-based compensation cost recognized in income was $3,742,000 and $3,883,000 for the three months ended March 31, 2016 and 2015, respectively, and total capitalized stock-based compensation cost was $3,048,000 and $3,244,000 for the three months ended March 31, 2016 and 2015, respectively. At March 31, 2016, there was a total unrecognized compensation cost of $40,083,000 for unvested restricted stock and performance awards, which does not include estimated forfeitures, and is expected to be recognized over a weighted average period of 3.9 years.

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 $1,524,000 and $2,611,000 during the three months ended March 31, 2016 and 2015, respectively. These fees are recognized on an accrual basis when earned in accordance with the accounting guidance applicable to revenue recognition, and 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 $3,796,000 and $3,832,000 as of March 31, 2016 and December 31, 2015, respectively.

Director Compensation

The Company recorded non-employee director compensation expense relating to restricted stock grants and deferred stock awards in the amount of $341,000 and $271,000 in the three months ended March 31, 2016 and 2015, 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 $195,000 and $488,000 on March 31, 2016 and December 31, 2015, respectively.

10.  Fair Value

Financial Instruments Carried at Fair Value

Derivative Financial Instruments

Currently, the Company uses interest rate swap and 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 March 31, 2016, 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 months ended March 31, 2016, 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 derivative positions at March 31, 2016 (dollars in thousands):

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Non-designated
Hedges
Interest Rate Caps
 
Cash Flow
Hedges
Interest Rate Caps
 
Cash Flow
Hedges
Interest Rate Swaps
 
 
 
 
 
 
Notional balance
$
724,700

 
$
36,525

 
$
1,050,000

Weighted average interest rate (1)
1.9
%
 
2.7
%
 
N/A

Weighted average swapped/capped interest rate
5.8
%
 
5.9
%
 
2.3
%
Earliest maturity date
Jul 2016

 
Apr 2019

 
May 2016

Latest maturity date
Feb 2021

 
Apr 2019

 
Nov 2017

____________________________________

(1)
For interest rate caps, 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 16 derivatives designated as cash flow hedges and 15 derivatives not designated as hedges at March 31, 2016. Fair value changes for derivatives not in qualifying hedge relationships for the three months ended March 31, 2016 and 2015 were not material. During three months ended March 31, 2016, the Company deferred $47,757,000 of losses for cash flow hedges, reported as a component of other comprehensive income (loss). In addition, the Company reclassified $1,374,000 and $1,595,000 of deferred losses from accumulated other comprehensive income as a component of interest expense, net for the three months ended March 31, 2016 and 2015, 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.

During the three months ended March 31, 2016, the Company entered into $450,000,000 of forward interest rate swap agreements to reduce the impact of variability in interest rates on a portion of the Company's expected debt issuance activity in 2016 and 2017. At maturity of the agreements, the Company expects to cash settle the contracts and either pay or receive cash for the then current fair value. Assuming that the Company issues the debt as expected, the impact from settling these positions will then be recognized over the life of the issued debt as a yield adjustment.

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.


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Table of Contents

Other Financial Instruments

Rents receivable, accounts and construction payable and accrued expenses and other liabilities are carried at their face amounts, which reasonably approximate 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 tables summarize 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):
 
 
 
 
Quoted Prices
in Active
Markets for
 
Significant
Other
Observable
 
Significant
Unobservable
 
 
 
 
Identical Assets
 
Inputs
 
Inputs
Description
 
Total Fair Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
3/31/2016
 
 
 
 
 
 
 
 
 
Non-Designated Hedges
 
 
 
 
 
 
 
 
Interest Rate Caps
 
$
64

 
$

 
$
64

 
$

Cash Flow Hedges
 
 
 
 
 
 
 
 
Interest Rate Caps
 
1

 

 
1

 

Interest Rate Swaps
 
(42,384
)
 

 
(42,384
)
 

Puts
 
(8,265
)
 

 

 
(8,265
)
DownREIT units
 
(1,427
)
 
(1,427
)
 

 

Indebtedness
 
 
 
 
 
 
 
 
Unsecured notes
 
(3,717,986
)
 
(3,717,986
)
 

 

Mortgage notes payable and unsecured term loan
 
(2,757,911
)
 

 
(2,757,911
)
 

Total
 
$
(6,527,908
)
 
$
(3,719,413
)
 
$
(2,800,230
)
 
$
(8,265
)
 
 
12/31/2015
Non-Designated Hedges
 
 
 
 
 
 
 
 
Interest Rate Caps
 
$
26

 
$

 
$
26

 
$

Cash Flow Hedges
 
 
 
 
 
 
 
 
Interest Rate Caps
 
5

 

 
5

 

Interest Rate Swaps
 
5,422

 

 
5,422

 

Puts
 
(8,181
)
 

 

 
(8,181
)
DownREIT units
 
(1,381
)
 
(1,381
)
 

 

Indebtedness
 
 
 
 
 
 
 
 
Unsecured notes
 
(3,668,417
)
 
(3,668,417
)
 

 

Mortgage notes payable and unsecured term loan
 
(2,700,341
)
 

 
(2,700,341
)
 

Total
 
$
(6,372,867
)
 
$
(3,669,798
)
 
$
(2,694,888
)
 
$
(8,181
)


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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.

The Company entered into $150,000,000 of forward interest rate swap agreements to reduce the impact of variability in interest rates on a portion of the Company's expected debt issuance activity in 2016 and 2017. At maturity of the agreements, the Company expects to cash settle the contracts and either pay or receive cash for the then current fair value. Assuming that the Company issues the debt as expected, the impact from settling these positions will then be recognized over the life of the issued debt as a yield adjustment.

Using available capacity under its Credit Facility, the Company repaid $134,500,000 of variable rate debt secured by Avalon Walnut Creek at par in advance of its March 2046 maturity date.

The Company acquired two parcels of land for development for an aggregate investment of $28,725,000. If developed as expected, the development rights related to this land will contain an aggregate of 633 apartment homes for an aggregate projected total capital cost of $234,000,000.


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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, 2015 (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 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 strategic vision is to be the leading apartment company in select US markets, providing a range of distinctive living experiences that customers value. We pursue this vision by targeting what we believe are the best markets and submarkets, leveraging our strategic capabilities in market research and consumer insight and being disciplined in our capital allocation and balance sheet management. Our communities are predominately upscale and generally command among the highest rents in their markets. However, we also pursue the ownership and operation of apartment communities that target a variety of customer segments and price points, consistent with our goal of offering a broad range of products and services. We regularly evaluate the allocation of our investments by the amount of invested capital and by product type within our individual markets.

First Quarter 2016 Highlights

We experienced favorable operating performance in the first quarter of 2016:

Net income attributable to common stockholders for the three months ended March 31, 2016 was $237,931,000, an increase of $29,787,000, or 14.3%, as compared to the prior year period. The increase is primarily attributable to an increase in NOI from newly developed and existing operating communities, which includes business interruption insurance proceeds, and a net casualty and impairment gain from insurance proceeds from the Edgewater casualty loss in excess of land impairments, partially offset by a decrease in real estate sales and related gains.

Established Communities NOI for the three months ended March 31, 2016 increased by $19,303,000, or 7.9%, over the prior year period. This increase was driven by an increase in rental revenue of 5.5%, partially offset by an increase in operating expenses of 0.1% 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 2016.


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During the three months ended March 31, 2016, we completed the construction of three communities with an aggregate of 732 apartment homes for a total capitalized cost of $212,100,000. We also started construction of one community expected to contain 290 apartment homes with an expected total capitalized cost of $64,000,000. At March 31, 2016, 24 communities expected to contain 7,670 apartment homes were under construction with a projected total capitalized cost of approximately $2,735,700,000.  In addition, as of March 31, 2016, we held a direct or indirect ownership interest in land or rights to land on which we expect to develop an additional 30 apartment communities that, if developed as expected, will contain an estimated 9,745 apartment homes, and will be developed for an aggregate total capitalized cost of $3,720,000,000, an increase of $302,000,000 from our position as of December 31, 2015.

During the three months ended March 31, 2016, we sold Eaves Trumbull, located in Trumbull, CT, containing 340 homes. Eaves Trumbull was sold for $70,250,000, and our gain in accordance with GAAP was $51,430,000,

During the three months ended March 31, 2016, we reached a final insurance settlement for the property damage and lost income for the casualty loss that occurred in 2015 at Avalon at Edgewater ("Edgewater"). In 2015 and 2016, we received aggregate insurance proceeds for Edgewater of $73,008,000, after self-insurance and deductibles. During the three months ended March 31, 2016, we received the final $29,008,000 of these proceeds, of which $8,702,000 was recognized as casualty and impairment (gain) loss, net and $20,306,000 as business interruption insurance proceeds, which is recorded as a component of rental and other income.

We expect to be able to meet our reasonably foreseeable liquidity needs, as they arise, through a combination of one or more of the following sources: existing cash on hand; operating cash flows; borrowings under our Credit Facility; secured debt; the issuance of corporate securities (which could include unsecured debt, preferred equity and/or common equity); the sale of apartment communities; or through the formation of joint ventures. See the discussion under Liquidity and Capital Resources.

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, Redevelopment Communities and Unconsolidated Communities. 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, Redevelopment, or Unconsolidated 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 three month periods ended March 31, 2016 and 2015, the Established Communities are communities that are consolidated for financial reporting purposes, had stabilized occupancy as of January 1, 2015, 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 and that are consolidated for financial reporting purposes, 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 consolidated communities where construction has been complete for less than one year and where physical occupancy has not reached 95%.

Redevelopment Communities are consolidated 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 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.


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Unconsolidated Communities are communities that we have an indirect ownership interest in through our investment interest in an unconsolidated joint venture, and that have stabilized occupancy, as defined above.

Development Communities are communities that are under construction and for which a certificate or certificates of occupancy for the entire community have not been received.  These communities may be partially complete and operating.

Development Rights are development opportunities in the early phase of the development process where we either have an option to acquire land or enter into a leasehold interest, where we are the buyer under a long-term conditional contract to purchase land, where we control the land through a ground lease or own land to develop a new community, or where we are the designated developer in a public-private partnership. We capitalize related pre-development costs incurred in pursuit of new developments for which we currently believe future development is probable.

We currently lease our corporate headquarters located in Arlington, Virginia, as well as our other regional and administrative offices under operating leases.


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Table of Contents

As of March 31, 2016, communities that we owned or held a direct or indirect interest in were classified as follows:
 
 
Number of
communities
 
Number of
apartment homes
 
 
 
 
 
Current Communities
 
 

 
 

 
 
 
 
 
Established Communities:
 
 

 
 

New England
 
40

 
9,010

Metro NY/NJ
 
35

 
10,830

Mid-Atlantic
 
27

 
9,575

Pacific Northwest
 
15

 
3,727

Northern California
 
33

 
9,987

Southern California
 
42

 
11,931

Total Established
 
192

 
55,060

 
 
 
 
 
Other Stabilized Communities:
 
 

 
 

New England
 
4

 
841

Metro NY/NJ
 
10

 
3,137

Mid-Atlantic
 
3

 
1,038

Pacific Northwest
 
1

 
367

Northern California
 
4

 
850

Southern California
 
6

 
2,747

Non Core
 
3

 
1,014

Total Other Stabilized
 
31

 
9,994

 
 
 
 
 
Lease-Up Communities
 
7

 
1,884

 
 
 
 
 
Redevelopment Communities
 
11

 
3,429

 
 
 
 
 
Unconsolidated Communities
 
17

 
5,012

 
 
 
 
 
Total Current Communities
 
258

 
75,379

 
 
 
 
 
Development Communities
 
24

 
7,670

 
 
 
 
 
Total Communities
 
282

 
83,049

 
 
 
 
 
Development Rights
 
30

 
9,745



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Table of Contents

Results of Operations

Our year-over-year operating performance is primarily affected by both overall and individual geographic market conditions and apartment fundamentals and is reflected in changes in NOI of our Established Communities; NOI derived from acquisitions and development completions; the loss of NOI related to disposed communities; and capital market and financing activity.  A comparison of our operating results for the three months ended March 31, 2016 and 2015 follows (unaudited, dollars in thousands):
 
For the three months ended
 
3/31/2016
 
3/31/2015
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
Revenue:
 

 
 

 
 

 
 

Rental and other income
$
506,974

 
$
439,756

 
$
67,218

 
15.3
 %
Management, development and other fees
1,524

 
2,611

 
(1,087
)
 
(41.6
)%
Total revenue
508,498

 
442,367

 
66,131

 
14.9
 %
 
 
 
 
 
 
 
 
Expenses:
 

 
 

 
 

 
 

Direct property operating expenses, excluding property taxes
97,387

 
93,723

 
3,664

 
3.9
 %
Property taxes
50,067

 
47,177

 
2,890

 
6.1
 %
Total community operating expenses
147,454

 
140,900

 
6,554

 
4.7
 %
 
 
 
 
 
 
 
 
Corporate-level property management and other indirect operating expenses
18,094

 
18,020

 
74

 
0.4
 %
Investments and investment management expense
1,145

 
1,034

 
111

 
10.7
 %
Expensed acquisition, development and other pursuit costs, net of recoveries
3,462

 
1,187

 
2,275

 
191.7
 %
Interest expense, net
43,410

 
45,573

 
(2,163
)
 
(4.7
)%
Depreciation expense
127,216

 
116,853

 
10,363

 
8.9
 %
General and administrative expense
11,404

 
10,468

 
936

 
8.9
 %
Casualty and impairment (gain) loss, net
(2,202
)
 
5,788

 
(7,990
)
 
N/A (1)

Total other expenses
202,529

 
198,923

 
3,606

 
1.8
 %
 
 
 
 
 
 
 
 
Equity in income of unconsolidated real estate entities
27,969

 
34,566

 
(6,597
)
 
(19.1
)%
Gain on sale of real estate

 
22

 
(22
)
 
(100.0
)%
Gain on sale of communities
51,430

 
70,936

 
(19,506
)
 
(27.5
)%
Income before taxes
237,914

 
208,068

 
29,846

 
14.3
 %
Income tax expense
37

 
15

 
22

 
146.7
 %
Net income
237,877

 
208,053

 
29,824

 
14.3
 %
 
 
 
 
 
 
 
 
Net loss attributable to noncontrolling interests
54

 
91

 
(37
)
 
(40.7
)%
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
$
237,931

 
$
208,144

 
$
29,787

 
14.3
 %
_________________________

(1)
Percent change is not meaningful.

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Net income attributable to common stockholders increased $29,787,000, or 14.3%, to $237,931,000 for the three months ended March 31, 2016 as compared to the prior year period. The increase for the three months ended March 31, 2016 is primarily attributable to an increase in NOI from newly developed and existing operating communities, which includes business interruption insurance proceeds, and a net casualty and impairment gain from insurance proceeds from the Edgewater casualty loss in excess of land impairments, partially offset by a decrease in real estate sales and related gains.

NOI is considered by management to be an important and appropriate supplemental performance measure to net income because it helps both investors and management to understand the core operations of a community or communities prior to the allocation of any corporate-level or financing-related costs.  NOI reflects the operating performance of a community and allows for an easy comparison of the operating performance of individual assets or groups of assets. In addition, because prospective buyers of real estate have different financing and overhead structures, with varying marginal impacts to overhead as a result of acquiring real estate, NOI is considered by many in the real estate industry to be a useful measure for determining the value of a real estate asset or group of assets.  We define NOI as total property revenue less direct property operating expenses, including property taxes, and excluding corporate-level income (including management, development and other fees), corporate-level property management and other indirect operating expenses, investments and investment management expenses, expensed acquisition, development and other pursuit costs, net of recoveries, interest expense, net, loss on extinguishment of debt, net, general and administrative expense, equity in income of unconsolidated real estate entities, depreciation expense, corporate income tax expense, casualty and impairment (gain) loss, net, gain on sale of real estate assets and net operating income from real estate assets sold or held for sale.

NOI does not represent cash generated from operating activities in accordance with GAAP, and NOI should not be considered an alternative to net income as an indication of our performance. NOI should also not be considered an alternative to net cash flow from operating activities, as determined by GAAP, as a measure of liquidity, nor is NOI indicative of cash available to fund cash needs.  Reconciliations of NOI for the three months ended March 31, 2016 and 2015 to net income for each period are as follows (unaudited, dollars in thousands):
 
For the three months ended
 
3/31/2016
 
3/31/2015
 
 
 
 
Net income
$
237,877

 
$
208,053

Indirect operating expenses, net of corporate income
16,537

 
15,399

Investments and investment management expense
1,145

 
1,034

Expensed acquisition, development and other pursuit costs, net of recoveries
3,462

 
1,187

Interest expense, net
43,410

 
45,573

General and administrative expense
11,404

 
10,468

Equity in income of unconsolidated real estate entities
(27,969
)
 
(34,566
)
Depreciation expense
127,216

 
116,853

Income tax expense
37

 
15

Casualty and impairment (gain) loss, net
(2,202
)
 
5,788

Gain on sale of real estate assets
(51,430
)
 
(70,958
)
Net operating income from real estate assets sold or held for sale (1)
(721
)
 
(3,219
)
Net operating income
$
358,766

 
$
295,627

____________________________

(1) Represents NOI from real estate assets sold or held for sale that are not otherwise classified as discontinued operations.

The NOI changes for the three months ended March 31, 2016, compared to the prior year period, consist of changes in the following categories (unaudited, dollars in thousands):

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Table of Contents

 
For the three months ended
 
3/31/2016
 
 

Established Communities
$
19,303

Other Stabilized Communities (1)
34,443

Development and Redevelopment Communities
9,393

Total
$
63,139

____________________________

(1) NOI for the three months ended March 31, 2016 includes $20,306 in business interruption insurance proceeds.

The increase in our Established Communities’ NOI for the three months ended March 31, 2016 is due to increased rental rates, partially offset by increased operating expenses. For the balance of 2016, we expect continued rental revenue growth over the prior year, offset partially by an expected increase in operating expenses. We expect our operating expenses will continue at a level above the prior year period for the remainder of the year.

Rental and other income increased in the three months ended March 31, 2016 compared to the prior year period due to additional rental income generated from newly developed and existing operating communities and an increase in rental rates at our Established Communities, discussed below, coupled with business interruption insurance proceeds primarily due to the final settlement of the Edgewater casualty loss.

Consolidated Communities — The weighted average number of occupied apartment homes increased to 67,156 apartment homes for the three months ended March 31, 2016, compared to 63,530 homes for th