November 4, 2016 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

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 September 30, 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:

137,325,877 shares of common stock, par value $0.01 per share, were outstanding as of October 31, 2016.

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AVALONBAY COMMUNITIES, INC.

FORM 10-Q

INDEX



		PAGE
PART I - FINANCIAL INFORMATION

ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015	1

	CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015	2

	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015	3

	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	5

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		24

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		53

ITEM 4. CONTROLS AND PROCEDURES		53

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS		53

ITEM 1A. RISK FACTORS		54

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		55

ITEM 3. DEFAULTS UPON SENIOR SECURITIES		55

ITEM 4. MINE SAFETY DISCLOSURES		55

ITEM 5. OTHER INFORMATION		55

ITEM 6. EXHIBITS		56

SIGNATURES		58

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AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)



	9/30/2016			12/31/2015
	(unaudited)
ASSETS
Real estate:
Land and improvements	$	3,894,647		$	3,636,761
Buildings and improvements	13,993,232			13,056,292
Furniture, fixtures and equipment	515,887			458,224
	18,403,766			17,151,277
Less accumulated depreciation	(3,591,604		)	(3,303,751		)
Net operating real estate	14,812,162			13,847,526
Construction in progress, including land	1,439,271			1,592,917
Land held for development	519,626			484,377
Real estate assets held for sale, net	100,351			17,489
Total real estate, net	16,871,410			15,942,309

Cash and cash equivalents	65,899			400,507
Cash in escrow	166,289			104,821
Resident security deposits	32,640			30,077
Investments in unconsolidated real estate entities	176,882			216,919
Deferred development costs	46,188			37,577
Prepaid expenses and other assets	229,349			199,095
Total assets	$	17,588,657		$	16,931,305

LIABILITIES AND EQUITY
Unsecured notes, net	$	4,070,247		$	3,845,674
Variable rate unsecured credit facility	170,000			—
Mortgage notes payable, net	2,575,723			2,611,274
Dividends payable	185,384			171,257
Payables for construction	100,113			98,802
Accrued expenses and other liabilities	335,249			260,005
Accrued interest payable	44,027			40,085
Resident security deposits	57,495			53,132
Liabilities related to real estate assets held for sale	3,845			553
Total liabilities	7,542,083			7,080,782

Commitments and contingencies

Redeemable noncontrolling interests	9,950			9,997

Equity:
Preferred stock, $0.01 par value; $25 liquidation preference; 50,000,000 shares authorized at September 30, 2016 and December 31, 2015; zero shares issued and outstanding at September 30, 2016 and December 31, 2015	—			—
Common stock, $0.01 par value; 280,000,000 shares authorized at September 30, 2016 and December 31, 2015; 137,324,780 and 137,002,031 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively	1,373			1,370
Additional paid-in capital	10,099,739			10,068,532
Accumulated earnings less dividends	36,043			(197,989		)
Accumulated other comprehensive loss	(100,531		)	(31,387		)
Total equity	10,036,624			9,840,526
Total liabilities and equity	$	17,588,657		$	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						For the nine months ended
	9/30/2016			9/30/2015			9/30/2016			9/30/2015
Revenue:
Rental and other income	$	514,891		$	473,199		$	1,522,705		$	1,367,473
Management, development and other fees	1,320			2,161			4,310			7,714
Total revenue	516,211			475,360			1,527,015			1,375,187

Expenses:
Operating expenses, excluding property taxes	124,789			115,655			360,318			340,501
Property taxes	52,338			50,416			153,512			143,505
Interest expense, net	47,871			43,234			137,862			133,398
(Gain) loss on extinguishment of debt, net	—			(18,987		)	2,461			(26,736		)
Depreciation expense	131,729			120,184			391,414			355,664
General and administrative expense	11,928			10,464			35,343			31,266
Expensed acquisition, development and other pursuit costs, net of recoveries	3,804			3,391			8,702			5,251
Casualty and impairment loss (gain), net	—			658			(3,935		)	(10,668		)
Total expenses	372,459			325,015			1,085,677			972,181

Equity in (loss) income of unconsolidated real estate entities	(342		)	20,554			54,779			68,925
Gain on sale of communities	202,163			35,216			284,582			106,151
Gain on sale of other real estate	10,778			—			10,921			9,647

Income before taxes	356,351			206,115			791,620			587,729
Income tax expense	22			39			95			1,348

Net income	356,329			206,076			791,525			586,381
Net loss attributable to noncontrolling interests	63			66			242			229

Net income attributable to common stockholders	$	356,392		$	206,142		$	791,767		$	586,610

Other comprehensive income (loss):
Income (loss) on cash flow hedges	719			(31		)	(73,826		)	(67		)
Cash flow hedge losses reclassified to earnings	1,748			1,373			4,682			4,401
Comprehensive income	$	358,859		$	207,484		$	722,623		$	590,944

Earnings per common share - basic:
Net income attributable to common stockholders	$	2.60		$	1.54		$	5.77		$	4.42

Earnings per common share - diluted:
Net income attributable to common stockholders	$	2.59		$	1.53		$	5.76		$	4.39

Dividends per common share	$	1.35		$	1.25		$	4.05		$	3.75

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 nine months ended
	9/30/2016			9/30/2015
Cash flows from operating activities:
Net income	$	791,525		$	586,381
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation expense	391,414			355,664
Amortization of deferred financing costs	5,664			5,117
Amortization of debt premium	(14,146		)	(19,571		)
Loss (gain) on extinguishment of debt, net	2,461			(26,736		)
Amortization of stock-based compensation	12,103			11,980
Equity in loss of, and return on, unconsolidated entities and noncontrolling interests, net of eliminations	11,756			13,502
Casualty and impairment (gain) loss, net	(3,935		)	(17,303		)
Abandonment of development pursuits	1,598			—
Cash flow hedge losses reclassified to earnings	4,682			4,334
Gain on sale of real estate assets	(348,675		)	(146,745		)
Increase in cash in operating escrows	(4,563		)	(8,409		)
(Increase) decrease in resident security deposits, prepaid expenses and other assets	(16,127		)	2,986
Increase in accrued expenses, other liabilities and accrued interest payable	17,911			33,072
Net cash provided by operating activities	851,668			794,272

Cash flows from investing activities:
Development/redevelopment of real estate assets including land acquisitions and deferred development costs	(869,342		)	(1,265,829		)
Acquisition of real estate assets, including partnership interest	(393,916		)	—
Capital expenditures - existing real estate assets	(43,020		)	(40,358		)
Capital expenditures - non-real estate assets	(5,513		)	(4,887		)
Proceeds from sale of real estate, net of selling costs	404,731			232,415
Increase in cash in deposit escrows	(59,263		)	—
Insurance proceeds for property damage claims	17,196			44,142
Mortgage note receivable lending	(11,074		)	—
Increase in payables for construction	1,311			1,010
Distributions from unconsolidated real estate entities	94,748			47,873
Investments in unconsolidated real estate entities	(2,449		)	(881		)
Net cash used in investing activities	(866,591		)	(986,515		)

Cash flows from financing activities:
Issuance of common stock, net	14,147			674,631
Dividends paid	(541,485		)	(484,251		)
Net borrowings under unsecured credit facility	170,000			—
Repayments of mortgage notes payable, including prepayment penalties	(161,095		)	(743,653		)
Issuance of unsecured notes	474,838			574,066
Repayment of unsecured notes	(250,000		)	—
Payment of deferred financing costs	(10,910		)	(4,741		)
Payment for termination of forward interest rate swaps	(14,847		)	—
Distributions to DownREIT partnership unitholders	(30		)	(28		)
Distributions to joint venture and profit-sharing partners	(303		)	(274		)
Redemption of preferred interest obligation	—			(14,410		)
Net cash (used in) provided by financing activities	(319,685		)	1,340

Net decrease in cash and cash equivalents	(334,608		)	(190,903		)

Cash and cash equivalents, beginning of period	400,507			509,460
Cash and cash equivalents, end of period	$	65,899		$	318,557

Cash paid during the period for interest, net of amount capitalized	$	137,720		$	149,097

See accompanying notes to Condensed Consolidated Financial Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Supplemental disclosures of non-cash investing and financing activities:

During the nine months ended September 30, 2016:

•

As described in Note 4, “Equity,” 196,491 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 80,873 shares valued at $13,129,000 were issued in connection with new stock grants; 44,327 shares valued at $3,894,000 were issued in conjunction with the conversion of deferred stock awards; 1,689 shares valued at $304,000 were issued through the Company’s dividend reinvestment plan; 53,214 shares valued at $8,316,000 were withheld to satisfy employees’ tax withholding and other liabilities; and 3,848 restricted shares with an aggregate value of $627,000 previously issued in connection with employee compensation were canceled upon forfeiture.


•	Common stock dividends declared but not paid totaled $185,384,000.


•	The Company recorded an increase of $529,000 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 $2,689,000 and an increase in accrued expenses and other liabilities of $53,591,000, and a corresponding loss to other comprehensive income of $56,280,000, and reclassified $4,682,000 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 fixed rate indebtedness with a principal amount of $67,904,000 in conjunction with the acquisition of Avalon Hoboken.


•	The Company assumed fixed rate indebtedness with a principal amount of $70,507,000 in conjunction with the acquisition of Avalon Columbia Pike.

During the nine months ended September 30, 2015:

•

The Company issued 157,779 shares of common stock as part of the Company's stock based compensation plans, of which 95,826 shares related to the conversion of performance awards 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; 1,608 shares valued at $275,000 were issued through the Company’s dividend reinvestment plan; 39,800 shares valued at $5,921,000 were withheld to satisfy employees’ tax withholding and other liabilities; and 4,293 restricted stock units with a value of $502,000 previously issued in connection with employee compensation were canceled upon forfeiture.


•	Common stock dividends declared but not paid totaled $171,098,000.


•	The Company recorded a decrease of $1,722,000 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 $67,000, and reclassified $4,401,000 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.

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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 September 30, 2016, the Company owned or held a direct or indirect ownership interest in 261 operating apartment communities containing 75,254 apartment homes in 10 states and the District of Columbia, of which eight communities containing 3,363 apartment homes were under reconstruction. In addition, the Company owned or held a direct or indirect interest in 22 communities under construction that are expected to contain an aggregate of 7,454 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 28 communities that, if developed as expected, will contain an estimated 9,550 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 and nine months ended September 30, 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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	For the three months ended						For the nine months ended
	9/30/2016			9/30/2015			9/30/2016			9/30/2015
Basic and diluted shares outstanding
Weighted average common shares - basic	136,997,756			133,669,584			136,901,164			132,516,847
Weighted average DownREIT units outstanding	7,500			7,500			7,500			7,500
Effect of dilutive securities	499,798			1,032,376			533,642			1,139,423
Weighted average common shares - diluted	137,505,054			134,709,460			137,442,306			133,663,770

Calculation of Earnings per Share - basic
Net income attributable to common stockholders	$	356,392		$	206,142		$	791,767		$	586,610
Net income allocated to unvested restricted shares	(872		)	(467		)	(2,036		)	(1,444		)
Net income attributable to common stockholders, adjusted	$	355,520		$	205,675		$	789,731		$	585,166

Weighted average common shares - basic	136,997,756			133,669,584			136,901,164			132,516,847

Earnings per common share - basic	$	2.60		$	1.54		$	5.77		$	4.42

Calculation of Earnings per Share - diluted
Net income attributable to common stockholders	$	356,392		$	206,142		$	791,767		$	586,610
Add: noncontrolling interests of DownREIT unitholders in consolidated partnerships, including discontinued operations	10			9			30			28
Adjusted net income available to common stockholders	$	356,402		$	206,151		$	791,797		$	586,638

Weighted average common shares - diluted	137,505,054			134,709,460			137,442,306			133,663,770

Earnings per common share - diluted	$	2.59		$	1.53		$	5.76		$	4.39

All options to purchase shares of common stock outstanding as of September 30, 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 September 30, 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 and nine months ended September 30, 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. The Company does not present or disclose the fair value of Hedging Derivatives on a net basis. Fair value changes for derivatives that are not in qualifying hedge relationships are reported as a component of interest expense, net. For the Hedging Derivative positions that the Company has determined qualify as effective cash flow hedges, the Company has recorded the 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 has established protocols for processing claims from third parties who suffered losses as a result of the fire, and many third parties have contacted the Company's insurance carrier and settled their claims. See Part II, Item 1, "Legal Proceedings," for further discussion of the lawsuits associated with the Edgewater casualty loss.

Three class action lawsuits have been filed against the Company on behalf of occupants of the destroyed building and consolidated in the United States District Court for the District of New Jersey. The Company has agreed with class counsel to the terms of a proposed settlement which would provide a claims process (with agreed upon protocols for instructing the adjuster as to how to evaluate claims) and, if needed, an arbitration process to determine damage amounts to be paid to individual claimants covered by the class settlement. On July 8, 2016, class counsel filed with the court a motion for preliminary approval of this class settlement, and the Company did not oppose such motion. The Court administratively terminated this motion without prejudice due to the filing of an appeal of an order denying a motion to intervene in the settlement, but the Company expects that the motion will be re-filed shortly. The Company cannot predict when or if the court will approve the settlement. A fourth class action, being heard in the same federal court, was filed against the Company on behalf of residents of the second Edgewater building that suffered minimal damage. In addition to the class action lawsuits described above, 20 lawsuits representing approximately 141 individual plaintiffs have been filed in the Superior Court of New Jersey Bergen County - Law Division and 19 of these lawsuits are currently pending. All of these state court cases have been consolidated by the court; the Company believes that it has meritorious defenses to the extent of damages claimed in all of the suits. There are also three subrogation lawsuits that have been filed against the Company by insurers of Edgewater residents who obtained “renter’s insurance”; it is the Company’s position that in the majority of the applicable leases the residents waived subrogation rights. One of these lawsuits has been dismissed on that basis and the other two are currently pending in the United States District Court for the District of New Jersey.

Having settled many third party claims through the insurance claims process, the Company currently believes that any potential remaining liability to third parties (including any potential liability to third parties determined in accordance with the class settlement described above, if approved) will not be material to the Company and will in any event be substantially covered by the Company's 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, debt and identified intangible assets and liabilities, consisting of the value of above or below market leases and in-place leases. In making estimates of fair values for purposes of allocating purchase price, the Company utilizes various sources, including its own analysis of recently acquired and existing comparable properties in its portfolio and other market data. Consideration for acquisitions is typically in the form of cash unless otherwise disclosed.

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.

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Reclassifications

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

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. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers-Deferral of the Effective Date, which defers the effective date of the new revenue recognition standard until the first quarter of 2018. Subsequently, the FASB has issued multiple ASU’s clarifying ASU 2014-09 and ASU 2015-14. The Company is assessing whether the new standard will have a material effect on its financial position or results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases, amending the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The new standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The guidance will be effective in the first quarter of 2019 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.

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.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses eight specific cash flow issues including debt prepayment or debt extinguishment costs, proceeds from the settlement of insurance claims, distributions received from equity method investees and separately identifiable cash flows and application of the predominance principle. The new standard requires a retrospective approach. The guidance will be effective in the first quarter of 2018 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.

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 $19,889,000 and $20,356,000 for the three months ended September 30, 2016 and 2015, respectively, and $60,522,000 and $59,186,000 for the nine months ended September 30, 2016 and 2015, respectively.

3. Mortgage Notes Payable, Unsecured Notes and Credit Facility

The Company’s mortgage notes payable, unsecured notes, variable rate unsecured term loan (the “Term Loan”) and Credit Facility, as defined below, as of September 30, 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 September 30, 2016 and December 31, 2015, as shown in the accompanying Condensed Consolidated Balance Sheets (dollars in thousands) (see Note 6, “Real Estate Disposition Activities”).

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	9/30/2016		12/31/2015

Fixed rate unsecured notes (1)	$	3,800,000	$	3,575,000
Term Loan	300,000		300,000
Fixed rate mortgage notes payable - conventional and tax-exempt (2)	1,672,758		1,561,109
Variable rate mortgage notes payable - conventional and tax-exempt (2)	908,621		1,045,182
Total mortgage notes payable and unsecured notes	6,681,379		6,481,291
Credit Facility	170,000		—
Total mortgage notes payable, unsecured notes and Credit Facility	$	6,851,379	$	6,481,291

_____________________________________


(1)	Balances at September 30, 2016 and December 31, 2015 exclude $6,882 and $7,601, respectively, of debt discount, and $22,871 and $21,725, respectively, of deferred financing costs, as reflected in unsecured notes, net on the accompanying Condensed Consolidated Balance Sheets.


(2)	Balances at September 30, 2016 and December 31, 2015 exclude $6,501 and $19,686, respectively, of debt premium, and $12,157 and $14,703, respectively, of deferred financing costs, as reflected in mortgage notes payable on the accompanying Condensed Consolidated Balance Sheets.

The following debt activity occurred during the nine months ended September 30, 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.


•	In April 2016, 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, recognizing a non-cash charge of $2,461,000 for the write-off of deferred financing costs.


•	In May 2016, the Company issued $475,000,000 principal amount of unsecured notes in a public offering under its existing shelf registration statement for net proceeds of approximately $471,751,000. The notes mature in May 2026 and were issued at a 2.95% coupon rate. The notes have an effective interest rate of approximately 3.35%, including the effect of an interest rate hedge and offering costs.


•	In August 2016, Avalon Wilshire, Avalon Mission Oaks and Avalon Encino were substituted as collateral for the outstanding fixed rate mortgage notes secured by Eaves Nanuet, Avalon Shrewsbury and Avalon at Freehold, respectively.


•	In September 2016, the Company repaid $250,000,000 principal amount of its 5.75% coupon unsecured notes pursuant to its scheduled maturity.


•	In September 2016, in conjunction with the acquisition of Avalon Columbia Pike, the Company assumed a fixed rate secured mortgage note with a principal balance of $70,507,000 and a contractual interest rate of 3.38% maturing in November 2019.

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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 (1.36% at September 30, 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 $170,000,000 outstanding under the Credit Facility as of September 30, 2016 and no borrowings outstanding under the Credit Facility as of December 31, 2015. The Company had $53,137,000 and $43,049,000 outstanding in letters of credit that reduced the borrowing capacity as of September 30, 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 $3,482,680,000, excluding communities classified as held for sale, as of September 30, 2016).

As of September 30, 2016, the Company has guaranteed $100,000,000 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 4.4% and 4.6% at September 30, 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 2.3% and 1.8% at September 30, 2016 and December 31, 2015, respectively.

Scheduled payments and maturities of mortgage notes payable and unsecured notes outstanding at September 30, 2016 are as follows (dollars in thousands):



Year	Secured notes payments		Secured notes maturities		Unsecured notes maturities		Stated interest rate of unsecured notes

2016	$	4,536	$	—	$	—	N/A
2017	18,671		709,591		250,000		5.700	%
2018	17,793		76,669		—		N/A
2019	4,696		655,386		—		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	4,585		84,835		525,000		3.450	%
					300,000		3.500	%
Thereafter	218,644		620,080		475,000		2.950	%
	$	288,245	$	2,293,134	$	4,100,000

The Company was in compliance at September 30, 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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4. Equity

The following summarizes the changes in equity for the nine months ended September 30, 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	—		—		791,767			—			791,767
Loss on cash flow hedges	—		—		—			(73,826		)	(73,826		)
Cash flow hedge loss reclassified to earnings	—		—		—			4,682			4,682
Change in redemption value of redeemable noncontrolling interest	—		—		(529		)	—			(529		)
Dividends declared to common stockholders	—		—		(555,916		)	—			(555,916		)
Issuance of common stock, net of withholdings	3		11,148		(1,290		)	—			9,861
Amortization of deferred compensation	—		20,059		—			—			20,059
Balance at September 30, 2016	$	1,373	$	10,099,739	$	36,043		$	(100,531	)	$	10,036,624

As of September 30, 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 nine months ended September 30, 2016, the Company:


i.	issued 128,192 shares of common stock in connection with stock options exercised;


ii.	issued 1,689 common shares through the Company’s dividend reinvestment plan;


iii.	issued 196,491 common shares in connection with restricted stock grants and the conversion of performance awards to restricted shares;


iv.	issued 44,327 common shares in conjunction with the conversion of deferred stock awards;


v.	withheld 53,214 common shares to satisfy employees’ tax withholding and other liabilities;


vi.	issued 5,671 common shares through the Employee Stock Purchase Program; and


vii.	canceled 407 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 nine months ended September 30, 2016 is not reflected on the accompanying Condensed Consolidated Balance Sheet as of September 30, 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 and nine months ended September 30, 2016, the Company had no sales under the program and did not enter into any forward sale agreements.

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5. Investments in Real Estate Entities

Investment in Unconsolidated Real Estate Entities

As of September 30, 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 and joint ventures formed with Equity Residential as part of the Archstone acquisition. 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 nine months ended September 30, 2016, AvalonBay Value Added Fund II, L.P. ("Fund II") sold two communities:


•	Eaves Rancho San Diego, located in El Cajon, CA, containing 676 apartment homes, was sold for $158,000,000. The Company's share of the gain in accordance with GAAP for the disposition was $13,057,000.


•	Eaves Tustin, located in Tustin, CA, containing 628 apartment homes, was sold for $163,550,000. The Company's share of the gain in accordance with GAAP for the disposition was $23,547,000.

In conjunction with the disposition of these communities during the nine months ended September 30, 2016, Fund II repaid $127,191,000 of 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 portion was $1,670,000, which is reported as a reduction of equity in (loss) income of unconsolidated real estate entities on the accompanying Condensed Consolidated Statements of Comprehensive Income.

The Company has an equity interest of 31.3% in Fund II, and upon achievement of a threshold return, the Company has a right to incentive distributions for its promoted interest representing 20.0% of further Fund II distributions, which is in addition to its share of the remaining 80.0% of distributions. During the nine months ended September 30, 2016, the Company recognized income of $3,447,000 for its promoted interest, which is reported as a component of equity in (loss) income of unconsolidated real estate entities on the accompanying Condensed Consolidated Statements of Comprehensive Income.

During the nine months ended September 30, 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, was sold 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 apartment homes, was sold 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 nine months ended September 30, 2016, the U.S. Fund repaid an aggregate of $94,822,000 of 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 is reported as a reduction of equity in (loss) 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 discussed above as of the dates presented (dollars in thousands):

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	9/30/2016		12/31/2015
	(unaudited)		(unaudited)
Assets:
Real estate, net	$	1,005,924	$	1,392,833
Other assets	52,992		57,044
Total assets	$	1,058,916	$	1,449,877

Liabilities and partners’ capital:
Mortgage notes payable and credit facility	$	720,703	$	947,205
Other liabilities	20,771		20,471
Partners’ capital	317,442		482,201
Total liabilities and partners’ capital	$	1,058,916	$	1,449,877

The following is a combined summary of the operating results of the entities accounted for using the equity method discussed above for the periods presented (dollars in thousands):



	For the three months ended						For the nine months ended
	9/30/2016			9/30/2015			9/30/2016			9/30/2015
	(unaudited)						(unaudited)
Rental and other income	$	30,771		$	43,868		$	101,534		$	132,518
Operating and other expenses	(12,069		)	(17,910		)	(39,206		)	(52,622		)
Gain on sale of communities	—			66,410			180,256			98,899
Interest expense, net (1)	(7,919		)	(14,883		)	(37,857		)	(35,694		)
Depreciation expense	(8,081		)	(11,213		)	(26,027		)	(35,058		)
Net income	$	2,702		$	66,272		$	178,700		$	108,043

_____________________________________


(1)	Amount for the nine months ended September 30, 2016 includes charges for prepayment penalties and write-offs of deferred financing costs of $12,344.

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 $38,485,000 and $40,978,000 at September 30, 2016 and December 31, 2015, respectively, of the Company's respective investment balances. These amounts are being amortized over the lives of the underlying assets as a component of equity in (loss) income of unconsolidated entities on the accompanying Condensed Consolidated Statements of Comprehensive Income.

In May 2016, the Company entered into a joint venture agreement to facilitate the acquisition of Avalon Clarendon, located in Arlington, VA. Avalon Clarendon is part of a mixed-use development containing residential, retail, office and public parking. The Company contributed $120,300,000 to the venture for the Company's share of the purchase price. The Company had shared control of the overall venture with its partner, but had all of the rights and obligations associated with the residential component of Avalon Clarendon, containing 300 apartment homes. The joint venture partner had all of the rights and obligations associated with the retail, office and public parking components of the mixed-use development. During the three months ended September 30, 2016, the Company and its venture partner established separate legal ownership of the residential and retail, office and public parking components of the venture, and the Company retained all of the rights and obligations associated with the residential component. After this legal separation, the Company will report the operating results of Avalon Clarendon as part of its consolidated operations. In conjunction with the consolidation of Avalon Clarendon, the Company recorded the consolidated assets at fair value applying the framework discussed below under "Investments in Consolidated Real Estate Entities" for valuation, resulting in a gain of $4,322,000 for the difference between the fair value of Avalon Clarendon and the Company's equity interest at the date of consolidation of $115,848,000, primarily attributable to depreciation recognized during the period the community was owned in the joint venture. The Company has included this gain as a component of gain on sale of communities on the accompanying Condensed Consolidated Statements of Comprehensive Income.

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During the three months ended September 30, 2016, the Company entered into a joint venture to develop, own, and operate AVA North Point, an apartment community located in Cambridge, MA, which is currently under construction and expected to contain 265 apartment homes upon completion. The Company owns a 55.0% interest in the venture, and the venture partner owns the remaining 45.0% interest. AVA North Point is the third phase of a master planned development, the other phases of which are owned through the AC JV. The AC JV’s partnership agreement contains provisions that require the Company to provide a right of first offer (“ROFO”) to the venture partners in connection with opportunities to acquire or develop additional interests in multifamily real estate assets within a specified geographic radius of the AC JV’s existing assets, generally one mile or less. During the three months ended September 30, 2016, the Company provided the partners of the AC JV the opportunity to acquire the AVA North Point land parcel owned by the Company as required in the ROFO provisions for the AC JV. After certain partners of the AC JV declined to participate, the Company entered into the new joint venture and sold the land parcel to the venture in exchange for a cash payment and a capital account credit, and is overseeing the development in exchange for a developer fee. Upon sale of the land parcel, the Company recognized a gain of $10,621,000, included in gain on sale of other real estate on the accompanying Condensed Consolidated Statements of Comprehensive Income.

Investments in Consolidated Real Estate Entities

During the nine months ended September 30, 2016, in addition to Avalon Clarendon discussed above, the Company acquired four consolidated communities:


•	Avalon Hoboken, located in Hoboken, NJ, contains 217 apartment 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, contains 323 apartment homes and was acquired for a purchase price of $108,250,000.


•	Avalon Columbia Pike, located in Arlington, VA, contains 269 apartment homes and was acquired for a purchase price of $102,000,000. In conjunction with the acquisition, the Company assumed a fixed rate secured mortgage note with a principal balance of $70,507,000 and a contractual interest rate of 3.38% maturing in November 2019.


•	Studio 77, located in North Hollywood, CA, contains 156 apartment homes and was acquired for a purchase price of $72,100,000.

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 expensed. 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 $3,804,000 and $3,391,000 for the three months ended September 30, 2016 and 2015, respectively, and $7,086,000 and $5,251,000 for the nine months ended September 30, 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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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 and nine months ended September 30, 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 nine months ended September 30, 2016, the Company recognized $10,500,000 of aggregate impairment charges related to three ancillary land parcels. This charge was determined as the excess of the Company's carrying basis over the expected sales price for each parcel, and is included in casualty and impairment loss (gain), 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 and nine months ended September 30, 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 and nine months ended September 30, 2016 and 2015.

Casualty Gains and Losses

During the nine months ended September 30, 2016, the Company reached a final insurance settlement for the Company's property damage and lost income for the Edgewater casualty loss, for which it received aggregate insurance proceeds for Edgewater of $73,150,000, after self-insurance and deductibles, as discussed below.

During the nine months ended September 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 $6,635,000 to record demolition and additional incident expenses, resulting in a net casualty gain of $15,663,000. Of these amounts, during the three months ended September 30, 2015, the Company recorded casualty charges for additional demolition and incident costs related to Edgewater of $658,000. During the nine months ended September 30, 2016, the Company received the final $29,008,000 of insurance proceeds, of which $8,702,000 was recognized as an additional net casualty gain and $20,306,000 as business interruption insurance proceeds. The Company reported the net casualty gains from each of the respective reporting periods as casualty and impairment loss (gain), net on the accompanying Condensed Consolidated Statements of Comprehensive Income, and reported the business interruption insurance proceeds as a component of rental and other income 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 nine months ended September 30, 2015, several of the Company's communities in its Northeast markets incurred property and casualty damages from severe winter storms, for which the Company recorded an impairment due to a casualty loss of $4,195,000. During the nine months ended September 30, 2016, the Company recorded a net casualty gain related to the 2015 severe winter storms of $5,732,000, which is comprised of $8,493,000 in third-party insurance proceeds received, partially offset by incremental costs of $2,761,000. These amounts are included in casualty and impairment loss (gain), net on the accompanying Condensed Consolidated Statements of Comprehensive Income.

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6. Real Estate Disposition Activities

During the nine months ended September 30, 2016, the Company sold five wholly-owned operating communities.


•	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.


•	Avalon Essex, located in Peabody, MA, containing 154 homes, was sold for $45,100,000. The Company's gain in accordance with GAAP on the disposition was $31,081,000, reported in gain on sale of communities on the accompanying Condensed Consolidated Statements of Comprehensive Income.


•	Eaves Nanuet, located in Nanuet, NY, containing 504 homes, was sold for $147,000,000. The Company's gain in accordance with GAAP on the disposition was $118,008,000, reported in gain on sale of communities on the accompanying Condensed Consolidated Statements of Comprehensive Income.

•

Avalon Shrewsbury, located in Shrewsbury, MA, containing 251 homes, was sold for $60,500,000. The Company's gain in accordance with GAAP on the disposition was $33,350,000, reported in gain on sale of communities on the accompanying Condensed Consolidated Statements of Comprehensive Income. The sale of Avalon Shrewsbury was expected to be part of a tax deferred exchange under which the Company had restricted the cash proceeds 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 in the fourth quarter of 2016.


•	Avalon at Freehold, located in Freehold, NJ, containing 296 homes, was sold for $68,000,000. The Company's gain in accordance with GAAP on the disposition was $46,482,000, reported in gain on sale of communities on the accompanying Condensed Consolidated Statements of Comprehensive Income.

At September 30, 2016, the Company had three communities and three ancillary land parcels that qualified as held for sale.

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, (gain) loss on extinguishment of debt, net, general and administrative expense, equity in (loss) income of unconsolidated real estate entities, depreciation expense, corporate income tax expense, casualty and impairment loss (gain), 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 and nine months ended September 30, 2016 and 2015 is as follows (dollars in thousands):

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	For the three months ended						For the nine months ended
	9/30/2016			9/30/2015			9/30/2016			9/30/2015
Net income	$	356,329		$	206,076		$	791,525		$	586,381
Indirect operating expenses, net of corporate income	14,946			13,427			46,960			43,642
Investments and investment management expense	1,205			1,167			3,545			3,274
Expensed acquisition, development and other pursuit costs, net of recoveries	3,804			3,391			8,702			5,251
Interest expense, net	47,871			43,234			137,862			133,398
(Gain) loss on extinguishment of debt, net	—			(18,987		)	2,461			(26,736		)
General and administrative expense	11,928			10,464			35,343			31,266
Equity in loss (income) of unconsolidated real estate entities	342			(20,554		)	(54,779		)	(68,925		)
Depreciation expense	131,729			120,184			391,414			355,664
Income tax expense	22			39			95			1,348
Casualty and impairment loss (gain), net	—			658			(3,935		)	(10,668		)
Gain on sale of real estate	(212,941		)	(35,216		)	(295,503		)	(115,798		)
Net operating income from real estate assets sold or held for sale (1)	(5,525		)	(9,180		)	(19,751		)	(28,248		)
Net operating income	$	349,710		$	314,703		$	1,043,939		$	909,849

__________________________________


(1)	Represents NOI from real estate assets sold or held for sale as of September 30, 2016 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						For the nine months ended
	9/30/2016			9/30/2015			9/30/2016			9/30/2015

Rental income from real estate assets sold or held for sale	$	8,814		$	15,098		$	31,731		$	46,610
Operating expenses from real estate assets sold or held for sale	(3,289		)	(5,918		)	(11,980		)	(18,362		)
Net operating income from real estate assets sold or held for sale	$	5,525		$	9,180		$	19,751		$	28,248

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 total revenue and NOI for the three and nine months ended September 30, 2016 and 2015 has been adjusted to exclude the real estate assets that were sold from January 1, 2015 through September 30, 2016, or otherwise qualify as held for sale as of September 30, 2016, as described in Note 6, “Real Estate Disposition Activities.” Segment information for gross real estate as of September 30, 2016 and 2015 has not been adjusted to exclude real estate assets that were sold or otherwise qualified as held for sale subsequent to the respective balance sheet dates.

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	For the three months ended						For the nine 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 September 30, 2016
Established
New England	$	59,321	$	37,657	0.6	%	$	174,731	$	111,497	5.9	%	$	1,845,679
Metro NY/NJ	96,231		65,299		1.5	%	283,554		193,001		2.0	%	3,206,696
Mid-Atlantic	58,929		40,029		0.4	%	174,922		120,623		1.4	%	2,335,116
Pacific Northwest	20,216		14,502		9.5	%	59,333		42,753		6.6	%	736,377
Northern California	80,783		61,560		5.9	%	238,867		182,658		8.0	%	2,657,020
Southern California	73,570		52,527		11.1	%	217,686		155,242		10.3	%	2,667,875
Total Established	389,050		271,574		4.3	%	1,149,093		805,774		5.5	%	13,448,763

Other Stabilized (2)	53,905		34,812		N/A		177,016		125,017		N/A		2,325,539
Development / Redevelopment	63,122		43,324		N/A		164,865		113,148		N/A		3,994,361
Land Held for Future Development	N/A		N/A		N/A		N/A		N/A		N/A		519,626
Non-allocated (3)	1,320		N/A		N/A		4,310		N/A		N/A		74,374

Total	$	507,397	$	349,710	11.1	%	$	1,495,284	$	1,043,939	14.7	%	$	20,362,663

For the period ended September 30, 2015
Established
New England	$	45,245	$	29,036	3.4	%	$	132,054	$	81,883	0.8	%	$	1,487,944
Metro NY/NJ	92,153		65,207		3.8	%	270,406		190,735		3.1	%	3,196,771
Mid-Atlantic	52,839		36,157		0.3	%	156,806		108,125		(0.4	)%	2,172,951
Pacific Northwest	17,319		12,077		5.0	%	50,563		36,214		8.0	%	720,223
Northern California	69,850		53,095		9.5	%	202,508		155,464		10.8	%	2,412,264
Southern California	65,019		43,714		7.9	%	190,513		130,278		9.1	%	2,505,625
Total Established	342,425		239,286		5.2	%	1,002,850		702,699		5.2	%	12,495,778

Other Stabilized	56,564		36,949		N/A		165,319		108,355		N/A		2,106,947
Development / Redevelopment	59,112		38,468		N/A		152,694		98,795		N/A		3,795,868
Land Held for Future Development	N/A		N/A		N/A		N/A		N/A		N/A		553,729
Non-allocated (3)	2,161		N/A		N/A		7,714		N/A		N/A		50,556

Total	$	460,262	$	314,703	11.5	%	$	1,328,577	$	909,849	12.8	%	$	19,002,878

__________________________________


(1)	Does not include gross real estate assets held for sale of $135,054 as of September 30, 2016.


(2)	Total revenue and NOI for the nine months ended September 30, 2016 includes $20,306 in business interruption insurance proceeds related to the Edgewater casualty loss.


(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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8. Stock-Based Compensation Plans

As part of its long term compensation plans, the Company has granted stock options, performance awards and restricted stock. Detail of the outstanding awards and activity is presented below.

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	(68,538	)	116.37		(59,654	)	112.85
Forfeited	—		—		—		—
Options Outstanding, September 30, 2016 (1)	180,640		$	124.37	22,541		$	77.91

__________________________________


(1)	All options outstanding are exercisable as of September 30, 2016.

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)	94,054		141.92
Change in units based on performance (2)	36,091		101.52
Converted to restricted stock	(115,618	)	94.67
Forfeited	(1,630	)	141.98
Outstanding at September 30, 2016	251,163		$	136.74

__________________________________


(1)	The amount of restricted stock that ultimately may be earned is based on the total shareholder return metrics related to the Company’s common stock for 61,039 performance awards and financial metrics related to operating performance and leverage metrics of the Company for 33,015 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 granted in 2016, for which achievement will be determined by using financial metrics, the compensation cost was based on a weighted average grant date value of $161.66, and the Company's estimate of corporate achievement for the financial metrics.

Information with respect to restricted stock granted is as follows:

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	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 - restricted stock shares	80,873		162.34		115,618
Vested - restricted stock shares	(84,623	)	141.49		(36,872	)
Forfeited	(3,453	)	162.34		(395	)
Outstanding at September 30, 2016	140,681		$	157.49	176,698

Total employee stock-based compensation cost recognized in income was $11,555,000 and $11,255,000 for the nine months ended September 30, 2016 and 2015, respectively, and total capitalized stock-based compensation cost was $7,790,000 and $7,738,000 for the nine months ended September 30, 2016 and 2015, respectively. At September 30, 2016, there was a total unrecognized compensation cost of $28,890,000 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 3.6 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 $1,320,000 and $2,161,000 during the three months ended September 30, 2016 and 2015, respectively, and $4,310,000 and $7,714,000 for the nine months ended September 30, 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 property and construction management role of $9,983,000 and $3,832,000 as of September 30, 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 $260,000 and $293,000 in the three months ended September 30, 2016 and 2015, respectively, and $877,000 and $842,000 in the nine months ended September 30, 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 $693,000 and $488,000 on September 30, 2016 and December 31, 2015, respectively. During the nine months ended September 30, 2016, the Company issued 44,327 shares of common stock 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 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 September 30, 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.

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Hedge ineffectiveness did not have a material impact on earnings of the Company for the three and nine months ended September 30, 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 September 30, 2016 (dollars in thousands):



	Non-designated Hedges Interest Rate Caps			Cash Flow Hedges Interest Rate Caps			Cash Flow Hedges Interest Rate Swaps

Notional balance	$	722,943		$	36,108		$	800,000
Weighted average interest rate (1)	2.6		%	2.7		%	N/A
Weighted average swapped/capped interest rate	6.2		%	5.9		%	2.3		%
Earliest maturity date	Nov 2016			Apr 2019			Nov 2017
Latest maturity date	Jul 2021			Apr 2019			Nov 2017

____________________________________


(1)	For interest rate caps, represents the weighted average interest rate on the hedged debt.

During the nine months ended September 30, 2016, the Company entered into $600,000,000 of forward interest rate swap agreements for a total of $1,200,000,000 of forward interest rate swap agreements executed to reduce the impact of variability in interest rates on a portion of the Company's expected debt issuance activity in 2016 and 2017. In May 2016, the Company settled $400,000,000 of the aggregate outstanding swaps, as discussed below. For the remaining outstanding swaps, 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.

In May 2016, in conjunction with the Company's May 2016 unsecured note issuance, the Company settled $400,000,000 of forward interest rate swap agreements designated as cash flow hedges of the interest rate variability on the forecasted issuance of the unsecured notes, making a payment of $14,847,000. The Company has deferred the effective portion of the fair value change of these swaps in accumulated other comprehensive loss on the accompanying Condensed Consolidated Balance Sheets, and will recognize the impact as a component of interest expense, net, over the life of the unsecured notes.

Excluding derivatives executed to hedge secured debt on communities classified as held for sale, the Company had 11 derivatives designated as cash flow hedges and 15 derivatives not designated as hedges at September 30, 2016. Fair value changes for derivatives not in qualifying hedge relationships for the three and nine months ended September 30, 2016 and 2015 were not material. During nine months ended September 30, 2016, the Company deferred $73,826,000 of losses for cash flow hedges reported as a component of other comprehensive income (loss).

The following table summarizes the deferred losses reclassified from accumulated other comprehensive income as a component of interest expense, net (dollars in thousands):



	For the three months ended				For the nine months ended
	9/30/2016		9/30/2015		9/30/2016		9/30/2015

Cash flow hedge losses reclassified to earnings	$	1,748	$	1,373	$	4,682	$	4,401

The Company anticipates reclassifying approximately $6,978,000 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.

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.

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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 and other receivables, 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):



Description	Total Fair Value			Quoted Prices in Active Markets for Identical Asset (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Description	Total Fair Value						Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	9/30/2016
Non-Designated Hedges
Interest Rate Caps	$	16		$	—		$	16		$	—
Cash Flow Hedges
Interest Rate Caps	—			—			—			—
Interest Rate Swaps	(53,591		)	—			(53,591		)	—
Puts	(8,181		)	—			—			(8,181		)
DownREIT units	(1,334		)	(1,334		)	—			—
Indebtedness
Unsecured notes	(3,988,324		)	(3,988,324		)	—			—
Mortgage notes payable, Credit Facility and Term Loan	(2,985,133		)	—			(2,985,133		)	—
Total	$	(7,036,547	)	$	(3,989,658	)	$	(3,038,708	)	$	(8,181	)

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Description	Total Fair Value			Quoted Prices in Active Markets for Identical Asset (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Description	Total Fair Value						Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	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, Credit Facility and Term Loan	(2,700,341		)	—			(2,700,341		)	—
Total	$	(6,372,867	)	$	(3,669,798	)	$	(2,694,888	)	$	(8,181	)

Form: 10-Q

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