May 4, 2018 - 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 March 31, 2018

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, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer x	Accelerated filer o
Non-accelerated filer (Do not check if a smaller reporting company) o	Smaller reporting company o
Emerging growth company o

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

138,208,815 shares of common stock, par value $0.01 per share, were outstanding as of April 30, 2018.

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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 MARCH 31, 2018 (UNAUDITED) AND DECEMBER 31, 2017	1

	CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017	2

	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017	3

	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	5

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		23

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		46

ITEM 4. CONTROLS AND PROCEDURES		46

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS		46

ITEM 1A. RISK FACTORS		47

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		48

ITEM 3. DEFAULTS UPON SENIOR SECURITIES		48

ITEM 4. MINE SAFETY DISCLOSURES		48

ITEM 5. OTHER INFORMATION		48

ITEM 6. EXHIBITS		49

SIGNATURES		51

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AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)



	3/31/2018			12/31/2017
	(unaudited)
ASSETS
Real estate:
Land and improvements	$	4,226,043		$	4,237,318
Buildings and improvements	15,733,783			15,708,666
Furniture, fixtures and equipment	636,793			615,288
	20,596,619			20,561,272
Less accumulated depreciation	(4,345,596		)	(4,218,379		)
Net operating real estate	16,251,023			16,342,893
Construction in progress, including land	1,375,366			1,306,300
Land held for development	136,771			68,364
Real estate assets held for sale, net	121,387			—
Total real estate, net	17,884,547			17,717,557

Cash and cash equivalents	137,244			67,088
Cash in escrow	134,163			134,818
Resident security deposits	33,130			32,686
Investments in unconsolidated real estate entities	164,344			163,475
Deferred development costs	39,369			45,819
Prepaid expenses and other assets	253,650			253,378
Total assets	$	18,646,447		$	18,414,821

LIABILITIES AND EQUITY
Unsecured notes, net	$	6,150,633		$	5,852,764
Variable rate unsecured credit facility	—			—
Mortgage notes payable, net	1,448,822			1,476,706
Dividends payable	203,166			196,094
Payables for construction	83,209			85,377
Accrued expenses and other liabilities	299,426			308,189
Accrued interest payable	60,111			43,116
Resident security deposits	58,760			58,473
Liabilities related to real estate assets held for sale	1,244			—
Total liabilities	8,305,371			8,020,719

Commitments and contingencies

Redeemable noncontrolling interests	5,952			6,056

Equity:
Preferred stock, $0.01 par value; $25 liquidation preference; 50,000,000 shares authorized at March 31, 2018 and December 31, 2017; zero shares issued and outstanding at March 31, 2018 and December 31, 2017	—			—
Common stock, $0.01 par value; 280,000,000 shares authorized at March 31, 2018 and December 31, 2017; 138,208,280 and 138,094,154 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively	1,382			1,381
Additional paid-in capital	10,229,738			10,235,475
Accumulated earnings less dividends	128,166			188,609
Accumulated other comprehensive loss	(24,162		)	(37,419		)
Total equity	10,335,124			10,388,046
Total liabilities and equity	$	18,646,447		$	18,414,821

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
	3/31/2018			3/31/2017
Revenue:
Rental and other income	$	559,906		$	521,126
Management, development and other fees	886			1,200
Total revenue	560,792			522,326

Expenses:
Operating expenses, excluding property taxes	132,024			123,044
Property taxes	59,896			52,930
Interest expense, net	55,113			49,295
Loss on extinguishment of debt, net	397			—
Depreciation expense	159,059			140,621
General and administrative expense	13,664			13,206
Expensed acquisition, development and other pursuit costs, net of recoveries	800			728
Casualty and impairment (gain) loss, net	(58		)	11,688
Total expenses	420,895			391,512

Income before equity in income of unconsolidated real estate entities, gain (loss) on sale of communities and other real estate, and income taxes	139,897			130,814

Equity in income of unconsolidated real estate entities	1,740			16,672
Gain on sale of communities	—			87,949
(Loss) gain on other real estate transactions	(47		)	366

Income before income taxes	141,590			235,801
Income tax expense	—			20

Net income	141,590			235,781
Net loss attributable to noncontrolling interests	53			94

Net income attributable to common stockholders	$	141,643		$	235,875

Other comprehensive income:
Gain on cash flow hedges	11,501			145
Cash flow hedge losses reclassified to earnings	1,756			1,752
Comprehensive income	$	154,900		$	237,772

Earnings per common share - basic:
Net income attributable to common stockholders	$	1.03		$	1.72

Earnings per common share - diluted:
Net income attributable to common stockholders	$	1.03		$	1.72

Dividends per common share	$	1.47		$	1.42

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
	3/31/2018			3/31/2017
Cash flows from operating activities:
Net income	$	141,590		$	235,781
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation expense	159,059			140,621
Amortization of deferred financing costs	2,007			1,826
Amortization of debt discount (premium)	419			(4,621		)
Loss on extinguishment of debt, net	397			—
Amortization of stock-based compensation	4,029			4,319
Equity in loss of (income), and return on, unconsolidated real estate entities and noncontrolling interests, net of eliminations	1,486			(5,768		)
Casualty and impairment (gain) loss, net	(58		)	11,688
Abandonment of development pursuits	112			265
Cash flow hedge losses reclassified to earnings	1,756			1,752
Loss (gain) on sale of real estate assets	47			(97,012		)
Increase in resident security deposits, prepaid expenses and other assets	(6,608		)	(10,630		)
Increase in accrued expenses, other liabilities and accrued interest payable	11,677			21,674
Net cash provided by operating activities	315,913			299,895

Cash flows from investing activities:
Development/redevelopment of real estate assets including land acquisitions and deferred development costs	(301,299		)	(259,573		)
Capital expenditures - existing real estate assets	(15,240		)	(8,015		)
Capital expenditures - non-real estate assets	(1,735		)	(2,429		)
Proceeds from sale of real estate, net of selling costs	603			159,985
Insurance proceeds for property damage claims	58			4,095
Mortgage note receivable lending	(2,006		)	(4,795		)
Mortgage note receivable payment	4,862			—
Decrease in payables for construction	(2,168		)	(4,326		)
Distributions from unconsolidated real estate entities	2,013			11,952
Investments in unconsolidated real estate entities	(4,368		)	(5,774		)
Net cash used in investing activities	(319,280		)	(108,880		)

Cash flows from financing activities:
Issuance of common stock, net	—			56,817
Dividends paid	(195,999		)	(185,192		)
Repayments of mortgage notes payable, including prepayment penalties	(28,584		)	(21,905		)
Issuance of unsecured notes	299,442			—
Payment of deferred financing costs	(3,244		)	(2,315		)
Payment of capital lease obligation	(267		)	—
Receipts for termination of forward interest rate swaps	12,598			—
Payments related to tax withholding for share-based compensation	(10,483		)	—
Distributions to DownREIT partnership unitholders	(11		)	(11		)
Contributions from joint venture and profit-sharing partners	—			1,038
Distributions to joint venture and profit-sharing partners	(104		)	(104		)
Preferred interest obligation redemption and dividends	(480		)	(600		)
Net cash provided by (used in) financing activities	72,868			(152,272		)

Net increase in cash and cash equivalents	69,501			38,743

Cash and cash equivalents and restricted cash, beginning of period	201,906			329,977
Cash and cash equivalents and restricted cash, end of period	$	271,407		$	368,720

Cash paid during the period for interest, net of amount capitalized	$	33,936		$	34,503

See accompanying notes to Condensed Consolidated Financial Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

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



	For the three months ended
	3/31/2018		3/31/2017
Cash and cash equivalents	$	137,244	$	121,705
Cash in escrow	134,163		247,015
Cash, cash equivalents and restricted cash reported in the Consolidated Statements of Cash Flows	$	271,407	$	368,720

Supplemental disclosures of non-cash investing and financing activities:

During the three months ended March 31, 2018:

•

As described in Note 4, "Equity," 182,998 shares of common stock were issued as part of the Company's stock-based compensation plans, of which 88,297 shares related to the conversion of performance awards to restricted shares, and the remaining 94,701 shares valued at $15,277,000 were issued in connection with new stock grants; 566 shares valued at $96,000 were issued through the Company's dividend reinvestment plan; 67,609 shares valued at $10,483,000 were withheld to satisfy employees' tax withholding and other liabilities; and 1,829 restricted shares with an aggregate value of $234,000 previously issued in connection with employee compensation were canceled upon forfeiture.


•	Common stock dividends declared but not paid totaled $203,166,000.


•	The Company recorded an increase of $63,000 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 reclassified $1,756,000 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.

During the three months ended March 31, 2017:

•

The Company issued 198,502 shares of common stock as part of the Company's stock-based compensation plans, of which 128,482 shares related to the conversion of performance awards to restricted shares, and the remaining 70,020 shares valued at $12,538,000 were issued in connection with new stock grants; 1,165 shares valued at $205,000 were issued through the Company's dividend reinvestment plan; 57,172 shares valued at $10,149,000 were withheld to satisfy employees' tax withholding and other liabilities; and 236 restricted shares with an aggregate value of $41,000 previously issued in connection with employee compensation were canceled upon forfeiture.


•	Common stock dividends declared but not paid totaled $195,657,000.


•	The Company recorded an increase of $183,000 in redeemable noncontrolling interest with a corresponding decrease to accumulated earnings less dividends to adjust the redemption value associated with the put options held by joint venture partners and DownREIT partnership units.

•

The Company recorded an increase in prepaid expenses and other assets of $180,000 and an increase in accrued expenses and other liabilities of $102,000, and a corresponding adjustment to other comprehensive income, and reclassified $1,752,000 of cash flow hedge losses from other comprehensive income to interest expense, net, to record the impact of the Company's derivative and hedge accounting activity.

•

As discussed in Note 5, "Investments in Real Estate Entities," the Company recognized a non-cash charge of $16,361,000 to write-off the net book value of the fixed assets destroyed by the fire that occurred in February 2017 at the Company's Avalon Maplewood Development Community ("Maplewood"), and a corresponding recovery of loss of $12,598,000 for property damage insurance proceeds for the Maplewood casualty loss not received during the period.

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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 March 31, 2018, the Company owned or held a direct or indirect ownership interest in 270 operating apartment communities containing 78,388 apartment homes in 12 states and the District of Columbia, of which 15 communities containing 6,260 apartment homes were under redevelopment. In addition, the Company owned or held a direct or indirect ownership interest in 18 communities under development that are expected to contain an aggregate of 5,774 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 9,268 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 2017 Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2018 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
	3/31/2018			3/31/2017
Basic and diluted shares outstanding
Weighted average common shares - basic	137,764,468			137,068,874
Weighted average DownREIT units outstanding	7,500			7,500
Effect of dilutive securities	381,202			454,868
Weighted average common shares - diluted	138,153,170			137,531,242

Calculation of Earnings per Share - basic
Net income attributable to common stockholders	$	141,643		$	235,875
Net income allocated to unvested restricted shares	(430		)	(652		)
Net income attributable to common stockholders, adjusted	$	141,213		$	235,223

Weighted average common shares - basic	137,764,468			137,068,874

Earnings per common share - basic	$	1.03		$	1.72

Calculation of Earnings per Share - diluted
Net income attributable to common stockholders	$	141,643		$	235,875
Add: noncontrolling interests of DownREIT unitholders in consolidated partnerships	11			11
Adjusted net income attributable to common stockholders	$	141,654		$	235,886

Weighted average common shares - diluted	138,153,170			137,531,242

Earnings per common share - diluted	$	1.03		$	1.72

Certain options to purchase shares of common stock in the amount of 6,995 were outstanding as of March 31, 2018, but were not included in the computation of diluted earnings per share because such options were anti-dilutive for the period. All options to purchase shares of common stock outstanding as of March 31, 2017 are included in the computation of diluted earnings per share.

Derivative Instruments and Hedging Activities

The Company enters into interest rate swap and interest rate cap agreements (collectively, "Hedging Derivatives") for interest rate risk management purposes and in conjunction with certain variable rate secured debt to satisfy lender requirements. The Company does not enter into Hedging Derivative transactions for trading or other speculative purposes. The Company assesses the effectiveness of qualifying cash flow and fair value hedges, both at inception and on an on-going basis. Hedge ineffectiveness is reported as a component of 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 cumulative changes in the fair value of Hedging Derivatives in other comprehensive loss. Amounts recorded in accumulated other comprehensive loss will be reclassified into earnings in the periods in which earnings are affected by the hedged cash flow. The effective portion of the change in fair value of the Hedging Derivatives that the Company has determined qualified as effective fair value hedges is reported as an adjustment to the carrying amount of the corresponding debt being hedged. See Note 10, "Fair Value," for further discussion of derivative financial instruments.

Legal and Other Contingencies

Edgewater Casualty Loss

In January 2015, a fire occurred at the Company's Avalon at Edgewater apartment community located in Edgewater, New Jersey ("Edgewater"). Edgewater consisted of two residential buildings. One building, containing 240 apartment homes, was destroyed. The second building, containing 168 apartment homes, suffered minimal damage and has been repaired.

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In conjunction with legal matters associated with the Edgewater casualty loss, 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 settlement which provides 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. In July 2017 the District Court granted final approval of the settlement and all claims have been submitted to the independent claims adjuster. A total of 66 units (consisting of residents who did not previously settle their claims and who did not opt out of the class settlement) are included in the class action settlement and bound by its terms. However, only 44 units submitted claims. The independent claims adjuster is currently reviewing the claims submitted; the submitted claims total approximately $6,900,000 but, based on the Company's review of the initial determinations made by the adjuster on a number of claims, the Company believes that the total amount actually awarded will be significantly less. To date, the claims adjuster has completed his evaluation of 17 of these claims and it is expected that the evaluation of the remaining claims should be completed within the next month. 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, 18 of the 19 lawsuits representing approximately 143 individual plaintiffs filed in the Superior Court of New Jersey Bergen County - Law Division were previously scheduled for trial on January 2, 2018. In advance of this date, the Company was able to resolve all of these claims in principle which included approximately 50 units. The Company previously resolved litigated claims with another 10 units. There is currently one remaining lawsuit which was recently filed in the Superior Court of New Jersey, Bergen County - Law Division on behalf of one apartment unit. The Company believes it has meritorious defenses to the extent of damages claimed in that suit. There are also seven subrogation lawsuits that have been filed against the Company by insurers of Edgewater residents who obtained renters 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, one is pending in the Superior Court of New Jersey, Bergen County - Law Division, one has been amicably resolved in principle and the other four have been consolidated and are currently pending in the United States District Court for the District of New Jersey. The District Court denied the Company's motions seeking dismissal on this basis. The Company will reassess the viability of this defense after conducting additional discovery.

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) 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 Part II, Item 1, "Legal Proceedings," for further discussion of the casualty gains and losses and lawsuits associated with the Edgewater casualty loss.

Other Matters

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

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Use of Estimates

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

Reclassifications

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

Revenue and Gain Recognition

As of January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers, using the modified retrospective approach, which applies the new standard to contracts that are not completed as of the date of adoption. Under the new standard, revenue is recognized in accordance with the transfer of goods and services to customers at an amount that reflects the consideration the Company expects to be entitled for those goods and services. The majority of the Company’s revenue is derived from residential and retail rental income and other lease income, which are scoped out from this standard and included in the current lease accounting framework, and will be accounted for under ASU 2016-02, Leases, discussed under Recently Issued Accounting Standards below. Revenue streams that are scoped into ASU 2014-09 include:

•

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


•	Rental and non-rental related income - The Company recognizes revenue for new rental related income not included as components of a lease, such as reservation and application fees, as well as for non-rental related income, as earned, and has concluded this is appropriate under the new standard.

•

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

The Company concluded that the adoption of the new standard did not require an adjustment to the opening balance of retained earnings.

The following table provides details of the Company’s revenue streams disaggregated by the Company’s reportable operating segments, further discussed in Note 7, “Segment Reporting,” for the three months ended March 31, 2018 and 2017. Segment information for total revenue has been adjusted to exclude the real estate assets that were sold from January 1, 2017 through March 31, 2018, or otherwise qualify as held for sale as of March 31, 2018, as described in Note 6, "Real Estate Disposition Activities," (dollars in thousands):

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	For the three months ended
	Established Communities		Other Stabilized Communities		Development/ Redevelopment Communities		Non- allocated (1)		Total
For the period ended March 31, 2018
Management, development and other fees	$	—	$	—	$	—	$	886	$	886
Rental and non-rental related income (2)	2,399		1,817		405		—		4,621
Total non-lease revenue (3)	2,399		1,817		405		886		5,507

Lease income (4)	415,145		69,386		67,529		—		552,060

Total revenue	$	417,544	$	71,203	$	67,934	$	886	$	557,567

For the period ended March 31, 2017
Management, development and other fees	$	—	$	—	$	—	$	1,200	$	1,200
Rental and non-rental related income (2)	2,224		1,687		405		—		4,316
Total non-lease revenue (3)	2,224		1,687		405		1,200		5,516

Lease income (4)	380,533		68,429		55,142		—		504,104

Total revenue	$	382,757	$	70,116	$	55,547	$	1,200	509,620

__________________________________


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


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


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


(4)	Amounts include all revenue streams derived from residential and retail rental income and other lease income, which are scoped out from ASC 2014-09 and accounted for under the lease accounting framework.

Due to the nature and timing of the Company’s identified revenue streams, there are no material amounts of outstanding or unsatisfied performance obligations as of March 31, 2018.

Recently Issued Accounting Standards

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU expands hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. This update also simplifies the application of hedge accounting guidance and eases the administrative burden of hedge documentation requirements and assessing hedge effectiveness. The Company adopted the guidance as of January 1, 2018 and it did not have a material effect on the Company’s financial position or results of operations.

In February 2017, the FASB issued ASU 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. This ASU (i) clarifies the scope of the nonfinancial asset guidance and the derecognition of certain businesses and nonprofit activities, (ii) eliminates the exception in the financial asset guidance for transfers of investments (including equity method investments) in real estate entities and supersedes the guidance in the Exchanges of a Nonfinancial Asset for a Noncontrolling Ownership Interest and (iii) provides guidance on the accounting of partial sales of nonfinancial assets and contributions of nonfinancial assets to a joint venture or other noncontrolled investee. The new standard allows for either a retrospective or modified retrospective approach. The Company adopted the new standard as of January 1, 2018 using the modified retrospective approach, applying the provisions to open contracts as of the date of adoption. See "Revenue and Gain Recognition" above for additional discussion of the impact of adopting the guidance.

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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 guidance will be effective in the first quarter of 2019 and allows for early adoption. The new standard requires a modified retrospective transition approach for all leases existing at the date of initial application, with an option to use certain transition relief. ASU 2016-02 provides for transition relief, which includes not electing to (i) reassess whether any expired or existing contract is a lease or contains a lease, (ii) reassess the lease classification of any expired or existing leases and (iii) expense any capitalized initial direct costs for any existing leases. Subsequently, the FASB issued ASU 2018-01 which provides further transition relief by including an option to not evaluate land easements that exist or have expired prior to the date of adoption under ASC 842. The Company anticipates adoption of the standard to have a material impact on its financial position resulting from the recognition of the right to use asset and corresponding lease obligation for its long-term ground leases, currently accounted for as operating leases. The Company will continue to assess the impact of the new standard.

Change in Accounting Principle

As of October 1, 2017, the Company adopted ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The guidance requires statements of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents, and was adopted retrospectively. The prior period amounts that have been impacted by the new guidance and retrospectively adjusted include (i) an increase in cash in operating escrows (cash provided by operating activities), (ii) an increase in cash in deposit escrows (cash provided by investing activities) and (iii) repayments of mortgage notes payable, including prepayment penalties (cash used in financing activities), located on the Consolidated Statements of Cash Flows.

The following tables present the impact of the change in accounting principle to the Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2017 (dollars in thousands):



	3/31/2017 (as previously reported)			Impact of ASU 2016-18			3/31/2017 (as adjusted and currently reported)
	3/31/2017 (as previously reported)			Impact of ASU 2016-18			3/31/2017 (as adjusted and currently reported)
Net cash provided by operating activities	$	293,462		$	6,433		$	299,895
Net cash used in investing activities	(235,347		)	126,467			(108,880		)
Net cash used in financing activities	(151,404		)	(868		)	(152,272		)

Net (decrease) increase in cash, cash equivalents	(93,289		)	93,289			—
Net increase in cash, cash equivalents and restricted cash	—			38,743			38,743

Cash, cash equivalents, beginning of period	214,994			(214,994		)	—
Cash, cash equivalents and restricted cash, beginning of period	—			329,977			329,977
Cash, cash equivalents, end of period	$	121,705		—			—
Cash, cash equivalents and restricted cash, end of period				$	247,015		$	368,720

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 $13,164,000 and $17,821,000 for the three months ended March 31, 2018 and 2017, respectively.

3. Mortgage Notes Payable, Unsecured Notes and Credit Facility

The Company's mortgage notes payable, unsecured notes, variable rate unsecured term loans ("Term Loans") and Credit Facility, as defined below, as of March 31, 2018 and December 31, 2017 are summarized below. The following amounts and discussion do not include the mortgage notes related to the communities classified as held for sale, if any, as of March 31, 2018 and December 31, 2017, as shown in the accompanying Condensed Consolidated Balance Sheets (dollars in thousands) (see Note 6, "Real Estate Disposition Activities").

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	3/31/2018		12/31/2017

Fixed rate unsecured notes (1)	$	5,650,000	$	5,350,000
Variable rate unsecured notes (1)	300,000		300,000
Term Loans (1)	250,000		250,000
Fixed rate mortgage notes payable - conventional and tax-exempt (2)	566,091		593,987
Variable rate mortgage notes payable - conventional and tax-exempt (2)	909,788		910,326
Total mortgage notes payable, unsecured notes and Term Loans	7,675,879		7,404,313
Credit Facility	—		—
Total mortgage notes payable, unsecured notes, Term Loans and Credit Facility	$	7,675,879	$	7,404,313

_____________________________________


(1)	Balances at March 31, 2018 and December 31, 2017 exclude $11,039 and $10,850, respectively, of debt discount, and $38,328 and $36,386, respectively, of deferred financing costs, as reflected in unsecured notes, net on the accompanying Condensed Consolidated Balance Sheets.


(2)	Balances at March 31, 2018 and December 31, 2017 exclude $16,328 and $16,351, respectively, of debt discount, and $10,729 and $11,256, 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 three months ended March 31, 2018:


•	In February 2018, the Company repaid $15,174,000 of fixed rate debt secured by Avalon Oaks West in advance of its scheduled maturity date, incurring a charge of $426,000, consisting of a prepayment penalty of $152,000 and the non-cash write-off of unamortized deferred financing costs of $274,000.


•	In February 2018, the Company repaid $11,038,000 of fixed rate debt secured by AVA Pasadena at par in advance of its scheduled maturity date.

•

In March 2018, the Company issued $300,000,000 principal amount of unsecured notes in a public offering under its existing shelf registration statement for net proceeds of approximately $296,210,000. The notes mature in April 2048 and were issued at a 4.35% interest rate. The effective interest rate of the notes for the first 10 years is 3.97%, including the impact of an interest rate hedge and offering costs, and for the remainder of the term the effective interest rate will be 4.39%.

At March 31, 2018, the Company has a $1,500,000,000 revolving variable rate unsecured credit facility with a syndicate of banks (the "Credit Facility") which matures in April 2020. The Company may extend the maturity for up to nine months, provided the Company is not in default and upon payment of a $1,500,000 extension fee. 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 (2.71% at March 31, 2018), assuming a one month borrowing rate. The annual facility fee is 0.125% (or 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 $43,352,000 and $47,315,000 outstanding in letters of credit that reduced the borrowing capacity as of March 31, 2018 and December 31, 2017, respectively.

In the aggregate, secured notes payable mature at various dates from April 2018 through July 2066, and are secured by certain apartment communities (with a net carrying value of $2,252,748,000, excluding communities classified as held for sale, as of March 31, 2018).

As of March 31, 2018, the Company has guaranteed a $100,000,000 secured note payable held by a wholly-owned subsidiary; such secured note payable is consolidated for financial reporting purposes. The weighted average interest rate of the Company's fixed rate secured notes payable (conventional and tax-exempt) was 3.9% and 4.0% at March 31, 2018 and December 31, 2017, respectively. The weighted average interest rate of the Company's variable rate secured notes payable (conventional and tax-exempt) including the effect of certain financing related fees, was 3.3% and 3.2% at March 31, 2018 and December 31, 2017, respectively.

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Scheduled payments and maturities of secured notes payable and unsecured notes outstanding at March 31, 2018 are as follows (dollars in thousands):



Year	Secured notes payments		Secured notes maturities		Unsecured notes maturities		Stated interest rate of unsecured notes
2018	5,273		65,183		—		N/A
2019	4,443		114,721		—		N/A
2020	3,345		140,429		250,000		6.100	%
					400,000		3.625	%
2021	3,259		27,844		250,000		3.950	%
					300,000		LIBOR + 0.43%
2022	3,483		—		450,000		2.950	%
					100,000		LIBOR + .90%
2023	3,713		—		350,000		4.200	%
					250,000		2.850	%
2024	3,950		—		300,000		3.500	%
					150,000		LIBOR + 1.50%
2025	4,202		84,835		525,000		3.450	%
					300,000		3.500	%
2026	4,486		—		475,000		2.950	%
					300,000		2.900	%
2027	4,048		185,100		400,000		3.350	%
Thereafter	135,148		682,417		350,000		3.900	%
					300,000		4.150	%
					450,000		3.200	%
					300,000		4.350	%
	$	175,350	$	1,300,529	$	6,200,000

The Company was in compliance at March 31, 2018 with customary financial and other covenants under the Credit Facility, the Term Loans and the Company's fixed rate unsecured notes.

4. Equity

The following summarizes the changes in equity for the three months ended March 31, 2018 (dollars in thousands):



	Common stock		Additional paid-in capital			Accumulated earnings less dividends			Accumulated other comprehensive loss			Total equity

Balance at December 31, 2017	$	1,381	$	10,235,475		$	188,609		$	(37,419	)	$	10,388,046
Net income attributable to common stockholders	—		—			141,643			—			141,643
Gain on cash flow hedges, net	—		—			—			11,501			11,501
Cash flow hedge losses reclassified to earnings	—		—			—			1,756			1,756
Change in redemption value of redeemable noncontrolling interest	—		—			(63		)	—			(63		)
Dividends declared to common stockholders	—		—			(203,166		)	—			(203,166		)
Issuance of common stock, net of withholdings	1		(12,286		)	1,143			—			(11,142		)
Amortization of deferred compensation	—		6,549			—			—			6,549
Balance at March 31, 2018	$	1,382	$	10,229,738		$	128,166		$	(24,162	)	$	10,335,124

As of March 31, 2018 and December 31, 2017, 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.

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During the three months ended March 31, 2018, the Company:


i.	issued 566 common shares through the Company's dividend reinvestment plan;


ii.	issued 182,998 common shares in connection with restricted stock grants and the conversion of performance awards to restricted shares;


iii.	withheld 67,609 common shares to satisfy employees' tax withholding and other liabilities; and


iv.	canceled 1,829 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, 2018 is not reflected on the accompanying Condensed Consolidated Balance Sheet as of March 31, 2018, 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 (and/or enter into forward sale agreements for the sale of) 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. The Company expects that, if entered into, 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. As of March 31, 2018, there are no outstanding forward sales agreements. During the three months ended March 31, 2018, the Company had no sales under the program. As of March 31, 2018, the Company had $892,915,000 of shares remaining authorized for issuance under this program.

5. Investments in Real Estate Entities

Investments in Unconsolidated Real Estate Entities

As of March 31, 2018, 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.

The Company has an equity interest of 31.3% in AvalonBay Value Added Fund II, L.P. ("Fund II"), and upon achievement of a threshold return, the Company has a right to incentive distributions for its promoted interest based on the current returns earned by Fund II, which currently represents 40.0% of further Fund II distributions, which is in addition to its proportionate share of the remaining 60.0% of distributions. During 2017, Fund II sold its final apartment communities. During the three months ended March 31, 2018, the Company recognized income of $925,000 for its promoted interest, which is reported as a component 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 discussed above as of the dates presented (dollars in thousands):

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	3/31/2018		12/31/2017
	(unaudited)		(unaudited)
Assets:
Real estate, net	$	689,612	$	695,077
Other assets	38,084		39,976
Total assets	$	727,696	$	735,053

Liabilities and partners' capital:
Mortgage notes payable, net and credit facility	$	523,008	$	523,815
Other liabilities	13,406		10,540
Partners' capital	191,282		200,698
Total liabilities and partners' capital	$	727,696	$	735,053

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
	3/31/2018			3/31/2017
	(unaudited)
Rental and other income	$	21,801		$	28,642
Operating and other expenses	(8,305		)	(11,094		)
Gain on sale of communities	—			29,447
Interest expense, net	(5,618		)	(6,948		)
Depreciation expense	(5,880		)	(7,327		)
Net income	$	1,998		$	32,720

In conjunction with the formation of North Point II JV, LP ("AVA North Point") and the acquisition of Archstone Multifamily Partners AC LP (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 $35,052,000 and $35,402,000 at March 31, 2018 and December 31, 2017, 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 income of unconsolidated real estate entities on the accompanying Condensed Consolidated Statements of Comprehensive Income.

In conjunction with the development of Avalon Brooklyn Bay, the Company entered into a joint venture agreement to construct a mixed-use building that contains rental apartments, for-sale residential condominium units and related common elements. The Company owns a 70.0% interest in the venture, which represents a 100% interest in the rental apartments, and the venture partner owns the remaining 30.0% interest, which represents a 100% interest in the for-sale residential condominium units. The Company is responsible for the development and construction of the structure, and provided a loan to the venture partner for the venture partner's share of costs. The development of Avalon Brooklyn Bay was completed during the three months ended March 31, 2018. As of March 31, 2018, the Company has a receivable from the venture partner in the form of a variable rate mortgage note, secured by the for-sale residential condominium units, in the amount of $41,976,000 for outstanding principal and interest, net of repayments, reported as a component of prepaid expenses and other assets on the accompanying Condensed Consolidated Balance Sheets. The Company recognizes interest income on the accrual basis. Beginning in 2018, the mortgage note is being repaid by the venture partner with the proceeds the venture partner receives from the sales of the residential condominium units. The venture is considered a VIE, and the Company consolidates its interest in the rental apartments and common areas.

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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 or disposition of assets for which such acquisition and disposition activity did not occur, in the amounts of $800,000 and $728,000 for the three months ended March 31, 2018 and 2017, 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.

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, 2018 and 2017, the Company did not recognize any impairment losses for wholly-owned operating real estate assets, and did not record any impairment losses other than those related to the impairment on land held for investment and casualty gains and losses from property damage, as discussed below.

The Company assesses its portfolio of land held for both development and investment for impairment if the intent of the Company changes with respect to either the development of, or the expected holding period for, the land. During the three months ended March 31, 2017, the Company recognized an impairment charge of $9,350,000 relating to a land parcel which the Company had acquired for development in 2004 and sold during 2017. This charge was determined as the excess of the Company's carrying basis over the expected sale price for the parcel, and is included in casualty and impairment (gain) loss, net on the accompanying Condensed Consolidated Statements of Comprehensive Income.

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 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, 2018 and 2017.

Casualty Gains and Losses

During the three months ended March 31, 2017, the Company recorded a casualty loss of $19,481,000 composed of a charge of $16,361,000 to write-off the net book value of the fixed assets destroyed in the Maplewood casualty loss, and an accrual for demolition and additional incident expenses of $3,120,000. The casualty loss was partially offset by $17,143,000 of property damage insurance proceeds, of which $4,545,000 was received during the three months ended March 31, 2017. The net casualty loss of $2,338,000 for the three months ended March 31, 2017 is included in casualty and impairment (gain) loss, net on the accompanying Condensed Consolidated Statements of Comprehensive Income.

6. Real Estate Disposition Activities

At March 31, 2018, the Company had two communities that qualified as held for sale.

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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 loss (gain), net, gain on sale of communities, loss (gain) on other real estate transactions 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, 2018 and 2017 is as follows (dollars in thousands):



	For the three months ended
	3/31/2018			3/31/2017
Net income	$	141,590		$	235,781
Indirect operating expenses, net of corporate income	18,082			16,297
Investments and investment management expense	1,643			1,321
Expensed acquisition, development and other pursuit costs, net of recoveries	800			728
Interest expense, net	55,113			49,295
Loss on extinguishment of debt, net	397			—
General and administrative expense	13,664			13,206
Equity in income of unconsolidated real estate entities	(1,740		)	(16,672		)
Depreciation expense	159,059			140,621
Income tax expense	—			20
Casualty and impairment loss (gain), net	(58		)	11,688
Gain on sale of communities	—			(87,949		)
Loss (gain) on other real estate transactions	47			(366		)
Net operating income from real estate assets sold or held for sale	(2,144		)	(8,101		)
Net operating income	$	386,453		$	355,869

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
	3/31/2018			3/31/2017
Rental income from real estate assets sold or held for sale	$	3,225		$	12,706
Operating expenses from real estate assets sold or held for sale	(1,081		)	(4,605		)
Net operating income from real estate assets sold or held for sale	$	2,144		$	8,101

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.

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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 months ended March 31, 2018 and 2017 has been adjusted to exclude the real estate assets that were sold from January 1, 2017 through March 31, 2018, or otherwise qualify as held for sale as of March 31, 2018, as described in Note 6, "Real Estate Disposition Activities." Segment information for gross real estate as of March 31, 2018 and 2017 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.



	For the three months ended
	Total revenue		NOI		% NOI change from prior year		Gross real estate (1)
For the period ended March 31, 2018
Established
New England	$	57,909	$	37,643	1.8	%	$	1,973,203
Metro NY/NJ	104,096		71,921		0.9	%	3,722,387
Mid-Atlantic	59,159		41,067		0.2	%	2,233,711
Pacific Northwest	21,242		14,838		(0.6	)%	725,487
Northern California	92,197		70,494		1.8	%	3,017,863
Southern California	82,941		59,394		1.9	%	2,842,685
Total Established	417,544		295,357		1.2	%	14,515,336

Other Stabilized	71,203		47,265		N/A		3,036,815
Development / Redevelopment	67,934		43,831		N/A		4,321,466
Land Held for Development	N/A		N/A		N/A		136,771
Non-allocated (2)	886		N/A		N/A		98,368

Total	$	557,567	$	386,453	8.6	%	$	22,108,756

For the period ended March 31, 2017
Established
New England	$	56,154	$	36,180	1.0	%	$	1,875,024
Metro NY/NJ	85,760		58,938		2.9	%	2,903,317
Mid-Atlantic	55,755		39,147		3.7	%	2,062,311
Pacific Northwest	20,454		14,815		5.2	%	731,537
Northern California	83,323		63,717		2.0	%	2,815,589
Southern California	81,311		59,223		5.0	%	3,005,810
Total Established	382,757		272,020		3.1	%	13,393,588

Other Stabilized	70,116		48,943		N/A		3,032,689
Development / Redevelopment	55,547		34,906		N/A		4,276,266
Land Held for Development	N/A		N/A		N/A		103,954
Non-allocated (2)	1,200		N/A		N/A		112,987

Total	$	509,620	$	355,869	3.4	%	$	20,919,484

__________________________________


(1)	Does not include gross real estate assets held for sale of $153,151 as of March 31, 2018.


(2)	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 Second Amended and Restated 2009 Equity Incentive Plan (the "2009 Plan") for the three months ended March 31, 2018, 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, 2017	149,973	$	126.77	7,778	$	48.60
Exercised	—	—		—	—
Granted (1)	6,995	161.10		—	—
Forfeited	—	—		—	—
Options Outstanding, March 31, 2018	156,968	$	128.30	7,778	$	48.60
Options Exercisable, March 31, 2018	149,973	$	126.77	7,778	$	48.60

__________________________________


(1)	Options granted during the three months ended March 31, 2018, are a result of recipient elections to receive a portion of earned performance awards and time-vesting restricted stock in the form of stock options.

Information with respect to performance awards granted is as follows:



	Performance awards		Weighted average grant date fair value per award
Outstanding at December 31, 2017	251,770		$	155.25
Granted (1)	100,501		155.31
Change in awards based on performance (2)	5,990		148.79
Converted to restricted stock or options	(88,477	)	148.79
Forfeited	(1,271	)	157.06
Outstanding at March 31, 2018	268,513		$	157.25

__________________________________


(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 61,746 performance awards and financial metrics related to operating performance and leverage metrics of the Company for 38,755 performance awards.


(2)	Represents the change in the number of performance awards earned based on actual performance achievement for the performance period.

The Company used a Monte Carlo model to assess the compensation cost associated with the portion of the performance awards granted in 2018 for which achievement will be determined by using total shareholder return measures. The assumptions used are as follows:



		2018
Dividend yield		3.7%
Estimated volatility over the life of the plan (1)		11.8% - 18.7%
Risk free rate		1.86% - 2.46%
Estimated performance award value based on total shareholder return measure		$151.67

__________________________________


(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 2018 for which achievement will be determined by using financial metrics, the compensation cost was based on the grant date fair value of $161.10, and the Company's estimate of corporate achievement for the financial metrics.

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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, 2017	133,633		$	172.33	233,928
Granted - restricted stock shares	94,701		161.32		88,297
Vested - restricted stock shares	(64,224	)	171.20		(112,076	)
Forfeited	(1,257	)	168.68		(572	)
Outstanding at March 31, 2018	162,853		$	166.40	209,577

Total employee stock-based compensation cost recognized in income was $3,846,000 and $3,986,000 for the three months ended March 31, 2018 and 2017, respectively, and total capitalized stock-based compensation cost was $2,086,000 and $2,078,000 for the three months ended March 31, 2018 and 2017, respectively. At March 31, 2018, there was a total unrecognized compensation cost of $50,913,000 for unvested restricted stock and performance awards and $69,000 for unvested stock options, which does not include forfeitures, and is expected to be recognized over a weighted average period of 3.1 years and 0.4 years, respectively.

9. Related Party Arrangements

Unconsolidated Entities

The Company manages unconsolidated real estate entities for which it receives asset management, property management, development and redevelopment fee revenue. From these entities, the Company earned fees of $886,000 and $1,200,000 during the three months ended March 31, 2018 and 2017, respectively. In addition, the Company has outstanding receivables associated with its property and construction management role of $4,265,000 and $2,449,000 as of March 31, 2018 and December 31, 2017, respectively.

Director Compensation

The Company recorded non-employee director compensation expense relating to restricted stock grants and deferred stock awards in the amount of $389,000 and $371,000 in the three months ended March 31, 2018 and 2017, 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 $189,000 and $525,000 on March 31, 2018 and December 31, 2017, respectively, reported as a component of prepaid expenses and other assets on the accompanying Condensed Consolidated Balance Sheets.

10. Fair Value

Financial Instruments Carried at Fair Value

Derivative Financial Instruments

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, 2018, 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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The following table summarizes the consolidated derivative positions at March 31, 2018 (dollars in thousands):



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

Notional balance	$	688,044		$	34,820
Weighted average interest rate (1)	3.2		%	3.5		%
Weighted average swapped/capped interest rate	6.5		%	5.9		%
Earliest maturity date	Aug 2018			Apr 2019
Latest maturity date	Sep 2022			Apr 2019

____________________________________


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

During the three months ended March 31, 2018, in conjunction with the Company's March 2018 unsecured note issuance, the Company settled $300,000,000 of forward interest rate swap agreements designated as cash flow hedges of the interest rate variability on the forecasted issuance of the unsecured notes, receiving a payment of $12,598,000. 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 next 10 years. As of March 31, 2018, the Company has no outstanding forward interest rate swap agreements.

Excluding derivatives executed to hedge secured debt on communities classified as held for sale, the Company had one derivative designated as a cash flow hedge and 14 derivatives not designated as hedges at March 31, 2018. Fair value changes for derivatives not in qualifying hedge relationships for the three months ended March 31, 2018 and 2017 were not material. During the three months ended March 31, 2018, the Company deferred $11,501,000 of gains for cash flow hedges reported as a component of accumulated other comprehensive loss.

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



	For the three months ended
	3/31/2018		3/31/2017

Cash flow hedge losses reclassified to earnings	$	1,756	$	1,752

The Company anticipates reclassifying approximately $5,752,000 of net 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. The Company did not have any derivatives designated as fair value hedges as of March 31, 2018 and 2017.

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.

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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 and prepaid expenses, 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 Loans 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 Loans 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):



	3/31/2018
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)
Non-Designated Hedges
Interest Rate Caps	$	18		$	—		$	18		$	—
Puts	(3,245		)	—			—			(3,245		)
DownREIT units	(1,234		)	(1,234		)	—			—
Indebtedness
Unsecured notes	(5,585,598		)	(5,585,598		)	—			—
Secured notes payable and variable rate unsecured indebtedness	(1,817,732		)	—			(1,817,732		)	—
Total	$	(7,407,791	)	$	(5,586,832	)	$	(1,817,714	)	$	(3,245	)

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	12/31/2017
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)
Non-Designated Hedges
Interest Rate Caps	$	2		$	—		$	2		$	—
Cash Flow Hedges
Interest Rate Swaps - Assets	2,270			—			2,270			—
Interest Rate Swaps - Liabilities	(1,171		)	—			(1,171		)	—
Puts	(3,245		)	—			—			(3,245		)
DownREIT units	(1,338		)	(1,338		)	—			—
Indebtedness
Unsecured notes	(5,446,604		)	(5,446,604		)	—			—
Secured notes payable and variable rate unsecured indebtedness	(1,849,851		)	—			(1,849,851		)	—
Total	$	(7,299,937	)	$	(5,447,942	)	$	(1,848,750	)	$	(3,245	)

11. Subsequent Events

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

In April 2018, the Company:


•	repaid $13,380,000 of 3.06% fixed rate debt secured by Avalon Andover at par at its maturity date; and


•	entered into an agreement to sell two operating communities containing an aggregate of 472 apartment homes and net real estate of $72,081,000 as of March 31, 2018, resulting in the communities qualifying as held for sale. The Company expects to complete the sales in the second quarter of 2018.

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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, 2017 (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 investments relative to other markets that do not have these characteristics. We believe that the Denver, Colorado, and Southeast Florida markets share these characteristics, and we are pursuing opportunities to invest in these markets through acquisitions and developments. 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 U.S. markets, providing a range of distinctive living experiences that customers value. We pursue this vision by targeting what we believe are among 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 2018 Highlights

•

Net income attributable to common stockholders for the three months ended March 31, 2018 was $141,643,000, a decrease of $94,232,000, or 39.9%, as compared to the prior year period. The decrease is primarily due to a decrease in real estate sales and related gains, coupled with increases in depreciation and interest expense, partially offset by an increase in NOI and a net casualty and impairment loss in the prior year period.


•	Established Communities NOI for the three months ended March 31, 2018 was $295,357,000, an increase of $3,645,000, or 1.2%, over the prior year period. This increase was driven by an increase in rental revenue of 2.4%, partially offset by an increase in operating expenses of 5.3% compared to the prior year period.

During the three months ended March 31, 2018, we completed the construction of three communities, containing 770 apartment homes for an aggregate total capitalized cost of $287,000,000. At March 31, 2018, we owned or held a direct or indirect interest in 18 communities under construction, which are expected to contain 5,774 apartment homes with a projected total capitalized cost of $2,697,000,000, including the total projected capitalized cost for one community being developed within an unconsolidated joint venture in which we own a 55.0% interest. In addition, as of March 31, 2018, we held a direct or indirect ownership interest in land or rights to land on which we expect to develop an additional 28 apartment communities that, if developed as expected, will contain 9,268 apartment homes, and will be developed for an aggregate total capitalized cost of $3,724,000,000.

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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, 2018 and 2017, the Established Communities are communities that are consolidated for financial reporting purposes, had stabilized occupancy as of January 1, 2017, 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 consolidated communities that have stabilized occupancy, as defined above, as of the beginning of the current calendar year. 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.


•	Unconsolidated Communities are communities that we have an indirect ownership interest in through our investment interest in an unconsolidated joint venture.

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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As of March 31, 2018, 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	34	8,145
Metro NY/NJ	40	11,690
Mid-Atlantic	27	9,465
Pacific Northwest	14	3,256
Northern California	37	11,033
Southern California	46	12,697
Total Established	198	56,286

Other Stabilized Communities:
New England	8	1,837
Metro NY/NJ	6	1,303
Mid-Atlantic	7	2,666
Pacific Northwest	2	860
Northern California	2	516
Southern California	10	2,680
Expansion Markets	2	622
Non Core	3	1,014
Total Other Stabilized	40	11,498

Lease-Up Communities	6	1,728

Redevelopment Communities (1)	15	6,260

Unconsolidated Communities	11	2,616

Total Current Communities	270	78,388

Development Communities (2)	18	5,774

Total Communities	288	84,162

Development Rights	28	9,268

_________________________


(1)	Redevelopment Communities includes the reconstruction of the building destroyed in the Edgewater casualty loss. Due to the nature of this reconstruction, the 240 apartment homes we expect the new building to contain upon completion are not included in the apartment home count presented, and will be included upon completion.


(2)	Development Communities includes AVA North Point, expected to contain 265 apartment homes, which is being developed within an unconsolidated joint venture.

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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, 2018 and 2017 follows (unaudited, dollars in thousands):



	For the three months ended
	3/31/2018		3/31/2017		$ Change			% Change

Revenue:
Rental and other income	$	559,906	$	521,126	$	38,780		7.4	%
Management, development and other fees	886		1,200		(314		)	(26.2	)%
Total revenue	560,792		522,326		38,466			7.4	%

Expenses:
Direct property operating expenses, excluding property taxes	111,405		104,233		7,172			6.9	%
Property taxes	59,896		52,930		6,966			13.2	%
Total community operating expenses	171,301		157,163		14,138			9.0

Form: 10-Q

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