August 5, 2020 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

Form: 10-Q

Documents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

Commission file number 1-12672

AVALONBAY COMMUNITIES, INC.

(Exact name of registrant as specified in its charter)

4040 Wilson Blvd., Suite 1000

Arlington, Virginia 22203

(Address of principal executive offices, including zip code)

(703) 329-6300

(Registrant's telephone number, including area code)

(Former name, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol		Name of each exchange on which registered
Common Stock, par value $0.01 per share		AVB	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ☐ No ☒

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date:

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

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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 JUNE 30, 2020 (UNAUDITED) AND DECEMBER 31, 2019	1

	CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019	2

	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019	3

	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	6

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		26

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		50

ITEM 4. CONTROLS AND PROCEDURES		50

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS		50

ITEM 1A. RISK FACTORS		50

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		53

ITEM 3. DEFAULTS UPON SENIOR SECURITIES		53

ITEM 4. MINE SAFETY DISCLOSURES		53

ITEM 5. OTHER INFORMATION		53

ITEM 6. EXHIBITS		54

SIGNATURES		55

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AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)



	6/30/2020			12/31/2019
	(unaudited)
ASSETS
Real estate:
Land and improvements	$	4,361,878		$	4,299,162
Buildings and improvements	16,916,054			16,668,496
Furniture, fixtures and equipment	888,633			829,242
	22,166,565			21,796,900
Less accumulated depreciation	(5,489,485		)	(5,164,398		)
Net operating real estate	16,677,080			16,632,502
Construction in progress, including land	1,272,171			1,303,751
Land held for development	39,829			—
For-sale condominium inventory	311,236			457,809
Real estate assets held for sale, net	—			38,927
Total real estate, net	18,300,316			18,432,989

Cash and cash equivalents	322,817			39,687
Cash in escrow	92,877			87,927
Resident security deposits	33,805			34,224
Investments in unconsolidated real estate entities	176,352			165,806
Deferred development costs	81,395			70,486
Prepaid expenses and other assets	184,023			164,971
Right of use lease assets	159,905			124,961
Total assets	$	19,351,490		$	19,121,051

LIABILITIES AND EQUITY
Unsecured notes, net	$	6,698,438		$	6,358,648
Variable rate unsecured credit facility	—			—
Mortgage notes payable, net	931,772			937,642
Dividends payable	226,126			215,414
Payables for construction	80,588			92,135
Accrued expenses and other liabilities	252,627			274,013
Lease liabilities	183,507			140,468
Accrued interest payable	44,337			47,154
Resident security deposits	60,536			61,752
Liabilities related to real estate assets held for sale	—			375
Total liabilities	8,477,931			8,127,601

Commitments and contingencies

Redeemable noncontrolling interests	2,754			3,252

Equity:
Preferred stock, $0.01 par value; $25 liquidation preference; 50,000,000 shares authorized at June 30, 2020 and December 31, 2019; zero shares issued and outstanding at June 30, 2020 and December 31, 2019	—			—
Common stock, $0.01 par value; 280,000,000 shares authorized at June 30, 2020 and December 31, 2019; 140,743,120 and 140,643,962 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively	1,407			1,406
Additional paid-in capital	10,742,796			10,736,733
Accumulated earnings less dividends	172,304			282,913
Accumulated other comprehensive loss	(46,317		)	(31,503		)
Total stockholders' equity	10,870,190			10,989,549
Noncontrolling interests	615			649
Total equity	10,870,805			10,990,198
Total liabilities and equity	$	19,351,490		$	19,121,051

See accompanying notes to Condensed Consolidated Financial Statements.

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AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(Dollars in thousands, except per share data)



	For the three months ended						For the six months ended
	6/30/2020			6/30/2019			6/30/2020			6/30/2019
Revenue:
Rental and other income	$	575,479		$	576,149		$	1,176,123		$	1,141,194
Management, development and other fees	926			1,114			1,933			2,252
Total revenue	576,405			577,263			1,178,056			1,143,446

Expenses:
Operating expenses, excluding property taxes	131,090			132,924			263,083			256,378
Property taxes	67,013			62,187			134,039			123,516
Interest expense, net	53,399			50,010			109,313			97,902
Loss on extinguishment of debt, net	268			229			9,438			509
Depreciation expense	176,249			162,693			354,160			324,749
General and administrative expense	15,573			18,965			32,893			32,671
Expensed transaction, development and other pursuit costs, net of recoveries	388			1,766			3,722			2,388
Total expenses	443,980			428,774			906,648			838,113

Equity in income (loss) of unconsolidated real estate entities	512			197			1,687			(863		)
Gain on sale of communities	35,295			20,530			59,731			35,365
Gain on other real estate transactions, net	156			34			199			300
Gain on for-sale condominiums, net of marketing and administrative costs	1,348			(945		)	4,808			(1,418		)

Income before income taxes	169,736			168,305			337,833			338,717
Income tax benefit	1,133			—			1,042			6

Net income	170,869			168,305			338,875			338,723
Net income attributable to noncontrolling interests	(41		)	(24		)	(76		)	(76		)

Net income attributable to common stockholders	$	170,828		$	168,281		$	338,799		$	338,647

Other comprehensive income (loss):
Loss on cash flow hedges	(1,461		)	(2,888		)	(19,064		)	(10,119		)
Cash flow hedge losses reclassified to earnings	2,301			1,611			4,250			3,079
Comprehensive income	$	171,668		$	167,004		$	323,985		$	331,607

Earnings per common share - basic:
Net income attributable to common stockholders	$	1.21		$	1.21		$	2.41		$	2.43

Earnings per common share - diluted:
Net income attributable to common stockholders	$	1.21		$	1.21		$	2.41		$	2.43

See accompanying notes to Condensed Consolidated Financial Statements.

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AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(Dollars in thousands)



	For the six months ended
	6/30/2020			6/30/2019
Cash flows from operating activities:
Net income	$	338,875		$	338,723
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation expense	354,160			324,749
Amortization of deferred financing costs	3,720			3,565
Amortization of debt discount	833			789
Loss on extinguishment of debt, net	9,438			509
Amortization of stock-based compensation	11,870			13,719
Equity in loss of, and return on, unconsolidated real estate entities and noncontrolling interests, net of eliminations	3,705			10,131
Abandonment of development pursuits	2,095			1,285
Cash flow hedge losses reclassified to earnings	4,250			3,079
Gain on sale of real estate assets	(59,930		)	(35,665		)
Gain on for-sale condominiums	(7,446		)	—
Increase in resident security deposits, prepaid expenses and other assets	(13,595		)	(24,241		)
(Decrease) increase in accrued expenses, other liabilities and accrued interest payable	(19,058		)	1,089
Net cash provided by operating activities	628,917			637,732

Cash flows from investing activities:
Development/redevelopment of real estate assets including land acquisitions and deferred development costs	(383,139		)	(560,385		)
Acquisition of real estate assets, including partnership interest	—			(152,260		)
Capital expenditures - existing real estate assets	(51,858		)	(48,006		)
Capital expenditures - non-real estate assets	(14,461		)	(4,222		)
(Decrease) increase in payables for construction	(11,547		)	7,562
Proceeds from sale of real estate, net of selling costs	132,882			168,034
Proceeds from the sale of for-sale condominiums, net of selling costs	155,217			—
Mortgage note receivable lending	(209		)	(507		)
Mortgage note receivable payments	2,238			978
Investments in unconsolidated real estate entities	(14,251		)	(1,218		)
Net cash used in investing activities	(185,128		)	(590,024		)

Cash flows from financing activities:
Issuance of common stock, net	1,613			206,193
Dividends paid	(437,326		)	(415,295		)
Issuance of mortgage notes payable	51,000			—
Repayments of mortgage notes payable, including prepayment penalties	(56,852		)	(137,653		)
Issuance of unsecured notes	1,296,581			449,803
Repayment of unsecured notes, including prepayment penalties	(958,680		)	—
Payment of deferred financing costs	(11,276		)	(10,668		)
Payment for termination of forward interest rate swaps	(25,135		)	(12,309		)
(Payment to) contribution from noncontrolling interest	(42		)	337
Payments related to tax withholding for share-based compensation	(14,750		)	(14,286		)
Distributions to DownREIT partnership unitholders	(24		)	(23		)
Distributions to joint venture and profit-sharing partners	(218		)	(227		)
Preferred interest obligation redemption and dividends	(600		)	(1,400		)
Net cash (used in) provided by financing activities	(155,709		)	64,472

Net increase in cash and cash equivalents	288,080			112,180

Cash and cash equivalents and restricted cash, beginning of period	127,614			217,864
Cash and cash equivalents and restricted cash, end of period	$	415,694		$	330,044

Cash paid during the period for interest, net of amount capitalized	$	103,328		$	88,948

See accompanying notes to Condensed Consolidated Financial Statements.

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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 six months ended
	6/30/2020		6/30/2019
Cash and cash equivalents	$	322,817	$	243,576
Cash in escrow	92,877		86,468
Cash, cash equivalents and restricted cash reported in the Condensed Consolidated Statements of Cash Flows	$	415,694	$	330,044

Supplemental disclosures of non-cash investing and financing activities:

During the six months ended June 30, 2020:

•

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


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


•	The Company recorded a decrease of $325,000 in redeemable noncontrolling interest with a corresponding increase to accumulated earnings less dividends to adjust the redemption value associated with the put options held by joint venture partners and DownREIT partnership units. For further discussion of the nature and valuation of these items, see Note 11, "Fair Value."

•

The Company recorded an increase to accrued expenses and other liabilities of $98,000, an increase in prepaid expenses and other assets of $178,000 and a corresponding adjustment to accumulated other comprehensive loss, and reclassified $4,250,000 of cash flow hedge losses from other comprehensive income (loss) to interest expense, net, to record the impact of the Company's derivative and hedge accounting activity.


•	The Company recorded $46,875,000 of lease liabilities and offsetting right of use lease assets related to the execution of two new office leases.

During the six months ended June 30, 2019:

•

The Company issued 150,359 shares of common stock as part of the Company's stock-based compensation plans, of which 73,072 shares related to the conversion of performance awards to restricted shares, and the remaining 77,287 shares valued at $15,145,000 were issued in connection with new stock grants; 1,092 shares valued at $208,000 were issued through the Company's dividend reinvestment plan; 75,195 shares valued at $14,206,000 were withheld to satisfy employees' tax withholding and other liabilities; and 1,438 restricted shares with an aggregate value of $250,000 previously issued in connection with employee compensation were canceled upon forfeiture.


•	Common stock dividends declared but not paid totaled $212,822,000.


•	The Company recorded an increase of $269,000 in redeemable noncontrolling interest with a corresponding decrease to accumulated earnings less dividends to adjust the redemption value associated with the put options held by joint venture partners and DownREIT partnership units.

•

The Company recorded an increase to accrued expenses and other liabilities of $4,198,000, an increase in prepaid expenses and other assets of $18,000 and a corresponding adjustment to accumulated other comprehensive loss, and reclassified $3,079,000 of cash flow hedge losses from other comprehensive income (loss) to interest expense, net, to record the impact of the Company's derivative and hedge accounting activity.

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•	The Company recorded $122,276,000 of lease liabilities and offsetting right of use lease assets for its ground and office leases, upon the adoption of ASU 2016-02, Leases, as of January 1, 2019.

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

At June 30, 2020, the Company owned or held a direct or indirect ownership interest in 276 operating apartment communities containing 80,182 apartment homes in 11 states and the District of Columbia. In addition, the Company owned or held a direct or indirect ownership interest in 19 communities under development that are expected to contain an aggregate of 6,198 apartment homes when completed, as well as The Park Loggia, which contains 172 for-sale residential condominiums, of which 52 have been sold as of June 30, 2020, and 67,000 square feet of retail space, of which 64% has been leased as of June 30, 2020. The Company also owned or held a direct or indirect ownership interest in land or rights to land on which the Company expects to develop an additional 28 communities that, if developed as expected, will contain an estimated 9,786 apartment homes.

The interim unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements required by GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited financial statements should be read in conjunction with the financial statements and notes included in the Company's 2019 Annual Report on Form 10-K. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the operating results for the full year. Management believes the disclosures are adequate to ensure the information presented is not misleading. In the opinion of management, all adjustments and eliminations, consisting only of normal, recurring adjustments necessary for a fair presentation of the financial statements for the interim periods, have been included.

Capitalized terms used without definition have meanings provided elsewhere in this Form 10-Q.

Earnings per Common Share

Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted average number of shares outstanding during the period. All outstanding unvested restricted share awards contain rights to non-forfeitable dividends and participate in undistributed earnings with common shareholders and, accordingly, are considered participating securities that are included in the two-class method of computing basic earnings per share ("EPS"). Both the unvested restricted shares and other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis. The Company's earnings per common share are determined as follows (dollars in thousands, except per share data):

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	For the three months ended						For the six months ended
	6/30/2020			6/30/2019			6/30/2020			6/30/2019
Basic and diluted shares outstanding
Weighted average common shares - basic	140,450,744			139,113,390			140,413,857			138,724,479
Weighted average DownREIT units outstanding	7,500			7,500			7,500			7,500
Effect of dilutive securities	279,916			497,341			330,974			495,397
Weighted average common shares - diluted	140,738,160			139,618,231			140,752,331			139,227,376

Calculation of Earnings per Share - basic
Net income attributable to common stockholders	$	170,828		$	168,281		$	338,799		$	338,647
Net income allocated to unvested restricted shares	(390		)	(435		)	(817		)	(935		)
Net income attributable to common stockholders, adjusted	$	170,438		$	167,846		$	337,982		$	337,712

Weighted average common shares - basic	140,450,744			139,113,390			140,413,857			138,724,479

Earnings per common share - basic	$	1.21		$	1.21		$	2.41		$	2.43

Calculation of Earnings per Share - diluted
Net income attributable to common stockholders	$	170,828		$	168,281		$	338,799		$	338,647
Add: noncontrolling interests of DownREIT unitholders in consolidated partnerships	12			12			24			23
Adjusted net income attributable to common stockholders	$	170,840		$	168,293		$	338,823		$	338,670

Weighted average common shares - diluted	140,738,160			139,618,231			140,752,331			139,227,376

Earnings per common share - diluted	$	1.21		$	1.21		$	2.41		$	2.43

All options to purchase shares of common stock outstanding as of June 30, 2020 and 2019 are included in the computation of diluted earnings per share.

Derivative Instruments and Hedging Activities

The Company enters into interest rate swap and interest rate cap agreements (collectively, "Hedging Derivatives") for interest rate risk management purposes and in conjunction with certain variable rate secured debt to satisfy lender requirements. The Company does not enter into Hedging Derivative transactions for trading or other speculative purposes. The Company assesses the effectiveness of qualifying cash flow and fair value hedges, both at inception and on an on-going basis. Hedge ineffectiveness is reported as a component of interest expense, net. The fair values of Hedging Derivatives that are in an asset position are recorded in prepaid expenses and other assets. The fair value of Hedging Derivatives that are in a liability position are included in accrued expenses and other liabilities. The Company does not present or disclose the fair value of Hedging Derivatives on a net basis. Fair value changes for derivatives that are not in qualifying hedge relationships are reported as a component of interest expense, net. For the Hedging Derivative positions that the Company has determined qualify as effective cash flow hedges, the Company has recorded the cumulative changes in the fair value of Hedging Derivatives in other comprehensive loss. Amounts recorded in accumulated other comprehensive loss will be reclassified into earnings in the periods in which earnings are affected by the hedged cash flow. The effective portion of the change in fair value of the Hedging Derivatives that the Company has determined qualified as effective fair value hedges is reported as an adjustment to the carrying amount of the corresponding debt being hedged. See Note 11, "Fair Value," for further discussion of derivative financial instruments.

Legal and Other Contingencies

The Company is involved in various claims and/or administrative proceedings that arise in the ordinary course of its business. While no assurances can be given, the Company does not currently believe that any of these outstanding litigation matters, individually or in the aggregate, will have a material adverse effect on its financial condition or results of operations.

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Acquisitions of Investments in Real Estate

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

Use of Estimates

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

Reclassifications

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

For-Sale Condominium Inventory

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

Leases

The Company is party to leases as both a lessor and a lessee, primarily as follows:


•	lessor of residential and retail space within its apartment communities; and


•	lessee under (i) ground leases for land underlying current operating or development communities and (ii) office leases for its corporate headquarters and regional offices.

Lessee Considerations

The Company assesses whether a contract is or contains a lease based on whether the contract conveys the right to control the use of an identified asset, including specified portions of larger assets, for a period of time in exchange for consideration. The Company’s leases include both fixed and variable lease payments, which are based on an index or rate such as the consumer price index (CPI) or percentage rents based on total sales. Lease payments included in the lease liability include only payments that depend on an index or rate. For leases that have options to extend the term or terminate the lease early, the Company only factored the impact of such options into the lease term if the option was considered reasonably certain to be exercised. The Company determined the discount rate associated with its ground and office leases on a lease by lease basis using the Company’s actual borrowing rates as well as indicative market pricing for longer term rates and taking into consideration the remaining term of each of the lease agreements.

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Lessor Considerations

The Company evaluates leases in which it is the lessor, which are composed of residential and retail leases at its apartment communities, and determined these leases to be operating leases. For lease agreements that provide for rent concessions and/or scheduled fixed and determinable rent increases, rental income is recognized on a straight-line basis over the noncancellable term of the lease, which, for residential leases, is generally one year. Some of the Company’s retail leases have fixed-price renewal options, and the lessee may be able to exercise its renewal option at an amount less than the fair value of the rent at such time. The Company only includes renewal options in the lease term if, at the commencement of the lease, it is reasonably certain that the lessee will exercise this option.

Revenue and Gain Recognition

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

The following table provides details of the Company’s revenue streams disaggregated by the Company’s reportable operating segments, further discussed in Note 8, “Segment Reporting,” for the three and six months ended June 30, 2020 and 2019. Segment information for total revenue has been adjusted to exclude the real estate assets that were sold from January 1, 2019 through June 30, 2020, or otherwise qualify as held for sale as of June 30, 2020, as described in Note 6, "Real Estate Disposition Activities" (dollars in thousands):



	For the three months ended
	Established Communities		Other Stabilized Communities		Development/ Redevelopment Communities (1)		Non- allocated (2)		Total
For the period ended June 30, 2020
Management, development and other fees	$	—	$	—	$	—	$	926	$	926
Rental and non-rental related income (3)	1,870		317		295		—		2,482
Total non-lease revenue (4)	1,870		317		295		926		3,408

Lease income (5)	521,558		34,360		16,397		—		572,315
Business interruption insurance proceeds	103		—		—		—		103

Total revenue	$	523,531	$	34,677	$	16,692	$	926	$	575,826

For the period ended June 30, 2019
Management, development and other fees	$	—	$	—	$	—	$	1,114	$	1,114
Rental and non-rental related income (3)	2,154		153		51		—		2,358
Total non-lease revenue (4)	2,154		153		51		1,114		3,472

Lease income (5)	536,916		25,369		2,359		—		564,644
Business interruption insurance proceeds	435		—		—		—		435

Total revenue	$	539,505	$	25,522	$	2,410	$	1,114	$	568,551

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	For the six months ended
	Established Communities		Other Stabilized Communities		Development/ Redevelopment Communities (1)		Non- allocated (2)		Total
For the period ended June 30, 2020
Management, development and other fees	$	—	$	—	$	—	$	1,933	$	1,933
Rental and non-rental related income (3)	3,478		793		527		—		4,798
Total non-lease revenue (4)	3,478		793		527		1,933		6,731

Lease income (5)	1,067,906		69,374		31,938		—		1,169,218
Business interruption insurance proceeds	103		—		—		—		103

Total revenue	$	1,071,487	$	70,167	$	32,465	$	1,933	$	1,176,052

For the period ended June 30, 2019
Management, development and other fees	$	—	$	—	$	—	$	2,252	$	2,252
Rental and non-rental related income (3)	3,986		634		67		—		4,687
Total non-lease revenue (4)	3,986		634		67		2,252		6,939

Lease income (5)	1,066,742		46,914		2,892		—		1,116,548
Business interruption insurance proceeds	607		—		—		—		607

Total revenue	$	1,071,335	$	47,548	$	2,959	$	2,252	$	1,124,094

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(1)	The Company had no Redevelopment Communities for the three and six months ended June 30, 2020 and 2019.


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


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


(4)	Represents all revenue accounted for under ASU 2014-09.


(5)	Amounts include all revenue streams derived from residential and retail rental income and other lease income, which are accounted for under ASC 842.

Due to the nature and timing of the Company’s identified revenue streams, there are no material amounts of outstanding or unsatisfied performance obligations as of June 30, 2020.

COVID-19 Pandemic

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

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

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Recently Issued and Adopted Accounting Standards

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

2. Interest Capitalized

The Company capitalizes interest during the development and redevelopment of real estate assets. Capitalized interest associated with the Company's development or redevelopment activities totaled $11,019,000 and $17,127,000 for the three months ended June 30, 2020 and 2019, respectively, and $22,517,000 and $34,716,000 for the six months ended June 30, 2020 and 2019, respectively.

3. Mortgage Notes Payable, Unsecured Notes and Credit Facility

The Company's mortgage notes payable, unsecured notes, variable rate unsecured term loans (the "Term Loans") and Credit Facility, as defined below, as of June 30, 2020 and December 31, 2019 are summarized below. The following amounts and discussion do not include the mortgage notes related to the communities classified as held for sale, if any, as of June 30, 2020 and December 31, 2019, as shown in the accompanying Condensed Consolidated Balance Sheets (dollars in thousands) (see Note 6, "Real Estate Disposition Activities").



	6/30/2020		12/31/2019

Fixed rate unsecured notes (1)	$	6,500,000	$	5,850,000
Variable rate unsecured notes (1)	—		300,000
Term Loans (1)	250,000		250,000
Fixed rate mortgage notes payable - conventional and tax-exempt (2)	478,070		479,221
Variable rate mortgage notes payable - conventional and tax-exempt (2)	471,450		476,150
Total mortgage notes payable and unsecured notes and Term Loans	7,699,520		7,355,371
Credit Facility	—		—
Total mortgage notes payable, unsecured notes, Term Loans and Credit Facility	$	7,699,520	$	7,355,371

_____________________________________


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


(2)	Balances at June 30, 2020 and December 31, 2019 exclude $14,618 and $14,464, respectively, of debt discount, and $3,130 and $3,265, respectively, of deferred financing costs, as reflected in mortgage notes payable, net on the accompanying Condensed Consolidated Balance Sheets.

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


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


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

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•

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


•	In May 2020, the Company issued $600,000,000 principal amount of unsecured notes in a public offering un

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)