10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 3, 2023
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended September 30, 2023
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______ to ______
Commission file number: 1-12672
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(703 ) 329-6300
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
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 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 90 days.
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
☒ | Accelerated filer | ☐ | ||||||||||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||
Emerging growth company |
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 Exchange Act).
Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date:
AVALONBAY COMMUNITIES, INC.
FORM 10-Q
INDEX
PAGE | ||||||||
PART I - FINANCIAL INFORMATION | ||||||||
ITEM 1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | |||||||
AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
September 30, 2023 | December 31, 2022 | ||||||||||
(unaudited) | |||||||||||
ASSETS | |||||||||||
Real estate: | |||||||||||
Land and improvements | $ | $ | |||||||||
Buildings and improvements | |||||||||||
Furniture, fixtures and equipment | |||||||||||
Less accumulated depreciation | ( |
( |
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Net operating real estate | |||||||||||
Construction in progress, including land | |||||||||||
Land held for development | |||||||||||
Real estate assets held for sale, net | |||||||||||
Total real estate, net | |||||||||||
Cash and cash equivalents | |||||||||||
Restricted cash | |||||||||||
Unconsolidated investments | |||||||||||
Deferred development costs | |||||||||||
Prepaid expenses and other assets | |||||||||||
Right of use lease assets | |||||||||||
Total assets | $ | $ | |||||||||
LIABILITIES AND EQUITY | |||||||||||
Unsecured notes, net | $ | $ | |||||||||
Variable rate unsecured credit facility and commercial paper, net | |||||||||||
Mortgage notes payable, net | |||||||||||
Dividends payable | |||||||||||
Payables for construction | |||||||||||
Accrued expenses and other liabilities | |||||||||||
Lease liabilities | |||||||||||
Accrued interest payable | |||||||||||
Resident security deposits | |||||||||||
Total liabilities | |||||||||||
Commitments and contingencies | |||||||||||
Redeemable noncontrolling interests | |||||||||||
Equity: | |||||||||||
Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital | |||||||||||
Accumulated earnings less dividends | |||||||||||
Accumulated other comprehensive income | |||||||||||
Total stockholders' equity | |||||||||||
Noncontrolling interests | |||||||||||
Total equity | |||||||||||
Total liabilities and equity | $ | $ |
See accompanying notes to Condensed Consolidated Financial Statements.
1
AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(Dollars in thousands, except per share data)
For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
Revenue: | |||||||||||||||||||||||
Rental and other income | $ | $ | $ | $ | |||||||||||||||||||
Management, development and other fees | |||||||||||||||||||||||
Total revenue | |||||||||||||||||||||||
Expenses: | |||||||||||||||||||||||
Operating expenses, excluding property taxes | |||||||||||||||||||||||
Property taxes | |||||||||||||||||||||||
Expensed transaction, development and other pursuit costs, net of recoveries | |||||||||||||||||||||||
Interest expense, net | |||||||||||||||||||||||
Loss on extinguishment of debt, net | |||||||||||||||||||||||
Depreciation expense | |||||||||||||||||||||||
General and administrative expense | |||||||||||||||||||||||
Casualty loss | |||||||||||||||||||||||
Total expenses | |||||||||||||||||||||||
Income from unconsolidated investments | |||||||||||||||||||||||
Gain on sale of communities | |||||||||||||||||||||||
Other real estate activity | |||||||||||||||||||||||
Income before income taxes | |||||||||||||||||||||||
Income tax expense | ( |
( |
( |
( |
|||||||||||||||||||
Net income | |||||||||||||||||||||||
Net loss attributable to noncontrolling interests | |||||||||||||||||||||||
Net income attributable to common stockholders | $ | $ | $ | $ | |||||||||||||||||||
Other comprehensive income: | |||||||||||||||||||||||
Gain on cash flow hedges | |||||||||||||||||||||||
Cash flow hedge losses reclassified to earnings | |||||||||||||||||||||||
Comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
Earnings per common share - basic: | |||||||||||||||||||||||
Net income attributable to common stockholders | $ | $ | $ | $ | |||||||||||||||||||
Earnings per common share - diluted: | |||||||||||||||||||||||
Net income attributable to common stockholders | $ | $ | $ | $ |
See accompanying notes to Condensed Consolidated Financial Statements.
2
AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in thousands)
For the nine months ended September 30, | |||||||||||
2023 | 2022 | ||||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ | $ | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Depreciation expense | |||||||||||
Amortization of deferred financing costs and debt discount | |||||||||||
Loss on extinguishment of debt, net | |||||||||||
Amortization of stock-based compensation | |||||||||||
Equity in loss (income) of, and return on, unconsolidated investments and noncontrolling interests, net of eliminations | ( |
||||||||||
Casualty loss | |||||||||||
Abandonment of development pursuits | |||||||||||
Cash flow hedge losses reclassified to earnings | |||||||||||
Gain on sale of real estate assets | ( |
( |
|||||||||
Decrease in prepaid expenses and other assets | ( |
( |
|||||||||
Increase in accrued expenses, other liabilities and accrued interest payable | |||||||||||
Net cash provided by operating activities | |||||||||||
Cash flows from investing activities: | |||||||||||
Development/redevelopment of real estate assets including land acquisitions and deferred development costs | ( |
( |
|||||||||
Acquisition of real estate assets | ( |
( |
|||||||||
Capital expenditures - existing real estate assets | ( |
( |
|||||||||
Capital expenditures - non-real estate assets | ( |
( |
|||||||||
Increase in payables for construction | |||||||||||
Proceeds from sale of real estate and for-sale condominiums, net of selling costs | |||||||||||
Note receivable lending | ( |
( |
|||||||||
Note receivable payments | |||||||||||
Distributions from unconsolidated entities | |||||||||||
Unconsolidated investments | ( |
( |
|||||||||
Net cash used in investing activities | ( |
( |
|||||||||
Cash flows from financing activities: | |||||||||||
Issuance of common stock, net | |||||||||||
Repurchase of common stock, net | ( |
||||||||||
Dividends paid | ( |
( |
|||||||||
Net borrowings under unsecured credit facility and commercial paper | |||||||||||
Repayments of mortgage notes payable, including prepayment penalties | ( |
( |
|||||||||
Repayment of unsecured notes | ( |
( |
|||||||||
Payment of deferred financing costs | ( |
( |
|||||||||
Redemption of noncontrolling interest and units for cash by minority partners | ( |
||||||||||
Payments to noncontrolling interest | ( |
||||||||||
Payments related to tax withholding for share-based compensation | ( |
( |
|||||||||
Distributions to DownREIT partnership unitholders | ( |
( |
|||||||||
Distributions to joint venture and profit-sharing partners | ( |
( |
|||||||||
Preferred interest obligation redemption and dividends | ( |
( |
|||||||||
Net cash used in financing activities | ( |
( |
|||||||||
Net increase (decrease) in cash, cash equivalents and restricted cash | ( |
||||||||||
Cash, cash equivalents and restricted cash, beginning of period | |||||||||||
Cash, cash equivalents and restricted cash, end of period | $ | $ | |||||||||
Cash paid during the period for interest, net of amount capitalized | $ | $ |
See accompanying notes to Condensed Consolidated Financial Statements.
3
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):
September 30, 2023 | September 30, 2022 | |||||||||||||
Cash and cash equivalents | $ | $ | ||||||||||||
Restricted cash | ||||||||||||||
Cash, cash equivalents and restricted cash reported in the Condensed Consolidated Statements of Cash Flows | $ | $ |
Supplemental disclosures of non-cash investing and financing activities:
During the nine months ended September 30, 2023:
•As described in Note 4, "Equity," the Company issued 152,894 shares of common stock as part of the Company's stock-based compensation plans, of which 60,016 shares related to the conversion of performance awards to shares of common stock, and the remaining 92,878 shares valued at $16,507,000 were issued in connection with new stock grants; 2,577 shares valued at $463,000 were issued through the Company's dividend reinvestment plan; 62,482 shares valued at $10,559,000 were withheld to satisfy employees' tax withholding and other liabilities; and 2,119 forfeited restricted shares with an aggregate value of $413,000 .
•Common stock dividends declared but not paid totaled $235,659,000 .
•The Company recorded (i) an increase to prepaid expenses and other assets of $23,988,000 and a corresponding adjustment to accumulated other comprehensive income; and (ii) reclassified $1,062,000 of cash flow hedge losses from other comprehensive income to interest expense, net, to record the impact of the Company's derivative and hedging activity.
During the nine months ended September 30, 2022:
•The Company issued 136,115 shares of common stock as part of the Company's stock-based compensation plans, of which 54,053 shares related to the conversion of performance awards to shares of common stock, and the remaining 82,062 shares valued at $19,286,000 were issued in connection with new stock grants; 2,057 shares valued at $461,000 were issued through the Company's dividend reinvestment plan; 72,132 shares valued at $16,872,000 were withheld to satisfy employees' tax withholding and other liabilities; and 3,235 forfeited restricted shares with an aggregate value of $689,000 .
•Common stock dividends declared but not paid totaled $223,638,000 .
•The Company recorded an increase of $33,000 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 (i) an increase to prepaid expenses and other assets of $26,102,000 and a corresponding adjustment to accumulated other comprehensive income and (ii) reclassified $3,039,000 of cash flow hedge losses from other comprehensive income to interest expense, net, to record the impact of the Company's derivative and hedging activity.
4
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, as amended (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 regions of Raleigh-Durham and Charlotte, North Carolina, Southeast Florida, Dallas and Austin, Texas, and Denver, Colorado.
At September 30, 2023, the Company owned or held a direct or indirect ownership interest in 296 operating apartment communities containing 89,240 apartment homes in 12 states and the District of Columbia, of which 17 communities were under development and one was under redevelopment. 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 38 communities that, if developed as expected, will contain an estimated 13,449 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 Annual Report on Form 10-K for the year ended December 31, 2022. The results of operations for the three and nine months ended September 30, 2023 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.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents includes all cash and liquid investments with an original maturity of three months or less from the date acquired. Restricted cash includes principal reserve funds that are restricted for the repayment of specified secured financing, amounts the Company has designated for planned 1031 exchange activity and resident security deposits. The majority of the Company's cash, cash equivalents and restricted cash are held at major commercial banks.
Earnings per Common Share
Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted average number of shares outstanding during the period. All outstanding unvested restricted share awards contain rights to non-forfeitable dividends and participate in undistributed earnings with common shareholders and, accordingly, are considered participating securities that are included in the two-class method of computing basic earnings per share ("EPS"). Both the unvested restricted shares and other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis. The Company's earnings per common share are determined as follows (dollars in thousands, except per share data):
5
For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
Basic and diluted shares outstanding | |||||||||||||||||||||||
Weighted average common shares - basic | |||||||||||||||||||||||
Weighted average DownREIT units outstanding | |||||||||||||||||||||||
Effect of dilutive securities | |||||||||||||||||||||||
Weighted average common shares - diluted | |||||||||||||||||||||||
Calculation of Earnings per Share - basic | |||||||||||||||||||||||
Net income attributable to common stockholders | $ | $ | $ | $ | |||||||||||||||||||
Net income allocated to unvested restricted shares | ( |
( |
( |
( |
|||||||||||||||||||
Net income attributable to common stockholders - basic | $ | $ | $ | $ | |||||||||||||||||||
Weighted average common shares - basic | |||||||||||||||||||||||
Earnings per common share - basic | $ | $ | $ | $ | |||||||||||||||||||
Calculation of Earnings per Share - diluted | |||||||||||||||||||||||
Net income attributable to common stockholders | $ | $ | $ | $ | |||||||||||||||||||
Add: noncontrolling interests of DownREIT unitholders in consolidated partnerships, including discontinued operations | |||||||||||||||||||||||
Net income attributable to common stockholders - diluted | $ | $ | $ | $ | |||||||||||||||||||
Weighted average common shares - diluted | |||||||||||||||||||||||
Earnings per common share - diluted | $ | $ | $ | $ |
Derivative Instruments and Hedging Activities
The Company enters into interest rate swap and interest rate cap agreements (collectively, "Hedging Derivatives") for interest rate risk management purposes and in conjunction with certain variable rate secured debt to satisfy lender requirements. The Company does not enter into Hedging Derivatives 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 ongoing basis. The fair values of Hedging Derivatives that are in an asset position are recorded in prepaid expenses and other assets. The fair values of Hedging Derivatives that are in a liability position are included in accrued expenses and other liabilities. Fair value changes for derivatives that are not in qualifying hedge relationships are reported as a component of interest expense, net. For the Hedging Derivatives that qualify as effective cash flow hedges, the Company has recorded the cumulative changes in the fair value of Hedging Derivatives in accumulated other comprehensive income. Amounts recorded in accumulated other comprehensive income will be reclassified into earnings in the periods in which earnings are affected by the hedged cash flow. The effective portion of the change in fair value of the Hedging Derivatives that qualify as effective fair value hedges is reported as an adjustment to the carrying amount of the corresponding hedged item. See Note 11, “Fair Value,” for further discussion of derivative financial instruments.
Legal and Other Contingencies
As of September 30, 2023, the Company was involved in various claims and/or administrative proceedings that arise in the ordinary course of its business. The Company recognizes a loss associated with contingent legal matters when the loss is probable and estimable. While no assurances can be given, the Company does not currently believe that any of such matters, individually or in the aggregate, will have a material adverse effect on its financial condition or results of operations. See Note 12, "Subsequent Events," for further discussion of legal and other contingencies.
6
Acquisitions of Investments in Real Estate
The Company accounts for real estate acquisitions by first determining if the real estate investment is the acquisition of an asset or a business combination. Under either model, the Company identifies and determines 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. The Company utilizes various sources to determine fair value, 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 purchase price is allocated 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 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' financial statements and notes to the financial statements to conform to current year presentations as a result of changes in held for sale classification, disposition activity, segment classification and classification of for-sale condominium inventory and activity.
Income Taxes
The Company recognized income tax expense of $4,372,000 and $7,715,000 for the three and nine months ended September 30, 2023, respectively, and $5,651,000 and $7,963,000 for the three and nine months ended September 30, 2022, respectively, primarily related to The Park Loggia.
Leases
The Company is party to leases as both a lessor and a lessee, primarily as follows:
•lessor of residential and commercial space within its apartment communities; and
•lessee under (i) ground leases for land underlying current operating or development communities and certain commercial and parking facilities 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 that are based on an index or rate such as the consumer price index (CPI) or percentage rents based on total sales. Variable lease payments that are not based on an index or rate are not included in the measurement of the lease liability, but will be recognized as variable lease expense in the period in which they are incurred.
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 the lease agreements. For leases that are 12 months or less, the Company has elected the practical expedient to not assess these leases under Accounting Standards Codification ("ASC") 842, Leases, and recognize the lease payments on a straight line basis.
7
Lessor Considerations
The Company has determined that the residential and commercial leases at its apartment communities are operating leases. For leases that include rent concessions and/or 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 commercial leases have renewal options which the Company will only include in the lease term if, at the commencement of the lease, it is reasonably certain that the lessee will exercise this option.
For the Company’s leases, which are comprised of a lease component and common area maintenance as a non-lease component, the Company determined that (i) the leases are operating leases, (ii) the lease component is the predominant component and (iii) all components of its operating leases share the same timing and pattern of transfer.
Revenue and Gain Recognition
Under ASC 606, Revenue from Contracts with Customers, the Company recognizes revenue for the transfer of goods and services to customers for consideration that the Company expects to receive. The majority of the Company’s revenue is derived from residential and commercial rental and other lease income, which are accounted for as discussed above, under "Leases". The Company's revenue streams that are not accounted for under ASC 842, Leases, include (i) management, development and other fees, (ii) non-lease related revenue and (iii) gains or losses on the sale of real estate.
The following table details the Company’s revenue disaggregated by reportable operating segment, further discussed in Note 8, “Segment Reporting,” for the three and nine months ended September 30, 2023 and 2022. Segment information for total revenue excludes real estate assets that were sold from January 1, 2022 through September 30, 2023, or otherwise qualify as held for sale as of September 30, 2023, as described in Note 6, "Real Estate Disposition Activities" (dollars in thousands):
Same Store | Other Stabilized |
Development/ Redevelopment |
Non- allocated (1) |
Total | ||||||||||||||||||||||||||||
For the three months ended September 30, 2023 | ||||||||||||||||||||||||||||||||
Management, development and other fees and other ancillary items | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Non-lease related revenue (2) | ||||||||||||||||||||||||||||||||
Total non-lease revenue (3) | ||||||||||||||||||||||||||||||||
Lease income (4) | ||||||||||||||||||||||||||||||||
Total revenue | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
For the three months ended September 30, 2022 | ||||||||||||||||||||||||||||||||
Management, development and other fees and other ancillary items | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Non-lease related revenue (2) | ||||||||||||||||||||||||||||||||
Total non-lease revenue (3) | ||||||||||||||||||||||||||||||||
Lease income (4) | ||||||||||||||||||||||||||||||||
Total revenue | $ | $ | $ | $ | $ |
8
Same Store | Other Stabilized |
Development/ Redevelopment |
Non- allocated (1) |
Total | ||||||||||||||||||||||||||||
For the nine months ended September 30, 2023 | ||||||||||||||||||||||||||||||||
Management, development and other fees and other ancillary items | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Non-lease related revenue (2) | ||||||||||||||||||||||||||||||||
Total non-lease revenue (3) | ||||||||||||||||||||||||||||||||
Lease income (4) | ||||||||||||||||||||||||||||||||
Total revenue | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
For the nine months ended September 30, 2022 | ||||||||||||||||||||||||||||||||
Management, development and other fees and other ancillary items | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Non-lease related revenue (2) | ||||||||||||||||||||||||||||||||
Total non-lease revenue (3) | ||||||||||||||||||||||||||||||||
Lease income (4) | ||||||||||||||||||||||||||||||||
Total revenue | $ | $ | $ | $ | $ |
(1)Represents third-party property management, developer fees and miscellaneous income and other ancillary items 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, and revenue streams not related to leasing activities including, but not limited to, application fees, renters insurance fees and vendor revenue sharing.
(3)Represents revenue accounted for under ASC 606.
(4)Represents residential and commercial rental and other lease income, accounted for under ASC 842.
Due to the nature and timing of the Company’s identified revenue streams, there were no material amounts of outstanding or unsatisfied performance obligations as of September 30, 2023.
Uncollectible Lease Revenue Reserves
The Company assesses the collectability of its lease revenue and receivables on an ongoing basis by (i) assessing the probability of receiving all lease amounts due on a lease-by-lease basis, (ii) reserving all amounts for those leases where collection of substantially all of the remaining lease payments is not probable and (iii) subsequently, will only recognize revenue to the extent cash is received. If the Company determines that collection of the remaining lease payments becomes probable at a future date, the Company will recognize the cumulative revenue that would have been recorded under the original lease agreement.
In addition to the specific reserves recognized under ASC 842, the Company also evaluates its lease receivables for collectability at a portfolio level under ASC 450, Contingencies – Loss Contingencies. The Company recognizes a reserve under ASC 450 when the uncollectible revenue is probable and reasonably estimable. The Company applies this reserve to the population of the Company’s revenue and receivables not specifically addressed as part of the specific ASC 842 reserve.
The Company recorded an aggregate offset to income for uncollectible lease revenue, net of amounts received from government rent relief programs, for its residential and commercial portfolios of $13,363,000 and $10,607,000 for the three months ended September 30, 2023 and 2022, respectively, and $43,667,000 and $31,267,000 for the nine months ended September 30, 2023 and 2022, respectively, under ASC 842 and ASC 450.
9
2. Interest Capitalized
3. Debt
The Company's debt, which consists of unsecured notes, the variable rate unsecured term loan (the "Term Loan"), mortgage notes payable, the Credit Facility and the Commercial Paper Program, each as defined below, as of September 30, 2023 and December 31, 2022 is 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 September 30, 2023 and December 31, 2022, as shown in the accompanying Condensed Consolidated Balance Sheets (dollars in thousands) (see Note 6, "Real Estate Disposition Activities"). The weighted average interest rates in the following table for secured and unsecured notes include costs of financing such as credit enhancement fees, trustees' fees, the impact of interest rate hedges and mark-to-market adjustments.
September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
Fixed rate unsecured notes | $ | % | $ | % | |||||||||||||||||||
Term Loan | % | % | |||||||||||||||||||||
Fixed rate mortgage notes payable - conventional and tax-exempt | % | % | |||||||||||||||||||||
Variable rate mortgage notes payable - conventional and tax-exempt | % | % | |||||||||||||||||||||
Total mortgage notes payable and unsecured notes and Term Loan | % | % | |||||||||||||||||||||
Credit Facility | % | % | |||||||||||||||||||||
Commercial paper | % | % | |||||||||||||||||||||
Total principal outstanding | % | % | |||||||||||||||||||||
Less deferred financing costs and debt discount (1) | ( |
( |
|||||||||||||||||||||
Total | $ | $ |
_____________________________________
(1)Excludes deferred financing costs and debt discount associated with the Credit Facility and the Commercial Paper Program which are included in prepaid expenses and other assets on the accompanying Condensed Consolidated Balance Sheets.
The Company has a $2,250,000,000 revolving variable rate unsecured credit facility with a syndicate of banks (the "Credit Facility") which matures in September 2026. The interest rate that would be applicable to borrowings under the Credit Facility was 6.12 % at September 30, 2023 and was composed of (i) the Secured Overnight Financing Rate ("SOFR") plus (ii) the current borrowing spread to SOFR of 0.805 % per annum, which consisted of a 0.10 % SOFR adjustment plus 0.705 % per annum, assuming a daily SOFR borrowing rate. The borrowing spread to SOFR can vary from SOFR plus 0.63 % to SOFR plus 1.38 % based upon the rating of the Company's unsecured and unsubordinated long-term indebtedness. There is also an annual facility commitment fee of 0.12 % of the borrowing capacity under the facility, which can vary from 0.095 % to 0.295 % based upon the rating of the Company's unsecured and unsubordinated long-term indebtedness. The Credit Facility contains a sustainability-linked pricing component which provides for interest rate margin and commitment fee reductions or increases by meeting or missing targets related to environmental sustainability, specifically greenhouse gas emission reductions, with the adjustment determined annually. The first determination under the sustainability-linked pricing component occurred in July 2023, resulting in reductions of approximately 0.02 % to the interest rate margin and 0.005 % to the commitment fee due to our achievement of sustainability targets.
10
The availability on the Company's Credit Facility as of September 30, 2023 and December 31, 2022, respectively, was as follows (dollars in thousands):
September 30, 2023 | December 31, 2022 | ||||||||||
Credit Facility commitment | $ | $ | |||||||||
Credit Facility outstanding | |||||||||||
Commercial paper outstanding | ( |
||||||||||
Letters of credit outstanding (1) | ( |
( |
|||||||||
Total Credit Facility available | $ | $ |
_____________________________________
(1)In addition, the Company had $50,418 and $48,740 outstanding in additional letters of credit unrelated to the Credit Facility as of September 30, 2023 and December 31, 2022, respectively.
The Company has an unsecured commercial paper note program (the “Commercial Paper Program”) with the maximum aggregate face or principal amount outstanding at any one time not to exceed $500,000,000 . The Commercial Paper Program is backstopped by the Company's commitment to maintain available borrowing capacity under the Credit Facility in an amount equal to actual borrowings under the Commercial Paper Program.
The following debt activity occurred during the nine months ended September 30, 2023:
•In March 2023, the Company repaid $250,000,000 principal amount of its 2.85 % unsecured notes at its maturity.
•In September 2023, the Company repaid its $150,000,000 Term Loan at par in advance of its February 2024 scheduled maturity.
•In September 2023, the Company utilized $37,600,000 of restricted cash held in a principal reserve fund to repay a portion of the outstanding secured variable rate indebtedness of Avalon Clinton North and Avalon Clinton South.
In the aggregate, secured notes payable mature at various dates from March 2027 through July 2066, and are secured by certain apartment communities (with a net carrying value of $1,159,639,000 , excluding communities classified as held for sale, as of September 30, 2023).
Scheduled payments and maturities of secured notes payable and unsecured notes outstanding at September 30, 2023 were as follows (dollars in thousands):
Year | Secured notes principal payments and maturities |
Unsecured notes maturities | Stated interest rate of unsecured notes |
|||||||||||||||||
2023 | $ | $ | % | |||||||||||||||||
2024 | % | |||||||||||||||||||
2025 | % | |||||||||||||||||||
% | ||||||||||||||||||||
2026 | % | |||||||||||||||||||
% | ||||||||||||||||||||
2027 | % | |||||||||||||||||||
2028 | % | |||||||||||||||||||
% | ||||||||||||||||||||
2029 | % | |||||||||||||||||||
2030 | % | |||||||||||||||||||
2031 | % | |||||||||||||||||||
2032 | % | |||||||||||||||||||
Thereafter | % | |||||||||||||||||||
% | ||||||||||||||||||||
% | ||||||||||||||||||||
% | ||||||||||||||||||||
$ | $ |
11
4. Equity
The following summarizes the changes in equity for the nine months ended September 30, 2023 and 2022 (dollars in thousands):
Common stock |
Additional paid-in capital |
Accumulated earnings less dividends |
Accumulated other comprehensive income (loss) |
Total stockholder's equity | Noncontrolling interests | Total equity |
|||||||||||||||||||||||||||||||||||
Balance at December 31, 2022 | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
Net income attributable to common stockholders | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Loss on cash flow hedges, net | — | — | — | ( |
( |
— | ( |
||||||||||||||||||||||||||||||||||
Cash flow hedge losses reclassified to earnings | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Change in redemption value of redeemable noncontrolling interest | — | — | ( |
— | ( |
— | ( |
||||||||||||||||||||||||||||||||||
Dividends declared to common stockholders ($ |
— | — | ( |
— | ( |
— | ( |
||||||||||||||||||||||||||||||||||
Issuance of common stock, net of withholdings | ( |
— | ( |
— | ( |
||||||||||||||||||||||||||||||||||||
Repurchase of common stock, including repurchase costs | — | ( |
( |
— | ( |
— | ( |
||||||||||||||||||||||||||||||||||
Amortization of deferred compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Balance at March 31, 2023 | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
Net income attributable to common stockholders | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Gain on cash flow hedges, net | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Cash flow hedge losses reclassified to earnings | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Change in redemption value of redeemable noncontrolling interest | — | — | ( |
— | ( |
— | ( |
||||||||||||||||||||||||||||||||||
Dividends declared to common stockholders ($ |
— | — | ( |
— | ( |
— | ( |
||||||||||||||||||||||||||||||||||
Issuance of common stock, net of withholdings | — | — | |||||||||||||||||||||||||||||||||||||||
Repurchase of common stock, including repurchase costs | — | ( |
( |
— | ( |
— | ( |
||||||||||||||||||||||||||||||||||
Amortization of deferred compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Balance at June 30, 2023 | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
Net income attributable to common stockholders | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Gain on cash flow hedges, net | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Cash flow hedge losses reclassified to earnings | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Change in redemption value of redeemable noncontrolling interest | — | — | ( |
— | ( |
— | ( |
||||||||||||||||||||||||||||||||||
Dividends declared to common stockholders ($ |
— | — | ( |
— | ( |
— | ( |
||||||||||||||||||||||||||||||||||
Issuance of common stock, net of withholdings | ( |
( |
— | ( |
— | ( |
|||||||||||||||||||||||||||||||||||
Amortization of deferred compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Balance at September 30, 2023 | $ | $ | $ | $ | $ | $ | $ |
12
Common stock |
Additional paid-in capital |
Accumulated earnings less dividends |
Accumulated other comprehensive income (loss) |
Total stockholder's equity | Noncontrolling interests | Total equity |
|||||||||||||||||||||||||||||||||||
Balance at December 31, 2021 | $ | $ | $ | $ | ( |
$ | $ | $ | |||||||||||||||||||||||||||||||||
Net income attributable to common stockholders | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Gain on cash flow hedges, net | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Cash flow hedge losses reclassified to earnings | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Change in redemption value of redeemable noncontrolling interest | — | — | ( |
— | ( |
— | ( |
||||||||||||||||||||||||||||||||||
Noncontrolling interest distribution and income allocation | — | — | — | — | — | ( |
( |
||||||||||||||||||||||||||||||||||
Dividends declared to common stockholders ($ |
— | — | ( |
— | ( |
— | ( |
||||||||||||||||||||||||||||||||||
Issuance of common stock, net of withholdings | ( |
( |
— | ( |
— | ( |
|||||||||||||||||||||||||||||||||||
Amortization of deferred compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Balance at March 31, 2022 | $ | $ | $ | $ | ( |
$ | $ | $ | |||||||||||||||||||||||||||||||||
Net income attributable to common stockholders | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Gain on cash flow hedges, net | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Cash flow hedge losses reclassified to earnings | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Change in redemption value of redeemable noncontrolling interest | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Noncontrolling interest distribution and income allocation | — | — | — | — | — | ( |
( |
||||||||||||||||||||||||||||||||||
Dividends declared to common stockholders ($ |
— | — | ( |
— | ( |
— | ( |
||||||||||||||||||||||||||||||||||
Issuance of common stock, net of withholdings | — | — | — | ||||||||||||||||||||||||||||||||||||||
Amortization of deferred compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Balance at June 30, 2022 | $ | $ | $ | $ | ( |
$ | $ | $ | |||||||||||||||||||||||||||||||||
Net income attributable to common stockholders | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Gain on cash flow hedges, net | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Cash flow hedge losses reclassified to earnings | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Change in redemption value of redeemable noncontrolling interest | — | — | ( |
— | ( |
— | ( |
||||||||||||||||||||||||||||||||||
Noncontrolling interest distribution and income allocation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Dividends declared to common stockholders ($ |
— | — | ( |
— | ( |
— | ( |
||||||||||||||||||||||||||||||||||
Issuance of common stock, net of withholdings | — | ( |
— | ( |
— | ( |
|||||||||||||||||||||||||||||||||||
Amortization of deferred compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Balance at September 30, 2022 | $ | $ | $ | $ | $ | $ | $ |
As of September 30, 2023 and December 31, 2022, 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.
13
During the nine months ended September 30, 2023, the Company:
i.issued 5,773 shares of common stock in connection with stock options exercised;
ii.issued 2,577 shares of common stock through the Company's dividend reinvestment plan;
iii.issued 152,894 shares of common stock in connection with restricted stock grants and the conversion of performance awards to shares of common stock;
iv.issued 2,000,000 shares of common stock in the settlement of the forward contracts, as discussed below;
v.issued 12,288 shares of common stock through the Employee Stock Purchase Plan;
vi.withheld 62,482 shares of common stock to satisfy employees' tax withholding and other liabilities;
vii.canceled 2,119 shares of restricted common stock upon forfeiture; and
viii.repurchased 11,800 shares of common stock through the Stock Repurchase Program (as defined below).
Deferred compensation granted under the Company's Second Amended and Restated 2009 Equity Incentive Plan (the "2009 Plan") for the nine months ended September 30, 2023 does not impact the Company's Condensed Consolidated Financial Statements until recognized as compensation cost.
The Company has a continuous equity program ("CEP") 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. During the three and nine months ended September 30, 2023, the Company had no sales under this program. As of September 30, 2023, the Company had $705,961,000 remaining authorized for issuance under the CEP.
In addition to the CEP, during the nine months ended September 30, 2023, the Company settled the outstanding forward contracts entered into in April 2022 (the "Equity Forward"), issuing 2,000,000 shares of common stock, net of offering fees and discounts for $491,912,000 or $245.96 per share.
The Company has a stock repurchase program under which the Company may acquire shares of its common stock in open market or negotiated transactions up to an aggregate purchase price of $500,000,000 (the "Stock Repurchase Program"). During the nine months ended September 30, 2023, the Company repurchased 11,800 shares of common stock at an average price of $161.96 per share. As of September 30, 2023, the Company had $314,237,000 remaining authorized for purchase under this program.
5. Investments
Unconsolidated Investments
As of September 30, 2023, the Company had investments in five unconsolidated entities with real estate entities holdings, with ownership interest percentages ranging from 20.0 % to 50.0 %, coupled with other unconsolidated investments including property technology and environmentally focused companies and investment management funds. For one of the investments which is under development and in which the Company has an investment of 25.0 %, the Company has guaranteed a construction loan on behalf of the venture, which had an outstanding balance of $127,803,000 as of September 30, 2023. Any amounts under the guarantee of this construction loan are obligations of the venture partners in proportion to their ownership interest. The Company accounts for its unconsolidated investments under the equity method of accounting or under the measurement alternative with the carrying amount of the investment adjusted to fair value when there is an observable transaction for the same or similar investment of the same issuer indicating a change in fair value. The significant accounting policies of the Company's unconsolidated investments are consistent with those of the Company in all material respects. Certain of these investments are subject to various buy‑sell provisions or other rights which are customary in real estate joint venture agreements. The Company and its partners in these entities may initiate these provisions to either sell the Company's interest or acquire the interest from the Company's partner.
The Company also has an equity interest of 28.6 % in the Archstone Multifamily Partners AC LP (the "U.S. Fund") and upon achievement of a threshold return, which has been met, the Company has a right to incentive distributions for its promoted interest based on the returns earned by the U.S. Fund. The Company recognized income of $424,000 and $