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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, 2019
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) 

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.
 
Large accelerated filer
 
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 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:

139,661,795 shares of common stock, par value $0.01 per share, were outstanding as of October 31, 2019.



AVALONBAY COMMUNITIES, INC.
FORM 10-Q
INDEX
 
 
PAGE
PART I - FINANCIAL INFORMATION
 
 
 
ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
 
 
1
 
 
 
 
2
 
 
 
 
3
 
 
 
 
5
 
 
28
 
 
53
 
 
53
 
 
 
 
 
53
 
 
53
 
 
54
 
 
54
 
 
54
 
 
54
 
 
55
 
 
56







AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
 
9/30/2019
 
12/31/2018
 
(unaudited)
 
 
ASSETS
 

 
 

Real estate:
 

 
 

Land and improvements
$
4,185,720

 
$
4,077,090

Buildings and improvements
16,256,164

 
15,651,035

Furniture, fixtures and equipment
795,370

 
696,200

 
21,237,254

 
20,424,325

Less accumulated depreciation
(5,003,393
)
 
(4,601,447
)
Net operating real estate
16,233,861

 
15,822,878

Construction in progress, including land
1,411,823

 
1,768,132

Land held for development
20,095

 
84,712

For-sale condominium inventory
453,686

 

Real estate assets held for sale, net

 
55,208

Total real estate, net
18,119,465

 
17,730,930

 
 
 
 
Cash and cash equivalents
246,425

 
91,659

Cash in escrow
88,329

 
126,205

Resident security deposits
34,172

 
31,816

Investments in unconsolidated real estate entities
207,204

 
217,432

Deferred development costs
74,388

 
47,443

Prepaid expenses and other assets
169,263

 
134,715

Right of use lease assets
121,221

 

Total assets
$
19,060,467

 
$
18,380,200

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Unsecured notes, net
$
6,356,890

 
$
5,905,993

Variable rate unsecured credit facility

 

Mortgage notes payable, net
1,004,389

 
1,134,270

Dividends payable
213,651

 
204,191

Payables for construction
93,593

 
96,983

Accrued expenses and other liabilities
304,676

 
297,700

Lease liabilities
136,705

 

Accrued interest payable
70,174

 
46,648

Resident security deposits
61,961

 
58,415

Liabilities related to real estate assets held for sale

 
150

Total liabilities
8,242,039

 
7,744,350

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Redeemable noncontrolling interests
3,355

 
3,244

 
 
 
 
Equity:
 

 
 

Preferred stock, $0.01 par value; $25 liquidation preference; 50,000,000 shares authorized at September 30, 2019 and December 31, 2018; zero shares issued and outstanding at September 30, 2019 and December 31, 2018

 

Common stock, $0.01 par value; 280,000,000 shares authorized at September 30, 2019 and December 31, 2018; 139,660,299 and 138,508,424 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively
1,397

 
1,385

Additional paid-in capital
10,528,787

 
10,306,588

Accumulated earnings less dividends
329,323

 
350,777

Accumulated other comprehensive loss
(45,082
)
 
(26,144
)
Total stockholders' equity
10,814,425

 
10,632,606

Noncontrolling interests
648

 

Total equity
10,815,073

 
10,632,606

Total liabilities and equity
$
19,060,467

 
$
18,380,200

 
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
 
For the nine months ended
 
9/30/2019
 
9/30/2018
 
9/30/2019
 
9/30/2018
Revenue:
 

 
 

 
 
 
 
Rental and other income
$
586,382

 
$
575,070

 
$
1,727,576

 
$
1,703,263

Management, development and other fees
1,231

 
912

 
3,484

 
2,752

Total revenue
587,613

 
575,982

 
1,731,060

 
1,706,015

 
 
 
 
 
 
 
 
Expenses:
 

 
 

 
 
 
 
Operating expenses, excluding property taxes
133,445

 
132,237

 
389,825

 
394,332

Property taxes
64,374

 
61,230

 
187,890

 
181,120

Interest expense, net
51,493

 
54,097

 
149,395

 
165,795

Loss on extinguishment of debt, net
93

 
1,678

 
602

 
2,717

Depreciation expense
165,463

 
156,538

 
490,213

 
472,282

General and administrative expense
12,769

 
14,744

 
45,440

 
44,384

Expensed transaction, development and other pursuit costs, net of recoveries
175

 
523

 
2,562

 
2,212

Casualty and impairment gain, net

 
(554
)
 

 
(612
)
Total expenses
427,812

 
420,493

 
1,265,927

 
1,262,230

 
 
 
 
 
 
 
 
Equity in income of unconsolidated real estate entities
1,643

 
10,031

 
780

 
12,560

Gain on sale of communities
130,484

 
27,243

 
165,849

 
132,444

Gain on other real estate transactions, net
73

 
12

 
374

 
335

For-sale condominium marketing and administrative costs
(1,108
)
 
(339
)
 
(2,526
)
 
(497
)
 
 
 
 
 
 
 
 
Income before income taxes
290,893

 
192,436

 
629,610

 
588,627

Income tax expense
11,184

 
29

 
11,178

 
87

 
 
 
 
 
 
 
 
Net income
279,709

 
192,407

 
618,432

 
588,540

Net (income) loss attributable to noncontrolling interests
(32
)
 
79

 
(108
)
 
251

 
 
 
 
 
 
 
 
Net income attributable to common stockholders
$
279,677

 
$
192,486

 
$
618,324

 
$
588,791

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 

 
 

 
 
 
 
(Loss) gain on cash flow hedges
(13,644
)
 

 
(23,763
)
 
11,499

Cash flow hedge losses reclassified to earnings
1,746

 
1,466

 
4,825

 
4,679

Comprehensive income
$
267,779

 
$
193,952

 
$
599,386

 
$
604,969

 
 
 
 
 
 
 
 
Earnings per common share - basic:
 

 
 

 
 
 
 
Net income attributable to common stockholders
$
2.00

 
$
1.39

 
$
4.44

 
$
4.26

 
 
 
 
 
 
 
 
Earnings per common share - diluted:
 

 
 

 
 
 
 
Net income attributable to common stockholders
$
2.00

 
$
1.39

 
$
4.43

 
$
4.26


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
 
9/30/2019
 
9/30/2018
Cash flows from operating activities:
 
 
 
Net income
$
618,432

 
$
588,540

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation expense
490,213

 
472,282

Amortization of deferred financing costs
5,458

 
6,066

Amortization of debt discount
1,186

 
1,259

Loss on extinguishment of debt, net
602

 
2,717

Amortization of stock-based compensation
20,810

 
15,617

Equity in loss of, and return on, unconsolidated real estate entities and noncontrolling interests, net of eliminations
10,787

 
4,514

Casualty and impairment gain, net

 
(58
)
Abandonment of development pursuits
1,080

 
725

Cash flow hedge losses reclassified to earnings
4,825

 
4,679

Gain on sale of real estate assets
(166,223
)
 
(141,415
)
Decrease in resident security deposits, prepaid expenses and other assets
(29,804
)
 
(4,509
)
Increase in accrued expenses, other liabilities and accrued interest payable
57,556

 
30,140

Net cash provided by operating activities
1,014,922

 
980,557

 
 
 
 
Cash flows from investing activities:
 
 
 
Development/redevelopment of real estate assets including land acquisitions and deferred development costs
(791,551
)
 
(864,550
)
Acquisition of real estate assets, including partnership interest
(286,804
)
 
(84,088
)
Capital expenditures - existing real estate assets
(92,825
)
 
(59,950
)
Capital expenditures - non-real estate assets
(4,223
)
 
(2,142
)
(Decrease) increase in payables for construction
(3,390
)
 
6,946

Proceeds from sale of real estate, net of selling costs
421,735

 
466,187

Insurance proceeds for property damage claims

 
58

Mortgage note receivable lending
(565
)
 
(2,880
)
Mortgage note receivable payments
978

 
50,929

Distributions from unconsolidated real estate entities
694

 
2,013

Investments in unconsolidated real estate entities
(1,253
)
 
(7,979
)
Net cash used in investing activities
(757,204
)
 
(495,456
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Issuance of common stock, net
207,789

 
1,224

Dividends paid
(627,467
)
 
(602,152
)
Net borrowings under unsecured credit facility

 
56,000

Issuance of mortgage notes payable
30,250

 

Repayments of mortgage notes payable, including prepayment penalties
(160,709
)
 
(157,164
)
Issuance of unsecured notes
449,804

 
299,442

Payment of deferred financing costs
(10,910
)
 
(3,347
)
(Payment) receipt for termination of forward interest rate swaps
(12,309
)
 
12,598

Contribution from noncontrolling interest
455

 

Payments related to tax withholding for share-based compensation
(15,961
)
 
(10,543
)
Distributions to DownREIT partnership unitholders
(34
)
 
(33
)
Distributions to joint venture and profit-sharing partners
(336
)
 
(321
)
Preferred interest obligation redemption and dividends
(1,400
)
 
(1,120
)
Net cash used in financing activities
(140,828
)
 
(405,416
)
 
 
 
 
Net increase in cash and cash equivalents
116,890

 
79,685

 
 
 
 
Cash and cash equivalents and restricted cash, beginning of period
217,864

 
201,906

Cash and cash equivalents and restricted cash, end of period
$
334,754

 
$
281,591

 
 
 
 
Cash paid during the period for interest, net of amount capitalized
$
114,400

 
$
130,361

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):
 
 
For the nine months ended
 
 
9/30/2019
 
9/30/2018
Cash and cash equivalents
 
$
246,425

 
$
55,887

Cash in escrow
 
88,329

 
225,704

Cash, cash equivalents and restricted cash reported in the Condensed Consolidated Statements of Cash Flows
 
$
334,754

 
$
281,591


Supplemental disclosures of non-cash investing and financing activities:

During the nine months ended September 30, 2019:

As described in Note 4, "Equity," 150,359 shares of common stock were issued 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; 1,594 shares valued at $314,000 were issued through the Company's dividend reinvestment plan; 83,602 shares valued at $15,961,000 were withheld to satisfy employees' tax withholding and other liabilities; and 1,730 restricted shares with an aggregate value of $305,000 previously issued in connection with employee compensation were canceled upon forfeiture.

Common stock dividends declared but not paid totaled $213,070,000.

The Company recorded an increase of $382,000 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 11, "Fair Value."

The Company recorded an increase to other liabilities of $17,824,000 and a corresponding adjustment to accumulated other comprehensive loss, and reclassified $4,825,000 of cash flow hedge losses from other comprehensive loss to interest expense, net, to record the impact of the Company's derivative and hedge accounting activity.

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. For further discussion on the adoption of the guidance, see Note 1, "Organization, Basis of Presentation and Significant Accounting Policies."

During the nine months ended September 30, 2018:

The Company issued 187,010 shares of common stock 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 98,713 shares valued at $15,950,000 were issued in connection with new stock grants; 1,713 shares valued at $290,000 were issued through the Company's dividend reinvestment plan; 67,963 shares valued at $10,543,000 were withheld to satisfy employees' tax withholding and other liabilities; and 4,622 restricted shares with an aggregate value of $679,000 previously issued in connection with employee compensation were canceled upon forfeiture.

Common stock dividends declared but not paid totaled $203,624,000.

The Company recorded an increase of $626,000 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 reclassified $4,679,000 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.



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 (the "Code"). The Company focuses on the development, redevelopment, acquisition, ownership and operation of multifamily communities primarily in New England, the New York/New Jersey metro area, the Mid-Atlantic, the Pacific Northwest, and Northern and Southern California.

At September 30, 2019, the Company owned or held a direct or indirect ownership interest in 272 operating apartment communities containing 78,947 apartment homes in 11 states and the District of Columbia, of which five communities containing 1,818 apartment homes were under redevelopment. In addition, the Company owned or held a direct or indirect ownership interest in 20 communities under development that are expected to contain an aggregate of 6,700 apartment homes when completed, as well as a mixed-use project being developed, which contains 172 for-sale residential condominiums and 67,000 square feet of retail space. 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 31 communities that, if developed as expected, will contain an estimated 9,994 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 2018 Annual Report on Form 10-K. The results of operations for the three and nine months ended September 30, 2019 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):

5


 
For the three months ended
 
For the nine months ended
 
9/30/2019
 
9/30/2018
 
9/30/2019
 
9/30/2018
Basic and diluted shares outstanding
 

 
 

 
 
 
 
Weighted average common shares - basic
139,340,142

 
137,848,788

 
138,931,955

 
137,818,076

Weighted average DownREIT units outstanding
7,500

 
7,500

 
7,500

 
7,500

Effect of dilutive securities
505,032

 
466,776

 
498,609

 
405,148

Weighted average common shares - diluted
139,852,674

 
138,323,064

 
139,438,064

 
138,230,724

 
 
 
 
 
 
 
 
Calculation of Earnings per Share - basic
 

 
 

 
 
 
 
Net income attributable to common stockholders
$
279,677

 
$
192,486

 
$
618,324

 
$
588,791

Net income allocated to unvested restricted shares
(704
)
 
(555
)
 
(1,655
)
 
(1,722
)
Net income attributable to common stockholders, adjusted
$
278,973

 
$
191,931

 
$
616,669

 
$
587,069

 
 
 
 
 
 
 
 
Weighted average common shares - basic
139,340,142

 
137,848,788

 
138,931,955

 
137,818,076

 
 
 
 
 
 
 
 
Earnings per common share - basic
$
2.00

 
$
1.39

 
$
4.44

 
$
4.26

 
 
 
 
 
 
 
 
Calculation of Earnings per Share - diluted
 

 
 

 
 
 
 
Net income attributable to common stockholders
$
279,677

 
$
192,486

 
$
618,324

 
$
588,791

Add: noncontrolling interests of DownREIT unitholders in consolidated partnerships
11

 
11

 
34

 
33

Adjusted net income attributable to common stockholders
$
279,688

 
$
192,497

 
$
618,358

 
$
588,824

 
 
 
 
 
 
 
 
Weighted average common shares - diluted
139,852,674

 
138,323,064

 
139,438,064

 
138,230,724

 
 
 
 
 
 
 
 
Earnings per common share - diluted
$
2.00

 
$
1.39

 
$
4.43

 
$
4.26

 

All options to purchase shares of common stock outstanding as of September 30, 2019 and 2018 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.


6


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.

Income Taxes

Taxable income from non-REIT activities performed through taxable REIT subsidiaries ("TRS") is subject to federal, state and local income taxes. During the three and nine months ended September 30, 2019, the Company recognized income tax expense of $11,184,000 and $11,178,000, respectively, related to its activities primarily through its TRS. The income tax expense was primarily due to (i) a deferred tax liability of $6,645,000 for the Company's for-sale development, The Park Loggia (previously referred to as 15 West 61st Street), and (ii) additional expense of $4,539,000, associated with the disposition of two wholly-owned operating communities as well as deferred tax liabilities related to our sustainability initiatives, which were transacted through the Company’s TRS. See Note 5, "Investments in Real Estate Entities" for further discussion of The Park Loggia development, and Note 6, "Real Estate Disposition Activities," for further discussion of the disposition activity.

For-Sale Condominium Inventory

In conjunction with the Company’s election to proceed with the sale of the residential condominiums of The Park Loggia development, the Company reclassified the associated real estate to for-sale condominium inventory based on the condominiums' relative fair value to the overall development, as presented on the accompanying Condensed Consolidated Balance Sheets. The Company presents for-sale condominium inventory at historical cost and evaluates the condominiums for impairment when potential indicators exist, as further discussed in Note 5, "Investments in Real Estate Entities." 

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.

The Company adopted ASU 2016-02, Leases, as of January 1, 2019 using the prospective adoption approach, applying the provisions of the new standard to existing leases as of the date of adoption.


7


Lessee Considerations

The Company assessed 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 identified leases as contracts in which it has the right to direct the use of the property and obtain all of the economic benefits.

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. When evaluating what payments to include in the measurement of the lease liability, the Company included lease payments that depend on an index or rate only. Variable lease payments that are not based on an index or rate including changes in CPI, percentage rents based on total sales, fair market value resets and others 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 considered whether these options are reasonably certain to be exercised, taking into account physical improvements, installation or relocation costs, rent during the option periods and the cost of returning the assets to a contractually specified condition. The Company only factored the impact of 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 using the Company’s actual borrowing rates as well as indicative market pricing for longer term rates. The Company determined the discount rates on a lease by lease basis using the incremental borrowing rate and taking into consideration the remaining term of each of the lease agreements.

Lessor Considerations

The Company evaluated leases in which it is the lessor, which are composed of residential and retail leases at its apartment communities. The accounting model for lessors did not significantly change as a result of ASU 2016-02, with the impacts primarily related to the accounting for sales-type and direct financing leases. The Company evaluated its residential and retail leases determining that they continue to be considered 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. The Company’s residential lease term 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, the option period rent is reasonably certain to be less than the base period rent and therefore exercised by the lessee.

Additionally, for the Company’s residential and retail leases, which are comprised of the 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) that all components of its operating leases share the same timing and pattern of transfer.

The Company changed its presentation of charges for uncollectible lease revenue associated with its residential and retail leasing activity, reflecting those amounts as a component of rental and other income on the accompanying Condensed Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2019. However, in accordance with its prospective adoption of the lease standard, the Company did not adjust the prior year period presentation of charges for uncollectible lease revenue associated with its residential and retail leasing activity as a component of operating expenses, excluding property taxes, on the on the accompanying Condensed Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2018.

Implementation Considerations and Impact

As discussed above, the Company used the prospective adoption approach for the standard. Additionally, in conjunction with the implementation of the standard, the Company elected to apply certain lessee practical expedients allowed under the standard including:

not reassessing (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) the accounting for initial direct costs for any existing leases;
not evaluating short term leases;
not assessing whether existing land easements are, or contain leases; and
making an accounting policy election by class of underlying asset, to not separate non-lease components from lease components and instead to account for each separate lease and non-lease component as a single lease component.


8


Also in conjunction with the implementation of the standard, the Company elected to apply the following practical expedients for lessors, making an accounting policy election:

by class of underlying asset for retail and residential leases, to not separate non-lease components from lease components and instead to account for each separate lease and non-lease component as a single lease component;
to exclude costs paid by lessees directly to third parties on behalf of the Company; and
to exclude sales taxes and other similar taxes assessed by a government authority and collected by the Company from the lessee.

Upon adoption, the Company recorded lease liabilities and offsetting right of use lease assets for its ground and office leases of $122,276,000. In addition, the Company made certain other reclassifications in the current year period of lease related amounts on its Condensed Consolidated Balance Sheet to conform to the presentation under the new standard. The adoption of the standard did not have a material impact on the accompanying Condensed Consolidated Statements of Comprehensive Income.

Revenue and Gain Recognition

The majority of the Company’s revenue is derived from residential and retail rental income and other lease income, which are accounted for under ASU 2016-02, Leases, discussed above. The Company's revenue streams that are not accounted for under ASU 2016-02 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.

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.

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. 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. In addition, a gain or loss recognized on the sale of a nonfinancial asset to an unconsolidated entity is recognized at 100%, and not the Company’s proportionate ownership percentage.

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 nine months ended September 30, 2019 and 2018. Segment information for total revenue has been adjusted to exclude the real estate assets that were sold from January 1, 2018 through September 30, 2019, or otherwise qualify as held for sale as of September 30, 2019, as described in Note 6, "Real Estate Disposition Activities." Additionally, as discussed above, the Company changed its presentation of charges for uncollectible lease revenue for the three and nine months ended September 30, 2019, including it as an adjustment to revenue and not as a component of operating expenses, as it is presented for prior periods on the accompanying Condensed Consolidated Statement of Comprehensive Income. In order to provide comparability between periods presented in the Company's segment reporting, the Company has included charges for uncollectible lease revenue for its segment results as a component of revenue for all periods presented. See Note 8, "Segment Reporting," for further discussion (dollars in thousands):

9


 
 
For the three months ended
 
 
Established
Communities
 
Other
Stabilized
Communities
 
Development/
Redevelopment
Communities
 
Non-
allocated (1)
 
Total
For the period ended September 30, 2019
 
 
 
 
 
 
 
 
 
 
Management, development and other fees
 
$

 
$

 
$

 
$
1,231

 
$
1,231

Rental and non-rental related income (2)
 
1,520

 
638

 
234

 

 
2,392

Total non-lease revenue (3)
 
1,520

 
638

 
234

 
1,231

 
3,623

 
 
 
 
 
 
 
 
 
 
 
Lease income (4)
 
459,713

 
75,782

 
46,216

 

 
581,711

Business interruption insurance proceeds
 

 
307

 

 

 
307

 
 
 
 
 
 
 
 
 
 
 
Total revenue
 
$
461,233

 
$
76,727


$
46,450


$
1,231


$
585,641

 
 
 
 
 
 
 
 
 
 
 
For the period ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
Management, development and other fees
 
$

 
$

 
$

 
$
912

 
$
912

Rental and non-rental related income (2)
 
1,160

 
610

 
78

 

 
1,848

Total non-lease revenue (3)
 
1,160

 
610

 
78

 
912

 
2,760

 
 
 
 
 
 
 
 
 
 
 
Lease income (4)
 
447,892

 
60,838

 
33,145

 

 
541,875

 
 
 
 
 
 
 
 
 
 
 
Total revenue
 
$
449,052

 
$
61,448

 
$
33,223

 
$
912

 
$
544,635

 
 
For the nine months ended
 
 
Established
Communities
 
Other
Stabilized
Communities
 
Development/
Redevelopment
Communities
 
Non-
allocated (1)
 
Total
For the period ended September 30, 2019
 
 
 
 
 
 
 
 
 
 
Management, development and other fees
 
$

 
$

 
$

 
$
3,484

 
$
3,484

Rental and non-rental related income (2)
 
4,890

 
1,656

 
566

 

 
7,112

Total non-lease revenue (3)
 
4,890

 
1,656

 
566

 
3,484

 
10,596

 
 
 
 
 
 
 
 
 
 
 
Lease income (4)
 
1,364,232

 
217,954

 
121,527

 

 
1,703,713

Business interruption insurance proceeds
 
404

 
510

 

 

 
914

 
 
 
 
 
 
 
 
 
 
 
Total revenue
 
$
1,369,526

 
$
220,120

 
$
122,093

 
$
3,484

 
$
1,715,223

 
 
 
 
 
 
 
 
 
 
 
For the period ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
Management, development and other fees
 
$

 
$

 
$

 
$
2,752

 
$
2,752

Rental and non-rental related income (2)
 
3,379

 
1,506

 
226

 

 
5,111

Total non-lease revenue (3)
 
3,379

 
1,506

 
226

 
2,752

 
7,863

 
 
 
 
 
 
 
 
 
 
 
Lease income (4)
 
1,324,445

 
169,960

 
96,407

 

 
1,590,812

 
 
 
 
 
 
 
 
 
 
 
Total revenue
 
$
1,327,824

 
$
171,466

 
$
96,633

 
$
2,752

 
$
1,598,675

__________________________________

(1)
Revenue represents third-party property management, asset management, developer fees and miscellaneous income which are not allocated to a reportable segment.
(2)
Amounts include revenue streams related to 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 accounted for under ASU 2016-02.

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 September 30, 2019.


10


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 $15,443,000 and $16,277,000 for the three months ended September 30, 2019 and 2018, respectively, and $50,159,000 and $44,008,000 for the nine months ended September 30, 2019 and 2018, 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 September 30, 2019 and December 31, 2018 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 September 30, 2019 and December 31, 2018, as shown in the accompanying Condensed Consolidated Balance Sheets (dollars in thousands) (see Note 6, "Real Estate Disposition Activities").
 
9/30/2019
 
12/31/2018
 
 
 
 
Fixed rate unsecured notes (1)
$
5,850,000

 
$
5,400,000

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)
546,082

 
533,215

Variable rate mortgage notes payable - conventional and tax-exempt (2)
476,150

 
619,140

Total mortgage notes payable, unsecured notes and Term Loans
7,422,232

 
7,102,355

Credit Facility

 

Total mortgage notes payable, unsecured notes, Term Loans and Credit Facility
$
7,422,232

 
$
7,102,355

_____________________________________

(1)
Balances at September 30, 2019 and December 31, 2018 exclude $8,977 and $9,879, respectively, of debt discount, and $34,133 and $34,128, respectively, of deferred financing costs, as reflected in unsecured notes, net on the accompanying Condensed Consolidated Balance Sheets.
(2)
Balances at September 30, 2019 and December 31, 2018 exclude $14,501 and $14,590, respectively, of debt discount, and $3,342 and $3,495, respectively, of deferred financing costs, as reflected in mortgage notes payable on the accompanying Condensed Consolidated Balance Sheets.

In addition to the Credit Facility discussed in this Form 10-Q, the following debt activity occurred during the nine months ended September 30, 2019:

In February 2019, the Company amended and restated the $250,000,000 variable rate unsecured term loan that it originally entered into in February 2017, of which $100,000,000 matures in February 2022 with stated pricing of LIBOR plus 0.90%, which remained the same, and $150,000,000 matures in February 2024 with stated pricing of LIBOR plus 0.85% that decreased from LIBOR plus 1.50%.

In April 2019, the Company repaid $13,363,000 of 2.99% fixed rate debt and $33,854,000 of variable rate debt secured by Avalon Natick at par on its maturity date.

In May 2019, the Company repaid $7,635,000 principal amount of variable rate debt secured by Eaves Mission Viejo at par in advance of its scheduled maturity date. The Company utilized $3,706,000 of restricted cash held in a principal reserve fund to repay a portion of the outstanding indebtedness.

In May 2019, the Company repaid $20,800,000 principal amount of variable rate debt secured by AVA Nob Hill at par in advance of its scheduled maturity date. The Company utilized $10,584,000 of restricted cash held in a principal reserve fund to repay a portion of the outstanding indebtedness.

In May 2019, the Company repaid $38,800,000 principal amount of variable rate debt secured by Avalon Campbell at par in advance of its scheduled maturity date. The Company utilized $22,622,000 of restricted cash held in a principal reserve fund to repay a portion of the outstanding indebtedness.


11


In May 2019, the Company repaid $17,600,000 principal amount of variable rate debt secured by Eaves Pacifica at par in advance of its scheduled maturity date. The Company utilized $10,263,000 of restricted cash held in a principal reserve fund to repay a portion of the outstanding indebtedness.

In May 2019, the Company issued $450,000,000 principal amount of unsecured notes in a public offering under its existing shelf registration statement for net proceeds of approximately $446,877,000. The notes mature in June 2029 and were issued at a 3.30% interest rate. The effective interest rate of the notes is 3.66%, including the impact of an interest rate hedge and offering costs.

In August 2019, as part of the tax-deferred exchange associated with the disposition of Archstone Lexington and acquisition of Avalon Cerritos, the Company (i) repaid $21,700,000 principal amount of variable rate debt secured by Archstone Lexington at par in advance of its scheduled maturity date and (ii) entered into a $30,250,000 fixed rate note secured by Avalon Cerritos, with a contractual interest rate of 3.26%, maturing in August 2029. See Note 6, "Real Estate Disposition Activities," and Note 5, "Investments in Real Estate Entities," for further discussion of the disposition and acquisition activity.

In February 2019, the Company entered into a $1,750,000,000 Fifth Amended and Restated Revolving Loan Agreement (the “Credit Facility”) with a syndicate of banks, which replaces its prior $1,500,000,000 credit facility dated as of January 14, 2016. The term of the Credit Facility ends on February 28, 2024.

The Credit Facility bears interest at varying levels based on (i) the London Interbank Offered Rate (“LIBOR”) applicable to the period of borrowing for a particular draw of funds from the facility (e.g., one month to maturity, three months to maturity, etc.) and (ii) the rating levels issued for our unsecured notes. The current stated pricing for drawn borrowings is LIBOR plus 0.775% per annum (2.79% at September 30, 2019), assuming a one month borrowing rate. The stated spread over LIBOR can vary from LIBOR plus 0.70% to LIBOR plus 1.45% based upon the rating of the Company's unsecured notes. The Credit Facility also provides a competitive bid option that is available for borrowings of up to 65% of the Credit Facility amount. This option allows banks that are part of the lender consortium to bid to provide the Company loans at a rate that is lower than the stated pricing provided by the unsecured credit facility. The competitive bid option may result in lower pricing than the stated rate if market conditions allow. The annual facility fee for the Credit Facility remained 0.125%, resulting in a fee of $2,188,000 annually based on the $1,750,000,000 facility size and based on the Company's current credit rating.

The Company had no borrowings outstanding under the Credit Facility as of September 30, 2019 and December 31, 2018. The Company had $17,813,000 and $39,810,000 outstanding in letters of credit that reduced the borrowing capacity as of September 30, 2019 and December 31, 2018, respectively. In addition, the Company had $18,964,000 outstanding in additional letters of credit as of September 30, 2019.

In the aggregate, secured notes payable mature at various dates from November 2019 through July 2066, and are secured by certain apartment communities (with a net carrying value of $1,693,511,000, excluding communities classified as held for sale, as of September 30, 2019).

The weighted average interest rate of the Company's fixed rate secured notes payable (conventional and tax-exempt) was both 3.8% at September 30, 2019 and December 31, 2018, 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 3.2% and 3.4% at September 30, 2019 and December 31, 2018, respectively.

Scheduled payments and maturities of secured notes payable and unsecured notes outstanding at September 30, 2019 are as follows (dollars in thousands):

12


Year
 
Secured notes
principal payments
 
Secured notes maturities
 
Unsecured notes and Term Loans maturities
 
Stated interest rate of unsecured notes and Term Loans
2019
 
975

 
65,886

 

 
N/A

2020
 
8,782

 
118,729

 
400,000

 
3.625
%
2021
 
9,304

 
27,844

 
250,000

 
3.950
%
 
 
 
 
 
 
300,000

 
LIBOR + 0.43%

2022
 
9,918

 

 
450,000

 
2.950
%
 
 
 
 
 
 
100,000

 
LIBOR + 0.90%

2023
 
10,739

 

 
350,000

 
4.200
%
 
 
 
 
 
 
250,000

 
2.850
%
2024
 
11,577

 

 
300,000

 
3.500
%
 
 
 
 
 
 
150,000

 
LIBOR + 0.85%

2025
 
12,508

 

 
525,000

 
3.450
%
 
 
 
 
 
 
300,000

 
3.500
%
2026
 
13,545

 

 
475,000

 
2.950
%
 
 
 
 
 
 
300,000

 
2.900
%
2027
 
13,575

 
186,505

 
400,000

 
3.350
%
2028
 
20,607

 

 
450,000

 
3.200
%
Thereafter
 
200,904

 
310,834

 
350,000

 
3.900
%
 
 
 
 
 
 
300,000

 
4.150
%
 
 
 
 
 
 
300,000

 
4.350
%
 
 
 
 
 
 
450,000

 
3.300
%
 
 
$
312,434

 
$
709,798

 
$
6,400,000

 
 

 

The Company was in compliance at September 30, 2019 with customary financial and other covenants under the Credit Facility, the Term Loans and the Company's fixed rate unsecured notes.


13


4.  Equity

The following summarizes the changes in equity for the nine months ended September 30, 2019 (dollars in thousands):
 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
earnings
less
dividends
 
Accumulated
other
comprehensive
loss
 
Total AvalonBay stockholder's equity
 
Noncontrolling interests
 
Total
equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
$
1,385

 
$
10,306,588

 
$
350,777

 
$
(26,144
)
 
$
10,632,606

 
$

 
$
10,632,606

Net income attributable to common stockholders

 

 
170,366

 

 
170,366

 

 
170,366

Loss on cash flow hedges, net

 

 

 
(7,231
)
 
(7,231
)
 

 
(7,231
)
Cash flow hedge losses reclassified to earnings

 

 

 
1,468

 
1,468

 

 
1,468

Change in redemption value of redeemable noncontrolling interest

 

 
(224
)
 

 
(224
)
 

 
(224
)
Dividends declared to common stockholders ($1.52 per share)

 

 
(212,166
)
 

 
(212,166
)
 

 
(212,166
)
Issuance of common stock, net of withholdings
9

 
143,202

 
(1,892
)
 

 
141,319

 

 
141,319

Amortization of deferred compensation

 
7,861

 

 

 
7,861

 

 
7,861

Balance at March 31, 2019
$
1,394

 
$
10,457,651

 
$
306,861

 
$
(31,907
)
 
$
10,733,999

 
$

 
$
10,733,999

Net income attributable to common stockholders

 

 
168,281

 

 
168,281

 

 
168,281

Loss on cash flow hedges, net

 

 

 
(2,888
)
 
(2,888
)
 

 
(2,888
)
Cash flow hedge losses reclassified to earnings

 

 

 
1,611

 
1,611

 

 
1,611

Change in redemption value of redeemable noncontrolling interest

 

 
(45
)
 

 
(45
)
 

 
(45
)
Noncontrolling interest contribution

 

 

 

 

 
530

 
530

Dividends declared to common stockholders ($1.52 per share)

 

 
(212,549
)
 

 
(212,549
)
 

 
(212,549
)
Issuance of common stock, net of withholdings
3

 
50,803

 

 

 
50,806

 

 
50,806

Amortization of deferred compensation

 
10,785

 

 

 
10,785

 

 
10,785

Balance at June 30, 2019
$
1,397

 
$
10,519,239

 
$
262,548

 
$
(33,184
)
 
$
10,750,000

 
$
530

 
$
10,750,530

Net income attributable to common stockholders

 

 
279,677

 

 
279,677

 

 
279,677

Loss on cash flow hedges, net

 

 

 
(13,644
)
 
(13,644
)
 

 
(13,644
)
Cash flow hedge losses reclassified to earnings

 

 

 
1,746

 
1,746

 

 
1,746

Change in redemption value of redeemable noncontrolling interest

 

 
(113
)
 

 
(113
)
 

 
(113
)
Noncontrolling interest contribution

 

 

 

 

 
118

 
118

Dividends declared to common stockholders ($1.52 per share)

 

 
(212,526
)
 

 
(212,526
)
 

 
(212,526
)
Issuance of common stock, net of withholdings

 
(454
)
 
(263
)
 

 
(717
)
 

 
(717
)
Amortization of deferred compensation

 
10,002

 

 

 
10,002

 

 
10,002

Balance at September 30, 2019
$
1,397

 
$
10,528,787

 
$
329,323

 
$
(45,082
)
 
$
10,814,425

 
$
648

 
$
10,815,073




14


The following summarizes the changes in equity for the nine months ended September 30, 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 ($1.47 per share)

 

 
(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

Net income attributable to common stockholders

 

 
254,662

 

 
254,662

Cash flow hedge losses reclassified to earnings

 

 

 
1,455

 
1,455

Change in redemption value of redeemable noncontrolling interest

 

 
(291
)
 

 
(291
)
Dividends declared to common stockholders ($1.47 per share)

 

 
(203,472
)
 

 
(203,472
)
Issuance of common stock, net of withholdings

 
627

 
1

 

 
628

Amortization of deferred compensation

 
10,082

 

 

 
10,082

Balance at June 30, 2018
$
1,382

 
$
10,240,447

 
$
179,066

 
$
(22,707
)
 
$
10,398,188

Net income attributable to common stockholders

 

 
192,486

 

 
192,486

Cash flow hedge losses reclassified to earnings

 

 

 
1,466

 
1,466

Change in redemption value of redeemable noncontrolling interest

 

 
(272
)
 

 
(272
)
Dividends declared to common stockholders ($1.47 per share)

 

 
(203,334
)
 

 
(203,334
)
Issuance of common stock, net of withholdings

 
442

 

 

 
442

Amortization of deferred compensation

 
8,422

 

 

 
8,422

Balance at September 30, 2018
$
1,382

 
$
10,249,311

 
$
167,946

 
$
(21,241
)
 
$
10,397,398



As of September 30, 2019 and December 31, 2018, the Company's charter had authorized for issuance a total of 280,000,000 shares of common stock and 50,000,000 shares of preferred stock.

During the nine months ended September 30, 2019, the Company:

i.
issued 81,626 shares of common stock in connection with stock options exercised;
ii.
issued 1,594 common shares through the Company's dividend reinvestment plan;
iii.
issued 150,359 common shares in connection with restricted stock grants and the conversion of performance awards to restricted shares;
iv.
issued 994,634 shares under CEP IV and CEP V, as discussed below;
v.
issued 1,838 common shares in conjunction with the conversion of deferred stock awards;
vi.
withheld 83,602 common shares to satisfy employees' tax withholding and other liabilities;
vii.
issued 7,156 common shares through the Employee Stock Purchase Plan; and
viii.
canceled 1,730 common shares of restricted stock upon forfeiture.


15


Any deferred compensation related to the Company's stock option, restricted stock and performance award grants during the nine months ended September 30, 2019 is not reflected on the accompanying Condensed Consolidated Balance Sheets as of September 30, 2019, 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 was able to 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. In conjunction with CEP IV, the Company engaged sales agents who received compensation up to 2.0% of the gross sales price for shares sold.

In May 2019, the Company replaced CEP IV with a new continuous equity program ("CEP V") 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 V, the Company engaged sales agents who will receive compensation of up to 1.5% 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 1.5% of the sales prices of all borrowed shares of common stock sold. As of September 30, 2019, there was an outstanding forward sales agreement, as discussed below.

During the nine months ended September 30, 2019, the Company sold 755,054 shares at an average sales price of $198.26 per share, for net proceeds of $147,450,000 under CEP IV, and 239,580 shares at an average sales price of $208.70 per share, for net proceeds of $49,250,000 under CEP V. As of September 30, 2019 and before considering the impact of the Forward discussed below, the Company had $950,000,000 remaining authorized for issuance under CEP V.

On September 25, 2019, the Company entered into a forward contract under CEP V to sell 947,868 shares of common stock for approximate proceeds of $198,000,000, net of offering fees and discounts (the "Forward"). The sales price was established based on the stock price during intraday trading on September 25, 2019. The proceeds received by the Company will be determined on the date or dates of settlement, with adjustments during the term of the contract for the Company’s dividends as well as for a daily interest factor that varies with changes in the Overnight Bank Funding rate. The Company generally has the ability to determine the date(s) and method of settlement, subject to certain conditions and the right of the forward counterparty to accelerate settlement under certain circumstances. Settlement may be (i) physical sale of shares of our common stock for cash, (ii) net cash settlement, whereby the Company will either pay or receive the difference between the forward contract price and the weighted average market price for its common stock at the time of settlement, or (iii) net share settlement, whereby the Company will either receive or issue shares of its common stock, with the number of shares issued or received determined by the difference between the forward contract price and the weighted average market price for its common stock at the time of settlement. The forward contract price and the weighted average market price would in both cases be determined under the applicable terms of the forward contract. Under either of the net settlement provisions, the Company will pay to the counterparty either cash or shares of its common stock when the weighted average market price of its common stock at the time of settlement exceeds the forward contract price, and will receive either cash or issue shares of its common stock to the extent that the weighted average market price of its common stock at the time of settlement is less than the price under the forward contract. Settlement of the forward contract will occur on one or more dates not later than September 25, 2020.

5.  Investments in Real Estate Entities

Investments in Unconsolidated Real Estate Entities

As of September 30, 2019, the Company had investments in six unconsolidated real estate entities with ownership interest percentages ranging from 20.0% to 55.0%, excluding 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.


16


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):
 
9/30/2019
 
12/31/2018
 
(unaudited)
 
 
Assets:
 

 
 

Real estate, net
$
1,363,360

 
$
1,420,039

Other assets
199,871

 
45,142

Total assets
$
1,563,231