EDGAR 10-K Filing

Company CIK: 915912
Filing Year: 2021
Filename: 915912_10-K_2021_0000915912-21-000004.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
General
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. We develop, redevelop, acquire, own and operate 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 our expansion markets in Southeast Florida and Denver, Colorado (the "Expansion Markets"). We focus on leading metropolitan areas in these regions that we believe historically have been characterized by growing employment in high wage sectors of the economy, higher cost of home ownership and a diverse and vibrant quality of life. We believe these market characteristics have offered, and will continue in the future to offer, the opportunity for superior risk-adjusted returns over the long-term on apartment community investments relative to other markets that do not have these characteristics.
At January 31, 2021, we owned or held a direct or indirect ownership interest in:
•272 operating apartment communities containing 79,856 apartment homes in 11 states and the District of Columbia, of which 260 communities containing 76,737 apartment homes were consolidated for financial reporting purposes and 12 communities containing 3,119 apartment homes were held by unconsolidated entities in which we hold an ownership interest.
•16 wholly-owned apartment communities under development that are expected to contain an aggregate of 5,128 apartment homes when completed and two unconsolidated investments which each hold an apartment community under development and together are expected to contain an aggregate of 803 apartment homes when completed.
•The Park Loggia, which contains 172 for-sale residential condominiums, of which 73 have been sold as of January 31, 2021, and 66,000 square feet of commercial space, of which 69% has been leased as of January 31, 2021.
•Rights to develop an additional 24 communities that, if developed as expected, will contain 7,853 apartment homes.
We generally obtain ownership in an apartment community by developing a new community on either vacant land or land with improvements that we raze, or by acquiring an existing community. In selecting sites for development or acquisition, we favor locations that are near expanding employment centers and convenient to transportation, recreation areas, entertainment, shopping and dining.
Our principal financial goal is to increase long-term shareholder value through the development, redevelopment, acquisition, ownership and, when appropriate, disposition of apartment communities in our markets. To help meet this goal, we regularly (i) monitor our investment allocation by geographic market and product type, (ii) develop, redevelop and acquire interests in apartment communities in our selected markets, (iii) selectively sell apartment communities that no longer meet our long-term strategy or when opportunities are presented to realize a portion of the value created through our investment and redeploy the proceeds from those sales and (iv) maintain a capital structure that we believe is aligned with our business risks and allows us to maintain continuous access to cost-effective capital. We pursue our development, redevelopment, investment and operating activities with the purpose of Creating a Better Way to Live. Our strategic vision is to be the leading apartment company in select US markets, providing a range of distinctive living experiences that customers value. We pursue this vision by targeting what we believe are among the best markets and submarkets, leveraging our strategic capabilities in market research and consumer insight and being disciplined in our capital allocation and balance sheet management. As described in Item 2. "Communities," we operate our apartment communities under three core brands, Avalon, AVA and eaves by Avalon, and in 2020 we introduced our Kanso brand. We pursue our development and redevelopment activities primarily through in-house development and redevelopment teams, which are complemented by our in-house acquisition platform. We believe that our organizational structure, which includes dedicated development and operational teams in each of our regions, and strong culture are key differentiators, providing us with highly talented, dedicated and capable associates.
During the three years ended December 31, 2020, we:
•acquired nine apartment communities, excluding unconsolidated investments, and in 2019 we purchased our joint venture partner's interest in one operating community, obtaining a 100% ownership in that apartment community;
•disposed of 23 apartment communities, excluding unconsolidated investments and the five wholly-owned communities located in New York City that we contributed to a newly formed joint venture (the "NYC Joint Venture") in 2018, retaining a 20.0% interest in the venture;
•realized our pro rata share of the gain from the sale of four communities owned by unconsolidated real estate entities;
•completed the development of 22 apartment communities and the redevelopment of 17 apartment communities.
A more detailed description of our unconsolidated real estate entities and the related investment activity can be found in Note 5, “Investments in Real Estate Entities,” of the Consolidated Financial Statements in Item 8 of this report and in Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations.”
A further discussion of our development, redevelopment, disposition, acquisition, property management and related strategies follows.
Development Strategy. We select land for development and follow established procedures that we believe minimize both the cost and the risks of development. As one of the largest developers of multifamily rental apartment communities in our selected markets, we maintain regional offices to identify and support development opportunities through local market presence and access to local market information. In addition to our principal executive office in Arlington, Virginia, we also have regional offices, administrative offices or specialty offices, including offices that are in or near the following cities:
•Bellevue, Washington;
•Boston, Massachusetts;
•Denver, Colorado;
•Fairfield, Connecticut;
•Irvine, California;
•Westfield, New Jersey;
•Los Angeles, California;
•Melville, New York;
•New York, New York;
•San Francisco, California;
•San Jose, California; and
•Virginia Beach, Virginia.
After selecting a site for development, we usually negotiate for the right to acquire the site either through an option or a long-term conditional contract. Options and long-term conditional contracts generally allow us to acquire an interest in the site after the completion of entitlements and shortly before the start of construction, which reduces development-related risks and preserves capital. However, as a result of competitive market conditions for land suitable for development, we have sometimes acquired and held land prior to construction for extended periods while entitlements are obtained, or acquired land zoned for uses other than residential with the potential for rezoning. For further discussion of our Development Rights, refer to Item 2. “Communities” in this report.
We generally act as our own general contractor and construction manager, except for certain mid-rise and high-rise apartment communities, or in locations where we have limited historical experience, where we may elect to use third-party general contractors as construction managers. We generally perform these functions directly (although we may use a wholly-owned subsidiary) both for ourselves and for the joint ventures and partnerships of which we are a member or a partner. We believe direct involvement in construction enables us to achieve higher construction quality, greater control over construction schedules and cost savings. Our development, property management and construction teams monitor construction progress to ensure quality workmanship and a smooth and timely transition into the leasing and operating phase.
During periods where competition for development land is more intense, we may acquire improved land with existing commercial uses and rezone the site for multifamily residential use. During the period that we hold these buildings for future development, any rent received in excess of expenses from these operations, which we consider to be incidental, is accounted for as a reduction in our investment in the development pursuit and not as net income. Any expenses relating to these operations, in excess of any rents received, are accounted for as a reduction in net income. We have also participated, and may in the future participate, in master planned or other large multi-use developments where we commit to build infrastructure (such as roads) to be used by other participants or commit to act as construction manager or general contractor in building structures or spaces for third parties (such as unimproved ground floor commercial space, municipal garages or parks). Costs we incur in connection with these activities may be accounted for as additional invested capital in the community or we may earn fee income for providing these services. Particularly with large scale, urban in-fill developments, we may engage in significant environmental remediation efforts to prepare a site for construction.
Throughout this report, the term “development” is used to refer to the entire property development cycle, including pursuit of zoning approvals, procurement of architectural and engineering designs and the construction process. References to “construction” refer to the actual construction of the property, which is only one element of the development cycle.
Redevelopment Strategy. When we undertake the redevelopment of a community, our goal is to renovate and/or rebuild an existing community so that our total investment is generally below replacement cost and the community is well positioned in the market to achieve attractive returns on our capital. We have dedicated redevelopment teams and procedures that are intended to control both the cost and risks of redevelopment. Our redevelopment teams, which include redevelopment, construction and property management personnel, monitor redevelopment progress.
Throughout this report, the term “redevelopment” is used to refer to the entire redevelopment cycle, including planning and procurement of architectural and engineering designs, budgeting and actual renovation work. The actual renovation work is referred to as “reconstruction,” which is only one element of the redevelopment cycle.
Disposition Strategy. We sell assets that no longer meet our long-term strategy or when real estate market conditions are favorable, and we redeploy the proceeds from those sales to develop, redevelop and acquire communities and to rebalance our portfolio across or within geographic regions. This also allows us to realize a portion of the value created through our investments and provides additional liquidity by redeploying the net proceeds from our dispositions in lieu of raising that amount of capital externally. When we decide to sell a community, we generally solicit competing bids from unrelated parties for these individual assets and consider the sales price and other terms of each proposal.
As part of the Archstone Acquisition in 2013 (as defined in Item 1. “Business” in the Company's Form 10-K filed February 22, 2019), we acquired, and still own, 14 assets that had previously been contributed by third parties on a tax-deferred basis to an Archstone partnership in which the third parties received ownership interests. To protect the tax-deferred nature of the contribution, the third parties are entitled to cash payments if we trigger tax obligations to the third parties by selling, or failing to maintain sufficient levels of secured financing on, the contributed assets. Our tax protection payment obligations with respect to these assets expire at different times and in some cases don’t expire until the death of a third party who contributed ownership interests to the Archstone partnership. After review and investigation of Archstone’s tax and accounting records, we estimate that, had we sold or taken other triggering actions in 2020 with respect to all 14 assets, the aggregate amount of the tax protection payments that would have been triggered would have been approximately $47,500,000. At the present time, we do not intend to take actions that would cause us to be required to make tax protection payments with respect to any of these assets.
Acquisition Strategy. Our core competencies in development and redevelopment discussed above allow us to be selective in the acquisitions we target. Acquisitions allow us to achieve rapid penetration into markets in which we desire an increased presence. Acquisitions (and dispositions) also help us achieve our desired product mix or rebalance our portfolio. Portfolio growth also allows for fixed general and administrative costs to be a smaller percentage of overall community Net Operating Income (“NOI”).
Property Management Strategy. We seek to increase operating income through innovative, proactive property management that will result in higher revenue from communities while constraining operating expenses. Our principal strategies to maximize NOI include:
•focusing on resident satisfaction;
•staggering lease terms such that lease expirations are better matched to traffic patterns;
•balancing high occupancy with premium pricing and increasing rents as market conditions and local law permit; and
•leveraging technology and data science, through revenue management software to optimize the pricing and term of leases, implementation of self guided tours and other innovations.
Constraining growth in operating expenses is another way in which we seek to increase earnings growth. Growth in our portfolio and the resulting increase in revenue allows for fixed operating costs to be spread over a larger volume of revenue, thereby increasing operating margins. We constrain growth in operating expenses in a variety of ways, which include, but are not limited to, the following:
•purchase order controls, acquiring goods and services from pre-approved vendors;
•national negotiated contracts and bulk purchases where possible;
•bidding third-party contracts on a volume basis;
•retaining residents through high levels of service, which reduces apartment turnover costs, marketing and vacant apartment utility costs;
•performing turnover work in-house or hiring third parties, generally considering the most cost effective approach as well as expertise needed to perform the work;
•regular preventive maintenance to maximize resident safety and satisfaction and property and equipment life;
•centralization of many community administration and support tasks at our shared service center;
•pursuing real estate tax appeals;
•installing high efficiency lighting and water fixtures, cogeneration systems and sustainability initiatives, such as solar, in our operating platform; and
•implementing technology for resident and prospect services such as package lockers and self guided or virtual tours.
On-site property management teams receive bonuses based largely upon the revenue, expense, NOI and customer service metrics produced at their respective communities. We use and continuously seek ways to improve technology applications to help manage our communities, believing that the accurate collection of financial and resident data will enable us to maximize revenue and control costs through careful leasing decisions, maintenance decisions and financial management.
We generally manage the operation and leasing activity of our communities directly (although we may use a wholly-owned subsidiary) both for ourselves and the joint ventures and partnerships of which we are a member or a partner. From time to time we may engage a third party to manage leasing and/or maintenance activity at one or more of our communities where we have limited historical experience or for other reasons.
From time to time we also pursue or arrange ancillary services for our residents to provide additional revenue sources or increase resident satisfaction. We provide such non-customary services to residents or share in the revenue or income from such services through a “taxable REIT subsidiary,” which is a subsidiary that is treated as a “C corporation” subject to federal income taxes. See “Tax Matters” below.
Financing Strategy. Our financing strategy is to maintain a capital structure that provides financial flexibility to help ensure we can select cost effective capital market options that are well matched to our business risks. We estimate that our short-term liquidity needs will be met from cash on hand, borrowings under our $1,750,000,000 revolving variable rate unsecured credit facility (the “Credit Facility”), sales of current operating communities and/or issuance of additional debt or equity securities. A determination to engage in an equity or debt offering depends on a variety of factors such as general market and economic conditions, our short and long-term liquidity needs, the relative costs of debt and equity capital and growth opportunities. A summary of debt and equity activity for the last three years is reflected on our Consolidated Statement of Cash Flows of the Consolidated Financial Statements set forth in Item 8 of this report.
We have entered into, and may continue in the future to enter into, joint ventures (including limited liability companies or partnerships) through which we would develop and/or own an indirect economic interest of less than 100% of the community or communities owned directly by such joint ventures. Our decision to either hold an apartment community in fee simple or to have an indirect interest in the community through a joint venture is based on a variety of factors and considerations, including: (i) the economic and tax terms required by a seller of land or of a community; (ii) our desire to diversify our portfolio of communities by market, submarket and product type; (iii) our desire at times to preserve our capital resources to maintain liquidity or balance sheet strength; and (iv) our projection, in some circumstances, that we will achieve higher returns on our invested capital or reduce our risk if a joint venture vehicle is used. Investments in joint ventures are not limited to a specified percentage of our assets. Each joint venture agreement is individually negotiated, and our ability to operate and/or dispose of a community in our sole discretion may be limited to varying degrees depending on the terms of the joint venture agreement.
In addition, from time to time, we may offer shares of our equity securities, debt securities or options to purchase stock in exchange for property. We may also acquire properties in exchange for properties we currently own.
Other Strategies and Activities. While we emphasize equity real estate investments in rental apartment communities, we have the ability to invest in other types of real estate, mortgages (including participating or convertible mortgages), securities of other REITs or real estate operating companies, or securities of technology companies that relate to our real estate operations or of companies that provide services to us or our residents, in each case consistent with our qualification as a REIT. In addition, we own and lease commercial space at our communities when either (i) the highest and best use of the space is for commercial (e.g., street level in an urban area); (ii) we believe the commercial space will enhance the attractiveness of the community to residents or; (iii) some component of commercial space is required to obtain entitlements to build apartment homes. As of December 31, 2020, we had a total of approximately 768,000 square feet of rentable commercial space, excluding commercial space within communities currently under development. Gross rental revenue provided by leased commercial space in 2020 was $20,434,000 (0.9% of total revenue). We may also develop a property in conjunction with another real estate company that will own and operate the commercial or for-sale residential components of a mixed-use building or project that we help develop. If we secure a development right and believe that its best use, in whole or in part, is to develop the real estate with the intent to sell rather than hold the asset, we may, through a taxable REIT subsidiary, develop real estate for sale, or if we determine that the best disposition opportunity for a development is a sale upon completion in whole or through individual apartment home condominium sales, such as our Park Loggia condominium development. Any investment in securities of other entities, and any development of real estate for sale, is subject to the percentage of ownership limitations, gross income tests, and other limitations that must be observed for REIT qualification.
We conduct many of the administrative functions associated with our property operations (including billing, collections, and response to resident inquiries) through an internally operated shared services center, rather than having on-site associates conduct such activities. We believe this centralized platform allows our on-site associates to focus more on current and prospective resident services, while at the same time enabling us to reduce costs, mitigate risk and increase our availability and responsiveness to our residents. We are exploring the possibility of performing these shared service center administrative functions for a third party as a means of creating an additional revenue stream and economies of scale at our center. We cannot assure that we will provide such services to a third party or that it will be successful if we do so.
We have not engaged in trading, underwriting or agency distribution or sale of securities of other issuers and do not intend to do so. At all times we intend to make investments in a manner so as to qualify as a REIT unless, because of circumstances or changes to the Internal Revenue Code of 1986, as amended (the “Code”) (or the Treasury Regulations thereunder), our Board of Directors determines that it is no longer in our best interest to qualify as a REIT.
Tax Matters
We filed an election with our 1994 federal income tax return to be taxed as a REIT under the Code and intend to maintain our qualification as a REIT in the future. As a REIT, with limited exceptions, such as those described under “Property Management Strategy” above, we will not be taxed under federal and certain state income tax laws at the corporate level on our taxable net income to the extent such taxable net income is distributed to our stockholders. We expect to make sufficient distributions to avoid income tax at the corporate level. While we believe that we are organized and qualified as a REIT and we intend to operate in a manner that will allow us to continue to qualify as a REIT, there can be no assurance that we will be successful in this regard. Qualification as a REIT involves the application of highly technical and complex provisions of the Code for which there are limited judicial and administrative interpretations and involves the determination of a variety of factual matters and circumstances not entirely within our control.
Competition
We face competition from other real estate investors, including insurance companies, pension and investment funds, REITs both in the multifamily as well as other sectors, and other well capitalized investors, to acquire and develop apartment communities and acquire land for future development. As an owner and operator of apartment communities, we also face competition for prospective residents from other operators whose communities may be perceived to offer a better location or better amenities or whose pricing may be perceived as a better value given the quality, location, terms and amenities that the prospective resident seeks. We also compete against condominiums and single-family homes that are for sale or rent, including those offered through online platforms. Although we often compete against large, sophisticated developers and operators for development opportunities and for prospective residents, real estate developers and operators of any size can provide effective competition for both real estate assets and potential residents.
Environmental and Related Matters
As a current or prior owner, operator and developer of real estate, we are subject to various federal, state and local environmental laws, regulations and ordinances and also could be liable to third parties resulting from environmental contamination or noncompliance at our communities. For some Development Communities we undertake extensive environmental remediation to prepare the site for construction, which could be a significant portion of our total construction cost. Environmental remediation efforts could expose us to possible liabilities for accidents or improper handling of contaminated materials during construction. These and other risks related to environmental matters are described in more detail in Item 1A. “Risk Factors.”
We believe that more government regulation of energy use, along with a greater focus on environmental protection, may, over time, have a significant impact on urban growth patterns. If changes in zoning to encourage greater density and proximity to mass transit do occur, such changes could benefit multifamily housing and those companies with a competency in high-density development. However, there can be no assurance as to whether or when such changes in regulations or zoning will occur or, if they do occur, whether the multifamily industry or the Company will benefit from such changes.
Human Capital
Attracting, motivating, developing, and retaining talented associates who share our purpose, core values and cultural norms is important to our long-term success. We train our associates to understand our purpose (Creating a Better Way to Live), our core values (a commitment to integrity, a spirit of caring and a focus on continuous improvement) and our cultural norms (we collaborate, excel, innovate, act like owners, are thoughtful and thorough, and show appreciation).
At January 31, 2021, we had 3,090 employees, of which approximately 96% were employed on a full-time basis. Approximately 71% of our associates work on-site at our operating communities and the balance work on other matters. None of our associates are represented by a union except for approximately 25 maintenance associates at communities in Westchester County, New York, where we are in the process of negotiating a collective bargaining agreement.
We consider the following aspects of human capital management to be important:
Diversity and Inclusion. We value workforce diversity and an inclusive culture. We believe that a diverse workplace will produce a variety of perspectives, motivate associates and help us understand and better serve our customers and the communities in which we do business. At January 31, 2021, 40% of our associates self-identified as White, 27% as Hispanic, 15% as Black, 6% as Asian, and 12% as other ethnicities, two or more ethnicities or did not respond. We are committed to promoting and achieving greater workplace diversity and have undertaken active steps to further this goal.
Associate Engagement. We monitor the engagement of our associates, receive feedback from our associates, and benchmark our performance by having a third party firm conduct anonymous associate perspective surveys each year. The results are discussed and presented both on a company-wide basis and within each functional group.
Safety. We take workplace safety seriously at our construction sites, our operating communities and our offices. Through our Construction Site Safety Observation program and our dedicated safety team, we monitor project-level safety performance metrics at our construction sites, and elements of compensation for our construction group and our CEO are based on safety compliance performance. Our maintenance associates are required to take monthly safety training on a variety of subjects, and our risk management group monitors incident reports from our offices and communities. The COVID-19 pandemic has presented unique health and safety challenges, and we have taken a number of actions in response to promote the well-being of our associates, including permitting remote work and flexible schedules where feasible, providing extended Company paid leave for associates who needed to miss work for COVID-19 related reasons, establishing office and community protocols for associate safety, conducting training and refresher courses on COVID-19 prevention and communicating regularly with associates on COVID-19 topics, including advising on how to sign up for vaccination.
Training. We help our associates develop the skills they need to advance in their careers and succeed at AvalonBay. We train our associates in a variety of ways, including through our learning management system, AvalonBay University, which offers approximately 700 courses providing technical, management, ethics, compliance and cyber-awareness training.
Other Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may obtain copies of our SEC filings, free of charge, from the SEC's website at www.sec.gov.
We maintain a website at www.avalonbay.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to the Securities Exchange Act of 1934 are available free of charge in the “Investor Relations” section of our website as soon as reasonably practicable after the reports are filed with or furnished to the SEC. In addition, the charters of our Board's Nominating and Corporate Governance Committee, Audit Committee and Compensation Committee, as well as our Director Independence Standards, Corporate Governance Guidelines, Code of Business Conduct and Ethics, Policy Regarding Shareholder Rights Agreements, Policy Regarding Shareholder Approval of Future Severance Agreements, Senior Officer Stock Ownership Guidelines, Policy on Political Contributions and Government Relations, Policy on Recoupment of Incentive Compensation, and Sustainability Reports, are available free of charge in that section of our website or by writing to AvalonBay Communities, Inc., 4040 Wilson Blvd., Suite 1000, Arlington, Virginia 22203, Attention: Chief Financial Officer. To the extent required by the rules of the SEC and the NYSE, we will disclose amendments and waivers relating to these documents in the same place on our website. The information posted on our website is not incorporated into this Annual Report on Form 10-K.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
Our operations involve various risks that could have adverse consequences, including those described below. This Item 1A. includes forward-looking statements. You should refer to our discussion of the qualifications and limitations on forward-looking statements in this Form 10-K.
Risks related to the COVID-19 pandemic’s impact on multifamily rental housing
The national and global impacts of the COVID-19 pandemic continue to evolve. Regulatory measures taken to date to limit the impact and spread of COVID-19 have at times included varying requirements for social distancing, limitations on landlords' rights with respect to delinquent tenants, and restrictions on travel, congregation and business operations. Business and consumer preferences for work and living arrangements during the pandemic continue to evolve as well. These developments, along with the resulting negative employment and economic impacts, have adversely affected the Company as described in this report. The long-term impact of COVID-19 on the United States and world economies remains uncertain, and the duration, scope and significance of any resulting economic downturn cannot currently be predicted. The COVID-19 pandemic presents material uncertainty and risk with respect to our performance, financial condition, results of operations and cash flows. Moreover, many of the risk factors set forth in this Form 10-K should be interpreted as heightened risks as a result of the impact of the COVID-19 pandemic. In addition, if in the future there is an outbreak of another highly infectious or contagious disease, the Company and our properties may be subject to similar risks as the risks posed by COVID-19.
Regulatory, business and consumer responses to the COVID-19 pandemic impact our operations.
Operating impacts from the COVID-19 pandemic include the following:
•The spread of the COVID-19 virus and related government actions and consumer responses could result in further increases in unemployment, and residents who experience deteriorating financial conditions as a result of the pandemic may be unwilling or unable to pay rent in full on a timely basis. In some cases, we have and may continue to restructure tenants’ rent obligations and may not be able to do so on terms as favorable to us as the lease terms that are currently in place. In response to the COVID-19 pandemic, numerous state, local, and federal efforts have also imposed restrictions, for varying times and to varying degrees, on our ability to enforce residents’ contractual lease obligations, and this will affect our ability (until a restriction is lifted or expires) to collect rent or enforce all our remedies (such as pursuing collections and seeking evictions) for the failure to pay rent. In addition to these regulatory limits on evictions, in practical terms many of the housing courts and sheriff’s offices on which we rely to enforce our rights are not operating at the same level of volume or effectiveness as before the pandemic.
•Our occupancy levels and pricing across our portfolio have declined and may continue to decline due to changes in demand. Consumers whose income has declined, who are working remotely or who cannot freely access neighborhood amenities like restaurants, gyms and entertainment venues, may decide during the pandemic to live in a location other than our markets. Low interest rates that are caused by the pandemic and government responses, as well as general health concerns, may encourage consumers who would otherwise rent a multifamily apartment to rent instead a single family home or purchase a home. Additionally, to the extent that some institutions of higher learning continue to turn to online education and business activity and travel remain at lower levels, we expect that demand from students and corporate apartment homes will continue below pre-pandemic levels.
•Various state, local and federal rules have required us, in some jurisdictions or for some properties, to waive late fees and certain other customary fees associated with our apartment rental business, and may do so in the future. We have elected at times also to waive these fees even where or when not required, and may do so in the future. These requirements or practices have resulted, and to the extent implemented or continued may in the future result, in foregone revenue.
•Our properties may also incur significant costs or losses related to shelter-in-place or stay-at-home orders, quarantines, infection, clean-up costs or other related factors.
•Social distancing and other measures in response to the pandemic have caused us to revise the manner in which we meet with prospective residents and serve current residents. For example, many prospective residents are visiting apartments virtually or on a self-tour rather than being accompanied by a leasing consultant. In addition, in many communities various common area amenities are closed or their access is limited. These factors may affect resident satisfaction and leasing velocity.
In addition to renting apartment homes directly to residents, we also lease ancillary commercial space at our communities and lease apartment homes to corporate apartment home providers. In 2020, 0.9% of our total revenue was from commercial tenants and 2.5% of our total residential revenue was from corporate apartment home providers. We are experiencing a higher rate of delinquency from commercial and corporate apartment home tenants than from residential tenants. There may also be a greater risk of bankruptcy and default from commercial and corporate apartment home providers.
Until such time as vaccines that have been developed are widely distributed or the virus is otherwise contained or eradicated, commerce and employment may not return to more customary levels and we may experience material reductions in our operating revenue and NOI compared to our pre-pandemic experience.
Emergency orders shutting down non-essential businesses, limiting congregations of people, and requiring social distancing have at times disrupted, and may in the future disrupt, our development and construction activity. To the extent we experience further cessations or delays in construction, our construction costs may increase and we may not achieve, on the schedule we originally planned, the cash flows that we expect when we begin leasing a completed property. We may also delay the start of construction of additional development communities which, if constructed and leased as originally planned, would have been a source of future additional cash flow.
The same factors as described immediately above may also impact our workforce. Many associates, particularly in overhead positions, are working remotely. This disruption in the normal operations of our workforce, as well as the possibility of illness among our associates or a substantial portion of our workforce, could also adversely affect our operations.
Changes in available financing or investor demand for apartment communities as a result of the COVID-19 pandemic could impact our liquidity.
As a result of the current economic downturn, the real estate market may be unable to attract the same level of capital investment that it attracted before the COVID-19 pandemic, and there may be a reduction in the number of companies seeking to acquire properties, which may result in the value of our properties not appreciating, or decreasing significantly below the amount for which we acquired or developed them. This may also limit our ability to promptly sell our properties if desired, realize a cash return on our investment and reinvest the sales proceeds in new properties.
In light of the disruptions caused by the COVID-19 pandemic, bank lending, capital and other financial markets and sources may deteriorate and our access to capital and other sources of funding may become constrained, which could adversely affect the availability and terms of future borrowings, renewals or refinancings. A constriction on lending by financial institutions could reduce the number of properties we can develop, redevelop or acquire, our cash flow from operations and our ability to make cash distributions to our stockholders.
Risks related to investments through acquisitions, construction, development, and joint ventures
Development, redevelopment and construction risks could affect our profitability.
We intend to continue to develop and redevelop apartment home communities. These activities can include long planning and entitlement timelines and can involve complex and costly activities, including significant environmental remediation or construction work in high-density urban areas. These activities may expose us to the following risks, among others:
•we may abandon opportunities that we have already begun to explore for a number of reasons, including changes in local market conditions or increases in construction or financing costs, and, as a result, we may fail to recover expenses already incurred in exploring those opportunities;
•occupancy rates and rents at a community may fail to meet our original expectations for a number of reasons, including changes in market and economic conditions beyond our control and the development by competitors of competing communities;
•we may be unable to obtain, or experience delays in obtaining, necessary zoning, occupancy or other required governmental or third party permits and authorizations, which could result in increased costs, or the delay or abandonment of opportunities;
•we may incur costs that exceed our original estimates due to increased material, labor or other costs;
•we may be unable to complete construction of a community on schedule or for the originally projected cost resulting in increased construction and financing costs;
•we may incur liabilities to third parties during the development process, for example, in connection with managing existing improvements on the site prior to tenant terminations and demolition (such as commercial space) or in connection with providing services to third parties (such as the construction of shared infrastructure or other improvements); and
•we may incur liability if our communities are not constructed in compliance with the accessibility provisions of the Americans with Disabilities Acts, the Fair Housing Act or other federal, state or local requirements. Noncompliance could result in imposition of fines, an award of damages to private litigants and a requirement that we undertake structural modifications to remedy the noncompliance.
Refer to our “Risks related to liquidity and financing” section below for additional construction and development risks related to financing.
Attractive investment opportunities may not be available, which could adversely affect our profitability.
We expect that other real estate investors, including insurance companies, pension and investment funds, other REITs and other well-capitalized investors will compete with us to acquire existing properties and to develop new properties. This competition could increase prices for properties of the type we would likely pursue and adversely affect our profitability for new investments.
Acquisitions may not yield anticipated results.
Our business strategy includes acquiring as well as developing communities. Our acquisition activities may be exposed to the following risks:
•an acquired property may fail to perform as we expected in analyzing our investment; and
•our estimate of the costs of operating, repositioning or redeveloping an acquired property may prove inaccurate.
Failure to succeed in new markets, or with new brands and community formats, or in activities other than the development, ownership and operation of residential rental communities may have adverse consequences.
We may from time to time commence development activity or make acquisitions outside of our existing market areas if appropriate opportunities arise. Our historical experience in our existing markets in developing, owning and operating rental communities does not ensure that we will be able to operate successfully in new markets. We may be exposed to a variety of risks when we enter a new market, including an inability to accurately evaluate local apartment market conditions and an inability to obtain land for development or to identify appropriate acquisition opportunities.
We also may engage or have an interest in for-sale activity, such as the sale of the residential condominiums at The Park Loggia, a mixed-use development located in New York, New York. We may be unsuccessful at developing real estate with the intent to sell or in selling condominiums at originally underwritten values, or at all, as a disposition strategy for an asset, which could have an adverse effect on our results of operations.
We are exposed to risks associated with investment in, and management of, discretionary real estate investment funds and joint ventures.
At times we invest in real estate as a partner or a co-venturer with other investors. Joint venture investments (including investments through partnerships or limited liability companies) involve risks, including the possibility that our partner might become insolvent or otherwise refuse to make capital contributions when due; that we may be responsible to our partner for indemnifiable losses or the debt and obligations of a venture; that our partner might have business goals that are inconsistent with ours which may result in the venture being unable to implement certain decisions that we consider beneficial; that our partner may be in a position to take action or withhold consent contrary to our instructions or requests; that our partners holding a majority of the equity interests may remove us as the general partner or managing member in certain cases involving cause; and we may be liable and/or our status as a REIT may be jeopardized if either the ventures, or the REIT entities associated with the ventures, fail to comply with various tax or other regulatory matters. Frequently, we and our partner may each have the right to trigger a buy-sell or similar arrangement that could cause us to sell our interest, acquire our partner's interest or force a sale of the asset, at a time when we otherwise would not have initiated such a transaction and on terms that are not most advantageous to us.
We are exposed to risks associated with real estate assets that are subject to ground leases that may restrict our ability to finance, sell or otherwise transfer our interests in those assets, limit our use and expose us to loss if such agreements are breached by us or terminated.
We own assets which are subject to long-term ground leases. These ground leases may impose limitations on our use of the properties, restrict our ability to finance, sell or otherwise transfer our interests or restrict the leasing of the properties. These restrictions may limit our ability to timely sell or exchange the properties, impair the properties’ value or negatively impact our ability to operate the properties. In addition, we could lose our interests in the properties if the ground leases are breached by us, terminated or lapse. As we get closer to the lease termination dates, the values of the properties could decrease if we are unable to agree upon an extension of the lease with the lessor. Certain of these ground leases have payments subject to annual escalations and/or periodic fair market value adjustments which could adversely affect our financial condition or results of operations.
Land we hold with no current intent to develop may be subject to future impairment charges.
We own land parcels that we do not currently intend to develop. As discussed in Item 2. “Communities-Other Land and Real Estate Assets,” in the event that the fair market value less the cost to dispose of a parcel changes such that it is less than the carrying basis of the parcel, we would be subject to an impairment charge, which would reduce our net income.
Risks related to liquidity and financing
Capital and credit market conditions may adversely affect our access to various sources of capital and/or the cost of capital, which could impact our business activities, dividends, earnings and common stock price, among other things.
In periods when the capital and credit markets experience significant volatility, the amounts, sources and cost of capital available to us may be adversely affected. We primarily use external financing to fund construction and to refinance indebtedness as it matures. If sufficient sources of external financing are not available to us on cost effective terms, we could be forced to limit our development and redevelopment activity and/or take other actions to fund our business activities and repayment of debt, such as selling assets, reducing our cash dividend or issuing equity. If we are able and/or choose to access capital at a higher cost than we have experienced in recent years, our earnings per share and cash flows could be adversely affected. In addition, the price of our common stock may fluctuate significantly and/or decline in a high interest rate environment or a volatile economic environment, or if we dilute the interest of stockholders by issuing additional equity. We believe that the lenders under our Credit Facility will fulfill their lending obligations thereunder, but if economic conditions deteriorate, the ability of those lenders to fulfill their obligations may be adversely impacted.
Insufficient cash flow could affect our debt financing and create refinancing risk.
We are subject to the risks associated with debt financing, including the risk that our available cash will be insufficient to meet required payments of principal and interest on our debt. For us to continue to qualify as a REIT, we are required to annually distribute dividends generally equal to at least 90% of our REIT taxable income, which limits the amount of our cash flow available to meet required principal and interest payments. The principal outstanding balance on a portion of our debt will not be fully amortized prior to its maturity. We cannot assure you that we will have sufficient cash flows available to make all required principal payments. Therefore, we expect that we will generally need to refinance at least a portion of our outstanding debt as it matures. There is a risk that we may not be able to refinance existing debt or that a refinancing will not be done on as favorable terms; either of these outcomes could have a material adverse effect on our financial condition and results of operations.
Rising interest rates could increase interest costs and could affect the market price of our common stock, and efforts to hedge such risk could be ineffective and cause us to incur costs.
If interest rates increase, our interest costs on variable rate debt will rise unless we have hedged the risk of rising interest rates. In addition, an increase in market interest rates may lead purchasers of our common stock to demand a greater annual dividend yield, which could adversely affect the market price of our common stock.
From time to time we use interest rate derivatives to hedge and manage our exposure to certain interest rate risks. For example, when we anticipate issuing debt securities, we may seek to limit our exposure to fluctuations in interest rates prior to debt issuance by entering into interest rate hedging contracts. Although these agreements may partially protect against rising interest rates, they also may reduce the benefits to the Company if interest rates decline. The settlement or termination of interest rate hedging contracts may involve material charges to our earnings including net costs, such as transaction fees, settlement costs and/or breakage costs. In addition, our use of interest rate hedging arrangements may expose us to additional risks, including a risk that a counterparty to a hedging arrangement may fail to honor its obligations. Developing and implementing an interest rate risk strategy is complex and no strategy can completely insulate us from risks associated with interest rate fluctuations and there can be no assurance that our hedging activities will be effective.
Bond financing and zoning and other compliance requirements could limit our income, restrict the use of communities and cause favorable financing to become unavailable.
We have financed some of our apartment communities with obligations issued by local government agencies because the interest paid to the holders of this debt is generally exempt from federal income taxes which typically provides a more favorable interest rate for us. These obligations are commonly referred to as “tax-exempt bonds” and generally must be secured by mortgages on our communities. As a condition to obtaining tax-exempt financing, or as a condition to obtaining favorable zoning or an agreement relating to property taxes in some jurisdictions, we will commit to make some of the apartments in a community available to households whose income does not exceed certain thresholds (e.g., 50% or 80% of area median income), or who meet other qualifying tests. As of December 31, 2020, 5.1% of our apartment homes at current operating communities were under income limitations such as these. These commitments, which may or may not expire, may limit our ability to raise rents and, as a consequence, adversely affect the value of the communities subject to these restrictions. If we fail to observe these commitments, we could lose benefits (such as reduced property taxes) or face liabilities including liability for the benefits we received under tax exempt bonds, tax credits or agreements related to property taxes.
Some of our tax-exempt bond financing documents require us to obtain a guarantee from a financial institution of payment of the principal and interest on the bonds. The guarantee may take the form of a letter of credit, surety bond, guarantee agreement or other additional collateral. If the financial institution defaults in its guarantee obligations, or if we are unable to renew the applicable guarantee or otherwise post satisfactory collateral, a default will occur and the community could be foreclosed upon if we do not redeem the tax exempt bonds.
Risks related to indebtedness.
We have a Credit Facility with a syndicate of commercial banks. Our organizational documents do not limit the amount or percentage of indebtedness that may be incurred. Accordingly, subject to compliance with outstanding debt covenants, we could incur more debt, resulting in an increased risk of default on our obligations and an increase in debt service requirements that could adversely affect our financial condition and results of operations.
The mortgages on properties that are subject to secured debt, our Credit Facility and the indentures under which a substantial portion of our debt was issued contain customary restrictions, requirements and other limitations, as well as certain financial and operating covenants including maintenance of certain financial ratios. Maintaining compliance with these restrictions could limit our flexibility. A default in these requirements, if uncured, could result in a requirement that we repay indebtedness, which could materially adversely affect our liquidity and increase our financing costs. Refer to Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations” for further discussion.
A substantial portion of our debt is subject to prepayment penalties or premiums that we will be obligated to pay in the event that we elect to prepay the debt prior to the earlier of (i) its stated maturity or (ii) another stated date. If we elect to prepay a significant amount of outstanding debt, our prepayment penalties or payments under these provisions could materially adversely affect our results of operations.
The phase-out of LIBOR and transition to SOFR as a benchmark interest rate will have uncertain and possibly adverse effects.
In 2018, the Alternative Reference Rate Committee identified the Secured Overnight Financing Rate (“SOFR”) as the alternative to LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities, published by the Federal Reserve Bank of New York. By the end of 2021, it is expected that no new contracts will reference LIBOR and will instead use SOFR. Due to the broad use of LIBOR as a reference rate, the impact of this transition on the interest rates charged to the Company could possibly adversely affect our financing costs, including spread pricing on our Credit Facility and variable rate unsecured term loans ( the "Term Loans") and certain other floating rate debt obligations, as well as our operations and cash flows.
Failure to maintain our current credit ratings could adversely affect our cost of funds, related margins, liquidity and access to capital markets.
There are two major debt rating agencies that routinely evaluate and rate our debt. Their ratings are based on a number of factors, which include their assessment of our financial strength, liquidity, capital structure, asset quality, amount of real estate under development, and sustainability of cash flow and earnings, among other factors. If market conditions change, we may not be able to maintain our current credit ratings, which could adversely affect our cost of funds and related margins, liquidity and access to capital markets.
The form, timing and/or amount of dividend distributions in future periods may vary and be impacted by our revenue generation, other liquidity needs and economic and other considerations.
The form, timing and/or amount of dividend distributions will be declared at the discretion of the Board of Directors and will depend on our rental revenue, actual cash from operations, our financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code and other factors as the Board of Directors may consider relevant. The Board of Directors may modify our dividend policy from time to time.
We may experience barriers to selling apartment communities that could limit financial flexibility.
Potential difficulties in promptly selling real estate at prices we find acceptable may limit our ability to quickly change or reduce the apartment communities in our portfolio in response to changes in economic, regulatory, or other conditions. Federal tax laws may also limit our ability to sell properties when desired. See “Risks related to our REIT or tax status” section for more information on federal tax law risks.
Risks related to ongoing operations of our communities
Rent control and other changes in applicable laws, or noncompliance with applicable laws, could adversely affect our operations or expose us to liability.
We must develop, construct and operate our communities in compliance with federal, state and local laws and regulations, some of which may conflict with one another or be subject to limited judicial or regulatory interpretations. These laws and regulations may include zoning laws, building codes, landlord/tenant laws and other laws generally applicable to business operations. Noncompliance with laws could expose us to liability. Lower revenue growth or significant unanticipated expenditures may result from our need to comply with changes in (i) laws imposing remediation requirements or other conditions, (ii) rent control or rent stabilization laws or other residential landlord/tenant laws, or (iii) other governmental rules and regulations or enforcement policies affecting the development, use and operation of our communities, including changes to building codes and fire and life-safety codes.
We have seen a recent increase in states and municipalities implementing, considering or being urged by advocacy groups to consider rent control or rent stabilization laws and regulations or take other actions that could limit the amount by which we can raise rents or charge non-rent fees. For example, in 2019 the State of California adopted statewide rent control for communities older than fifteen years, limiting rent increases to the lesser of 10% or 5% plus local CPI. Also in 2019 the State of New York adopted new rules for rent-controlled and rent-stabilized units that revised and limited the way rent increases are calculated for renewal leases, basing increases solely on rent actually paid and eliminating the ability to increase the renewal rent to a higher “registered rent.” Furthermore, in California the Governor has the ability to enact local or statewide states of emergency which limit our ability to increase new and renewal rents more than 10% over the rent in place on the date such state of emergency was declared, which has impacted some of our California communities. Current and future enactments of rent control or rent stabilization laws or other laws regulating multi-family housing may limit our ability to charge market rents, increase rents, evict tenants or recover increases in our operating expenses and could make it more difficult for us to dispose of properties in certain circumstances. Expenses associated with our investment in these communities, such as debt service, real estate taxes, insurance and maintenance costs, are generally not reduced when circumstances cause a reduction in rental income from the community.
Short-term leases expose us to the effects of declining market rents.
Substantially all of our apartment leases are for a term of one year or less. Because these leases generally permit the residents to leave at the end of the lease term without penalty, our rental revenues are impacted by declines in market rents more quickly than if our leases were for longer terms.
Competition could limit our ability to lease apartment homes or increase or maintain rents.
Our apartment communities compete with other apartment operators as well as rental housing alternatives such as single-family homes for rent, and short term furnished offerings such as those available from extended stay hotels or through on-line listing services. In addition, our residents and prospective residents also consider as an alternative to renting the purchase of a new or existing condominium or single-family home for sale. Competitive residential housing could adversely affect our ability to lease apartment homes and to increase or maintain rental rates.
Unfavorable changes in market and economic conditions could adversely affect occupancy, rental rates, operating expenses, and the overall market value of our real estate assets.
Local conditions in our markets significantly affect occupancy, rental rates and the operating performance of our communities, and may be adversely affected by the following risks:
•corporate restructurings and/or layoffs, and industry slowdowns;
•an oversupply of, or a reduced demand for, apartment homes;
•a decline in household formation or employment or lack of employment growth;
•the inability or unwillingness of residents to pay rent increases; and
•economic conditions that could cause an increase in our operating expenses, such as increases in property taxes, utilities, compensation of on-site associates and routine maintenance.
Risks related to commercial operations
Although we are primarily in the multifamily rental business, we also own and lease ancillary commercial space. Gross rental revenue provided by leased commercial space in our portfolio represented 0.9% of our total revenue in 2020. The long term nature of our commercial leases and characteristics of many of our tenants (small, local businesses) may subject us to certain risks. We may not be able to lease new space for rents that are consistent with our projections or at market rates. Also, when leases for our existing commercial space expire, the space may not be relet or the terms of reletting, including the cost of allowances and concessions to tenants, may be less favorable than the current lease terms. Our properties compete with other properties with commercial space. The presence of competitive alternatives may affect our ability to lease space and the level of rents we can obtain. If our commercial tenants experience financial distress or bankruptcy, they may fail to comply with their contractual obligations, seek concessions in order to continue operations or cease their operations, which could adversely impact our results of operations and financial condition.
Risks related to our REIT or tax status
Failure to qualify as a REIT would cause us to be taxed as a corporation, which would significantly reduce funds available for distribution to stockholders.
If we fail to qualify as a REIT for federal income tax purposes, we will be subject to regular federal corporate income tax on our taxable income. In addition, unless we are entitled to relief under applicable statutory provisions, we would be ineligible to make an election for treatment as a REIT for the four taxable years following the year we lose our qualification. The additional tax liability resulting from the failure to qualify as a REIT would significantly reduce or eliminate the amount of funds available for distribution to our stockholders. Furthermore, we would no longer be required to make distributions to our stockholders. Thus, our failure to qualify as a REIT could also impair our ability to expand our business and raise capital and would adversely affect the value of our common stock.
We believe that we are organized and qualified as a REIT, and we intend to operate in a manner that will allow us to continue to qualify as a REIT. However, we cannot assure you that we are qualified as a REIT, or that we will remain qualified in the future. This is because qualification as a REIT involves the application of highly technical and complex provisions of the Code for which there are only limited judicial and administrative interpretations and involves the determination of a variety of factual matters and circumstances not entirely within our control. Our qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements on a continuing basis. In addition, future legislation, new regulations, administrative interpretations or court decisions may significantly change the tax laws or the application of the tax laws with respect to qualification as a REIT for federal income tax purposes or the federal income tax consequences of this qualification.
Even if we qualify as a REIT, we will be subject to certain federal, state and local taxes on our income and property and on taxable income that we do not distribute to our stockholders. In addition, we hold certain assets and engage in certain activities through our taxable REIT subsidiaries that a REIT could not engage in directly. We also use taxable REIT subsidiaries to hold certain assets that we believe would be subject to the 100% prohibited transaction tax if sold at a gain outside of a taxable REIT subsidiary or to engage in activities that generate non-qualifying REIT income. Our taxable REIT subsidiaries are subject to federal income tax as regular corporations.
We may choose to pay dividends in our own stock, in which case stockholders may be required to pay tax in excess of the cash they receive.
We may distribute taxable dividends that are payable in part in our stock. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as income to the extent of our current and accumulated earnings and profits for federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of the cash dividend received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, the trading price of our stock would experience downward pressure if a significant number of our stockholders sell shares of our stock in order to pay taxes owed on dividends.
We may experience regulatory and federal tax barriers to selling apartment communities that could limit financial flexibility.
Federal tax laws may limit our ability to earn a gain on the sale of a community (unless we own it through a subsidiary which will incur a taxable gain upon sale) if we are found to have held, acquired or developed the community primarily with the intent to resell the community, and this limitation may affect our ability to sell communities without adversely affecting returns to our stockholders.
From time to time we dispose of properties in transactions intended to qualify as “like-kind exchanges” under Section 1031 of the Code. If a transaction intended to qualify as a Section 1031 exchange is later determined to be taxable, we may face adverse tax consequences, and if the laws applicable to such transactions are amended or repealed, we may not be able to dispose of properties on a tax deferred basis.
We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock or debt securities.
At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. We cannot predict when or if any new federal income tax law, regulation, or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation, or interpretation may take effect retroactively. We and our stockholders and holders of our debt securities could be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative interpretation.
Risks that may not be insured in full or in part
We are exposed to risks that are either uninsurable, not economically insurable or in excess of our insurance coverage, including risks discussed below.
Insurance coverage for various risks can be costly and in limited supply. As a result, we may experience shortages in desired coverage levels if market conditions are such that insurance is not available or the cost of insurance makes it, in the Company's view, economically impractical. Incidents that directly or indirectly damage our communities, both physically and financially, or cause losses that exceed our insurance coverage could have a material adverse effect on our business, financial condition and results of operations including increased maintenance, repair, and delays in construction. In addition, we would also continue to be obligated to repay any mortgage indebtedness or other obligations related to the community which could have a material adverse effect on our business and our financial condition and results of operations. The following risks are uninsurable or insurance coverage is limited due to premium rates (See Item 2. “Communities-Insurance and Risk of Uninsured Losses”):
•Earthquake risk. As further described in Item 2. “Communities-Insurance and Risk of Uninsured Losses,” many of our West Coast communities are located in the general vicinity of active earthquake faults. Insurance coverage for earthquakes can be costly and in limited supply.
•Severe or inclement weather risk. Many of our markets, particularly those located in coastal cities, are exposed to risks associated with inclement or severe weather, including hurricanes, severe winter storms and coastal flooding.
•Climate change risk. To the extent that significant changes in the climate occur in areas where our communities are located, we may experience extreme weather and changes in precipitation and temperature, all of which may result in physical damage to or a decrease in demand for properties located in these areas or affected by these conditions. In addition, changes in regulations based on concerns about climate change could result in increased capital expenditures on our existing properties and our new development properties (for example, to improve energy efficiency and/or resistance to inclement weather) without a corresponding increase in revenue, resulting in adverse impacts to our net income.
•Terrorism and other risk. We have significant investments in large metropolitan markets, such as Metro New York/New Jersey and Washington, D.C., which have in the past been or may in the future be the target of actual or threatened terrorist attacks. We carry commercial general liability insurance, property insurance and terrorism insurance with respect to our communities on terms and in amounts we consider commercially reasonable. There are, however, certain types of losses (such as losses arising from acts of war) that are not insured, in full or in part, because they are either uninsurable or the cost of insurance makes it, in the Company's view, economically impractical.
We may incur costs due to environmental contamination or non-compliance.
Under various public health laws and regulations, we may be required, regardless of knowledge or responsibility, to investigate and remediate the presence or effects of hazardous or toxic substances such as asbestos, lead paint, chemical vapors from soils or groundwater, petroleum product releases, and natural substances such as methane and radon gas. We may be held liable under these laws or common law to a governmental entity or to third parties for property, personal injury or natural resources damages and for investigation and remediation costs incurred as a result of the contamination. These damages and costs may be substantial and may exceed any insurance coverage we have for such events. The presence of these substances, or the failure to properly remediate or contain the contamination, may adversely affect our ability to borrow against, develop, sell or rent the affected property. In addition, some environmental laws create or allow a government agency to impose a lien on the contaminated site in favor of the government for damages and costs it incurs as a result of the contamination.
The development, construction and operation of our communities are subject to regulations and permitting under various federal, state and local laws, regulations and ordinances, which regulate matters including wetlands protection, storm water runoff and wastewater discharge. These laws and regulations may impose restrictions on the manner in which our communities may be developed, and noncompliance with these laws and regulations may subject us to fines and penalties and may subject us to liability in connection with personal injury.
Certain laws and regulations govern the removal, encapsulation or disturbance of asbestos containing materials (“ACMs”) when such materials are in poor condition or in the event of renovation or demolition of a building. These laws and the common law may impose liability for release of ACMs and may allow third parties to seek recovery from owners or operators of real properties for personal injury associated with exposure to ACMs. We are not aware that any ACMs were used in the construction of the communities we developed. ACMs were, however, used in the construction of a number of the communities that we have acquired. Although we implement an operations and maintenance program at each of the communities at which ACMs are detected, we may fail to adequately observe such program or a disturbance of ACMs may occur nevertheless, exposing us to liability. We are aware that some of our communities have lead paint and have implemented an operations and maintenance program at each of those communities.
All of our stabilized operating communities, and all of the communities that we are currently developing, have been subjected to at least a Phase I or similar environmental assessment, which generally does not involve invasive techniques such as soil or groundwater sampling. These assessments, together with subsurface assessments conducted on some properties, have not revealed, and we are not otherwise aware of, any environmental conditions that we believe would have a material adverse effect on our business, assets, financial condition or results of operations. In connection with our ownership, operation and development of communities, from time to time we undertake substantial remedial action in response to the presence of subsurface or other contaminants, including contaminants in soil, groundwater and soil vapor beneath or affecting our buildings. In some cases, an indemnity exists upon which we may be able to rely if environmental liability arises from the contamination or remediation costs exceed estimates. There can be no assurance, however, that all necessary remediation actions have been or will be undertaken at our properties or that we will be indemnified, in full or at all, in the event that environmental liability arises.
Mold growth may occur when excessive moisture accumulates in buildings or on building materials, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Certain molds may in some instances lead to adverse health effects, including allergic or other reactions. We cannot provide assurance that mold or excessive moisture will be detected and remediated in a timely manner. If a significant mold problem arises at one of our communities, we could be required to undertake a costly remediation program to contain or remove the mold from the affected community and could be exposed to other liabilities that may exceed any applicable insurance coverage.
Additionally, we have occasionally been involved in developing, managing, leasing and operating various properties for third parties. Consequently, we may be considered to have been an operator of such properties and, therefore, potentially liable for removal or remediation costs or other potential costs which relate to the release or presence of hazardous or toxic substances or petroleum products at such properties.
We cannot assure you that:
•the environmental assessments described above have identified all potential environmental liabilities;
•no prior owner created any material environmental condition not known to us or the consultants who prepared the assessments;
•no environmental liabilities have developed since the environmental assessments were prepared;
•the condition of land or operations in the vicinity of our communities, such as the presence of underground storage tanks, will not affect the environmental condition of our communities;
•future uses or conditions, including, without limitation, changes in applicable environmental laws and regulations, will not result in the imposition of environmental liability; and
•no environmental liabilities will arise at communities that we have sold for which we may have liability.
General Risk Factors
The ability of our stockholders to control our policies and effect a change of control of our company is limited by certain provisions of our charter and bylaws and by Maryland law.
There are provisions in our charter and bylaws that may discourage a third party from making a proposal to acquire us. These provisions include the following:
Our charter authorizes our Board of Directors to issue up to 50,000,000 shares of preferred stock without stockholder approval and to establish the preferences and rights, including voting rights, of any series of preferred stock issued. This could allow the Board to issue one or more classes or series of preferred stock that could discourage or delay a tender offer or a change in control.
To maintain our qualification as a REIT for federal income tax purposes, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by or for five or fewer individuals at any time during the last half of any taxable year. To maintain this qualification, and/or to address other concerns about concentrations of ownership of our stock, our charter generally prohibits ownership (directly, indirectly by virtue of the attribution provisions of the Code, or beneficially as defined in Section 13 of the Securities Exchange Act) by any single stockholder of more than 9.8% of the issued and outstanding shares of any class or series of our stock. In general, under our charter, pension plans and mutual funds may directly and beneficially own up to 15% of the outstanding shares of any class or series of stock. Under our charter, our Board of Directors may in its sole discretion waive or modify the ownership limit for one or more persons, but it is not required to do so even if such waiver would not affect our qualification as a REIT. These ownership limits may prevent or delay a change in control and, as a result, could adversely affect our stockholders' ability to realize a premium for their shares of common stock.
As a Maryland corporation, we are subject to the provisions of the Maryland General Corporation Law. Maryland law restricts some business combinations and requires compliance with statutory procedures before some mergers and acquisitions may occur, which may delay or prevent offers to acquire us or increase the difficulty of completing any offers, even if they are in our stockholders' best interests. In addition, other provisions of the Maryland General Corporation Law permit the Board of Directors to make elections and to take actions without stockholder approval (such as classifying our Board such that the entire Board is not up for re-election annually) that, if made or taken, could have the effect of discouraging or delaying a change in control.
Changes in U.S. accounting standards may materially and adversely affect the reporting of our operations.
The Company follows accounting principles generally accepted in the United States (“GAAP”). GAAP is established by the Financial Accounting Standards Board (“FASB”), an independent body whose standards are recognized by the SEC as authoritative for publicly held companies. The FASB and the SEC create and interpret accounting standards and may issue new accounting pronouncements or change the interpretation and application of these standards that govern the preparation of our financial statements. These changes could have a material impact on our reported consolidated results of operations and financial position.
We rely on information technology in our operations, and any breach, interruption or security failure of that technology, or any non-compliance with applicable laws with respect to the use of that technology, could have a negative impact on our business, results of operations, financial condition and/or reputation.
Information security risks have generally increased in recent years due to the rise in new technologies and the increased sophistication and activities of perpetrators of cyber attacks.
We collect and hold personally identifiable information of our residents and prospective residents in connection with our leasing and property management activities, and we collect and hold personally identifiable information of our associates in connection with their employment. In addition, we engage third party service providers that may have access to such personally identifiable information in connection with providing necessary information technology and security and other business services to us.
There can be no assurance that we will be able to prevent unauthorized access to this information. Any failure in or breach of our operational or information security systems, or those of our third party service providers, as a result of cyber attacks or information security breaches, could result in a wide range of potentially serious harm to our business operations and financial prospects, including (among others) disruption of our business and operations, disclosure or misuse of confidential or proprietary information (including personal information of our residents and/or associates), damage to our reputation, and/or potentially significant legal and/or financial liabilities and penalties.
Various laws and regulations and interpretations thereof, as well as agreements with payment processors, require, or may require, us to comply with rules related to our websites for use by residents and prospective residents, including requirements related to accessibility of our websites to persons with disabilities and our handling and use of data we collect. We could face liabilities for failure to comply with these requirements. New statutes, such as the California Consumer Privacy Act (“CCPA”), and related regulations are evolving and may be subject to differing interpretations. We could incur costs to comply with stricter and more complex data privacy, data collection and information security laws and standards.
Our success depends on key personnel whose continued service is not guaranteed.
Our success depends in part on our ability to attract and retain the services of executive officers and other personnel. Our executive officers make important capital allocation decisions or recommendations to our Board of Directors from among the opportunities identified by our regional offices. There is substantial competition for qualified personnel in the real estate industry, and the loss of our key personnel could adversely affect the Company.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2. COMMUNITIES
Our real estate investments consist primarily of current operating apartment communities, communities in various stages of development (“Development Communities”) and Development Rights (as defined below). Our current operating communities are further classified as Established Communities, Other Stabilized Communities, Lease-Up Communities, Redevelopment Communities and Unconsolidated Communities. While we generally establish the classification of communities on an annual basis, we intend to update the classification of communities during the calendar year to the extent that our plans with regard to the disposition or redevelopment of a community change during the year. The following is a description of each category:
Current Communities are categorized as Established, Other Stabilized, Lease-Up, Redevelopment or Unconsolidated according to the following attributes:
•Established Communities (also known as Same Store Communities) for the year ended December 31, 2020 are consolidated communities in the markets where we have a significant presence (New England, New York/New Jersey, Mid-Atlantic, Pacific Northwest, Northern and Southern California and our expansion markets of Southeast Florida and Denver, Colorado), and where a comparison of operating results from the prior year to the current year is meaningful, as these communities were owned and had stabilized occupancy, as defined below, as of the beginning of the respective prior year. The Established Communities for the year ended December 31, 2020 are communities that are consolidated for financial reporting purposes, had stabilized occupancy as of January 1, 2019, are not conducting or are not probable to conduct substantial redevelopment activities, and are not held for sale or probable for disposition to unrelated third parties within the fiscal year. A community is considered to have stabilized occupancy at the earlier of (i) attainment of 90% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment.
•Other Stabilized Communities are all other completed consolidated communities that have stabilized occupancy, as defined above, as of January 1, 2020, or which were acquired during the years ended December 31, 2020 or 2019. Other Stabilized Communities for the year ended December 31, 2020 excludes communities that are conducting or are probable to conduct substantial redevelopment activities within the fiscal year.
•Lease-Up Communities are consolidated communities where construction has been complete for less than one year and that do not have stabilized occupancy.
•Redevelopment Communities are consolidated communities where substantial redevelopment is in progress or is probable to begin during the fiscal year. Redevelopment is considered substantial when (i) capital invested during the reconstruction effort is expected to exceed the lesser of $5,000,000 or 10% of the community's pre-redevelopment gross cost basis and (ii) physical occupancy is below or is expected to be below 90% during, or as a result of, the redevelopment activity.
•Unconsolidated Communities are communities that we have an indirect ownership interest in through our investment interest in an unconsolidated joint venture.
Development Communities are consolidated communities that are under construction and for which a certificate or certificates of occupancy for the entire community have not been received. These communities may be partially complete and operating.
Unconsolidated Development Communities are communities that are under construction and for which a certificate or certificates of occupancy for the entire community have not been received that we have an indirect ownership interest in through our investment interest in an unconsolidated joint venture. These communities may be partially complete and operating.
Development Rights are development opportunities in the early phase of the development process where we either have an option to acquire land or enter into a leasehold interest, where we are the buyer under a long-term conditional contract to purchase land, where we control the land through a ground lease or own land to develop a new community, or where we are the designated developer in a public-private partnership. We capitalize related pre-development costs incurred in pursuit of new developments for which we currently believe future development is probable.
We currently lease our corporate headquarters located in Arlington, Virginia, as well as our other regional and administrative offices under operating leases.
As of December 31, 2020, communities that we owned or held a direct or indirect interest in were classified as follows:
Number of
communities Number of
apartment homes
Current Communities
Established Communities:
New England 36 9,367
Metro NY/NJ 45 12,775
Mid-Atlantic 38 13,494
Pacific Northwest 16 4,116
Northern California 38 10,954
Southern California 56 16,379
Expansion Markets 3 912
Total Established 232 67,997
Other Stabilized Communities:
New England 4 943
Metro NY/NJ 2 854
Mid-Atlantic 1 151
Pacific Northwest 2 745
Northern California 1 873
Southern California 2 681
Expansion Markets 5 1,388
Total Other Stabilized 17 5,635
Lease-Up Communities 11 2,999
Redevelopment Communities 1 344
Unconsolidated Communities 12 3,119
Total Current Communities 273 80,094
Development Communities 16 5,128
Unconsolidated Development Communities 2 803
Total Communities 291 86,025
Development Rights 24 7,853
Our holdings under each of the above categories are discussed on the following pages.
We generally establish the composition of our Established Communities portfolio annually. Changes in the Established Communities portfolios for the years ended December 31, 2020, 2019 and 2018 were as follows:
Number of
communities
Established Communities as of December 31, 2017 190
Communities added 25
Communities removed (1)
Redevelopment Communities (9)
Disposed Communities (2) (13)
Other Stabilized (3) (1)
Communities with multiple phases separated 2
Established Communities as of December 31, 2018 194
Communities added 22
Communities removed (1)
Redevelopment Communities (2)
Disposed Communities (3)
Other Stabilized (3) (1)
Established Communities as of December 31, 2019 210
Communities added 32
Communities removed (1)
Redevelopment Communities (1)
Disposed Communities (9)
Established Communities as of December 31, 2020 232
_________________________________
(1) We remove a community from our Established Communities portfolio if we believe that planned activity for the upcoming year will result in that community's expected operations not being comparable to the prior year, including when we intend either (i) to undertake a significant capital renovation, such that the community will be classified as a Redevelopment Community; (ii) to dispose of a community; or (iii) when a significant casualty loss occurs.
(2) Includes the five wholly-owned communities contributed to the NYC Joint Venture.
(3) Community was moved from the Established Communities portfolio to the Other Stabilized portfolio as a result of a casualty loss that occurred during the year and impacted operations.
Current Communities
Our Current Communities include garden-style apartment communities consisting of multi-story buildings of stacked flats and/or townhome apartments in landscaped settings, as well as mid and high rise apartment communities consisting of larger elevator-served buildings of four or more stories, frequently with structured parking. As of January 31, 2021, our Current Communities consisted of the following:
Number of
communities Number of
apartment homes
Garden-style 128 39,767
Mid-rise 115 31,338
High-rise 29 8,751
Total Current Communities 272 79,856
As discussed in Item 1. “Business,” we operate under three core brands: Avalon, AVA and eaves by Avalon. We believe that this branding differentiation allows us to target our product offerings to multiple customer groups and submarkets within our existing geographic footprint. Our core “Avalon” brand focuses on upscale apartment living and high end amenities and services. “AVA” targets customers in high energy, transit-served urban neighborhoods and generally feature smaller apartments, many of which are designed for roommate living with an emphasis on modern design and a technology focus. “eaves by Avalon” is targeted to the cost conscious, “value” segment in suburban areas. In 2020, we introduced our "Kanso" brand through one of our current Development Communities. The Kanso brand is designed to create an apartment living experience that offers simplicity without sacrifice at a more moderate price point - featuring high-quality apartment homes, limited-to-no community amenities and supported by a low-touch, largely self-service operating model that leverages technology and smart access. We believe that these brands allow us to further penetrate our existing markets by appealing to different consumer preferences.
We also have an extensive and ongoing maintenance program to continually maintain and enhance our communities and apartment homes. The aesthetic appeal of our communities, and a service-oriented property management team that is focused on the specific needs of residents, enhances market appeal. We believe our mission of Creating a Better Way To Live helps us achieve higher rental rates and occupancy levels while minimizing resident turnover and operating expenses.
Our Current Communities are located in the following geographic markets:
Number of
communities at Number of
apartment homes at Percentage of total
apartment homes at
1/31/2020 1/31/2021 1/31/2020 1/31/2021 1/31/2020 1/31/2021
New England 47 45 11,854 11,487 14.9 % 14.4 %
Boston, MA 39 40 10,440 10,541 13.1 % 13.2 %
Fairfield, CT 8 5 1,414 946 1.8 % 1.2 %
Metro NY/NJ 56 54 15,989 15,528 20.1 % 19.4 %
New York City, NY 14 14 5,089 5,089 6.5 % 6.4 %
New York Suburban 19 18 4,573 4,464 5.7 % 5.6 %
New Jersey 23 22 6,327 5,975 7.9 % 7.4 %
Mid-Atlantic 42 43 14,531 14,902 18.2 % 18.7 %
Washington Metro 37 38 12,969 13,340 16.2 % 16.7 %
Baltimore, MD 5 5 1,562 1,562 2.0 % 2.0 %
Pacific Northwest 19 20 5,135 5,451 6.5 % 6.8 %
Seattle, WA 19 20 5,135 5,451 6.5 % 6.8 %
Northern California 42 42 12,548 12,629 15.7 % 15.8 %
San Jose, CA 12 12 4,713 4,713 5.9 % 5.9 %
Oakland-East Bay, CA 13 15 3,847 4,336 4.8 % 5.4 %
San Francisco, CA 17 15 3,988 3,580 5.0 % 4.5 %
Southern California 60 59 17,279 17,209 21.7 % 21.5 %
Los Angeles, CA 40 39 11,843 11,773 14.9 % 14.7 %
Orange County, CA 12 12 3,370 3,370 4.2 % 4.2 %
San Diego, CA 8 8 2,066 2,066 2.6 % 2.6 %
Expansion markets 8 9 2,300 2,650 2.9 % 3.4 %
Denver, CO 4 4 1,086 1,086 1.4 % 1.4 %
Southeast Florida 4 5 1,214 1,564 1.5 % 2.0 %
274 272 79,636 79,856 100.0 % 100.0 %
We manage and operate substantially all of our Current Communities. During the year ended December 31, 2020, we completed construction of eight communities containing 2,095 apartment homes and sold 10 operating communities containing 1,887 apartment homes. The average age of our Current Communities, on a weighted average basis according to number of apartment homes, is 19.9 years. When adjusted to reflect redevelopment activity, as if redevelopment were a new construction completion date, the weighted average age of our Current Communities is 11.1 years.
Of the Current Communities, as of January 31, 2021, we owned (directly or through wholly-owned subsidiaries):
•258 operating communities, including 248 with a full fee simple, or absolute, ownership interest and 10 that are on land subject to a land lease. The land leases have various expiration dates from May 2041 to March 2142, and four of the land leases are used to support tax advantaged structures that ultimately allow us to purchase the land upon lease expiration.
•A general partnership interest and an indirect limited partnership interest in Archstone Multifamily Partners AC LP (the “U.S. Fund”) and Multifamily Partners AC JV LP (the “AC JV”), subsidiaries of which own three and two operating communities, respectively.
•A membership interest in four limited liability companies. One of the ventures, the NYC Joint Venture, through subsidiaries owns a fee simple interest in three operating communities and a leasehold interest in two additional operating communities. The other three ventures that each hold a fee simple interest in an operating community, one of which is consolidated for financial reporting purposes.
•A general partnership interest in one partnership structured as a “DownREIT,” which is consolidated and owns one community. In this partnership, one of our wholly-owned subsidiaries is the general partner. Limited partners are entitled to receive an initial distribution before any distribution is made to the general partner. The distributions per unit paid to the holders of units of limited partnership interests are equal to our current common stock dividend amount. The limited partnership interests have the right to present all or some of their units for redemption for a cash amount based on the fair value of our common stock. In lieu of a cash redemption by the partnership, we may elect to acquire any unit presented for redemption for one share of our common stock. At January 31, 2021, there were 7,500 DownREIT partnership units outstanding.
In addition to our Current Communities, we also hold, directly or through wholly-owned subsidiaries, a full fee simple ownership interest in our wholly-owned Development Communities, a membership interest in two limited liability companies that each hold an interest in an Unconsolidated Development Community, and a wholly-owned mixed-use project with for-sale condominiums.
Development Communities
As of December 31, 2020, we owned or held a direct interest in 16 Development Communities. We expect these Development Communities, when completed, to add a total of 5,128 apartment homes and 62,000 square feet of commercial space to our portfolio for a total capitalized cost, including land acquisition costs, of approximately $1,951,000,000. We cannot assure you that we will meet our schedule for construction completion or that we will meet our budgeted costs, either individually, or in the aggregate. You should carefully review Item 1A. “Risk Factors” for a discussion of the risks associated with development activity and our discussion under Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations” (including the factors identified under “Forward-Looking Statements”) for further discussion of development activity.
The following table presents a summary of the Development Communities.
Number of
apartment
homes Projected total
capitalized cost (1)
($ millions) Construction
start Initial projected or actual occupancy (2) Estimated
completion Estimated
stabilized operations (3)
1. Avalon Yonkers
Yonkers, NY
590 $ 196 Q4 2017 Q3 2019 Q1 2021 Q3 2021
2. AVA Hollywood (4)
Hollywood, CA
695 375 Q4 2016 Q4 2019 Q1 2021 Q4 2021
3. Avalon Old Bridge
Old Bridge, NJ
252 72 Q3 2018 Q3 2020 Q2 2021 Q4 2021
4. Avalon 555 President
Baltimore, MD
400 139 Q3 2018 Q3 2020 Q3 2021 Q1 2022
5. Avalon Newcastle Commons II
Newcastle, WA
293 107 Q4 2018 Q4 2020 Q3 2021 Q2 2022
6. Kanso Twinbrook
Rockville, MD
238 66 Q4 2018 Q4 2020 Q2 2021 Q4 2021
7. Avalon Harrison (4)
Harrison, NY
143 77 Q4 2018 Q2 2021 Q2 2022 Q3 2022
8. Avalon Brea Place
Brea, CA
653 290 Q2 2019 Q1 2021 Q2 2022 Q1 2023
9. Avalon Foundry Row
Owings Mill, MD
437 100 Q2 2019 Q1 2021 Q1 2022 Q3 2022
10. Avalon Acton II
Acton, MA
86 32 Q4 2019 Q3 2020 Q1 2021 Q2 2021
11. Avalon Woburn
Woburn, MA
350 121 Q4 2019 Q3 2021 Q2 2022 Q4 2022
12. AVA RiNo
Denver, CO
246 87 Q4 2019 Q1 2022 Q2 2022 Q4 2022
13. Avalon Monrovia
Monrovia, CA
154 68 Q4 2019 Q1 2021 Q3 2021 Q1 2022
14. Avalon Harbor Isle
Island Park, NY
172 90 Q4 2020 Q1 2022 Q3 2022 Q1 2023
15. Avalon Easton II
Easton, MA
44 15 Q4 2020 Q3 2021 Q4 2021 Q1 2022
16. Avalon Somerville Station
Somerville, NJ
375 116 Q4 2020 Q2 2022 Q3 2023 Q1 2024
Total 5,128 $ 1,951
_________________________________
(1)Projected total capitalized cost includes all capitalized costs projected to be or actually incurred to develop the respective Development Community, determined in accordance with GAAP, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees, as well as costs incurred for first generation commercial tenants such as tenant improvements and leasing commissions.
(2)Initial projected occupancy dates are estimates.
(3)Stabilized operations is defined as the earlier of (i) attainment of 90% or greater physical occupancy or (ii) the one-year anniversary of completion of development.
(4)Development Communities containing at least 10,000 square feet of commercial space include AVA Hollywood (19,000 square feet) and Avalon Harrison (27,000 square feet).
During the year ended December 31, 2020, the Company completed the development of the following communities:
Number of
apartment
homes Total capitalized
cost (1)
($ millions) Approximate rentable area
(sq. ft.) Total capitalized cost per sq. ft. Quarter of completion
1. Avalon Teaneck
Teaneck, NJ
248 $ 73 242,988 $ 300 Q1 2020
2. Avalon North Creek
Bothwell, WA
316 83 304,083 273 Q1 2020
3. Avalon Norwood
Norwood, MA
198 61 244,361 250 Q1 2020
4. Avalon Public Market
Emeryville, CA
289 175 287,658 608 Q3 2020
5. Avalon Marlborough II
Marlborough, MA
123 42 166,364 252 Q4 2020
6. Avalon Towson
Towson, MD
371 114 320,840 355 Q4 2020
7. Avalon Walnut Creek II
Walnut Creek, CA
200 113 202,916 557 Q4 2020
8. Avalon Doral
Doral, FL
350 116 324,057 358 Q4 2020
Total 2,095 $ 777
____________________________________
(1)Total capitalized cost is as of December 31, 2020. We generally anticipate incurring additional costs associated with these communities that are customary for new developments.
Unconsolidated Development Communities
As of December 31, 2020, we had an indirect interest in the following Unconsolidated Development Communities.
Unconsolidated
Development Community Company
ownership percentage # of apartment homes Projected total
capitalized cost (1)
($ millions) Construction
start Initial projected
occupancy
(2) Estimated
completion
1. Avalon Alderwood Mall
Lynnwood, WA
50.0 % 328 $ 110 Q4 2019 Q4 2021 Q3 2022
2. AVA Arts District (3)
Los Angeles, CA
25.0 % 475 276 Q3 2020 Q1 2023 Q4 2023
Total 803 $ 386
_____________________________
(1)Projected total capitalized cost includes all capitalized costs projected to be incurred to develop the respective Unconsolidated Development Community, determined in accordance with GAAP, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees and other regulatory fees, as well as costs incurred for first generation commercial tenants such as tenant improvements and leasing commissions. Projected total capitalized cost is the total projected joint venture amount.
(2)Initial projected occupancy dates are estimates.
(3)AVA Arts District is expected to contain 56,000 square feet of commercial space.
Development Rights
At December 31, 2020, we had $110,142,000 in acquisition and related capitalized costs for direct interests in five land parcels we own. In addition, we own the land for four development Rights that are additional development phases of existing stabilized operating communities we own and which will be constructed on land currently adjacent to or directly associated with those operating communities. In addition, we had $55,427,000 in capitalized costs (including legal fees, design fees and related overhead costs) related to 15 Development Rights for which we control the land parcel, typically through a conditional agreement or option to purchase or lease the land. Collectively, the land held for development and associated costs for deferred development rights relate to 24 Development Rights for which we expect to develop new apartment communities in the future. The Development Rights range from those beginning design and architectural planning to those that have completed site plans and drawings and can begin construction almost immediately. We estimate that the successful completion of all of these
communities would ultimately add approximately 7,853 apartment homes to our portfolio. Substantially all of these apartment homes will offer features like those offered by the communities we currently own.
The properties comprising the Development Rights are in different stages of the due diligence and regulatory approval process. The decisions as to which of the Development Rights to invest in, if any, or to continue to pursue once an investment in a Development Right is made, are business judgments that we make after we perform financial, demographic and other analyses. In the event that we do not proceed with a Development Right, we generally would not recover any of the capitalized costs incurred in the pursuit of those communities, unless we were to recover amounts in connection with the sale of land; however, we cannot guarantee a recovery. Pre-development costs incurred in the pursuit of Development Rights, for which future development is not yet considered probable, are expensed as incurred. In addition, if the status of a Development Right changes, making future development no longer probable, any unrecoverable capitalized pre-development costs are charged to expense. During 2020, we incurred a charge of $12,399,000 for expensed transaction, development and other pursuit costs, net of recoveries, which include development pursuits that were not yet probable of future development at the time incurred, or for pursuits that we determined were no longer probable of being developed. This charge includes the write-off of $7,264,000 related to a Development Right in New York City, with a projected total capitalized cost of $688,000,000, that we no longer expect is probable.
You should carefully review Item 1A. “Risk Factors,” for a discussion of the risks associated with Development Rights.
Land Acquisitions
We select land for development and follow established procedures that we believe minimize both the cost and the risks of development. During 2020, we acquired the following land parcels for an aggregate investment of $114,395,000.
Estimated
number of
apartment
homes Projected total
capitalized
cost (1)
($ millions) Date
acquired
1. Avalon Harbor Isle (2)
Island Park, NY
172 $ 90 February 2020
2. Avalon Merrick Park
Coral Gables, FL
254 96 March 2020
3. Avalon Somerville Station (2)
Somerville, NJ
375 116 October 2020
4. Avalon Bothell Commons (3)
Bothell, WA
908 360 October 2020
5. Avalon Easton II (2)
Easton, MA
44 15 October 2020
6. Avalon South Miami
Miami, FL
248 108 November 2020
7. Avalon Westminster Promenade
Westminster, CO
312 99 December 2020
Total 2,313 $ 884
____________________________________
(1)Projected total capitalized cost includes all capitalized costs incurred to date (if any) and projected to be incurred to develop the respective community, determined in accordance with GAAP, including land and related acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees, as well as costs incurred for first generation commercial tenants such as tenant improvements and leasing commissions, net of projected proceeds for any planned sales of associated outparcels and other real estate.
(2)Construction on this land parcel commenced during 2020.
(3)Land purchased for the expected development of two adjacent operating communities.
Disposition Activity
We sell assets when they do not meet our long-term investment strategy or when real estate markets allow us to realize a portion of the value created over our periods of ownership, and we generally redeploy the proceeds from those sales to develop, redevelop and acquire communities. Pending such redeployment, we will generally use the proceeds from the sale of these communities to reduce amounts outstanding under our Credit Facility or retain the cash proceeds on our balance sheet until it is redeployed into acquisition, development or redevelopment activity. On occasion, we will set aside the proceeds from the sale of communities into a cash escrow account to facilitate a tax-deferred, like-kind exchange transaction. From January 1, 2020 to January 31, 2021, we sold our interest in ten wholly-owned operating communities, containing 2,055 apartment homes, with an aggregate gross sales price of $699,750,000.
Insurance and Risk of Uninsured Losses
We maintain commercial general liability insurance and property insurance with respect to all of our communities, with insurance policies issued by a combination of third party insurers as well as a wholly-owned captive insurance company. These policies, along with other insurance policies we maintain, have policy specifications, insured and self-insured limits, exclusions and deductibles that we consider commercially reasonable. We utilize a wholly-owned captive insurance company to insure certain types and amounts of risks, which include property damage and resulting business interruption losses, general liability insurance and other construction related liability risks. The captive is utilized to insure other limited levels of risk, which may be in part reinsured by third party insurance. There are, however, certain types of losses (including, but not limited to, losses arising from nuclear liability, pandemic or acts of war) that are not insured, in full or in part, because they are either uninsurable or the cost of insurance makes it, in management’s view, economically impractical. You should carefully review the discussion under Part I, Item 1A. “Risk Factors” of this Form 10-K for a discussion of risks associated with an uninsured property or casualty loss.
Our communities are insured for certain property damage and business interruption losses through a combination of community specific insurance policies and/or a master property insurance program which covers the majority of our communities. This master property program provides a $400,000,000 limit for any single occurrence, subject to certain sub-limits and exclusions. Under the master property program, we are subject to various deductibles per occurrence, as well as additional self-insured retentions. In addition to our potential liability for the various policy self-insured retentions and deductibles, our captive insurance company is directly responsible for 100% of the first $25,000,000 of losses (per occurrence) and 10% of the second $25,000,000 of losses (per occurrence) incurred by the master property insurance policy. Our master property insurance program includes coverage for losses resulting from wildfires and windstorm. Limits, deductibles, self-insured retentions, and coverages are consistent with customary market programs and may increase or decrease annually during the insurance renewal process, which occurs on different dates throughout the calendar year.
Many of our West Coast communities are located within the general vicinity of active earthquake faults. Many of our communities are near, and thus susceptible to, the major fault lines in California, including the San Andreas Fault, the Hayward Fault or other geological faults that are known or unknown. We cannot assure you that an earthquake would not cause damage or losses greater than our current insured levels. We procure property damage and resulting business interruption insurance coverage with a loss limit of $175,000,000 for any single occurrence and in the annual aggregate for losses resulting from earthquakes. However, for any losses resulting from earthquakes at communities located in California or Washington, the loss limit is $200,000,000 for any single occurrence and in the annual aggregate.
Our communities are insured for third-party liability losses through a combination of community specific insurance policies and/or coverage provided under a master commercial general liability and umbrella/excess insurance program. The master commercial general liability and umbrella/excess insurance policies cover the majority of our communities and are subject to certain coverage limitations and exclusions. Our captive insurance company is directly responsible for covered liability claims arising out of our primary commercial general liability policy, subject to a $2,000,000 per occurrence loss limit.
We also maintain certain casualty policies (general liability, umbrella/excess and workers compensation) for construction related risks which have various exclusions and deductibles that, in management’s view, are commercially reasonable.
Just as with office buildings, transportation systems and government buildings, there have been reports that apartment communities could become targets of terrorism. Our communities are insured for terrorism related losses through the Terrorism Risk Insurance Program Reauthorization Act (“TRIPRA”) program. This coverage extends to most of our casualty exposures (subject to deductibles and insured limits) and certain property insurance policies. We have also purchased private-market insurance for property damage due to terrorism with limits of $600,000,000 per occurrence and in the annual aggregate that includes certain coverages (not covered under TRIPRA) such as domestic-based terrorism. This insurance, often referred to as “non-certified” terrorism insurance, is subject to deductibles, limits, and exclusions.
An additional consideration for insurance coverage and potential uninsured losses is mold growth or other environmental contamination. Mold growth may occur when excessive moisture accumulates in buildings or on building materials, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. If a significant mold problem arises at one of our communities, we could be required to undertake a costly remediation program to contain or remove the mold from the affected community and could be exposed to other liabilities. For further discussion of the risks and our related prevention and remediation activities, please refer to the discussion under Part I, Item 1A. “Risk Factors - We may incur costs due to environmental contamination or non-compliance” elsewhere in this report. We cannot provide assurance that we will have coverage under our existing policies for property damage or liability to third parties arising as a result of exposure to mold or a claim of exposure to mold at one of our communities.
We also maintain a crime policy (also commonly referred to as a fidelity policy or employee dishonesty policy) that applies to losses from employee theft of money, securities or property and a cyber liability insurance policy that applies to losses from breaches of data privacy. These policies are subject to maximum loss limits and include coverage limitations or exclusion that may preclude a full insurance recovery of losses related to employee theft or breaches of data privacy.
The amount or types of insurance we maintain may not be sufficient to cover all losses and we may change our policy limits, coverages, and self-insured retentions at any time.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims and/or administrative proceedings that arise in the ordinary course of its business. While no assurances can be given, the Company does not currently believe that any of these outstanding litigation matters, individually or in the aggregate, will have a material adverse effect on its financial condition or results of operations.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the NYSE under the ticker symbol AVB. On January 29, 2021 there were 443 holders of record of an aggregate of 139,527,493 shares of our outstanding common stock. The number of holders does not include individuals or entities who beneficially own shares but whose shares are held of record by a broker or clearing agency, but does include each such broker or clearing agency as one record holder.
At present, we expect to continue our policy of paying regular quarterly cash dividends. However, the form, timing and/or amount of dividend distributions will be declared at the discretion of the Board of Directors and will depend on actual cash from operations, our financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code and other factors as the Board of Directors may consider relevant. The Board of Directors may modify our dividend policy from time to time.
In February 2021, we announced that our Board of Directors declared a dividend on our common stock for the first quarter of 2021 of $1.59 per share, consistent with our previous quarterly dividend. The dividend will be payable on April 15, 2021 to all common stockholders of record as of March 31, 2021.
Issuer Purchases of Equity Securities
Period (a)
Total Number
of Shares
Purchased (1) (b)
Average
Price Paid
Per Share (c)
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (d)
Maximum Dollar
Amount that May Yet
be Purchased Under
the Plans or Programs
(in thousands) (2)
October 1- October 31, 2020 220,220 $ 148.20 219,186 $ 330,083
November 1- November 30, 2020 93,871 $ 148.45 93,871 $ 316,148
December 1- December 31, 2020 36 $ 169.28 - $ 316,148
_________________________________
(1)Consists primarily of activity under the 2020 Stock Repurchase Program and includes shares surrendered to the Company in connection with exercise of stock options as payment of exercise price, as well as for taxes associated with the vesting of restricted share grants.
(2)In July 2020, the Board of Directors approved the 2020 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. Purchases of common stock under the 2020 Stock Repurchase Program may be exercised from time to time in the Company’s discretion and in such amounts as market conditions warrant. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions and other corporate liquidity requirements and priorities. The 2020 Stock Repurchase Program does not have an expiration date and may be suspended or terminated at any time without prior notice.
Information regarding securities authorized for issuance under equity compensation plans is included in the section entitled Item 12. “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in this Form 10-K.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. RESERVED

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help provide an understanding of our business, financial condition and results of operations. This MD&A should be read in conjunction with our Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included elsewhere in this report. This report, including the following MD&A, contains forward-looking statements regarding future events or trends that should be read in conjunction with the factors described under “Forward-Looking Statements” included in this report. Actual results or developments could differ materially from those projected in such statements as a result of the factors described under “Forward-Looking Statements” as well as the risk factors described in Part I, Item 1A. “Risk Factors” of this report.
Capitalized terms used without definition have the meanings provided elsewhere in this Form 10-K.
Executive Overview
Business Description
Our strategic vision is to be the leading apartment company in select U.S. markets, providing a range of distinctive living experiences that customers value. We pursue this vision by targeting what we believe are among the best markets and submarkets, leveraging our strategic capabilities in market research and consumer insight and being disciplined in our capital allocation and balance sheet management. Our communities are predominately upscale and generally command among the highest rents in their markets. However, we also pursue the ownership and operation of apartment communities that target a variety of customer segments and price points, consistent with our goal of offering a broad range of products and services. We regularly evaluate the market allocation of our investments by current market value and share of total revenue and NOI, as well as relative asset value and submarket positioning.
We develop, redevelop, acquire, own and operate multifamily apartment communities in New England, the New York/New Jersey metro area, the Mid-Atlantic, the Pacific Northwest, Northern and Southern California, as well as in our expansion markets in Southeast Florida and Denver, Colorado (the "Expansion Markets"). We focus on leading metropolitan areas that we believe historically have been characterized by growing employment in high wage sectors of the economy, higher cost of home ownership and a diverse and vibrant quality of life. We believe these market characteristics have offered and will continue in the future to offer the opportunity for superior risk-adjusted returns over the long-term on apartment community investments relative to other markets that do not have these characteristics. We seek to create long-term shareholder value by accessing capital on cost effective terms; deploying that capital to develop, redevelop and acquire apartment communities in our selected markets; leveraging our scale and competencies in technology and data science to operate apartment communities; and selling communities when they no longer meet our long-term investment strategy or when pricing is attractive.
2020 Financial Highlights
Net income attributable to common stockholders for the year ended December 31, 2020 was $827,630,000, an increase of $41,656,000, or 5.3%, as compared to the prior year. The increase is primarily attributable to increases in real estate sales and related gains, as well as NOI from Development and Other Stabilized Communities in the current year. These amounts were partially offset by a decrease in NOI from Established Communities and communities sold in 2019 and 2020, and an increase in depreciation expense in the current year.
Established Communities NOI for the year ended December 31, 2020 decreased by $96,395,000, or 6.4%, from the prior year. The decrease was due to a decrease in rental revenue of 3.7%, of which $43,970,000 was due to uncollectible lease revenue, $33,768,000 of which was for residential revenue and $10,202,000 was for commercial revenue, as well as an increase in property operating expenses of $17,424,000, or 2.9%, over 2019.
During 2020, we raised approximately $2,150,622,000 of gross capital through the issuance of unsecured notes and the sale of nine consolidated operating communities, condominiums at The Park Loggia and other real estate. This amount does not include our share of proceeds from joint venture dispositions. We believe that our current capital structure will continue to provide financial flexibility to access capital on attractive terms.
We believe our development activity will continue to create long-term value. During 2020, we:
•Completed the construction of eight consolidated apartment communities containing an aggregate of 2,095 apartment homes for an aggregate total capitalized cost of $777,000,000.
•Started the construction of three consolidated apartment communities containing an aggregate of 591 apartment homes, which are expected to be completed for an estimated total capitalized cost of $221,000,000.
•Started the construction of one unconsolidated apartment community containing 475 apartment homes, which is expected to be completed for an estimated total capitalized cost of $276,000,000, or $69,000,000 when including only our 25.0% interest.
We believe that our balance sheet strength, as measured by our current level of indebtedness, our current ability to service interest and other fixed charges, and our current moderate use of financial encumbrances (such as secured financing), provide us with adequate access to liquidity from the capital markets. We expect to be able to meet our reasonably foreseeable liquidity needs, as they arise, through a combination of one or more of the following sources: existing cash on hand; operating cash flows; borrowings under our Credit Facility; secured debt; the issuance of corporate securities (which could include unsecured debt, preferred equity and/or common equity); the sale of apartment communities; or through the formation of joint ventures. See the discussion under "Liquidity and Capital Resources."
COVID-19 Pandemic
We have taken various actions in response to the COVID-19 pandemic to adjust our business operations and to address the health and safety of our residents and associates. During the year ended December 31, 2020, we adopted varying measures to help mitigate the financial impact arising from the national emergency on our residents, including providing flexible lease renewal options, creating payment plans for residents who are unable to pay their rent because they are impacted by this national emergency and, in certain jurisdictions, waiving late fees and certain other customary fees associated with apartment rentals. To the extent still implemented, we may discontinue these measures at any time except where required by law.
The impact on our consolidated results of operations from COVID-19 for periods beyond 2020 will depend on the duration and severity of the pandemic, the effectiveness of vaccines and the timing of vaccine availability, the duration and nature of governmental responses to contain the spread of the disease and cushion the impact on consumers, the responses of consumers and businesses with respect to living and work preferences, and how quickly and to what extent normal economic and operating conditions can resume. The current and potential future impacts of the COVID-19 pandemic on our business, particularly on (i) rent levels, collectibility of rents, occupancy and the extent to which we waive certain other customary fees associated with our apartment rental business and (ii) development timing and volume, mean that our historical results of operations and financial condition are not indicative of future results of operations and financial condition.
The COVID-19 pandemic has impacted our rental operations including (i) revenues and expenses, as well as (ii) our collections and associated outstanding receivables. For further discussion see "Results of Operations." The following table presents the percentage of (i) apartment base rent charged to residents and (ii) other rentable items, including parking and storage rent, along with pet and other fees in accordance with residential leases, that has been collected ("Collected Residential Revenue") for Established Communities for the three months ended June 30, 2020, September 30, 2020 and December 31, 2020. Collected Residential Revenue excludes transactional and other fees.
At quarter end (1)(2) At January 31, 2021 (3)(4)
Q2 2020 95.4% 98.1%
Q3 2020 95.2% 97.1%
Q4 2020 94.8% 95.9%
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(1)Collections presented reflect our Established Communities for 2020 and excludes commercial revenue, which was 0.7% and 1.2% of our 2020 and 2019 Established Communities' total revenue, respectively.
(2)The Collected Residential Revenue percentage as of June 30, 2020 for Q2 2020, September 30, 2020 for Q3 2020 and December 31, 2020 for Q4 2020, respectively.
(3)The percentage of Collected Residential Revenue as of January 31, 2021 for Q2 2020, Q3 2020 and Q4 2020.
(4)Collected Residential Revenue for January 2021 as of January 31, 2021 was 92.9%.
The collection rates are based on individual resident activity as reflected in our property management systems and are presented to provide information about collections trends during the COVID-19 pandemic. Prior to the COVID-19 pandemic, the collections information provided was not routinely produced for internal use by senior management or publicly disclosed by the Company and is a result of analysis that is not subject to internal controls over financial reporting. This information is not prepared in accordance with GAAP, does not reflect GAAP revenue or cash flow metrics and may be subject to adjustment in preparing GAAP revenue and cash flow metrics. Additionally, this information should not be interpreted as predicting the Company’s financial performance, results of operations or liquidity for any period. At December 31, 2020, our outstanding rent receivable balance for residential and commercial tenants, net of reserves, increased to $18,159,000 from $11,594,000 at December 31, 2019.
Communities Overview
As of December 31, 2020 we owned or held a direct or indirect ownership interest in 291 apartment communities containing 86,025 apartment homes in 11 states and the District of Columbia, of which 16 consolidated communities were under development and one community was under redevelopment. We have an indirect interest in 14 of the 291 apartment communities which were owned by entities that were not consolidated for financial reporting purposes, including two that are being developed within joint ventures. In addition, we held a direct or indirect ownership interest in Development Rights to develop an additional 24 communities that, if developed as expected, will contain an estimated 7,853 apartment homes.
Our real estate investments consist primarily of Current Communities, Development Communities, Unconsolidated Development Communities and Development Rights. Our Current Communities are further distinguished as Established Communities, Other Stabilized Communities, Lease-Up Communities, Redevelopment Communities and Unconsolidated Communities.
Established Communities are generally consolidated communities in markets where we have a significant presence that were owned and had stabilized occupancy as of the beginning of the prior year, allowing for a meaningful comparison of operating results between years. Other Stabilized Communities are generally all other completed consolidated communities that have stabilized occupancy at the beginning of the current year or were acquired during the year. Lease-Up Communities are consolidated communities where construction has been complete for less than one year and stabilized occupancy has not been achieved. Redevelopment Communities are consolidated communities where substantial redevelopment is in progress or is planned to begin during the fiscal year. Unconsolidated Communities are communities in which we have an indirect ownership interest through our investment interest in an unconsolidated entity. A more detailed description of our reportable segments and other related operating information can be found in Note 8, “Segment Reporting,” of our Consolidated Financial Statements.
Although each of these categories is important to our business, we generally evaluate overall operating, industry and market trends based on the operating results of Established Communities, for which a detailed discussion can be found in “Results of Operations” as part of our discussion of overall operating results. We evaluate our current and future cash needs and future operating potential based on acquisition, disposition, development, redevelopment and financing activities within Other Stabilized, Redevelopment and Development Communities. Discussions related to current and future cash needs and financing activities can be found under "Liquidity and Capital Resources."
NOI of our current operating communities is one of the financial measures that we use to evaluate the performance of our communities. NOI is affected by the demand and supply dynamics within our markets, our rental rates and occupancy levels and our ability to control operating costs. Our overall financial performance is also impacted by the general availability and cost of capital and the performance of newly developed, redeveloped and acquired apartment communities.
Results of Operations
As discussed above under “Executive Overview - COVID-19 Pandemic” and elsewhere in this report, the COVID-19 pandemic has affected our business, and may continue to do so. See also Part I, Item 1A, “Risk Factors.” Our year-over-year operating performance is primarily affected by both overall and individual geographic market conditions and apartment fundamentals and is reflected in changes in NOI of our Established Communities; NOI derived from acquisitions, development completions and development under construction and in lease-up; loss of NOI related to disposed communities; and capital market and financing activity. A comparison of our operating results for 2020 and 2019 follows (dollars in thousands). Discussion of our operating results for 2019 and comparison to 2018 can be found in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Form 10-K filed with the SEC on February 21, 2020.
For the year ended 2020 vs. 2019
2020 2019 $ Change % Change
Revenue:
Rental and other income $ 2,297,442 $ 2,319,666 $ (22,224) (1.0) %
Management, development and other fees 3,819 4,960 (1,141) (23.0) %
Total revenue 2,301,261 2,324,626 (23,365) (1.0) %
Expenses:
Direct property operating expenses, excluding property taxes 448,658 427,114 21,544 5.0 %
Property taxes 273,189 252,961 20,228 8.0 %
Total community operating expenses 721,847 680,075 41,772 6.1 %
Corporate-level property management and other indirect operating expenses 101,255 88,031 13,224 15.0 %
Expensed transaction, development and other pursuit costs, net of recoveries 12,399 4,991 7,408 148.4 %
Interest expense, net 214,151 203,585 10,566 5.2 %
Loss on extinguishment of debt, net 9,333 602 8,731 1,450.3 %
Depreciation expense 707,331 661,578 45,753 6.9 %
General and administrative expense 60,343 58,042 2,301 4.0 %
Total other expenses 1,104,812 1,016,829 87,983 8.7 %
Equity in income of unconsolidated real estate entities 6,422 8,652 (2,230) (25.8) %
Gain on sale of communities 340,444 166,105 174,339 105.0 %
Gain on other real estate transactions, net 440 439 1 0.2 %
Net for-sale condominium activity 2,551 (3,812) 6,363 N/A (1)
Income before income taxes 824,459 799,106 25,353 3.2 %
Income tax benefit (expense) 3,247 (13,003) 16,250 N/A (1)
Net income 827,706 786,103 41,603 5.3 %
Net income attributable to noncontrolling interests (76) (129) 53 (41.1) %
Net income attributable to common stockholders $ 827,630 $ 785,974 $ 41,656 5.3 %
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(1) Percent change is not meaningful.
Net income attributable to common stockholders increased $41,656,000, or 5.3%, to $827,630,000 in 2020 from 2019, primarily attributable to increases in real estate sales and related gains, as well as NOI from Development and Other Stabilized Communities in the current year. These amounts were partially offset by a decrease in NOI from Established Communities and communities sold in 2019 and 2020, and an increase in depreciation expense in the current year.
NOI is considered by management to be an important and appropriate supplemental performance measure to net income because it helps both investors and management to understand the core operations of a community or communities prior to the allocation of any corporate-level or financing-related costs. NOI reflects the operating performance of a community and allows for an easier comparison of the operating performance of individual assets or groups of assets. In addition, because prospective buyers of real estate have different financing and overhead structures, with varying marginal impact to overhead as a result of acquiring real estate, NOI is considered by many in the real estate industry to be a useful measure for determining the value of a real estate asset or group of assets. We define NOI as total property revenue less direct property operating expenses (including property taxes), and excluding corporate-level income (including management, development and other fees), corporate-level property management and other indirect operating expenses, expensed transaction, development and other pursuit costs, net of recoveries, interest expense, net, (gain) loss on extinguishment of debt, net, general and administrative expense, equity in income of unconsolidated real estate entities, depreciation expense, corporate income tax (benefit) expense, casualty and impairment (gain) loss, net, gain on sale of communities, (gain) loss on other real estate transactions, net for-sale condominium activity and net operating income from real estate assets sold or held for sale.
NOI does not represent cash generated from operating activities in accordance with GAAP, and NOI should not be considered an alternative to net income as an indication of our performance. NOI should also not be considered an alternative to net cash flow from operating activities, as determined by GAAP, as a measure of liquidity, nor is NOI indicative of cash available to fund cash needs. Reconciliations of NOI for the years ended December 31, 2020 and 2019 to net income for each year are as follows (dollars in thousands):
For the year ended
12/31/20 12/31/19
Net income $ 827,706 $ 786,103
Indirect operating expenses, net of corporate income 97,443 83,008
Expensed transaction, development and other pursuit costs, net of recoveries 12,399 4,991
Interest expense, net 214,151 203,585
Loss on extinguishment of debt, net 9,333 602
General and administrative expense 60,343 58,042
Equity in income of unconsolidated real estate entities (6,422) (8,652)
Depreciation expense 707,331 661,578
Income tax (benefit) expense (3,247) 13,003
Gain on sale of real estate assets (340,444) (166,105)
Gain on other real estate transactions, net (440) (439)
Net for-sale condominium activity (2,551) 3,812
Net operating income from real estate assets sold or held for sale (28,412) (45,354)
Net operating income $ 1,547,190 $ 1,594,174
The NOI decrease for 2020 as compared to 2019 consists of changes in the following categories (dollars in thousands):
Full Year
Established Communities $ (96,395)
Other Stabilized Communities 17,226
Development and Redevelopment Communities 32,185
Total $ (46,984)
The decrease in our Established Communities' NOI in 2020 is due to a decrease in rental revenue of 3.7%, of which $43,970,000 was due to uncollectible lease revenue, $33,768,000 of which was for residential revenue and $10,202,000 was for commercial revenue, as well as an increase in property operating expenses of $17,424,000, or 2.9%, over 2019.
Rental and other income for the consolidated portfolio decreased $22,224,000, or 1.0%, in 2020 compared to the prior year due to an increase of $53,298,000 in uncollectible lease revenue as a result of the COVID-19 pandemic, of which $39,600,000 relates to residential revenue and $13,698,000 relates to commercial revenue, as well as decreased occupancy and rental rates at our Established Communities and revenue from communities sold in 2019 and 2020, partially offset by additional rental income generated from development completions, development under construction and in lease-up and acquired operating communities.
During 2020 as a result of the pandemic, we increased our use of residential concessions. The increased concessions, which are amortized on a straight-line basis over the life of the respective leases (generally one year), contributed to the overall decline in our rental revenue in 2020 and will continue to impact rental revenue in 2021. The amortization of residential concessions increased by $21,434,000 in 2020 as compared to the prior year, and the remaining net unamortized balance of residential concessions as of December 31, 2020 was $35,367,000.
As discussed elsewhere in this report, the COVID-19 impact and related economic, regulatory and operating impacts are likely to continue to adversely affect our rental revenue, and comparisons to prior year periods, during the COVID-19 pandemic. If job losses in our markets and nationally continue, this would likely continue to decrease our ability to maintain and/or increase rents and/or maintain occupancy at our historical levels. Deteriorating financial conditions among our residents and commercial tenants, as well as regulations that limit our ability to evict residents and tenants, may continue to result in higher than normal uncollectible lease revenue. The pandemic may also continue to depress demand among consumers for our apartments for a variety of other reasons, including the following: consumers whose income has declined, who are working from home remotely or who cannot freely access neighborhood amenities like restaurants, gyms and entertainment venues, may decide during the pandemic to live in markets or submarkets that are less costly than ours; low interest rates that are caused by government response to the pandemic may encourage consumers who would otherwise rent to seek out home ownership; and various sources of demand for our apartments (e.g., students, corporate apartment homes, seasonal job-related demand as in the entertainment industry) may remain below pre-pandemic levels.
Consolidated Communities-The weighted average number of occupied apartment homes for consolidated communities increased to 73,724 apartment homes for 2020, as compared to 72,901 homes for 2019. The weighted average monthly rental revenue per occupied apartment home decreased to $2,593 for 2020 as compared to $2,647 in 2019.
The following table presents the year to date change in rental revenue, including the attribution of the change between rental rates and Economic Occupancy, for Established Communities.
For the year ended
Rental revenue (000s) (1) Average rental rates Economic Occupancy (2)
$ Change % Change % Change % Change
2020 2019 2020 to
2019 2020 to
2019 2020 2019 2020 to
2019 2020 2019 2020 to
New England $ 297,915 $ 303,993 $ (6,078) (2.0) % $ 2,821 $ 2,836 (0.5) % 93.9 % 95.4 % (1.5) %
Metro NY/NJ 445,585 465,498 (19,913) (4.3) % 3,065 3,159 (3.0) % 94.8 % 96.1 % (1.3) %
Mid-Atlantic 341,008 351,183 (10,175) (2.9) % 2,245 2,256 (0.5) % 93.8 % 96.2 % (2.4) %
Pacific Northwest 108,981 112,553 (3,572) (3.2) % 2,319 2,368 (2.1) % 95.1 % 96.2 % (1.1) %
Northern California 377,840 396,828 (18,988) (4.8) % 3,043 3,139 (3.1) % 94.5 % 96.2 % (1.7) %
Southern California 432,123 451,065 (18,942) (4.2) % 2,298 2,398 (4.2) % 95.7 % 95.7 % - %
Expansion Markets 23,267 23,401 (134) (0.6) % 2,268 2,270 (0.1) % 93.7 % 94.2 % (0.5) %
Total Established $ 2,026,719 $ 2,104,521 $ (77,802) (3.7) % 2,624 2,689 (2.4) % 94.6 % 95.9 % (1.3) %
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(1) Includes both residential and commercial rental revenue. Total Established Communities residential rental revenue decreased 3.2% in 2020 from 2019.
(2) Economic occupancy takes into account the fact that apartment homes of different sizes and locations within a community have different economic impacts on a community's gross revenue. Economic occupancy is defined as gross potential revenue less vacancy loss, as a percentage of gross potential revenue. Gross potential revenue is determined by valuing occupied homes at leased rates and vacant homes at market rents. Vacancy loss is determined by valuing vacant units at current market rents.
The following table presents the change in rental revenue for Established Communities for the year ended December 31, 2020, compared to the prior year:
For the year ended
12/31/2020
Residential rental revenue
Lease rates 0.5 %
Concessions and other discounts (0.7) %
Economic occupancy (1.3) %
Other rental revenue (0.1) %
Uncollectible lease revenue (1) (1.6) %
Total residential rental revenue (3.2) %
Commercial rental revenue (2) (0.5) %
Total Established Communities change in rental revenue (3.7) %
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(1) Uncollectible lease revenue increased $33,768,000 to $44,829,000, or 2.18% of total residential revenue, as compared to 0.53% of total residential revenue for 2019.
(2) Consists primarily of $11,157,000 of recognized uncollectible commercial lease revenue, of which $5,514,000 represents the write-off of straight line rent receivables.
Management, development and other fees decreased $1,141,000, or 23.0%, in 2020 as a result of dispositions by unconsolidated ventures resulting in lower property and asset management fees earned in the current year, coupled with lower revenue within the ventures.
Direct property operating expenses, excluding property taxes increased $21,544,000, or 5.0%, in 2020 as compared to the prior year, primarily due to the addition of newly developed and acquired apartment communities. The increase is also partially due to operating expenses at our Established Communities, including increased turnover expenses and an increase in COVID-19 related costs for personal protective equipment and cleaning.
For Established Communities, direct property operating expenses, excluding property taxes, increased $9,034,000, or 2.4%, in 2020 as compared to the prior year, primarily due to overall operating costs, including increased turnover expenses and an increase in COVID-19 related costs for personal protective equipment and cleaning.
Property taxes increased $20,228,000, or 8.0%, in 2020 as compared to the prior year, primarily due to the addition of newly developed and acquired apartment communities and increased assessments for the Company's stabilized portfolio, partially offset by decreased property taxes from dispositions.
For Established Communities, property taxes increased $8,390,000, or 3.7%, in 2020 as compared to the prior year, primarily due to increased assessments and rates across the portfolio in the current year, as well as successful appeals in the prior year in excess of those in the current year. For communities in California, property tax changes are determined by the change in the California Consumer Price Index, with increases limited by law (Proposition 13). We evaluate property tax increases internally and also engage third-party consultants to assist in our evaluations. We appeal property tax increases when appropriate.
Corporate-level property management and other indirect operating expenses increased $13,224,000, or 15.0%, in 2020 as compared to the prior year, primarily due to costs related to an increased investment in technology initiatives to improve efficiency in services for residents and prospects, increased compensation related costs and advocacy contributions of $8,558,000 related to California Proposition 21 in the current year. Proposition 21 was a California referendum that failed in the November 3, 2020 election.
Expensed transaction, development and other pursuit costs, net of recoveries primarily reflect costs incurred for development pursuits not yet considered probable for development, as well as the abandonment of Development Rights and costs related to abandoned acquisition and disposition pursuits. These costs can be volatile, particularly in periods of increased acquisition pursuit activity, periods of economic downturn or when there is limited access to capital, and therefore may vary significantly from year to year. Expensed transaction, development and other pursuit costs, net of recoveries, increased $7,408,000, or 148.4%, in 2020 as compared to the prior year. The amount for 2020 includes the write-off of $7,264,000 related to a Development Right in New York City, with a projected total capitalized cost of $688,000,000, that we no longer expect is probable.
Interest expense, net increased $10,566,000, or 5.2%, in 2020 as compared to the prior year. This category includes interest costs offset by capitalized interest pertaining to development and redevelopment activity, amortization of premium/discount on debt, and interest income. The increase in 2020 was primarily due to a decrease in capitalized interest and interest income, coupled with an increase in outstanding unsecured indebtedness in the current year. This was partially offset by lower overall effective rates on unsecured indebtedness, a combination of a decrease in variable rates on, and amounts of, secured indebtedness, and gain on interest rate contract.
Loss on the extinguishment of debt, net reflects prepayment penalties, the write-off of unamortized deferred financing costs and premiums from our debt repurchase and retirement activity, or payments to acquire our outstanding debt at amounts above or below the carrying basis of the debt acquired. The loss of $9,333,000 in 2020 was primarily due to the repayments of unsecured notes during the year, ahead of their scheduled maturity.
Depreciation expense increased $45,753,000, or 6.9%, in 2020 as compared to the prior year, primarily due to the addition of newly developed and acquired apartment communities, partially offset by dispositions.
General and administrative expense (“G&A”) increased $2,301,000, or 4.0%, in 2020 as compared to the prior year, primarily due to legal settlement proceeds that were present in the prior year, partially offset by a decrease in compensation related expenses due to associate retirements in 2019.
Equity in income of unconsolidated real estate entities decreased $2,230,000, or 25.8%, in 2020 as compared to the prior year, primarily due to decreased NOI from the ventures in the current year, including dispositions and our acquisition of the 45.0% equity interest of AVA North Point that was owned by our venture partner in 2019, upon which we consolidated AVA North Point as a wholly-owned operating community.
Gain on sale of communities increased in 2020 as compared to the prior year. The amount of gain realized in a given period depends on many factors, including the number of communities sold, the size and carrying value of the communities sold and the market conditions in the local area. The gain of $340,444,000 in 2020 was primarily due to the sale of nine wholly-owned operating communities. The gain of $166,105,000 in 2019 was primarily due to the sale of six wholly-owned operating communities.
Net for-sale condominium activity is a net gain of $2,551,000 for the year ended December 31, 2020 and an expense of $3,812,000 for the year ended December 31, 2019, and in 2020 is comprised of the gain before taxes on the sale of condominiums at The Park Loggia, net of marketing, operating and administrative costs. During the year ended December 31, 2020, we sold 70 residential condominiums at The Park Loggia, for gross proceeds of $216,372,000, resulting in a gain in accordance with GAAP of $8,213,000. In addition, we incurred $5,662,000 and $3,812,000 for the years ended December 31, 2020 and 2019, respectively, in marketing, operating and administrative costs.
Income tax benefit (expense) of $3,247,000 for the year ended December 31, 2020 was primarily due to losses generated through taxable REIT subsidiaries ("TRS") and provisions of the Coronavirus Aid, Relief, and Economic Security Act, allowing for further carryback of net operating losses. Income tax expense for the year ended December 31, 2019 consists of $5,782,000 of income tax expenses for a deferred tax liability for the GAAP to tax basis differences at The Park Loggia, which is being realized as we sell the condominiums, and $7,221,000 related to other activity we undertook through TRSs including the disposition of two wholly-owned operating communities and expense for deferred tax liabilities related to our sustainability initiatives.
Reconciliation of Non-GAAP Financial Measures
Funds from Operations attributable to common stockholders, or “FFO,” and FFO adjusted for non-core items, or “Core FFO,” as defined below, are generally considered by management to be appropriate supplemental measures of our operating and financial performance. In calculating FFO, we exclude gains or losses related to dispositions of previously depreciated property and exclude real estate depreciation, which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates. FFO can help one compare the operating performance of a real estate company between periods or as compared to different companies. By further adjusting for items that are not considered by us to be part of our core business operations, Core FFO allows one to compare the core operating performance of the Company year over year. We believe that, in order to understand our operating results, FFO and Core FFO should be examined with net income as presented in the Consolidated Statements of Comprehensive Income included elsewhere in this report.
Consistent with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts® (“NAREIT”), we calculate FFO as net income or loss attributable to common stockholders computed in accordance with GAAP, adjusted for:
•gains or losses on sales of previously depreciated operating communities;
•cumulative effect of change in accounting principle;
•impairment write-downs of depreciable real estate assets;
•write-downs of investments in affiliates due to a decrease in the value of depreciable real estate assets held by those affiliates;
•depreciation of real estate assets; and
•similar adjustments for unconsolidated partnerships and joint ventures, including those from a change in control.
We calculate Core FFO as FFO, adjusted for:
•joint venture gains (if not adjusted through FFO), non-core costs and promoted interests from partnerships;
•casualty and impairment losses or gains, net on non-depreciable real estate;
•gains or losses from early extinguishment of consolidated borrowings;
•abandoned pursuits;
•business interruption insurance proceeds and the related lost NOI that is covered by the expected business interruption insurance proceeds;
•property and casualty insurance proceeds and legal settlements;
•gains or losses on sales of assets not subject to depreciation;
•advocacy contributions, representing payments to promote our business interests;
•hedge ineffectiveness or gains or losses from derivatives not designated as hedges for accounting purposes;
•severance related costs;
•net for-sale condominium activity, including gains, marketing, operating and administrative costs and imputed carry cost;
•income taxes; and
•other non-core items.
FFO and Core FFO do not represent net income in accordance with GAAP, and therefore should not be considered an alternative to net income, which remains the primary measure, as an indication of our performance. In addition, FFO and Core FFO as calculated by other REITs may not be comparable to our calculations of FFO and Core FFO.
FFO and Core FFO also do not represent cash generated from operating activities in accordance with GAAP, and therefore should not be considered an alternative to net cash flows from operating activities, as determined by GAAP, as a measure of liquidity. Additionally, it is not necessarily indicative of cash available to fund cash needs. A presentation of GAAP based cash flow metrics is included in our Consolidated Financial Statements included elsewhere in this report.
The following is a reconciliation of net income attributable to common stockholders to FFO attributable to common stockholders and to Core FFO attributable to common stockholders (dollars in thousands, except per share data).
For the year ended
12/31/20 12/31/19
Net income attributable to common stockholders $ 827,630 $ 785,974
Depreciation - real estate assets, including joint venture adjustments 704,331 666,563
Distributions to noncontrolling interests 48 46
Gain on sale of unconsolidated entities holding previously depreciated real estate (5,157) (5,788)
Gain on sale of previously depreciated real estate (340,444) (166,105)
FFO attributable to common stockholders $ 1,186,408 $ 1,280,690
Adjusting items:
Joint venture losses 375 87
Business interruption insurance proceeds (385) (1,441)
Lost NOI from casualty losses covered by business interruption insurance 48 675
Loss on extinguishment of consolidated debt 9,333 602
Gain on interest rate contract (2,894) -
Advocacy contributions 8,558 50
Severance related costs 2,142 2,327
Development pursuit write-offs and expensed transaction costs, net (1) 11,443 3,782
Gain on for-sale condominiums (2) (8,213) -
For-sale condominium marketing, operating and administrative costs (2) 5,662 3,812
For-sale condominium imputed carry cost (3) 11,317 6,351
Gain on other real estate transactions (440) (439)
Legal settlements (4) 490 (6,292)
Income tax (benefit) expense (5) (3,247) 13,003
Core FFO attributable to common stockholders $ 1,220,597 $ 1,303,207
Weighted average common shares outstanding - diluted 140,435,195 139,571,550
EPS per common share - diluted $ 5.89 $ 5.63
FFO per common share - diluted $ 8.45 $ 9.18
Core FFO per common share - diluted $ 8.69 $ 9.34
_________________________________
(1) Amounts for 2020 includes the write-off of $7,264 related to a Development Right in New York City, with a projected total capitalized cost of $688,000, that we no longer expect is probable.
(2) The aggregate impact of (i) gain on for-sale condominiums and (ii) for-sale condominium marketing, operating and administrative costs is a net gain of $2,551 for 2020, and an expense of $3,812 for 2019.
(3) Represents the imputed carry cost of for-sale residential condominiums at The Park Loggia. We compute this adjustment by multiplying the total capitalized cost of completed and unsold for-sale residential condominiums by our weighted average unsecured debt rate.
(4) Amounts for 2019 include $2,237 in legal settlement proceeds related to a construction defect at a community and $3,126 in legal settlement proceeds related to a former Development Right.
(5) Amount for 2020 relates to tax losses generated through taxable REIT subsidiaries ("TRS") as well as provisions of the Coronavirus Aid, Relief, and Economic Security Act. Amount for 2019 consists of $5,782 primarily related to a net deferred tax liability for the GAAP to tax basis differences at The Park Loggia and $7,221 related to the other activity we undertook through TRSs, including the disposition of two wholly-owned operating communities and deferred tax obligations related to our sustainability initiatives.
Liquidity and Capital Resources
We employ a disciplined approach to our liquidity and capital management. When we source capital, we take into account both our view of the most cost effective alternative available and our desire to maintain a balance sheet that provides us with flexibility. Our principal focus on near-term and intermediate-term liquidity is to ensure we have adequate capital to fund:
•development and redevelopment activity in which we are currently engaged or in which we plan to engage;
•the minimum dividend payments on our common stock required to maintain our REIT qualification under the Code;
•debt service and principal payments either at maturity or opportunistically before maturity;
•normal recurring operating expenses and corporate overhead expenses; and
•investment in our operating platform, including strategic investments.
Factors affecting our liquidity and capital resources are our cash flows from operations, financing activities and investing activities (including dispositions) as well as general economic and market conditions. Cash flows from operations are determined by: operating activities and factors including but not limited to (i) the number of apartment homes currently owned, (ii) rental rates, (iii) occupancy levels (iv) uncollectible lease revenue levels or interruptions in collections caused by market conditions and (v) operating expenses with respect to apartment homes. The timing and type of capital markets activity in which we engage is affected by changes in the capital markets environment, such as changes in interest rates or the availability of cost-effective capital. Our plans for development, redevelopment, non-routine capital expenditure, acquisition and disposition activity are affected by market conditions and capital availability. We frequently review our liquidity needs, especially in periods with volatile market conditions, as well as the adequacy of cash flows from operations and other expected liquidity sources to meet these needs.
We had cash, cash equivalents and cash in escrow of $313,532,000 at December 31, 2020, an increase of $185,918,000 from $127,614,000 at December 31, 2019. The following discussion relates to changes in cash, cash equivalents and cash in escrow due to operating, investing and financing activities, which are presented in our Consolidated Statements of Cash Flows included elsewhere in this report.
Operating Activities-Net cash provided by operating activities decreased to $1,219,615,000 in 2020 from $1,321,804,000 in 2019, primarily due to decreases in rental income, including the impact of uncollectible lease revenue.
Investing Activities-Net cash used in investing activities totaled $179,433,000 in 2020. The net cash used was primarily due to:
•investment of $843,907,000 in the development and redevelopment of communities; and
•capital expenditures of $137,036,000 for our operating communities and non-real estate assets (primarily related to our corporate and certain regional offices).
These amounts are partially offset by:
•net proceeds from the disposition of nine operating communities of $619,773,000; and
•net proceeds from the sale of for-sale residential condominiums of $202,033,000.
Financing Activities-Net cash used in financing activities totaled $854,264,000 in 2020. The net cash used was primarily due to:
•repayments of unsecured notes in the amount of $958,680,000;
•payment of cash dividends in the amount of $883,212,000;
•the repurchase of 1,225,790 shares of our common stock at an average price of $149.99 per share for a total purchase price including fees of $183,876,000; and
•the repayment of mortgage notes payable in the amount of $126,712,000, of which $56,852,000 was subsequently refinanced, as discussed below.
These amounts are partially offset by:
•proceeds from the issuance of unsecured notes in the amount of $1,296,581,000; and
•the issuance of a secured note that was part of a refinancing, as discussed above, in the amount of $51,000,000.
Variable Rate Unsecured Credit Facility
We have a $1,750,000,000 revolving variable rate unsecured credit facility with a syndicate of banks (the “Credit Facility”) which matures in February 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 (0.89% at January 31, 2021), assuming a one month borrowing rate. The annual facility fee for the Credit Facility remained at 0.125%, resulting in a fee of $2,188,000 annually based on the $1,750,000,000 facility size and based on our current credit rating.
We had no borrowings outstanding under the Credit Facility and had $2,900,000 outstanding in letters of credit that reduced our borrowing capacity as of January 31, 2021. In addition, we had $32,943,000 outstanding in additional letters of credit on a separate facility unrelated to the Credit Facility as of January 31, 2021.
The phase-out of LIBOR and expected transition to SOFR as a benchmark interest rate will have uncertain and possibly adverse effects on our LIBOR borrowings. See Item 1A. “Risk Factors” for further discussion.
Financial Covenants
We are subject to financial covenants contained in the Credit Facility, Term Loans and the indentures under which our unsecured notes were issued. The principal financial covenants include the following:
•limitations on the amount of total and secured debt in relation to our overall capital structure;
•limitations on the amount of our unsecured debt relative to the undepreciated basis of real estate assets that are not encumbered by property-specific financing; and
•minimum levels of debt service coverage.
We were in compliance with these covenants at December 31, 2020.
In addition, some of our secured borrowings include yield maintenance, defeasance, or prepayment penalty provisions, which would result in us incurring an additional charge in the event of a full or partial prepayment of outstanding principal before the scheduled maturity. These provisions in our secured borrowings are generally consistent with other similar types of debt instruments issued during the same time period in which our borrowings were secured.
Continuous Equity Offering Program
In May 2019, we commenced our fifth continuous equity program ("CEP V") under which we may sell (and/or enter into forward sale agreements for the sale of) up to $1,000,000,000 of our common stock from time to time. Actual sales will depend on a variety of factors to be determined, including market conditions, the trading price of our common stock and determinations of the appropriate sources of funding. In conjunction with CEP V, we engaged sales agents who will receive compensation of up to 1.5% of the gross sales price for shares sold. We expect that, if entered into, we will physically settle each forward sale agreement on one or more dates prior to the maturity date of that particular forward sale agreement, in which case we 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, we may also elect to cash settle or net share settle a forward sale agreement. In connection with each forward sale agreement, we 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. During 2020 and through January 31, 2021, we had no sales under the program. As of January 31, 2021, there are no outstanding forward sale agreements and we had $752,878,000 remaining authorized for issuance under this program.
Forward Interest Rate Swap Agreements
The following activity occurred during the year ended December 31, 2020:
•We settled an aggregate of $600,000,000 of forward interest rate swap agreements, making aggregate payments of $25,135,000. Of the positions settled by us, $250,000,000 were forward interest swaps that we had entered into during 2020. The settled positions were comprised of the following:
◦In conjunction with the issuance of our $700,000,000 unsecured notes due 2030 in February 2020, we settled $350,000,000 of forward interest rate swap agreements designated as cash flow hedges of the interest rate variability on the issuance of the unsecured notes, making a payment of $20,314,000.
◦In conjunction with the issuance of our $600,000,000 unsecured notes due 2031 in May 2020, we settled $250,000,000 of forward interest rate swap agreements designated as cash flow hedges of the interest rate variability on the issuance of the unsecured notes, making a payment of $4,821,000.
We have deferred these amounts in accumulated other comprehensive loss on the accompanying Consolidated Balance Sheets, and are recognizing the impact as a component of interest expense, net, over the term of the respective hedged debt.
•We entered into an additional $150,000,000 of new forward interest rate swap agreements that were executed to reduce the impact of variability of interest rates on a portion of expected debt issuance activity in 2021 (the "Swaps"). Based on changes in our expected capital needs in 2021 as of December 31, 2020, while we may still issue debt in 2021, it is no longer probable that we will issue the debt for which the Swaps were executed. As a result, we ceased hedge accounting and recognized a gain of $2,894,000 for the change in fair of the Swaps for the three months ended December 31, 2020. In January 2021, we terminated the Swaps and received a payment of $6,962,000.
Stock Repurchase Program
In July 2020, our Board of Directors voted to terminate our prior $500,000,000 Stock Repurchase Program (the "Amended 2005 Stock Repurchase Program") and approved a new stock repurchase program under which we may acquire shares of our common stock in open market or negotiated transactions up to an aggregate purchase price of $500,000,000 (the "2020 Stock Repurchase Program"). Purchases of common stock under the 2020 Stock Repurchase Program may be exercised from time to time in our discretion and in such amounts as market conditions warrant. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions and other corporate liquidity requirements and priorities. The 2020 Stock Repurchase Program does not have an expiration date and may be suspended or terminated at any time without prior notice. As of January 31, 2021, we repurchased 1,225,790 shares of common stock at an average price of $149.99 per share, of which all activity took place during the year ended December 31, 2020. As of January 31, 2021, we had $316,148,000 remaining authorized for purchase under this program.
Future Financing and Capital Needs-Debt Maturities
One of our principal long-term liquidity needs is the repayment of long-term debt at maturity. For both our unsecured and secured notes, a portion of the principal of these notes may be repaid prior to maturity. Early retirement of our unsecured or secured notes could result in gains or losses on extinguishment. If we do not have funds on hand sufficient to repay our indebtedness as it becomes due, it will be necessary for us to refinance or otherwise provide liquidity to satisfy the debt at maturity. This refinancing may be accomplished by uncollateralized private or public debt offerings, equity issuances, additional debt financing that is secured by mortgages on individual communities or groups of communities or borrowings under our Credit Facility. Although we believe we will have the capacity to meet our currently anticipated liquidity needs, we cannot assure you that capital from additional debt financing or debt or equity offerings will be available or, if available, that they will be on terms we consider satisfactory, especially in light of the uncertain impacts of the COVID-19 pandemic on capital markets.
The following debt activity occurred during 2020:
•In February 2020, we issued $700,000,000 principal amount of unsecured notes in a public offering under our existing shelf registration statement for net proceeds of approximately $694,701,000. The notes mature in March 2030 and were issued at a 2.30% interest rate.
•In February 2020, we refinanced the secured borrowing for Avalon San Bruno III. The secured borrowing had a fixed interest rate of 3.08% and was refinanced for a principal balance of $51,000,000, with a fixed interest rate of 2.38% and maturity date of March 2027.
•In March 2020, we repaid (i) $400,000,000 principal amount of our 3.625% unsecured notes in advance of the October 2020 scheduled maturity and (ii) $250,000,000 principal amount of our 3.95% unsecured notes in advance of the January 2021 scheduled maturity. In conjunction with these repayments, we recognized a loss on debt extinguishment of $9,170,000 for prepayment penalties and the non-cash write-off of unamortized deferred financing costs.
•In May 2020, we issued $600,000,000 principal amount of unsecured notes in a public offering under our existing shelf registration statement for net proceeds of approximately $593,430,000. The notes mature in January 2031 and were issued at a 2.45% interest rate.
•In May 2020, we repaid $300,000,000 principal amount of variable rate unsecured notes in advance of the January 2021 scheduled maturity, recognizing a charge of $268,000 for the non-cash write-off of deferred financing costs.
•In August 2020, we repaid $67,904,000 principal amount of 4.18% fixed rate debt secured by Avalon Hoboken at par in advance of the December 2020 maturity date.
In January 2021, we repaid $27,795,000 principal amount of 5.37% fixed rate debt secured by Avalon San Bruno II at par in advance of the April 2021 maturity date.
The following table details our consolidated debt maturities for the next five years, excluding our Credit Facility and amounts outstanding related to communities classified as held for sale, for debt outstanding at December 31, 2020 and 2019 (dollars in thousands). We are not directly or indirectly (as borrower or guarantor) obligated in any material respect to pay principal or interest on the indebtedness of any unconsolidated entities in which we have an equity or other interest.
All-In
interest
rate (1) Principal
maturity
date Balance Outstanding (2) Scheduled Maturities
Community 12/31/2019 12/31/2020 2021 2022 2023 2024 2025 Thereafter
Tax-exempt bonds
Fixed rate
Avalon at Chestnut Hill 6.16 % Oct-2047 $ 36,995 $ 36,399 $ 629 $ 663 $ 699 $ 737 $ 778 $ 32,893
Avalon Westbury 3.86 % Nov-2036 (3) 62,200 62,200 - - - - - 62,200
99,195 98,599 629 663 699 737 778 95,093
Variable rate
Avalon Acton 1.13 % Jul-2040 (4) 45,000 45,000 - - - - - 45,000
Avalon Clinton North 1.78 % Nov-2038 (4) 147,000 147,000 - - - - - 147,000
Avalon Clinton South 1.78 % Nov-2038 (4) 121,500 121,500 - - - - - 121,500
Avalon Midtown West 1.70 % May-2029 (4) 98,200 93,500 5,200 5,600 6,100 6,800 7,300 62,500
Avalon San Bruno I 1.67 % Dec-2037 (4) 64,450 63,850 1,900 2,000 2,200 2,300 2,400 53,050
476,150 470,850 7,100 7,600 8,300 9,100 9,700 429,050
Conventional loans
Fixed rate
$250 million unsecured notes 4.04 % Jan-2021 (5) 250,000 - - - - - - -
$450 million unsecured notes 4.30 % Sep-2022 450,000 450,000 - 450,000 - - - -
$250 million unsecured notes 3.00 % Mar-2023 250,000 250,000 - - 250,000 - - -
$400 million unsecured notes 3.78 % Oct-2020 (5) 400,000 - - - - - - -
$350 million unsecured notes 4.30 % Dec-2023 350,000 350,000 - - 350,000 - - -
$300 million unsecured notes 3.66 % Nov-2024 300,000 300,000 - - - 300,000 - -
$525 million unsecured notes 3.55 % Jun-2025 525,000 525,000 - - - - 525,000 -
$300 million unsecured notes 3.62 % Nov-2025 300,000 300,000 - - - - 300,000 -
$475 million unsecured notes 3.35 % May-2026 475,000 475,000 - - - - - 475,000
$300 million unsecured notes 3.01 % Oct-2026 300,000 300,000 - - - - - 300,000
$350 million unsecured notes 3.95 % Oct-2046 350,000 350,000 - - - - - 350,000
$400 million unsecured notes 3.50 % May-2027 400,000 400,000 - - - - - 400,000
$300 million unsecured notes 4.09 % Jul-2047 300,000 300,000 - - - - - 300,000
$450 million unsecured notes 3.32 % Jan-2028 450,000 450,000 - - - - - 450,000
$300 million unsecured notes 3.97 % Apr-2048 300,000 300,000 - - - - - 300,000
$450 million unsecured notes 3.66 % Jun-2029 450,000 450,000 - - - - - 450,000
$700 million unsecured notes 2.69 % Mar-2030 - 700,000 - - - - - 700,000
$600 million unsecured notes 2.65 % Jan-2031 - 600,000 - - - - - 600,000
All-In
interest
rate (1) Principal
maturity
date Balance Outstanding (2) Scheduled Maturities
Community 12/31/2019 12/31/2020 2021 2022 2023 2024 2025 Thereafter
Avalon Walnut Creek 4.00 % Jul-2066 3,847 4,001 - - - - - 4,001
eaves Los Feliz 3.68 % Jun-2027 41,400 41,400 - - - - - 41,400
eaves Woodland Hills 3.67 % Jun-2027 111,500 111,500 - - - - - 111,500
Avalon Russett 3.77 % Jun-2027 32,200 32,200 - - - - - 32,200
Avalon San Bruno II 3.85 % Apr-2021 (6) 28,435 27,844 27,844 - - - - -
Avalon Westbury 4.88 % Nov-2036 (3) 13,665 12,170 1,575 1,655 1,740 1,840 1,930 3,430
Avalon San Bruno III 3.18 % Jun-2020 (7) 50,825 - - - - - - -
Avalon San Bruno III 2.38 % Mar-2027 (7) - 51,000 - - - - - 51,000
Avalon Hoboken 3.55 % Dec-2020 (5) 67,904 - - - - - - -
Avalon Cerritos 3.35 % Aug-2029 30,250 30,250 - - - - - 30,250
6,230,026 6,810,365 29,419 451,655 601,740 301,840 826,930 4,598,781
Variable rate
Term Loan - $100 million 1.23 % Feb-2022 100,000 100,000 - 100,000 - - - -
Term Loan - $150 million 1.16 % Feb-2024 150,000 150,000 - - - 150,000 - -
$300 million unsecured notes 2.45 % Jan-2021 (5) 300,000 - - - - - - -
550,000 250,000 - 100,000 - 150,000 - -
Total indebtedness - excluding Credit Facility $ 7,355,371 $ 7,629,814 $ 37,148 $ 559,918 $ 610,739 $ 461,677 $ 837,408 $ 5,122,924
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(1)Rates are given as of December 31, 2020 and include credit enhancement fees, facility fees, trustees’ fees, the impact of interest rate hedges, offering costs, mark to market amortization and other fees.
(2)Balances outstanding represent total amounts due at maturity, and exclude deferred financing costs and debt discount for the unsecured notes of $47,995 and $41,352 as of December 31, 2020 and 2019, respectively, deferred financing costs and debt discount associated with secured notes of $17,482 and $17,729 as of December 31, 2020 and 2019, respectively, as reflected on our Consolidated Balance Sheets included elsewhere in this report.
(3)Maturity date reflects the contractual maturity of the underlying bond. There is also an associated earlier credit enhancement maturity date.
(4)Financed by variable rate debt, but interest rate is capped through an interest rate protection agreement.
(5)During 2020, we repaid this borrowing in advance of its scheduled maturity date.
(6)During January 2021, we repaid this borrowing at par in advance of its scheduled maturity date.
(7)During 2020, we refinanced the secured borrowing.
Future Financing and Capital Needs-Portfolio and Capital Markets Activity
In light of the COVID-19 pandemic, we continue to monitor the availability of our various capital raising alternatives. In 2021, we expect to meet our liquidity needs from one or more a variety of internal and external sources, which may include (i) real estate dispositions, (ii) cash balances on hand as well as cash generated from our operating activities, (iii) borrowing capacity under our Credit Facility and (iv) secured and unsecured debt financings. Additional sources of liquidity in 2021 may include the issuance of common and preferred equity. Our ability to obtain additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to the real estate industry, our credit ratings and credit capacity, as well as the perception of lenders regarding our long or short-term financial prospects. In addition, the impacts of the COVID-19 pandemic on capital markets, including the availability and costs of debt and equity capital, remain uncertain and may have material adverse effects on our access to capital on attractive terms.
Before beginning new construction or reconstruction activity in 2021, including activity related to communities owned by unconsolidated joint ventures, we plan to source sufficient capital to complete these undertakings, although we cannot assure you that we will be able to obtain such financing. In the event that financing cannot be obtained, we may have to abandon Development Rights, write off associated pre-development costs that were capitalized and/or forego reconstruction activity. In such instances, we will not realize the increased revenues and earnings that we expected from such Development Rights or reconstruction activity and significant losses could be incurred.
From time to time we use joint ventures to hold or develop individual real estate assets. We generally employ joint ventures primarily to mitigate asset concentration or market risk and secondarily as a source of liquidity. We may also use joint ventures related to mixed-use land development opportunities and new markets where our partners bring development and operational expertise and/or experience to the venture. Each joint venture or partnership agreement has been individually negotiated, and our ability to operate and/or dispose of a community in our sole discretion may be limited to varying degrees depending on the terms of the joint venture or partnership agreement. We cannot assure you that we will achieve our objectives through joint ventures.
In evaluating our allocation of capital within our markets, we sell assets that do not meet our long-term investment criteria or when capital and real estate markets allow us to realize a portion of the value created over our ownership periods and redeploy the proceeds from those sales to develop and redevelop communities. Because the proceeds from the sale of communities may not be immediately redeployed into revenue generating assets that we develop, redevelop or acquire, the immediate effect of a sale of a community for a gain is to increase net income, but reduce future total revenues, total expenses and NOI until such time as the proceeds have been redeployed into revenue generating assets. We believe that the temporary absence of future cash flows from communities sold will not have a material impact on our ability to fund future liquidity and capital resource needs.
Unconsolidated Real Estate Investments and Off-Balance Sheet Arrangements
Unconsolidated Investments - Operating Communities
As of December 31, 2020, we had investments in the following unconsolidated real estate entities accounted for under the equity method of accounting, excluding development joint ventures. Refer to Note 5, “Investments in Real Estate Entities,” of the Consolidated Financial Statements included elsewhere in this report, which includes information on the aggregate assets, liabilities and equity, as well as operating results, and our proportionate share of their operating results. For ventures holding operating apartment communities as of December 31, 2020, detail of the real estate and associated indebtedness underlying our unconsolidated investments is presented in the following table (dollars in thousands).
Debt (1)
Unconsolidated Real Estate Investments Company
Ownership
Percentage # of
Apartment
Homes Total
Capitalized
Cost Principal Amount Type Interest
Rate Maturity
Date
NYC Joint Venture
1. Avalon Bowery Place I-New York, NY 206 $ 209,264 $ 93,800 Fixed 4.01 % Jan 2029
2. Avalon Bowery Place II-New York, NY 90 90,973 39,639 Fixed 4.01 % Jan 2029
3. Avalon Morningside-New York, NY (2) 295 211,012 112,500 Fixed 3.55 % Jan 2029/May 2046
4. Avalon West Chelsea-New York, NY (3) 305 127,966 66,000 Fixed 4.01 % Jan 2029
5. AVA High Line-New York, NY (3) 405 121,357 84,000 Fixed 4.01 % Jan 2029
Total NYTA MF Investors LLC 20.0 % 1,301 760,572 395,939 3.88 %
U.S. Fund
1. Avalon Studio 4121-Studio City, CA 149 57,197 26,989 Fixed 3.34 % Nov 2022
2. Avalon Station 250-Dedham, MA 285 98,536 52,570 Fixed 3.73 % Sep 2022
3. Avalon Grosvenor Tower-Bethesda, MD 237 80,727 40,751 Fixed 3.74 % Sep 2022
Total U.S. Fund 28.6 % 671 236,460 120,310 3.65 %
AC JV
1. Avalon North Point-Cambridge, MA (4) 426 190,192 111,653 Fixed 6.00 % Aug 2021
2. Avalon North Point Lofts - Cambridge, MA 103 26,899 - N/A N/A N/A
Total AC JV 20.0 % 529 217,091 111,653 6.00 %
Other Operating Joint Ventures
1. MVP I, LLC 25.0 % 313 128,600 103,000 Fixed 3.24 % Jul 2025
2. Brandywine Apartments of Maryland, LLC 28.7 % 305 19,383 21,005 Fixed 3.40 % Jun 2028
Total Other Joint Ventures 618 147,983 124,005 3.27 %
Total Unconsolidated Investments 3,119 $ 1,362,106 $ 751,907 4.06 %
_________________________________
(1)We have not guaranteed the debt of these unconsolidated investees and bear no responsibility for the repayment.
(2)Borrowing on this community is comprised of two mortgage loans. The interest rate is the weighted average interest rate as of December 31, 2020.
(3)Borrowing on this dual-branded community is comprised of a single mortgage loan.
(4)Borrowing is comprised of a loan made by the equity investors in the venture in proportion to their equity interests.
During 2020, the U.S. Fund sold one community containing 70 apartment homes and 9,000 square feet of commercial space for $65,000,000. Our share of the gain in accordance with GAAP was $5,157,000. In conjunction with the disposition of the community, the U.S. Fund repaid $27,117,000 of secured indebtedness at par.
Unconsolidated Investments - Development Communities
During 2020, we entered into a joint venture to develop, own and operate AVA Arts District, an apartment community located in Los Angeles, CA, which is currently under construction and expected to contain 475 apartment homes and 56,000 square feet of commercial space when completed. We own a 25.0% interest in the venture with a total expected equity investment of $27,600,000, of which $19,500,000 has already been contributed. The venture has secured a $165,600,000 variable rate construction loan to fund approximately 60% of the development of AVA Arts District of which no amounts have been drawn as of December 31, 2020. The venture will commence draws under the loan subsequent to required equity contributions by the venture partners. We have guaranteed the construction loan on behalf of the venture, and any obligations we may incur under the construction loan guarantee, except to the extent that our misconduct gave rise to the obligation, are required capital contributions of the partners based on ownership interest.
In addition, we have a 50.0% interest in Avalon Alderwood MF Member, LLC, a joint venture to develop, own, and operate Avalon Alderwood Mall, an apartment community located in Lynnwood, WA, which is currently under construction and expected to contain 328 apartment homes when complete.
Off-Balance Sheet Arrangements
In addition to our investment interests in consolidated and unconsolidated real estate entities, we have certain off-balance sheet arrangements with the entities in which we invest. Additional discussion of these entities can be found in Note 5, “Investments in Real Estate Entities,” of our Consolidated Financial Statements included elsewhere in this report.
Unless otherwise noted, we have not guaranteed the debt of our unconsolidated real estate entities, as referenced in the tables above, nor do we have any obligation to fund this debt should the unconsolidated real estate entities be unable to do so. In the future, in the event the unconsolidated real estate entities were unable to meet their obligations under a loan, we cannot predict at this time whether we would provide any voluntary support, or take any other action, as any such action would depend on a variety of factors, including the amount of support required and the possibility that such support could enhance the return of the unconsolidated real estate entities and/or our returns by providing time for performance to improve.
There are no other material lines of credit, side agreements, financial guarantees or any other derivative financial instruments related to or between our unconsolidated real estate entities and us. In evaluating our capital structure and overall leverage, management takes into consideration our proportionate share of the indebtedness of unconsolidated entities in which we have an interest.
Contractual Obligations
Scheduled contractual obligations required for the next five years and thereafter are as follows as of December 31, 2020 (dollars in thousands):
Payments due by period
Total Less than 1
Year 1-3 Years 3-5 Years More than 5
Years
Debt Obligations $ 7,629,814 $ 37,148 $ 1,170,657 $ 1,299,085 $ 5,122,924
Interest on Debt Obligations (1) 2,385,745 250,938 466,134 384,972 1,283,701
Operating Lease Obligations (2) 418,971 14,270 27,419 26,842 350,440
Finance Lease Obligations (2)(3) 44,466 1,080 2,166 2,176 39,044
$ 10,478,996 $ 303,436 $ 1,666,376 $ 1,713,075 $ 6,796,109
_________________________________
(1) Interest payments on variable rate debt obligations are calculated based on the rate as of December 31, 2020.
(2) Includes ground leases expiring between May 2041 and March 2142. Amounts do not include any adjustment for purchase options available under the ground leases.
(3) Aggregate finance lease payments include $24,300 in interest costs.
Inflation and Deflation
Substantially all of our apartment leases are for a term of one year or less. In an inflationary environment, this may allow us to realize increased rents upon renewal of existing leases or the beginning of new leases. Short-term leases generally minimize our risk from the adverse effect of inflation, although these leases generally permit residents to leave at the end of the lease term and therefore expose us to the effect of a decline in market rents.
Forward-Looking Statements
This Form 10-K contains “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by our use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “project,” “plan,” “may,” “shall,” “will” and other similar expressions in this Form 10-K, that predict or indicate future events and trends and that do not report historical matters. These statements include, among other things, statements regarding our intent, belief or expectations with respect to:
•the impact of the COVID-19 pandemic on our business, results of operations and financial condition;
•our potential development, redevelopment, acquisition or disposition of communities;
•the timing and cost of completion of apartment communities under construction, reconstruction, development or redevelopment;
•the timing of lease-up, occupancy and stabilization of apartment communities;
•the timing and net sales proceeds of condominium sales;
•the pursuit of land on which we are considering future development;
•the anticipated operating performance of our communities;
•cost, yield, revenue, NOI and earnings estimates;
•the impact of landlord-tenant laws and rent regulations;
•our declaration or payment of dividends;
•our joint venture and discretionary fund activities;
•our policies regarding investments, indebtedness, acquisitions, dispositions, financings and other matters;
•our qualification as a REIT under the Code;
•the real estate markets in Northern and Southern California, Denver, Colorado, and Southeast Florida, and markets in selected states in the Mid-Atlantic, New England, Metro New York/New Jersey and Pacific Northwest regions of the United States and in general;
•the availability of debt and equity financing;
•interest rates;
•general economic conditions, including the potential impacts from current economic conditions and the COVID-19 pandemic;
•trends affecting our financial condition or results of operations; and
•the impact of outstanding legal proceedings.
We cannot assure the future results or outcome of the matters described in these statements; rather, these statements merely reflect our current expectations of the approximate outcomes of the matters discussed. We do not undertake a duty to update these forward-looking statements, and therefore they may not represent our estimates and assumptions after the date of this report. You should not rely on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. These risks, uncertainties and other factors may cause our actual results, performance or achievements to differ materially from the anticipated future results, performance or achievements expressed or implied by these forward-looking statements. You should carefully review the discussion under Item 1A. “Risk Factors” in this report for further discussion of risks associated with forward-looking statements.
Risks and uncertainties that might cause such differences include those related to the COVID-19 pandemic, about which there are many uncertainties, including (i) the duration and severity of the pandemic, (ii) the effect on the multifamily industry and the general economy of measures taken by businesses and the government to prevent the spread of the novel coronavirus and relieve economic distress of consumers, such as governmental limitations on the ability of multifamily owners to evict residents who are delinquent in the payment of their rent and (iii) the preferences of consumers and businesses for living and working arrangements both during and after the pandemic. Due to this uncertainty we are not able at this time to estimate the effect of these factors on our business, but the adverse impact of the pandemic on our business, results of operations, cash flows and financial condition could be material. In addition, the effects of the pandemic are likely to heighten the following risks, which we routinely face in our business:
•we may fail to secure development opportunities due to an inability to reach agreements with third parties to obtain land at attractive prices or to obtain desired zoning and other local approvals;
•we may abandon or defer development opportunities for a number of reasons, including changes in local market conditions which make development less desirable, increases in costs of development, increases in the cost of capital or lack of capital availability, resulting in losses;
•construction costs of a community may exceed our original estimates;
•we may not complete construction and lease-up of communities under development or redevelopment on schedule, resulting in increased interest costs and construction costs and a decrease in our expected rental revenues;
•the timing and net proceeds of condominium sales may not equal our current expectations;
•occupancy rates and market rents may be adversely affected by competition and local economic and market conditions which are beyond our control;
•financing may not be available on favorable terms or at all, and our cash flows from operations and access to cost effective capital may be insufficient for the development of our pipeline, which could limit our pursuit of opportunities;
•the impact of new landlord-tenant laws and rent regulations may be greater than we expect;
•our cash flows may be insufficient to meet required payments of principal and interest, and we may be unable to refinance existing indebtedness or the terms of such refinancing may not be as favorable as the terms of existing indebtedness;
•we may be unsuccessful in our management of joint ventures and the REIT vehicles that are used with certain joint ventures;
•laws and regulations implementing rent control or rent stabilization, or otherwise limiting our ability to increase rents, charge fees or evict tenants, may impact our revenue or increase our costs;
•our expectations, estimates and assumptions as of the date of this filing regarding outstanding legal proceedings are subject to change; and
•the possibility that we may choose to pay dividends in our stock instead of cash, which may result in stockholders having to pay taxes with respect to such dividends in excess of the cash received, if any.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, or different assumptions were made, it is possible that different accounting policies would have been applied, resulting in different financial results or a different presentation of our financial statements. Below is a discussion of the accounting policies that we consider critical to an understanding of our financial condition and operating results that may require complex or significant judgment in their application or require estimates about matters which are inherently uncertain. A discussion of our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 1, “Organization, Basis of Presentation and Significant Accounting Policies,” of our Consolidated Financial Statements.
Cost Capitalization
We capitalize costs during the development of assets. Capitalization begins when we determine that development of a future asset is probable and continues until the asset, or a portion of the asset, is delivered and is ready for its intended use. For redevelopment efforts, we capitalize costs either (i) in advance of taking apartment homes out of service when significant renovation of the common area has begun and continue until the redevelopment is completed, or (ii) when an apartment home is taken out of service for redevelopment and continue until the redevelopment is completed and the apartment home is available for a new resident. Rental income and operating expenses incurred during the initial lease-up or post-redevelopment lease-up period are fully recognized in earnings as they accrue.
During the development and redevelopment efforts we capitalize all direct costs and indirect costs which have been incurred as a result of the development and redevelopment activities. These costs include interest and related loan fees, property taxes as well as other direct and indirect costs. Interest is capitalized for any project-specific financing, as well as for general corporate financing to the extent of our aggregate investment in the projects. Indirect project costs, which include personnel and office and administrative costs that are clearly associated with our development and redevelopment efforts, are also capitalized. Capitalized indirect costs associated with our development and redevelopment activities are comprised primarily of compensation related costs for associates dedicated to our development and redevelopment efforts and total $45,268,000 and $48,168,000 for 2020 and 2019, respectively. The estimation of the direct and indirect costs to capitalize as part of our development and redevelopment activities requires judgment and, as such, we believe cost capitalization to be a critical accounting estimate.
There may be a change in our operating expenses in the event that there are changes in accounting guidance governing capitalization or changes to our levels of development or redevelopment activity. If changes in the accounting guidance limit our ability to capitalize costs or if we reduce our development and redevelopment activities without a corresponding decrease in indirect project costs, there may be an increase in our operating expenses.
We capitalize pre-development costs incurred in pursuit of Development Rights. These costs include legal fees, design fees and related overhead costs. Future development of these pursuits is dependent upon various factors, including zoning and regulatory approval, rental market conditions, construction costs and availability of capital. Pre-development costs incurred for pursuits for which future development is not yet considered probable are expensed as incurred. In addition, if the status of a Development Right changes, making future development no longer probable, any capitalized pre-development costs are written off with a charge to expense.
Due to the subjectivity in determining whether a pursuit will result in the development of an apartment community, and therefore should be capitalized, the accounting for pursuit costs is a critical accounting estimate. As of December 31, 2020, capitalized pursuit costs associated with Development Rights totaled $55,427,000.
Abandoned Pursuit Costs & Asset Impairment
We evaluate our direct and indirect investments in real estate and other long-lived assets for impairment when potential indicators of impairment exist. If events or circumstances indicate that the carrying amount of a property may not be recoverable, we assess its recoverability by comparing the carrying amount of the property to its estimated undiscounted future cash flows. If the carrying amount exceeds the aggregate undiscounted future cash flows, we recognize an impairment loss to the extent the carrying amount exceeds the estimated fair value of the property. We assess land held for development for impairment if our intent changes with respect to the development of the land. We evaluate our unconsolidated investments for impairment, considering both the carrying value of the investment, estimated to be the expected proceeds that it would receive if the entity were dissolved and the net assets were liquidated, as well as our proportionate share of any impairment of assets held by unconsolidated investments.
We expense costs related to abandoned pursuits, which include the abandonment of Development Rights and disposition pursuits. These costs can vary greatly, and the costs incurred in any given period may be significantly different in future years.
Our focus on value creation through real estate development presents an impairment risk in the event of a future deterioration of the real estate and/or capital markets or a decision by us to reduce or cease development. We cannot predict the occurrence of future events that may cause an impairment assessment to be performed, or the likelihood of any future impairment charges, if any. You should also review Item 1A. “Risk Factors” in this Form 10-K.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks from our financial instruments primarily from changes in market interest rates. We do not have exposure to any other significant market risk. We monitor interest rate risk as an integral part of our overall risk management, which recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effect on our results of operations. Our operating results are affected by changes in interest rates, primarily in short-term LIBOR and the SIFMA index as a result of borrowings under our Credit Facility and outstanding bonds and unsecured notes with variable interest rates. In addition, the fair value of our fixed rate unsecured and secured notes are impacted by changes in market interest rates. The effect of interest rate fluctuations on our results of operations historically has been small relative to other factors affecting operating results, such as rental rates and occupancy.
We currently use interest rate protection agreements (consisting of interest rate swap and interest rate cap agreements) for our risk management objectives, as well as for compliance with the requirements of certain lenders, and not for trading or speculative purposes. During 2020, we settled an aggregate of $600,000,000 of forward interest rate swap agreements in conjunction with our February 2020 and May 2020 unsecured note issuances, of which $250,000,000 had been entered into during 2020. During 2020, we entered into an additional $150,000,000 of forward interest rate swap agreements to reduce the impact of variability in interest rates on a portion of our expected debt issuance activity in 2021. Based on changes in our expected capital needs in 2021 as of December 31, 2020, while we may still issue debt in 2021, it is no longer probable that we will issue the debt for which the Swaps were executed, and as a result, we ceased hedge accounting.
In addition, we have interest rate caps that serve to effectively limit the amount of interest rate expense we would incur on a floating rate borrowing. Further discussion of the financial instruments impacted and our exposure is presented below.
As of December 31, 2020 and 2019, we had $720,850,000 and $1,026,150,000, respectively, in variable rate debt outstanding, with no amounts outstanding under our Credit Facility. If interest rates on the variable rate debt had been 100 basis points higher throughout 2020 and 2019, our annual interest incurred would have increased by approximately $8,289,000 and $11,221,000, respectively, based on balances outstanding during the applicable years.
Because the counterparties providing the interest rate cap and swap agreements are major financial institutions which have an A or better credit rating by the Standard & Poor's Ratings Group, we do not believe there is exposure at this time to a default by a counterparty provider.
In addition, changes in interest rates affect the fair value of our fixed rate debt, computed using quoted market prices for our unsecured notes or a discounted cash flow model for our secured notes, considering our current market yields, which impacts the fair value of our aggregate indebtedness. Debt securities and notes payable (including amounts outstanding under our Credit Facility) with an aggregate principal amount outstanding of $7,629,814,000 at December 31, 2020 had an estimated aggregate fair value of $8,315,775,000 at December 31, 2020. Contractual fixed rate debt represented $7,692,497,000 of the fair value at December 31, 2020. If interest rates had been 100 basis points higher as of December 31, 2020, the fair value of this fixed rate debt would have decreased by approximately $1,224,574,000.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item 8 is included as a separate section of this Annual Report on Form 10-K.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
(a)Evaluation of Disclosure Controls and Procedures. As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. We continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.
(b)Management's Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2020 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2020.
Our internal control over financial reporting as of December 31, 2020 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included elsewhere herein.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 pertaining to directors and executive officers of the Company and the Company's Code of Conduct is incorporated herein by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting of Stockholders scheduled to be held on May 20, 2021.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 pertaining to executive compensation is incorporated herein by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting of Stockholders scheduled to be held on May 20, 2021.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 pertaining to security ownership of management and certain beneficial owners of the Company's common stock is incorporated herein by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting of Stockholders scheduled to be held on May 20, 2021, to the extent not set forth below.
The Company maintains the Second Amended and Restated 2009 Equity Incentive Plan (the “2009 Plan”) and the 1996 Non-Qualified Employee Stock Purchase Plan (the “ESPP”), pursuant to which common stock or other equity awards may be issued or granted to eligible persons.
The following table gives information about equity awards under the 2009 Plan and the ESPP as of December 31, 2020:
(a) (b) (c)
Plan category Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights Weighted-average
exercise price of
outstanding options,
warrants and rights Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
Equity compensation plans approved by security holders (1) 539,608 (2) $ 129.35 (3) 6,913,585
Equity compensation plans not approved by security holders (4) - N/A 634,273
Total 539,608 $ 129.35 (3) 7,547,858
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(1) Consists of the 2009 Plan.
(2) Includes 43,260 deferred restricted stock units granted under the 2009 Plan, which, subject to vesting requirements, will convert in the future to common stock on a one-for-one basis. Also includes the maximum number of shares that may be issued upon settlement of outstanding Performance Awards awarded to officers and maturing on December 31, 2020, 2021 and 2022. Does not include 278,043 shares of restricted stock that are outstanding and that are already reflected in the Company's outstanding shares.
(3) Excludes performance awards and deferred units granted under the 2009 Plan, which, subject to vesting requirements, will convert in the future to common stock on a one-for-one basis.
(4) Consists of the ESPP.
The ESPP, which was adopted by the Board of Directors on October 29, 1996, has not been approved by our shareholders. A further description of the ESPP appears in Note 9, “Stock-Based Compensation Plans,” of the Consolidated Financial Statements set forth in Item 8 of this report.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 pertaining to certain relationships and related transactions is incorporated herein by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting of Stockholders to be held on May 20, 2021.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 pertaining to the fees paid to and services provided by the Company's principal accountant is incorporated herein by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting of Stockholders to be held on May 20, 2021.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE
15(a)(1) Financial Statements
Consolidated Financial Statements and Financial Statement Schedule:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Equity for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
15(a)(2) Financial Statement Schedule
Schedule III-Real Estate and Accumulated Depreciation
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
15(a)(3) Exhibits
The exhibits listed on the accompanying Index to Exhibits are filed as a part of this report.