Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2012

 

Commission file number 1-12672

 

AVALONBAY COMMUNITIES, INC.

(Exact name of registrant as specified in its charter)

 


 

Maryland

 

77-0404318

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

Ballston Tower

671 N. Glebe Rd, Suite 800

Arlington, Virginia  22203

(Address of principal executive offices, including zip code)

 

(703) 329-6300

(Registrant’s telephone number, including area code)

 

 

(Former name, if changed since last report)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days.  Yes  x  No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x  No  o

 

Indicate by check mark whether the Exchange registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  o  No  x

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

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

 

97,706,463 shares of common stock, par value $0.01 per share, were outstanding as of October 31, 2012

 

 

 



Table of Contents

 

AVALONBAY COMMUNITIES, INC.

FORM 10-Q

INDEX

 

PART I - FINANCIAL INFORMATION

 

 

 

Page

 

 

 

Item 1. Condensed Consolidated Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011

 

1

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and nine months ended September 30, 2012 and 2011

 

2

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2012 and 2011

 

3-5

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

6-20

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

21-43

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

43

 

 

 

Item 4. Controls and Procedures

 

43

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

Item 1. Legal Proceedings

 

44

 

 

 

Item 1a. Risk Factors

 

44

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

44

 

 

 

Item 3. Defaults Upon Senior Securities

 

45

 

 

 

Item 4. Mine Safety Disclosures

 

45

 

 

 

Item 5. Other Information

 

45

 

 

 

Item 6. Exhibits

 

45

 

 

 

Signatures

 

48

 



Table of Contents

 

AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

 

 

9-30-12

 

12-31-11

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

Real estate:

 

 

 

 

 

Land

 

$

1,438,741

 

$

1,336,225

 

Buildings and improvements

 

7,171,769

 

6,681,136

 

Furniture, fixtures and equipment

 

251,497

 

226,359

 

 

 

8,862,007

 

8,243,720

 

Less accumulated depreciation

 

(2,013,104

)

(1,820,381

)

Net operating real estate

 

6,848,903

 

6,423,339

 

Construction in progress, including land

 

725,450

 

597,346

 

Land held for development

 

304,295

 

325,918

 

Operating real estate assets held for sale, net

 

 

78,427

 

Total real estate, net

 

7,878,648

 

7,425,030

 

 

 

 

 

 

 

Cash and cash equivalents

 

664,133

 

616,853

 

Cash in escrow

 

49,851

 

73,400

 

Resident security deposits

 

25,242

 

23,597

 

Investments in unconsolidated real estate entities

 

139,405

 

144,561

 

Deferred financing costs, net

 

33,557

 

33,653

 

Deferred development costs

 

28,260

 

24,770

 

Prepaid expenses and other assets

 

149,470

 

140,526

 

Total assets

 

$

8,968,566

 

$

8,482,390

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Unsecured notes, net

 

$

1,899,208

 

$

1,629,210

 

Variable rate unsecured credit facility

 

 

 

Mortgage notes payable

 

1,908,872

 

1,969,986

 

Dividends payable

 

94,778

 

84,953

 

Payables for construction

 

51,194

 

36,775

 

Accrued expenses and other liabilities

 

225,111

 

246,214

 

Accrued interest payable

 

21,571

 

34,210

 

Resident security deposits

 

39,754

 

36,620

 

Liabilities related to real estate assets held for sale

 

 

35,467

 

Total liabilities

 

4,240,488

 

4,073,435

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

7,203

 

7,063

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Preferred stock, $0.01 par value; $25 liquidation preference; 50,000,000 shares authorized at both September 30, 2012 and December 31, 2011; zero shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively

 

 

 

Common stock, $0.01 par value; 140,000,000 shares authorized at both September 30, 2012 and December 31, 2011; 97,705,713 and 95,175,677 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively

 

977

 

952

 

Additional paid-in capital

 

4,980,937

 

4,652,457

 

Accumulated earnings less dividends

 

(153,811

)

(171,648

)

Accumulated other comprehensive loss

 

(110,787

)

(87,020

)

Total stockholders’ equity

 

4,717,316

 

4,394,741

 

Noncontrolling interest

 

3,559

 

7,151

 

Total equity

 

4,720,875

 

4,401,892

 

Total liabilities and equity

 

$

8,968,566

 

$

8,482,390

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

1



Table of Contents

 

AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME (LOSS)

(unaudited)

(Dollars in thousands, except per share data)

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

9-30-12

 

9-30-11

 

9-30-12

 

9-30-11

 

Revenue:

 

 

 

 

 

 

 

 

 

Rental and other income  

 

$

269,371

 

$

241,286

 

$

773,424

 

$

698,938

 

Management, development and other fees

 

2,533

 

2,433

 

7,852

 

7,085

 

Total revenue

 

271,904

 

243,719

 

781,276

 

706,023

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Operating expenses, excluding property taxes

 

70,365

 

68,268

 

204,836

 

195,542

 

Property taxes

 

26,184

 

23,741

 

75,641

 

70,908

 

Interest expense, net

 

33,985

 

42,659

 

100,804

 

130,174

 

Loss on extinguishment of debt, net

 

 

 

1,179

 

 

Depreciation expense

 

65,998

 

60,893

 

193,434

 

180,953

 

General and administrative expense

 

8,372

 

6,087

 

26,398

 

21,524

 

Impairment loss

 

 

14,052

 

 

14,052

 

Total expenses

 

204,904

 

215,700

 

602,292

 

613,153

 

 

 

 

 

 

 

 

 

 

 

Equity in income of unconsolidated entities

 

5,553

 

2,615

 

9,801

 

3,513

 

Gain on sale of land

 

 

13,716

 

280

 

13,716

 

Gain on acquisition of unconsolidated entity

 

14,194

 

 

14,194

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

86,747

 

44,350

 

203,259

 

110,099

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

 

327

 

2,870

 

631

 

Gain on sale of real estate assets

 

 

 

95,049

 

7,675

 

Total discontinued operations

 

 

327

 

97,919

 

8,306

 

 

 

 

 

 

 

 

 

 

 

Net income

 

86,747

 

44,677

 

301,178

 

118,405

 

Net loss attributable to noncontrolling interests

 

97

 

147

 

334

 

132

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders  

 

$

86,844

 

$

44,824

 

$

301,512

 

$

118,537

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Unrealized loss on cash flow hedges

 

(6,977

)

(60,270

)

(23,767

)

(79,691

)

Comprehensive income (loss)  

 

$

79,867

 

$

(15,446

)

$

277,745

 

$

38,846

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share - basic:

 

 

 

 

 

 

 

 

 

Income from continuing operations attributable to common stockholders

 

$

0.89

 

$

0.49

 

$

2.12

 

$

1.25

 

Discontinued operations attributable to common stockholders

 

 

 

1.02

 

0.09

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders  

 

$

0.89

 

$

0.49

 

$

3.14

 

$

1.34

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share - diluted:

 

 

 

 

 

 

 

 

 

Income from continuing operations attributable to common stockholders

 

$

0.89

 

$

0.49

 

$

2.11

 

$

1.24

 

Discontinued operations attributable to common stockholders

 

 

 

1.02

 

0.09

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders

 

$

0.89

 

$

0.49

 

$

3.13

 

$

1.33

 

 

 

 

 

 

 

 

 

 

 

Dividends per common share:

 

$

0.9700

 

$

0.8925

 

$

2.9100

 

$

2.6775

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

2



Table of Contents

 

AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(Dollars in thousands)

 

 

 

For the nine months ended

 

 

 

9-30-12

 

9-30-11

 

 

 

 

 

 

 

Net income

 

$

301,178

 

$

118,405

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

Depreciation expense

 

193,434

 

180,953

 

Depreciation expense from discontinued operations

 

895

 

6,002

 

Amortization of deferred financing costs and debt premium/discount

 

4,122

 

4,888

 

Loss on extinguishment of debt

 

1,781

 

 

Amortization of stock-based compensation

 

8,548

 

5,390

 

Equity in income of unconsolidated entities and noncontrolling interests, net of eliminations

 

(7,484

)

(1,177

)

Impairment loss

 

 

14,052

 

Gain on sale of real estate assets

 

(95,329

)

(21,391

)

Gain on acquisition of unconsolidated entity

 

(14,194

)

 

Expensed acquisition costs

 

 

1,010

 

(Increase)/decrease in cash in operating escrows

 

6,644

 

(2,553

)

Increase in resident security deposits, prepaid expenses and other assets

 

(8,069

)

(17,683

)

(Decrease) increase in accrued expenses, other liabilities and accrued interest payable

 

(16,353

)

7,116

 

Net cash provided by operating activities

 

375,173

 

295,012

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Development/redevelopment of real estate assets including land acquisitions and deferred development costs

 

(567,867

)

(456,965

)

Acquisition of real estate assets

 

(105,904

)

(46,275

)

Capital expenditures - existing real estate assets

 

(13,449

)

(14,838

)

Capital expenditures - non-real estate assets

 

(1,094

)

(7,911

)

Proceeds from exchange/sale of real estate, net of selling costs

 

182,225

 

55,479

 

Increase in payables for construction

 

14,419

 

1,770

 

Decrease in cash in construction escrows

 

16,944

 

13,421

 

Increase in investments in unconsolidated real estate entities

 

(8,006

)

(14,163

)

Net cash used in investing activities

 

(482,732

)

(469,482

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Issuance of common stock

 

326,653

 

1,037,630

 

Dividends paid

 

(270,866

)

(233,427

)

Repayments of mortgage notes payable

 

(106,255

)

(42,648

)

Issuance of unsecured notes

 

450,000

 

 

Settlement of interest rate contract

 

(54,930

)

 

Repayment of unsecured notes

 

(179,400

)

(189,900

)

Payment of deferred financing costs

 

(6,744

)

(5,996

)

Acquisition of joint venture partner equity interest

 

(3,350

)

(6,570

)

Distributions to DownREIT partnership unitholders

 

(22

)

(20

)

Distributions to joint venture and profit-sharing partners

 

(247

)

(194

)

Net cash provided by financing activities

 

154,839

 

558,875

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

47,280

 

384,405

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

616,853

 

305,644

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

664,133

 

$

690,049

 

 

 

 

 

 

 

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

 

$

101,121

 

$

129,005

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

 

Supplemental disclosures of non-cash investing and financing activities (amounts in whole dollars):

 

During the nine months ended September 30, 2012:

 

·                  As described in Note 4, “Equity,” 96,592 shares of common stock valued at $12,883,000 were issued in connection with stock grants; 1,830 shares valued at $254,000 were issued through the Company’s dividend reinvestment plan; 120,952 shares valued at $15,491,000 were withheld to satisfy employees’ tax withholding and other liabilities; and 7,558 shares and options valued at $393,000 previously issued in connection with employee compensation were cancelled upon forfeiture. In addition, the Company granted 115,303 options for common stock at a value of $3,357,000.

 

·                  The Company recorded an increase to other liabilities and a corresponding decrease to other comprehensive income of $23,767,000; and recorded a decrease to prepaid expenses and other assets of $11,000, with a corresponding offset to the basis of unsecured notes, net to record the impact of the Company’s hedge accounting activity.

 

·                  Common dividends declared but not paid totaled $94,778,000.

 

·                  The Company recorded an increase of $480,000 in redeemable noncontrolling interests with a corresponding decrease to accumulated earnings less dividends to adjust the redemption value associated with the put option held by a joint venture partner and DownREIT partnership units. For further discussion of the nature and valuation of these items, see Note 10, “Fair Value”.

 

·                  The Company assumed a 4.61% coupon fixed-rate mortgage loan with an outstanding balance of $11,958,000 in conjunction with the acquisition of The Mark Pasadena.

 

During the nine months ended September 30, 2011:

 

·                  499,461 shares of common stock valued at $63,147,000 were issued in connection with stock grants primarily associated with the Company’s 2008 deferred stock performance plan; 2,548 shares valued at $310,000 were issued through the Company’s dividend reinvestment plan; 129,176 shares valued at $14,825,000 were withheld to satisfy employees’ tax withholding and other liabilities; and 505 shares valued at $16,000 were cancelled upon forfeiture.  In addition, the Company granted 144,827 options for common stock at a value of $4,258,000.

 

·                  7,500 units of limited partnership, valued at $365,000 were presented for redemption to the DownREIT partnerships that issued such units and were acquired by the Company in exchange for an equal number of shares of the Company’s common stock.

 

·                  The Company recorded an increase to accrued expenses and other liabilities and a corresponding decrease to other comprehensive income of $79,691,000 and recorded a decrease to prepaid expenses and other assets of $1,324,000, with a corresponding offset to the basis of unsecured notes, net to record the impact of the Company’s hedge accounting activity.

 

·                  Common dividends declared but not paid totaled $84,815,000.

 

·                  The Company recorded an increase of $2,306,000 in redeemable noncontrolling interests with a corresponding decrease to accumulated earnings less dividends to adjust the redemption value associated with the put options held by joint venture partners and DownREIT partnership units.

 

·                  The Company repaid all amounts due under a $93,440,000 variable-rate, tax-exempt bond financing using the proceeds which were held in escrow.

 

·                  The Company assumed a 4.75% coupon fixed-rate mortgage loan with an outstanding balance of $44,044,000 in conjunction with the acquisition of Fairfax Towers.

 

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Table of Contents

 

·                  As part of an asset exchange, the Company assumed a $55,400,000 fixed-rate mortgage loan with a 5.24% interest rate and relinquished a $55,800,000 mortgage loan with a 5.86% fixed rate.

 

·                  The Company entered into a ground lease that is considered a capital lease associated with a development community, recording a capital lease obligation of $14,500,000 in accrued expenses and other liabilities with a corresponding offset to construction in progress including land.

 

·                  The Company recorded an increase in noncontrolling interest of $3,350,000 associated with the consolidation of a development joint venture.

 

5



Table of Contents

 

AVALONBAY COMMUNITIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1.  Organization, Basis of Presentation and Significant Accounting Policies

 

Organization and Basis of Presentation

 

AvalonBay Communities, Inc. (the “Company,” which term, unless the context otherwise requires, refers to AvalonBay Communities, Inc. together with its consolidated subsidiaries), is a Maryland corporation that elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986 (the “Code”). The Company focuses on the development, acquisition, ownership and operation of apartment communities in high barrier to entry markets of the United States. These markets are located in the New England, Metro New York/New Jersey, Mid-Atlantic, Pacific Northwest, and Northern and Southern California regions of the country.

 

At September 30, 2012, the Company owned or held a direct or indirect ownership interest in 183 operating apartment communities containing 53,487 apartment homes in nine states and the District of Columbia, of which seven communities containing 1,802 apartment homes were under reconstruction. In addition, the Company owned or held a direct or indirect ownership interest in 22 communities under construction that are expected to contain an aggregate of 6,614 apartment homes when completed. The Company also owned or held a direct or indirect ownership interest in land or rights to land in which the Company expects to develop an additional 31 communities that, if developed as expected, will contain an estimated 8,837 apartment homes.

 

The interim unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements required by GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited financial statements should be read in conjunction with the financial statements and notes included in the Company’s 2011 Annual Report on Form 10-K. The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the operating results for the full year. Management believes the disclosures are adequate to ensure the information presented is not misleading.  In the opinion of management, all adjustments and eliminations, consisting only of normal, recurring adjustments necessary for a fair presentation of the financial statements for the interim periods, have been included.

 

Capitalized terms used without definition have the meaning as provided elsewhere in this Form 10-Q.

 

Earnings per Common Share

 

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

 

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Table of Contents

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

9-30-12

 

9-30-11

 

9-30-12

 

9-30-11

 

Basic and diluted shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares - basic

 

97,044,603

 

91,388,357

 

95,742,676

 

88,312,930

 

 

 

 

 

 

 

 

 

 

 

Weighted average DownREIT units outstanding

 

7,500

 

7,707

 

7,500

 

8,559

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities

 

494,466

 

944,304

 

651,382

 

878,009

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares - diluted

 

97,546,569

 

92,340,368

 

96,401,558

 

89,199,498

 

 

 

 

 

 

 

 

 

 

 

Calculation of Earnings per Share - basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders

 

$

86,844

 

$

44,824

 

$

301,512

 

$

118,537

 

Net income allocated to unvested restricted shares

 

(186

)

(206

)

(1,003

)

(406

)

Net income attributable to common stockholders, adjusted

 

$

86,658

 

$

44,618

 

$

300,509

 

$

118,131

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares - basic

 

97,044,603

 

91,388,357

 

95,742,676

 

88,312,930

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share - basic

 

$

0.89

 

$

0.49

 

$

3.14

 

$

1.34

 

 

 

 

 

 

 

 

 

 

 

Calculation of Earnings per Share - diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders

 

$

86,844

 

$

44,824

 

$

301,512

 

$

118,537

 

Add: noncontrolling interests of DownREIT unitholders in consolidated partnerships, including discontinued operations

 

7

 

7

 

21

 

20

 

 

 

 

 

 

 

 

 

 

 

Adjusted net income attributable to common stockholders

 

$

86,851

 

$

44,831

 

$

301,533

 

$

118,557

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares - diluted

 

97,546,569

 

92,340,368

 

96,401,558

 

89,199,498

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share - diluted

 

$

0.89

 

$

0.49

 

$

3.13

 

$

1.33

 

 

Certain options to purchase shares of common stock in the amounts of 418,177 and 320,698 were outstanding at September 30, 2012 and 2011, respectively, but were not included in the computation of diluted earnings per share because such options were anti-dilutive.

 

The Company is required to estimate the forfeiture of stock options and recognize compensation cost net of the estimated forfeitures.  The estimated forfeitures included in compensation cost are adjusted to reflect actual forfeitures at the end of the vesting period.  The forfeiture rate at September 30, 2012 is based on the average forfeiture activity over a period equal to the estimated life of the stock options, and was 1.5%. The application of estimated forfeitures did not materially impact compensation expense for the three and nine months ended September 30, 2012 and 2011.

 

Derivative Instruments and Hedging Activities

 

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

 

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Table of Contents

 

Legal and Other Contingencies

 

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

 

The Company accounts for recoveries from legal matters as a reduction in the legal and related costs incurred associated with the matter, with recoveries in excess of these costs reported as a gain or, where appropriate, a reduction in the basis of a community to which the suit related.

 

Use of Estimates

 

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

 

Reclassifications

 

Certain reclassifications have been made to amounts in prior period financial statements to conform to current period presentations.

 

2.  Interest Capitalized

 

The Company capitalizes interest during the development and redevelopment of real estate assets. Capitalized interest associated with the Company’s development or redevelopment activities totaled $12,504,000 and $8,946,000 for the three months ended September 30, 2012 and 2011, respectively, and $37,449,000 and $22,962,000 for the nine months ended September 30, 2012 and 2011, respectively.

 

3.  Notes Payable, Unsecured Notes and Credit Facility

 

The Company’s mortgage notes payable, unsecured notes and Credit Facility, as defined below, as of September 30, 2012 and December 31, 2011, are summarized below (dollars in thousands).  The following amounts and discussion do not include the mortgage notes related to the communities classified as held for sale, if any, as of September 30, 2012 and December 31, 2011, as shown in the Condensed Consolidated Balance Sheets (see Note 6, “Real Estate Disposition Activities”).

 

 

 

9-30-12

 

12-31-11

 

 

 

 

 

 

 

Fixed rate unsecured notes (1)

 

$

1,901,601

 

$

1,556,001

 

Variable rate unsecured notes (1)

 

 

75,000

 

Fixed rate mortgage notes payable - conventional and tax-exempt (2)

 

1,530,681

 

1,528,783

 

Variable rate mortgage notes payable - conventional and tax-exempt

 

376,935

 

440,241

 

 

 

 

 

 

 

Total notes payable and unsecured notes

 

3,809,217

 

3,600,025

 

 

 

 

 

 

 

Credit Facility

 

 

 

 

 

 

 

 

 

Total mortgage notes payable, unsecured notes and Credit Facility

 

$

3,809,217

 

$

3,600,025

 

 


(1)         Balances at September 30, 2012 and December 31, 2011 exclude $2,393 and $1,802, respectively, of debt discount, and $0 and $11, respectively, for basis adjustments, as reflected in unsecured notes on the Company’s Condensed Consolidated Balance Sheets.

(2)         Balances at September 30, 2012 and December 31, 2011 exclude $1,255 and $962, respectively of debt premium as reflected in mortgage notes payable on the Company’s Condensed Consolidated Balance Sheets.

 

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Table of Contents

 

The following debt activity occurred during the nine months ended September 30, 2012:

 

·                  In January 2012, the Company repaid $179,400,000 principal amount of its 5.5% coupon unsecured notes pursuant to their scheduled maturity.

·                  In February 2012, in conjunction with the acquisition of a community, the Company assumed the existing 4.61% mortgage note in the amount of $11,958,000 that matures in June 2018, and is secured by the community.

·                  Also in February 2012, the Company repaid a variable rate secured mortgage note in the amount of $48,500,000 in advance of its November 2039 scheduled maturity date.  In conjunction with the early retirement the Company incurred a non-cash charge of $1,179,000 for the write off of deferred financing fees which was recognized as a loss on extinguishment of debt.

·                  In May 2012, the Company repaid a variable rate secured mortgage note in the amount of $14,566,000 in accordance with its scheduled maturity date.

·                  Also in May 2012, in conjunction with the disposition of an operating community, the Company repaid a variable rate secured mortgage note in the amount of $33,100,000 in advance of its scheduled maturity date. The Company incurred a charge of $602,000 for a prepayment penalty and the write off of deferred financing fees associated with the early repayment of this note included in income from discontinued operations on the accompanying Condensed Consolidated Statements of Comprehensive Income (Loss).

·                  In September 2012, the Company issued $450,000,000 principal amount of unsecured notes in a public offering under its existing shelf registration statement.  The notes mature in September 2022 and were issued at a 2.95% coupon rate. The notes have an effective interest rate of approximately 4.30%, including the effect of an interest rate hedge and offering costs.

 

The Company has a variable rate unsecured credit facility (the “Credit Facility”) with a syndicate of commercial banks, which has an available borrowing capacity of $750,000,000 and a 4-year term, plus a one year extension option.  The Credit Facility was entered into in September 2011 and it bears interest at varying levels based on the London InterBank Offered Rate (“LIBOR”), rating levels achieved on the Company’s unsecured notes and on a maturity schedule selected by the Company.  The current stated pricing is LIBOR plus 1.075% per annum (1.29% at September 30, 2012). The Company had no borrowings outstanding under the Credit Facility and had $45,596,000 and $52,659,000 outstanding in letters of credit that reduced the borrowing capacity as of September 30, 2012 and December 31, 2011, respectively.

 

In the aggregate, secured notes payable mature at various dates from April 2013 through July 2066, and are secured by certain apartment communities and improved land parcels (with a net carrying value of $1,525,208,000 as of September 30, 2012).

 

As of September 30, 2012, the Company has guaranteed approximately $245,933,000 of mortgage notes payable held by wholly owned subsidiaries; all such mortgage notes payable are consolidated for financial reporting purposes.  The weighted average interest rate of the Company’s fixed rate mortgage notes payable (conventional and tax-exempt) was 5.9% at September 30, 2012 and 5.7% at December 31, 2011.  The weighted average interest rate of the Company’s variable rate mortgage notes payable and its Credit Facility, including the effect of certain financing related fees, was 2.4% at September 30, 2012 and 2.3% at December 31, 2011.

 

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Table of Contents

 

Scheduled payments and maturities of mortgage notes payable and unsecured notes outstanding at September 30, 2012 are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

Stated

 

 

 

Secured

 

Secured

 

Unsecured

 

interest rate

 

 

 

notes

 

notes

 

notes

 

of unsecured

 

Year

 

payments (1)

 

maturities

 

maturities

 

notes

 

 

 

 

 

 

 

 

 

 

 

2012

 

$

3,612

 

$

 

$

201,601

 

6.125

%

 

 

 

 

 

 

 

 

 

 

2013

 

13,376

 

223,473

 

100,000

 

4.950

%

 

 

 

 

 

 

 

 

 

 

2014

 

14,284

 

 

150,000

 

5.375

%

 

 

 

 

 

 

 

 

 

 

2015

 

12,170

 

406,019

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

12,807

 

 

250,000

 

5.750

%

 

 

 

 

 

 

 

 

 

 

2017

 

13,709

 

18,300

 

250,000

 

5.700

%

 

 

 

 

 

 

 

 

 

 

2018

 

14,330

 

11,073

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

2,597

 

610,813

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

2,768

 

 

250,000

 

6.100

%

 

 

 

 

 

 

 

 

 

 

2021

 

2,952

 

 

250,000

 

3.950

%

 

 

 

 

 

 

 

 

 

 

Thereafter

 

86,698

 

458,635

 

450,000

 

2.950

%

 

 

 

 

 

 

 

 

 

 

 

 

$

179,303

 

$

1,728,313

 

$

1,901,601

 

 

 

 


(1)  Secured note payments are comprised of the principal pay downs for amortizing mortgage notes.

 

The Company was in compliance at September 30, 2012 with all financial and other covenants under the Credit Facility and the Company’s unsecured notes.

 

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Table of Contents

 

4.  Equity

 

The following summarizes the changes in equity for the nine months ended September 30, 2012 (dollars in thousands):

 

 

 

 

 

 

 

Accumulated

 

Accumulated

 

Total

 

 

 

 

 

 

 

 

 

Additional

 

earnings

 

other

 

AvalonBay

 

 

 

 

 

 

 

Common

 

paid-in

 

less

 

comprehensive

 

stockholders’

 

Noncontrolling

 

Total

 

 

 

stock

 

capital

 

dividends

 

loss

 

equity

 

interests

 

equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2011

 

$

952

 

$

4,652,457

 

$

(171,648

)

$

(87,020

)

$

4,394,741

 

$

7,151

 

$

4,401,892

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders

 

 

 

301,512

 

 

301,512

 

 

301,512

 

Unrealized loss on cash flow hedges, net of reclassifications

 

 

 

 

(23,767

)

(23,767

)

 

(23,767

)

Change in redemption value of redeemable noncontrolling interest

 

 

 

(480

)

 

(480

)

 

(480

)

Noncontrolling interests

 

 

 

 

 

 

(3,592

)

(3,592

)

Dividends declared to common stockholders

 

 

 

(280,945

)

 

(280,945

)

 

(280,945

)

Issuance of common stock, net of withholdings

 

25

 

313,455

 

(2,250

)

 

311,230

 

 

311,230

 

Amortization of deferred compensation

 

 

15,025

 

 

 

15,025

 

 

15,025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2012

 

$

977

 

$

4,980,937

 

$

(153,811

)

$

(110,787

)

$

4,717,316

 

$

3,559

 

$

4,720,875

 

 

During the nine months ended September 30, 2012, the Company:

 

(i)                                     issued 2,165,206 shares of common stock through public offerings under CEP II and CEP III, discussed below;

(ii)                                  issued 391,387 shares of common stock in connection with stock options exercised;

(iii)                               issued 1,830 common shares through the Company’s dividend reinvestment plan;

(iv)                              issued 96,592 common shares in connection with stock grants;

(v)                                 withheld 120,952 common shares to satisfy employees’ tax withholding and other liabilities; and

(vi)                              cancelled 4,027 shares of restricted common stock upon forfeiture.

 

In addition, the Company granted 115,303 options for common stock to employees.  Any deferred compensation related to the Company’s stock option and restricted stock grants during the nine months ended September 30, 2012 is not reflected on the Company’s Condensed Consolidated Balance Sheet as of September 30, 2012, and will not be reflected until earned as compensation cost.

 

In November 2010, the Company commenced a second continuous equity program (“CEP II”), under which the Company was authorized to sell up to $500,000,000 of its common stock from time to time during a 36-month period. During the three and nine months ended September 30, 2012, the Company completed the sale of common stock authorized under CEP II, selling 315,323 and 1,435,215 shares at an average sales price of $141.35 and $140.41 per share, for net proceeds of $43,901,000 and $198,489,000, respectively. From program inception in November 2010 through completion, the Company issued 3,925,980 common shares at an average price of $127.36 per share for net proceeds of $492,490,000.

 

In August 2012, the Company commenced a third continuous equity program (“CEP III”), under which the Company is authorized to sell up to $750,000,000 of shares of its common stock from time to time during a 36-month period.  During the three months ended September 30, 2012, the Company sold 729,991 shares at an average sales price of $142.09 per share, for net proceeds of $102,168,000.

 

5.  Investments in Real Estate Entities

 

Investments in consolidated entities

 

In July 2012, the Company acquired Avalon Del Rey, a 309 apartment home community which was owned by a joint venture in which the Company held a 30% ownership interest.  As part of this transaction, the venture repaid the $43,606,000 variable rate note secured by the community.  The Company paid approximately $67,200,000 for its joint venture partner’s 70% interest as well as contributing its proportionate share of the note repayment to the venture. Upon the acquisition of Avalon Del Rey, the Company consolidated the community, recognized income

 

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Table of Contents

 

from its promoted interest of $4,055,000 included in equity in income of unconsolidated equities, and a gain of $14,194,000, as gain on acquisition of unconsolidated entity in the Condensed Consolidated Statements of Comprehensive Income (Loss). The gain recognized reflects the amount by which the fair value of the Company’s previously owned investment interest exceeded its carrying value.

 

The Company accounted for the acquisition of Avalon Del Rey as a business combination and recorded the acquired assets and assumed liabilities, including identifiable intangibles, at their fair values.  The Company looked to internal pricing for the value of the land, and an internal model to determine the fair value of the real estate assets and in place leases.  Given the heterogeneous nature of multi-family real estate, the fair values for the land, real estate assets and in place leases incorporated significant unobservable inputs and therefore are considered to be Level 3 prices within the fair value hierarchy.

 

Investment in unconsolidated entities

 

As of September 30, 2012, the Company had investments in four unconsolidated real estate entities with ownership interest percentages ranging from 15.2% to 31.3%. The Company accounts for its investments in unconsolidated real estate entities under the equity method of accounting. The significant accounting policies of the Company’s unconsolidated real estate entities are consistent with those of the Company in all material respects.

 

There were no other changes in the Company’s ownership interest in, or presentation of, its investments in unconsolidated real estate entities during the three months ended September 30, 2012.

 

The following is a combined summary of the financial position of the entities accounted for using the equity method, as of the dates presented (dollars in thousands):

 

 

 

9-30-12

 

12-31-11

 

 

 

(unaudited)

 

(unaudited)

 

Assets:

 

 

 

 

 

Real estate, net

 

$

1,477,756

 

$

1,583,397

 

Other assets

 

88,627

 

70,233

 

Total assets

 

$

1,566,383

 

$

1,653,630

 

 

 

 

 

 

 

Liabilities and partners’ capital:

 

 

 

 

 

Mortgage notes payable and credit facility

 

$

1,033,226

 

$

1,074,429

 

Other liabilities

 

26,379

 

27,335

 

Partners’ capital

 

506,778

 

551,866

 

Total liabilities and partners’ capital

 

$

1,566,383

 

$

1,653,630

 

 

The following is a combined summary of the operating results of the entities accounted for using the equity method, for the periods presented (dollars in thousands):

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

(unaudited)

 

(unaudited)

 

 

 

9-30-12

 

9-30-11

 

9-30-12

 

9-30-11

 

 

 

 

 

 

 

 

 

 

 

Rental and other income

 

$

43,168

 

$

40,953

 

$

130,300

 

$

117,407

 

Operating and other expenses

 

(18,733

)

(18,829

)

(56,533

)

(53,474

)

Gain on sale of communities

 

44,723

 

12,445

 

57,457

 

12,445

 

Interest expense, net

 

(12,742

)

(12,818

)

(38,468

)

(37,596

)

Depreciation expense

 

(11,947

)

(12,363

)

(37,244

)

(35,702

)

 

 

 

 

 

 

 

 

 

 

Net income

 

$

44,469

 

$

9,388

 

$

55,512

 

$

3,080

 

 

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Table of Contents

 

In conjunction with the formation of AvalonBay Value Added Fund I, L.P. (“Fund I”) and AvalonBay Value Added Fund II, L.P. (“Fund II”), as well as the acquisition and development of certain other investments in unconsolidated entities, the Company incurred costs in excess of its equity in the underlying net assets of the respective investments. These costs represent $8,305,000 at September 30, 2012 and $9,167,000 at December 31, 2011 of the respective investment balances.

 

As part of the formation of Fund I and Fund II, the Company provided separate and distinct guarantees to one of the limited partners in each of the ventures.  These guarantees are specific to the respective fund and any impacts or obligation of the Company to perform under one of the guarantees has no impact on the Company’s obligations with respect to the other guarantee. The guarantees provide that, if, upon final liquidation of Fund I or Fund II, the total amount of all distributions to the guaranteed partner during the life of the respective fund (whether from operating cash flow or property sales) does not equal the total capital contributions made by that partner, then the Company will pay the guaranteed partner an amount equal to the shortfall, but in no event more than 10% of the total capital contributions made by the guaranteed partner (maximum of approximately $7,500,000 for Fund I and approximately $8,910,000 for Fund II as of September 30, 2012).  As of September 30, 2012, the expected realizable values of the real estate assets owned by Fund I and Fund II are considered adequate to cover such potential payments under a liquidation scenario.  The estimated fair value of, and the Company’s obligation under these guarantees, both at inception and as of September 30, 2012, was not significant and therefore the Company has not recorded any obligation for either of these guarantees as of September 30, 2012.

 

Abandoned Pursuit Costs and Impairment of Long-Lived Assets

 

The Company capitalizes pre-development costs incurred in pursuit of new development opportunities for which the Company currently believes future development is probable (“Development Rights”). Future development of these Development Rights is dependent upon various factors, including zoning and regulatory approval, rental market conditions, construction costs and the availability of capital.  Initial pre-development costs incurred for pursuits for which future development is not yet considered probable are expensed as incurred.  In addition, if the status of a Development Right changes, making future development by the Company no longer probable, any capitalized pre-development costs are written off with a charge to expense.  The Company expensed costs related to abandoned pursuits, which includes the abandonment of Development Rights as well as costs incurred in pursuing the acquisition of assets or the disposition of assets for which such disposition activity did not occur, in the amounts of $608,000 and $633,000 for the three months ended September 30, 2012 and 2011, respectively, and $1,749,000 and $2,636,000 for the nine months ended September 30, 2012 and 2011, respectively. These costs are included in operating expenses, excluding property taxes on the accompanying Condensed Consolidated Statements of Comprehensive Income (Loss). Abandoned pursuit costs can vary greatly, and the costs incurred in any given period may be significantly different in future periods.

 

The Company evaluates its operating real estate and other long-lived assets for impairment when potential indicators of impairment exist. Such assets are stated at cost, less accumulated depreciation and amortization, unless the carrying amount of the asset is not recoverable. If events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, the Company assesses its recoverability by comparing the carrying amount of the long-lived asset to its estimated undiscounted future cash flows. If the carrying amount exceeds the aggregate undiscounted future cash flows, the Company recognizes an impairment loss to the extent the carrying amount exceeds the estimated fair value of the long-lived asset. Based on periodic tests of recoverability of long-lived assets, the Company did not record any impairment losses for its operating communities for the three and nine months ended September 30, 2012 and 2011.

 

The Company assesses its portfolio of land, both held for development and for investment, for impairment if the intent of the Company changes with respect to either the development of, or the expected holding period for the land.  The Company did not recognize any impairment charges on its investment in land for the three and nine months ended September 30, 2012. The Company also evaluates its unconsolidated investments for impairment, considering both its carrying value of the investment, estimated as the expected proceeds that it would receive if the entity were dissolved and the net assets were liquidated at their current GAAP basis, as well as the Company’s proportionate share of any impairment of assets held by unconsolidated investments. There were no impairment losses recognized by any of the Company’s investments in unconsolidated entities during the three and nine months ended September 30, 2012.

 

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Table of Contents

 

In the third quarter of 2011, the Company concluded that the carrying basis of two land parcels being held for investment were not fully recoverable. In addition, the Company determined that its investment in an unconsolidated development joint venture was not recoverable and that the impairment was other than temporary.  As a result, the Company recognized an aggregate charge of $14,052,000 for the impairment of these land parcels and the investment in the unconsolidated joint venture.

 

6.  Real Estate Disposition Activities

 

During the three months ended September 30, 2012, the Company did not sell any communities.

 

As of September 30, 2012, the Company did not have any real estate assets that qualified as held for sale.

 

The operations for any real estate assets sold from January 1, 2011 through September 30, 2012 have been presented as income from discontinued operations in the accompanying Condensed Consolidated Statements of Comprehensive Income (Loss). Accordingly, certain reclassifications have been made to prior years to reflect discontinued operations consistent with current year presentation.

 

The following is a summary of income from discontinued operations for the periods presented (dollars in thousands):

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

(unaudited)

 

(unaudited)

 

 

 

9-30-12

 

9-30-11

 

9-30-12

 

9-30-11

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

 

$

9,469

 

$

6,986

 

$

27,832

 

Operating and other expenses

 

 

(5,988

)

(2,486

)

(17,277

)

Interest expense, net

 

 

(1,311

)

(133

)

(3,922

)

Loss on extinguishment of debt

 

 

 

(602

)

 

Depreciation expense

 

 

(1,843

)

(895

)

(6,002

)

Income from discontinued operations

 

$

 

$

327

 

$

2,870

 

$

631

 

 

7.  Segment Reporting

 

The Company’s reportable operating segments include Established Communities, Other Stabilized Communities, and Development/Redevelopment Communities.  Annually as of January 1st, the Company determines which of its communities fall into each of these categories and unless disposition or redevelopment plans regarding a community change, maintains that classification throughout the year for the purpose of reporting segment operations.

 

In addition, the Company owns land for future development and has other corporate assets that are not allocated to an operating segment.

 

The Company’s segment disclosures present the measure(s) used by the chief operating decision maker for purposes of assessing each segments’ performance.  The Company’s chief operating decision maker is comprised of several members of its executive management team who use net operating income (“NOI”) as the primary financial measure for Established Communities and Other Stabilized Communities.  NOI is defined by the Company as total revenue less direct property operating expenses.  Although the Company considers NOI a useful measure of a community’s or communities’ operating performance, NOI should not be considered an alternative to net income or net cash flow from operating activities, as determined in accordance with GAAP.  NOI excludes a number of income and expense categories as detailed in the reconciliation of NOI to net income.

 

14



Table of Contents

 

A reconciliation of NOI to net income for the three and nine months ended September 30, 2012 and 2011 is as follows (dollars in thousands):

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

9-30-12

 

9-30-11

 

9-30-12

 

9-30-11

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

86,747

 

$

44,677

 

$

301,178

 

$

118,405

 

Indirect operating expenses, net of corporate income

 

7,396

 

7,743

 

24,049

 

22,490

 

Investments and investment management expense

 

1,582

 

1,328

 

4,526

 

3,860

 

Expensed acquisition, development and other pursuit costs

 

608

 

633

 

1,749

 

2,636

 

Interest expense, net

 

33,985

 

42,659

 

100,804

 

130,174

 

Loss on extinguishment of debt, net

 

 

 

1,179

 

 

General and administrative expense

 

8,372

 

6,087

 

26,398

 

21,524

 

Equity in income of unconsolidated entities

 

(5,553

)

(2,615

)

(9,801

)

(3,513

)

Depreciation expense

 

65,998

 

60,893

 

193,434

 

180,953

 

Impairment loss

 

 

14,052

 

 

14,052

 

Gain on sale of real estate assets

 

 

(13,716

)

(95,329

)

(21,391

)

Income from discontinued operations

 

 

(327

)

(2,870

)

(631

)

Gain on acquisition of unconsolidated entity

 

(14,194

)

 

(14,194

)

 

Net operating income

 

$

184,941

 

$

161,414

 

$

531,123

 

$

468,559

 

 

The primary performance measure for communities under development or redevelopment depends on the stage of completion.  While under development, management monitors actual construction costs against budgeted costs as well as lease-up pace and rent levels compared to budget.

 

The following table provides details of the Company’s segment information as of the dates specified (dollars in thousands). The segments are classified based on the individual community’s status as of the beginning of the given calendar year. Therefore, each year the composition of communities within each business segment is adjusted.  Accordingly, the amounts between years are not directly comparable. Segment information for the three and nine months ended September 30, 2012 and 2011 have been adjusted for the real estate assets that were sold from January 1, 2011 through September 30, 2012, or otherwise qualify as discontinued operations as of September 30, 2012, as described in Note 6, “Real Estate Disposition Activities.”

 

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For the three months ended

 

For the nine months ended

 

 

 

Total

 

 

 

% NOI change

 

Total

 

 

 

% NOI change

 

Gross

 

 

 

revenue

 

NOI

 

from prior year

 

revenue

 

NOI

 

from prior year

 

real estate (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the period ended September 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Established

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New England

 

$

42,755

 

$

27,374

 

2.7

%

$

125,568

 

$

81,268

 

5.6

%

$

1,287,578

 

Metro NY/NJ

 

59,346

 

41,051

 

5.6

%

174,734

 

121,280

 

7.2

%

1,966,938

 

Mid-Atlantic

 

26,300

 

18,618

 

3.7

%

77,825

 

56,156

 

4.2

%

591,802

 

Pacific Northwest

 

8,401

 

5,984

 

19.6

%

24,426

 

17,207

 

13.6

%

304,381

 

Northern California

 

32,949

 

24,316

 

15.9

%

95,979

 

70,344

 

14.7

%

1,180,656

 

Southern California

 

25,131

 

17,224

 

6.2

%

74,000

 

51,225

 

8.8

%

946,802

 

Total Established

 

194,882

 

134,567

 

7.1

%

572,532

 

397,480

 

8.1

%

6,278,157

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Stabilized

 

39,222

 

25,691

 

N/A

 

110,200

 

71,641

 

N/A

 

1,383,135

 

Development / Redevelopment

 

35,267

 

24,683

 

N/A

 

90,692

 

62,002

 

N/A

 

1,871,336

 

Land Held for Future Development

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

304,295

 

Non-allocated (2)

 

2,533

 

N/A

 

N/A

 

7,852

 

N/A

 

N/A

 

54,829

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

271,904

 

$

184,941

 

14.6

%

$

781,276

 

$

531,123

 

14.4

%

$

9,891,752

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the period ended September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Established

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New England

 

$

43,277

 

$

27,560

 

8.6

%

$

126,387

 

$

80,048

 

8.6

%

$

1,300,019

 

Metro NY/NJ

 

49,721

 

33,707

 

10.0

%

145,912

 

98,420

 

7.3

%

1,532,296

 

Mid-Atlantic

 

26,031

 

18,403

 

5.6

%

76,677

 

55,242

 

6.7

%

602,609

 

Pacific Northwest

 

9,560

 

6,120

 

7.1

%

28,035

 

18,609

 

4.7

%

362,806

 

Northern California

 

24,172

 

17,244

 

11.3

%

70,449

 

50,445

 

8.9

%

868,400

 

Southern California

 

19,035

 

12,699

 

13.1

%

55,997

 

37,047

 

7.8

%

695,828

 

Total Established

 

171,796

 

115,733

 

9.3

%

503,457

 

339,811

 

7.7

%

5,361,958

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Stabilized

 

35,742

 

23,310

 

N/A

 

101,773

 

65,605

 

N/A

 

1,566,557

 

Development / Redevelopment

 

33,748

 

22,371

 

N/A

 

93,708

 

63,143

 

N/A

 

1,627,772

 

Land Held for Future Development

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

263,155

 

Non-allocated (2)

 

2,433

 

N/A

 

N/A

 

7,085

 

N/A

 

N/A

 

76,321

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

243,719

 

$

161,414

 

15.1

%

$

706,023

 

$

468,559

 

14.0

%

$

8,895,763

 

 


(1)          Does not include gross real estate assets held for sale of $0 and $269,719 as of September 30, 2012 and 2011, respectively.

 

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

 

8.  Stock-Based Compensation Plans

 

Information with respect to stock options granted under the Company’s 1994 Stock Option and Incentive Plan (the “1994 Plan”) and its 2009 Stock Option and Incentive Plan (the “2009 Plan”) is as follows:

 

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Weighted

 

 

 

Weighted

 

 

 

 

 

average

 

 

 

average

 

 

 

2009 Plan

 

exercise price

 

1994 Plan

 

exercise price

 

 

 

shares

 

per share

 

shares

 

per share

 

 

 

 

 

 

 

 

 

 

 

Options Outstanding, December 31, 2011

 

247,403

 

$

98.42

 

1,112,959

 

$

94.10

 

Exercised

 

(42,204

)

84.67

 

(349,183

)

68.28

 

Granted

 

115,303

 

133.16

 

 

 

Forfeited

 

(11,887

)

115.15

 

(6,779

)

127.48

 

Options Outstanding, September 30, 2012

 

308,615

 

$

112.64

 

756,997

 

$

105.71

 

 

 

 

 

 

 

 

 

 

 

 

 

Options Exercisable September 30, 2012

 

75,679

 

$

97.53

 

756,997

 

$

105.71

 

 

The weighted average fair value of the options granted under the 2009 Plan during the nine months ended September 30, 2012 is estimated at $29.11 per share on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield of 3.5% over the expected life of the option, volatility of 35.00%, risk-free interest rate of 0.9% and an expected life of approximately 5 years.

 

At September 30, 2012, the Company had 203,308 outstanding unvested shares granted under restricted stock awards. Restricted stock vesting during the nine months ended September 30, 2012 totaled 317,685 shares and had fair values at the grant date ranging from $48.60 to $149.05 per share.  The total grant date fair value of shares vested was $36,232,000 and $34,899,000 for the nine months ended September 30, 2012 and 2011, respectively.

 

Total employee stock-based compensation cost recognized in income was $8,394,000 and $7,614,000 for the nine months ended September 30, 2012 and 2011, respectively, and total capitalized stock-based compensation cost was $3,877,000 and $4,118,000 for the nine months ended September 30, 2012 and 2011, respectively.  At September 30, 2012, there was a total of $2,730,000 and $8,144,000 in unrecognized compensation cost for unvested stock options and unvested restricted stock, respectively, which does not include estimated forfeitures. The unrecognized compensation cost for unvested stock options and restricted stock is expected to be recognized over a weighted average period of 1.92 years and 2.50 years, respectively.

 

9.  Related Party Arrangements

 

Unconsolidated Entities

 

The Company manages unconsolidated real estate entities for which it receives asset management, property management, development and redevelopment fee revenue.  From these entities, the Company received fees of $2,533,000 and $2,433,000 in the three months ended September 30, 2012 and 2011, respectively, and $7,852,000 and $7,085,000 for the nine months ended September 30, 2012 and 2011, respectively.  These fees are included in management, development and other fees on the accompanying Condensed Consolidated Statements of Comprehensive Income (Loss). In addition, the Company has outstanding receivables associated with its management role of $3,643,000 and $4,294,000 as of September 30, 2012 and December 31, 2011, respectively.

 

Director Compensation

 

The Company recorded non-employee director compensation expense relating to restricted stock grants and deferred stock awards in the amount of $240,000 and $669,000 for the three and nine months ended September 30, 2012, respectively, as a component of general and administrative expense.  Deferred compensation relating to these restricted stock grants and deferred stock awards was $576,000 and $370,000 on September 30, 2012 and December 31, 2011, respectively.

 

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10.  Fair Value

 

Financial Instruments Carried at Fair Value

 

Derivative Financial Instruments

 

The Company reports its interest rate swap and interest rate cap agreements at fair value in the Company’s financial statements.  In adjusting the fair value of its derivative contracts for the effect of counterparty nonperformance risk, the Company has considered the impact of its net position with a given counterparty, as well as any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. The Company minimizes its credit risk on these transactions by dealing with major, creditworthy financial institutions which have an A or better credit rating by the Standard & Poor’s Ratings Group. As part of its on-going control procedures, the Company monitors the credit ratings of counterparties and the exposure of the Company to any single entity, thus minimizing credit risk concentration. The Company believes the likelihood of realizing losses from counterparty non-performance is remote. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives use Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. As of September 30, 2012, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined it is not significant.  As a result, the Company has determined that its derivative valuations are classified in Level 2 of the fair value hierarchy.

 

Hedge ineffectiveness did not have a material impact on earnings of the Company for any prior period, and the Company does not anticipate that it will have a material effect in the future.

 

The following table summarizes the consolidated Hedging Derivatives at September 30, 2012, excluding derivatives executed to hedge debt on communities classified as held for sale (dollars in thousands):

 

 

 

Non-

 

 

 

 

 

 

 

designated

 

Cash Flow

 

Cash Flow

 

 

 

Hedges

 

Hedges

 

Hedges

 

 

 

Interest

 

Interest

 

Interest

 

 

 

Rate Caps

 

Rate Caps

 

Rate Swaps

 

 

 

 

 

 

 

 

 

Notional balance

 

$

39,347

 

$

180,024

 

$

215,000

 

Weighted average interest rate (1)

 

1.2%

 

2.4%

 

4.6%

 

Weighted average capped interest rate

 

7.4%

 

5.3%

 

N/A

 

Earliest maturity date

 

Mar-14

 

Jul-13

 

May-13

 

Latest maturity date

 

Sep-17

 

Jun-15

 

May-13

 

 

 

 

 

 

 

 

 

 


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

 

Excluding derivatives executed to hedge debt on communities classified as held for sale, the Company had five derivatives designated as cash flow hedges and three derivatives not designated as hedges at September 30, 2012. In connection with the Company’s September 2012 unsecured note issuance, the Company settled a forward starting interest rate swap agreement designated as a cash flow hedge of the interest rate variability on the unsecured notes, making a payment of $54,930,000, which amount is included in accumulated other comprehensive loss on the Condensed Consolidated Balance Sheets and will be recognized as a component of interest expense, net, over the life of the unsecured notes. Fair value changes for derivatives not in qualifying hedge relationships for the nine months ended September 30, 2012, were not material. To adjust the Hedging Derivatives in qualifying cash flow hedges to their fair value and recognize the impact of hedge accounting, the Company recorded an increase in other comprehensive loss of $23,767,000 and $79,691,000 during the nine months ended September 30, 2012 and 2011, respectively. The amount reclassified from accumulated other comprehensive loss into earnings for the nine months ended September 30, 2012 was not material. The Company anticipates reclassifying approximately $5,493,000 of hedging losses from accumulated other comprehensive loss into earnings within the next twelve months to offset the variability of cash flows of the hedged items during this period. The Company had derivatives designated as fair value hedges as of December 31, 2011 which matured prior to September 30, 2012. The Company recorded a decrease in the fair value of these fair value hedges of $1,324,000 for the nine months ended September 30, 2011.

 

Redeemable Noncontrolling Interests

 

The Company provided a redemption option (the “Put”) that allows a joint venture partner of the Company to require the Company to purchase its interest in the investment at a guaranteed minimum amount. The Put is payable

 

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in cash. The Company determines the fair value of the Put based on unobservable inputs considering the assumptions that market participants would make in pricing the obligation, applying a guaranteed rate of return to the joint venture partner’s net capital contribution balance as of period end. Given the significance of the unobservable inputs, the valuation is classified in Level 3 of the fair value hierarchy.

 

The Company issued units of limited partnership interests in DownREITs which provide the DownREIT limited partners the ability to present all or some of their units for redemption for cash as determined by the partnership agreement.  Under the DownREIT agreement, for each limited partnership unit, the limited partner is entitled to receive cash in the amount equal to the fair value of the Company’s common stock on or about the date of redemption.  In lieu of cash redemption, the Company may elect to exchange such units for an equal number of shares of the Company’s common stock. The limited partnership units in the DownREIT are valued using the market price of the Company’s common stock, a Level 1 price under the fair value hierarchy.

 

Financial Instruments Not Carried at Fair Value

 

Cash and Cash Equivalents

 

Cash and cash equivalent balances are held with various financial institutions, with cash balances held in principal protected accounts and any cash equivalents held in the form of short term investments that do not expose the Company to principal loss. The Company monitors credit ratings of these financial institutions and the concentration of cash and cash equivalent balances with any one financial institution and believes the likelihood of realizing material losses related to cash and cash equivalent balances is remote.  Cash and cash equivalents are carried at their face amounts, which reasonably approximate their fair values.

 

Other Financial Instruments

 

Rents receivable, accounts and construction payable and accrued expenses and other liabilities are carried at their face amounts, which reasonably approximate their fair values.

 

The Company values its unsecured notes using quoted market prices, a Level 1 price within the fair value hierarchy. The Company values its notes payable and outstanding amounts under the Credit Facility using a discounted cash flow analysis on the expected cash flows of each instrument. This analysis reflects the contractual terms of the instrument, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The process also considers credit valuation adjustments to appropriately reflect the Company’s nonperformance risk. The Company has concluded that the value of its notes payable and amounts outstanding under its credit facility are Level 2 prices as the majority of the inputs used to value its positions fall within Level 2 of the fair value hierarchy.

 

Financial Instruments Measured at Fair Value on a Recurring Basis

 

The following table summarizes the classification between the three levels of the fair value hierarchy of the Company’s financial instruments measured and /or disclosed at fair value on a recurring basis (dollars in thousands):

 

 

 

 

 

Quoted Prices

 

Significant

 

 

 

 

 

 

 

in Active

 

Other

 

Significant

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

Description

 

9/30/2012

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Caps

 

$

28

 

$

 

$

28

 

$

 

Interest Rate Swaps

 

(54,812

)

 

(54,812

)

 

Put

 

(5,748

)

 

 

(5,748

)

DownREIT units

 

(1,020

)

(1,020

)

 

 

Indebtedness

 

(4,064,394

)

(2,070,262

)

(1,994,132

)

 

Total

 

$

(4,125,946

)

$

(2,071,282

)

$

(2,048,916

)

$

</