Market Overview

AvalonBay Communities, Inc. Announces 2017 Operating Results, 3.5% Dividend Increase and Initial 2018 Financial Outlook

Share:

AvalonBay Communities, Inc. (NYSE:AVB) (the "Company") reported today
that Net Income Attributable to Common Stockholders for the three months
ended December 31, 2017 was $237,573,000. This resulted in a decrease in
Earnings per Share – diluted ("EPS") of 2.3% to $1.72 for the three
months ended December 31, 2017, from $1.76 for the prior year period.

Funds from Operations attributable to common stockholders - diluted
("FFO") per share for the three months ended December 31, 2017 increased
4.3% to $2.18 from $2.09 for the prior year period. Core FFO per share
(as defined in this release) for the three months ended December 31,
2017 increased 6.1% to $2.25 from $2.12 for the prior year period.

The following table compares the Company's actual results for EPS, FFO
per share and Core FFO per share for the three months ended December 31,
2017 to its results for the prior year period:

     
Q4 2017 Results Compared to Q4 2016
       

Per Share

EPS   FFO   Core FFO
 
Q4 2016 per share reported results $ 1.76 $ 2.09 $ 2.12
Established and Redevelopment Community NOI 0.04 0.04 0.03
Development and Other Stabilized Community NOI 0.20 0.20 0.20
Capital markets activity (1) (0.12 ) (0.12 ) (0.06 )
Joint venture income and management fees (0.03 ) (0.03 ) (0.01 )
General and administrative expense and other (0.04 ) (0.04 ) (0.04 )
Casualty gain, net 0.04 0.04 0.01
Gain on sale of real estate and depreciation expense (0.13 )   $      
Q4 2017 per share reported results $ 1.72     $ 2.18     $ 2.25  
 
(1) Includes the impact of non-cash lease termination and debt
extinguishment costs.
 
 

The following table compares the Company's actual results for EPS, FFO
per share and Core FFO per share for the fourth quarter of 2017 to its
October 2017 outlook:

     
Fourth Quarter 2017 Results
Comparison to October 2017 Outlook
       

Per Share

EPS   FFO   Core FFO
 
Projected per share - October 2017 outlook (1) $ 1.60 $ 2.22 $ 2.24
Other Stabilized and Development Community NOI 0.01 0.01 0.01
Casualty gain, net 0.05 0.05 0.01
Capital markets activity (2) (0.09 ) (0.09 )
General and administrative expense and other (0.01 ) (0.01 ) (0.01 )
Gain on sale of real estate 0.16          
Q4 2017 per share reported results $ 1.72     $ 2.18     $ 2.25  
 
(1) The mid-point of the Company's October 2017 outlook.
 
(2) Includes the impact of non-cash lease termination and debt
extinguishment costs.
 
 

For the year ended December 31, 2017, EPS decreased 15.6% to $6.35 from
$7.52 for the prior year, FFO per share increased 2.3% to $8.45 from
$8.26 for the prior year, and Core FFO per share increased 5.3% to $8.62
from $8.19 for the prior year.

The following table compares the Company's actual results for EPS, FFO
per share and Core FFO per share for the full year 2017 to its results
for the full year 2016:

     
Full Year 2017 Results
Comparison to Full Year 2016
       
Per Share
EPS   FFO   Core FFO
 
2016 per share reported results $ 7.52 $ 8.26 $ 8.19
Established and Redevelopment Community NOI 0.19 0.19 0.18
Development and Other Stabilized Community NOI 0.60 0.60 0.61
Capital markets activity

(0.44

)

(0.44

)

(0.26

)
Joint venture income and management fees 0.13 0.13 (0.04 )
General and administrative expense and other

(0.06

)

(0.06

)

(0.07

)
Casualty and impairment gain (loss), net and business interruption
insurance proceeds

(0.18

)

(0.15

)

.01

Gain on sale of real estate and depreciation expense (1.41 )   (0.08 )    
2017 per share reported results $ 6.35     $ 8.45     $ 8.62  
                           
 

Operating Results for the Three Months Ended December 31, 2017
Compared to the Prior Year Period

For the Company, total revenue increased by $37,052,000, or 7.1%,
to $555,292,000. This increase is primarily due to growth in revenue
from development communities and stabilized operating communities.

For Established Communities, total revenue increased $8,478,000,
or 2.2%, to $396,979,000. Operating expenses for Established Communities
increased $3,016,000, or 2.7%, to $114,314,000. NOI for Established
Communities increased $5,462,000, or 2.0%, to $282,665,000. Rental
revenue for Established Communities increased 2.2%, as a result of an
increase in Average Rental Rates of 2.1% and Economic Occupancy of 0.1%.
If the Company were to include current and previously completed
redevelopment communities as part of its Established Communities
portfolio, the increase in Established Communities' rental revenue would
have been 2.3%.

The following table reflects the percentage changes in rental revenue,
operating expenses and NOI for Established Communities for the three
months ended December 31, 2017 compared to the three months ended
December 31, 2016:

 
Q4 2017 Compared to Q4 2016
   

Rental
Revenue (1)

  Opex (2)   NOI  

% of
NOI (3)

New England 1.5% 3.0% 0.6% 14.3%
Metro NY/NJ 1.6% (0.1)% 2.3% 23.5%
Mid-Atlantic 1.3% 2.6% 0.7% 16.3%
Pacific NW 5.4% (4.1)% 9.1% 5.8%
No. California 1.6% 3.9% 0.9% 19.6%
So. California 3.7% 6.6% 2.7% 20.5%
Total 2.2% 2.7% 2.0% 100.0%
 
(1) See full release for additional detail.
 
(2) See full release for discussion of variances.
 

(3) Represents each region's % of total NOI for Q4 2017, including
amounts related to
communities that have been sold or that
are classified as held for sale.

 
 

Operating Results for the Year Ended December 31, 2017 Compared to
the Prior Year

For the Company, total revenue increased by $113,373,000, or
5.5%, to $2,158,628,000. This increase is primarily due to growth in
revenue from stabilized operating communities and development
communities.

For Established Communities, total revenue increased $38,558,000,
or 2.5%, to $1,575,260,000. Operating expenses for Established
Communities increased $11,367,000, or 2.5%, to $462,788,000. NOI for
Established Communities increased $27,191,000, or 2.5%, to
$1,112,472,000. Rental revenue for Established Communities increased
2.5%, as a result of an increase in Average Rental Rates of 2.4% and
Economic Occupancy of 0.1%. If the Company were to include current and
previously completed redevelopment communities as part of its
Established Communities portfolio, the increase in Established
Communities' rental revenue would have been 2.6%.

The following table reflects the percentage changes in rental revenue,
operating expenses and NOI for Established Communities for the year
ended December 31, 2017 compared to the year ended December 31, 2016:

 
Full Year 2017 Compared to Full Year 2016
   

Rental
Revenue (1)

  Opex (2)   NOI  

% of
NOI (3)

New England 2.4% 3.0% 2.1% 14.2%
Metro NY/NJ 2.1% 1.9% 2.1% 23.8%
Mid-Atlantic 1.8% 2.3% 1.5% 15.7%
Pacific NW 5.4% 2.5% 6.3% 5.6%
No. California 1.6% 1.4% 1.6% 20.1%
So. California 3.9% 3.9% 3.9% 20.6%
Total 2.5% 2.5% 2.5% 100.0%
 
(1) See full release for additional detail.
 
(2) See full release for discussion of variances.
 

(3) Represents each region's % of total NOI for Full Year 2017,
including amounts
related to communities that have been sold
or that are classified as held for sale.

 
 

Development Activity

During the three months ended December 31, 2017, the Company completed
the development of six communities:

  • Avalon North Station, located in Boston, MA;
  • Avalon West Hollywood, located in West Hollywood, CA;
  • Avalon Newcastle Commons I, located in Newcastle, WA;
  • Avalon Great Neck, located in Great Neck, NY;
  • Avalon Rockville Centre II, located in Rockville Centre, NY; and
  • Avalon Easton, located in Easton, MA.

These communities contain an aggregate of 1,821 apartment homes and
44,000 square feet of retail space and were constructed for an aggregate
Total Capital Cost of $752,000,000.

The Company started the construction of four communities:

  • Avalon Towson, located in Towson, MD;
  • Avalon Yonkers, located in Yonkers, NY;
  • Avalon Walnut Creek II, located in Walnut Creek, CA; and
  • Avalon North Creek, located in Bothell, WA.

These communities are expected to contain a total of 1,477 apartment
homes when completed and will be developed for an aggregate estimated
Total Capital Cost of $479,000,000.

During 2017, the Company:

  • completed the development of 14 communities containing an aggregate of
    5,189 apartment homes and 71,000 square feet of retail space, for an
    aggregate Total Capital Cost of $1,897,000,000; and
  • commenced the development of eight communities, which in the aggregate
    are expected to contain 2,600 apartment homes and be completed for a
    Total Capital Cost of $808,000,000.

At December 31, 2017, the Company had 21 communities under construction
that in the aggregate are expected to contain 6,544 apartment homes and
97,000 square feet of retail space and be completed for an estimated
Total Capital Cost of $2,928,000,000, including the Company's share of
communities being developed through joint ventures.

The projected Total Capital Cost of development rights at December 31,
2017 increased to $3.8 billion at December 31, 2017 from $3.2 billion at
September 30, 2017.

During the three months ended December 31, 2017, the Company acquired
one land parcel for development, and acquired two additional land
parcels for development in January 2018, for an aggregate investment of
$35,078,000. The Company has started or anticipates starting
construction of apartment communities on this land during the first half
of 2018.

Acquisition Activity

In December 2017, the Company acquired 850 Boca, located in Boca Raton,
FL. 850 Boca contains 370 apartment homes and was acquired for a
purchase price of $138,000,000. The acquisition marked the Company's
entry into the Southeast Florida metropolitan region.

During 2017, the Company acquired three communities containing an
aggregate of 1,062 apartment homes and 27,000 square feet of retail
space, for an aggregate purchase price of $365,750,000.

Disposition Activity

Consolidated Apartment Communities

During the three months ended December 31, 2017, the Company sold three
wholly-owned operating communities: Avalon Run East, located in
Lawrenceville, NJ, Avalon Huntington, located in Shelton, CT and Avalon
Milford, located in Milford, CT. In the aggregate, the three communities
contain 657 apartment homes and were sold for $171,000,000 resulting in
a gain in accordance with GAAP of $92,715,000 and an Economic Gain of
$54,767,000. These communities generated an Unleveraged IRR of 9.5% over
a weighted average investment period of 11.9 years.

During the year ended December 31, 2017, the Company sold six
wholly-owned operating communities containing 1,624 apartment homes, one
of which included a golf course adjacent to the community. These
communities were sold for an aggregate sales price of $475,500,000,
resulting in a gain in accordance with GAAP of $251,163,000, and an
Economic Gain of $163,081,000. The six communities yielded an
Unleveraged IRR of 11.0% over a weighted average investment period of
9.6 years.

Unconsolidated Real Estate Investments

Fund II

AvalonBay Value Added Fund II, L.P. ("Fund II") is a private
discretionary real estate investment vehicle that was formed in
September 2008, and acquired, owned, operated and disposed of 13
apartment communities. The Company made an investment of $111,375,000 in
Fund II, representing an equity interest of 31.3%. The Company also
served as both the general partner and property manager for the
investments of Fund II, and earned asset and property management fees
over this period. As the General Partner of Fund II, the Company was
entitled to, and received, a promoted return above its proportionate
share of the venture's results achieved in excess of certain thresholds.

During the year ended December 31, 2017, Fund II sold its final three
communities containing 1,366 apartment homes for a total sales price of
$272,050,000, resulting in an aggregate gain in accordance with GAAP for
the Company of $26,322,000. In conjunction with these dispositions, the
real estate ventures repaid $127,179,000 of related secured indebtedness
at par in advance of the scheduled maturity dates. In addition, the
Company recognized $26,742,000 in joint venture income associated with
its promoted interest in Fund II for these dispositions.

From the inception of Fund II through its final real estate
dispositions, the Company recognized a Gross Levered IRR of 19.2%, and a
Gross Levered Cash Flow Multiple of 2.4 times. The Company's total
returns over the life of Fund II include recognition of its promoted
interest in Fund II of $34,727,000.

U.S. Fund

During the year ended December 31, 2017, Multifamily Partners AC LP (the
"U.S. Fund"), a private discretionary real estate investment vehicle
acquired as part of the Archstone acquisition, in which the Company
holds an equity interest of 28.6%, sold Eaves Sunnyvale containing 192
apartment homes for a sales price of $107,000,000. The Company's share
of the gain in accordance with GAAP was $13,788,000. In conjunction with
the disposition of this community, the U.S. Fund repaid $32,542,000 of
related secured indebtedness in advance of the scheduled maturity date.
This resulted in charges for prepayment penalties and write-offs of
deferred financing costs, of which the Company's portion was $406,000,
reported as a reduction of joint venture income.

Liquidity and Capital Markets

At December 31, 2017, the Company did not have any borrowings
outstanding under its $1,500,000,000 unsecured credit facility, and had
$201,906,000 in unrestricted cash and cash in escrow.

The Company's annualized Net Debt-to-Core EBITDA for the fourth quarter
of 2017 was 5.0 times.

Q4 2017 Capital Markets Activity

During the three months ended December 31, 2017, the Company issued the
following unsecured notes in public offerings under its existing shelf
registration statement:

  • $300,000,000 principal amount of floating rate unsecured notes were
    issued for net proceeds of $298,800,000. The notes mature in January
    2021 and were issued at three-month LIBOR plus 0.43%; and
  • $450,000,000 principal amount of unsecured notes were issued for net
    proceeds of $445,271,000. The notes mature in January 2028 and were
    issued with a 3.20% coupon.

In addition, the Company obtained a $21,700,000 variable rate secured
note with a maturity date of October 2020, in conjunction with the
refinancing of $21,601,000 of secured indebtedness that had a
contractual interest rate of 6.26%.

During the three months ended December 31, 2017, in addition to amounts
refinanced discussed above, the Company repaid the following
indebtedness or satisfied the following encumbrances:

  • $300,000,000 principal amount of its variable rate unsecured term loan
    indexed to LIBOR plus 1.450% entered into in March 2014, was repaid
    prior to the contractual maturity, resulting in a charge of $1,367,000
    for the non-cash write-off of deferred financing costs; and
  • the ground lease for Avalon Morningside Park, located in New York
    City, in conjunction with the acquisition of the land for $95,000,000,
    for which the Company recognized a non-cash write-off of prepaid rent
    of $11,153,000 associated with the ground lease termination.

Full Year 2017 Capital Markets Activity

During 2017, the Company issued $1,906,800,000 aggregate principal
amount of debt, consisting of $1,700,000,000 of unsecured debt and
$206,800,000 of secured debt. The Company used proceeds from these
offerings to repay outstanding indebtedness of $1,565,804,000,
consisting of $300,000,000 of unsecured debt and $1,265,804,000 of
secured debt, as well as acquiring land encumbered by a ground lease for
$95,000,000.

As a result of the debt issuance and repayment activity, the Company's
debt profile improved as of December 31, 2017 as compared to December
31, 2016 by (i) decreasing the weighted average effective interest rate
on outstanding debt to 3.6% from 3.7%; (ii) decreasing the weighted
average contractual interest rate on outstanding debt to 3.3% from 3.6%;
(iii) increasing unencumbered NOI to 89% from 80%; and (iv) increasing
weighted average years to maturity to 9.9 years from 8.6 years.

In addition, during the year ended December 31, 2017, the Company sold
568,424 shares of common stock at an average sales price of $188.39 per
share, for net proceeds of $105,478,000 under the current continuous
equity program established in December 2015.

First Quarter 2018 Dividend Declaration

The Company's Board of Directors declared a dividend for the first
quarter of 2018 of $1.47 per share on the Company's common stock (par
value of $0.01 per share). The declared dividend is a 3.5% increase over
the Company's prior quarterly dividend of $1.42 per share. The dividend
is payable on April 16, 2018 to common stockholders of record as of
March 29, 2018.

In declaring the increased dividend, the Board of Directors evaluated
the Company's past performance and future prospects for earnings growth.
Additional factors considered in determining the increase included
current common dividend distributions, the relationship of the current
common dividend distribution to the Company's Core FFO, the relationship
of dividend distributions to taxable income, distribution requirements
under rules governing real estate investment trusts, and expected growth
in taxable income.

2018 Financial Outlook

The following presents a summary of the Company's financial outlook for
2018, further details for which are provided in the full release.

For its first quarter and full year 2018 financial outlook, the Company
expects the following:

 
Projected EPS, Projected FFO and Projected Core FFO Outlook (1)
    Q1 2018   Full Year 2018

Low

High

Low

High

 
Projected EPS $0.99 - $1.05 $5.83 - $6.23
Projected FFO per share $2.13 - $2.19 $8.67 - $9.07
Projected Core FFO per share $2.14 - $2.20 $8.73 - $9.13
 

(1) See Definitions and Reconciliations of this release for
reconciliations of
Projected FFO per share and Projected Core
FFO per share to Projected EPS.

 
 

The following table compares the 2018 full year outlook for EPS, FFO per
share and Core FFO per share to the Company's actual results for the
full year 2017:

     
Full Year 2018 Outlook
Comparison to Full Year 2017 Results
       
Per Share
EPS   FFO   Core FFO
 
2017 per share reported results $ 6.35 $ 8.45 $ 8.62
Established and Redevelopment Community NOI 0.18 0.18 0.14
Development and other community NOI 0.56 0.56 0.56
Capital markets activity (0.14 ) (0.14 ) (0.30 )
General and administrative expense

0.08

0.08

(0.07 )
Joint venture income and management fees

(0.20

)

(0.20

) (0.02 )
Casualty and impairment gain (loss), net and business interruption
insurance proceeds
(0.06 ) (0.06 )
Gain on sale of real estate and depreciation expense (0.74 )    
2018 per share outlook (1) $ 6.03   $ 8.87   $ 8.93  
 
(1) Represents the mid-point of the Company's January 2018 outlook.
 
 

First Quarter Conference Schedule

Management is scheduled to present at Citi's Global Property CEO
Conference from March 4 - 7, 2018. Management may discuss the Company's
current operating environment; operating trends; development,
redevelopment, disposition and acquisition activity; financial outlook;
portfolio strategy and other business and financial matters affecting
the Company. Details on how to access a webcast of the Company's
presentation will be available in advance of the conference event on the
Company's website at http://www.avalonbay.com/events.

Other Matters

The Company will hold a conference call on February 1, 2018 at 1:00 PM
ET to review and answer questions about this release, its fourth quarter
2017 results, the Attachments (described below) and related matters. To
participate on the call, dial 877-795-3647 domestically and 719-325-2308
internationally and use conference id: 6417274.

To hear a replay of the call, which will be available from February 1,
2018 at 6:00 PM ET to February 8, 2018 at 6:00 PM ET, dial 888-203-1112
domestically and 719-457-0820 internationally and use conference id:
6417274. A webcast of the conference call will also be available at http://www.avalonbay.com/earnings,
and an on-line playback of the webcast will be available for at least
seven days following the call.

The Company produces Earnings Release Attachments (the "Attachments")
that provide detailed information regarding operating, development,
redevelopment, disposition and acquisition activity. These Attachments
are considered a part of this earnings release and are available in full
with this earnings release via the Company's website at http://www.avalonbay.com/earnings.
To receive future press releases via e-mail, please submit a request
through http://www.avalonbay.com/email.

In addition to the Attachments, the Company is providing a
teleconference presentation that will be available on the Company's
website at http://www.avalonbay.com/earnings
subsequent to this release and before the market opens on February 1,
2018. These supplemental materials will be available on the Company's
website for 30 days following the earnings call.

About AvalonBay Communities, Inc.

As of December 31, 2017, the Company owned or held a direct or indirect
ownership interest in 288 apartment communities containing 84,158
apartment homes in 12 states and the District of Columbia, of which 21
communities were under development and nine communities were under
redevelopment. The Company is an equity REIT in the business of
developing, redeveloping, acquiring and managing apartment communities
in leading metropolitan areas primarily in New England, the New York/New
Jersey Metro area, the Mid-Atlantic, the Pacific Northwest, and the
Northern and Southern California regions of the United States. More
information may be found on the Company's website at http://www.avalonbay.com.
For additional information, please contact Jason Reilley, Vice President
of Investor Relations, at 703-317-4681.

Forward-Looking Statements

This release, including its Attachments, contains forward-looking
statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. These forward-looking statements, which you can
identify by the Company's use of words such as "expects," "plans,"
"estimates," "anticipates," "projects," "intends," "believes," "outlook"
and similar expressions that do not relate to historical matters, are
based on the Company's expectations, forecasts and assumptions at the
time of this release, which may not be realized and involve risks and
uncertainties that cannot be predicted accurately or that might not be
anticipated. These could cause actual results to differ materially from
those expressed or implied by the forward-looking statements. Risks and
uncertainties that might cause such differences include the following,
among others: we may abandon development or redevelopment opportunities
for which we have already incurred costs; adverse capital and credit
market conditions may affect our access to various sources of capital
and/or cost of capital, which may affect our business activities,
earnings and common stock price, among other things; changes in local
employment conditions, demand for apartment homes, supply of competitive
housing products, and other economic conditions may result in lower than
expected occupancy and/or rental rates and adversely affect the
profitability of our communities; delays in completing development,
redevelopment and/or lease-up may result in increased financing and
construction costs and may delay and/or reduce the profitability of a
community; debt and/or equity financing for development, redevelopment
or acquisitions of communities may not be available or may not be
available on favorable terms; we may be unable to obtain, or experience
delays in obtaining, necessary governmental permits and authorizations;
expenses may result in communities that we develop or redevelop failing
to achieve expected profitability; our assumptions concerning risks
relating to our lack of control of joint ventures and our abilities to
successfully dispose of certain assets may not be realized; our
assumptions and expectations in our financial outlook may prove to be
too optimistic; and the Company's expectations and assumptions as of the
date of this release regarding potential uninsured loss amounts and
on-going investigations resulting from the casualty loss at Avalon at
Edgewater ("Edgewater") are subject to change and could materially
affect the Company's current expectations regarding the impact of the
casualty loss. Additional discussions of risks and uncertainties that
could cause actual results to differ materially from those expressed or
implied by the forward-looking statements appear in the Company's
filings with the Securities and Exchange Commission, including the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2016 under the heading "Risk Factors" and under the heading
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Forward-Looking Statements" and in subsequent quarterly
reports on Form 10-Q.

The Company does not undertake a duty to update forward-looking
statements, including its expected 2018 operating results and other
financial data forecasts contained in this release. The Company may, in
its discretion, provide information in future public announcements
regarding its outlook that may be of interest to the investment
community. The format and extent of future outlooks may be different
from the format and extent of the information contained in this release.

Definitions and Reconciliations

Non-GAAP financial measures and other capitalized terms, as used in this
earnings release, are defined and further explained on Attachment 15,
Definitions and Reconciliations of Non-GAAP Financial Measures and Other
Terms. Attachment 15 is included in the full earnings release available
at the Company's website at http://www.avalonbay.com/earnings.
This wire distribution includes only definitions and reconciliations of
the following non-GAAP financial measures:

Average Rental Rates are calculated by the
Company as rental revenue in accordance with GAAP, divided by the
weighted average number of occupied apartment homes.

Economic Gain (Loss) is calculated by the
Company as the gain (loss) on sale in accordance with GAAP, less
accumulated depreciation through the date of sale and any other non-cash
adjustments that may be required under GAAP accounting. Management
generally considers Economic Gain (Loss) to be an appropriate
supplemental measure to gain (loss) on sale in accordance with GAAP
because it helps investors to understand the relationship between the
cash proceeds from a sale and the cash invested in the sold community.
The Economic Gain (Loss) for each of the communities presented is based
on their respective final settlement statements. A reconciliation of
Economic Gain (Loss) to gain on sale in accordance with GAAP for the
year ended December 31, 2017 as well as prior years' activities is
presented elsewhere in the full release.

Economic Occupancy ("Ec Occ") is defined as
total possible revenue less vacancy loss as a percentage of total
possible revenue. Total possible revenue (also known as "gross
potential") is determined by valuing occupied units at contract rates
and vacant units at market rents. Vacancy loss is determined by valuing
vacant units at current market rents. By measuring vacant apartments at
their market rents, 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.

Established Communities are consolidated
communities where a comparison of operating results from the prior year
to the current year is meaningful, as these communities were owned and
had Stabilized Operations, as defined below, as of the beginning of the
respective prior year period. Therefore, for 2017 operating results,
Established Communities are consolidated communities that have
Stabilized Operations as of January 1, 2016, are not conducting or
planning to conduct substantial redevelopment activities and are not
held for sale or planned for disposition within the current year.

FFO and Core FFO are considered by
management to be supplemental measures of our operating and financial
performance. FFO is calculated by the Company in accordance with the
definition adopted by the Board of Governors of the National Association
of Real Estate Investment Trusts ("NAREIT"). FFO is calculated by the
Company 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 a
change in accounting principle, impairment write-downs of depreciable
real estate assets, write-downs of investments in affiliates which are
driven by a decrease in the value of depreciable real estate assets held
by the affiliate and depreciation of real estate assets, including
adjustments for unconsolidated partnerships and joint ventures. By
excluding gains or losses related to dispositions of previously
depreciated operating communities and excluding 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 and financial performance of a company's
real estate between periods or as compared to different companies. Core
FFO is the Company's FFO as adjusted for non-core items outlined in the
table below. By further adjusting for items that are not considered part
of our core business operations, Core FFO can help one compare the core
operating and financial performance of the Company between periods. A
reconciliation of Net income attributable to common stockholders to FFO
and to Core FFO is as follows (dollars in thousands):

                   
    Q4   Q4   Full Year   Full Year
2017 2016 2017 2016
Net income attributable to common stockholders $ 237,573 $ 242,235 $ 876,921 $ 1,034,002
Depreciation - real estate assets, including joint venture
adjustments
156,413 140,773 582,907 538,606
Distributions to noncontrolling interests 10 10 42 41
Gain on sale of unconsolidated entities holding previously
depreciated real estate
57 (4,897 ) (40,053 ) (58,069 )
Gain on sale of previously depreciated real estate (92,845 ) (90,041 ) (252,599 ) (374,623 )
Casualty and impairment (recovery) loss, net on real estate (1)(6)       (4,195 )
FFO attributable to common stockholders 301,208 288,080 1,167,218 1,135,762
 
Adjusting items:
Joint venture losses (2) 139 268 950 6,031
Joint venture promote (3) (4,538 ) (26,742 ) (7,985 )
Impairment loss on real estate (4)(6) 9,350 10,500

Casualty (gain) loss, net on real estate (5)(6)

(5,438

)

(3,100

)

(10,239 )
Business interruption insurance proceeds (7) (143 ) (3,495 ) (20,565 )
Lost NOI from casualty losses covered by business interruption
insurance (8)
1,662 1,786 7,904 7,366
Loss on extinguishment of consolidated debt 1,310 4,614 25,472 7,075
Hedge ineffectiveness (753 )
Severance related costs

(66

) (55 ) 87 852
Development pursuit and other write-offs 232 (107 ) 1,406 3,662
Loss (gain) on other real estate transactions (9) 11,153 697 10,907 (10,224 )
Acquisition costs 92 959 92 3,523

Legal settlements

589

 

(417 )

680

 

(417 )
Core FFO attributable to common stockholders $ 310,881   $ 291,144   $ 1,189,976   $ 1,125,341  
 
Average shares outstanding - diluted 138,245,981 137,519,045 138,066,686 137,461,637
 
Earnings per share - diluted $ 1.72   $ 1.76   $ 6.35   $ 7.52  
FFO per common share - diluted $ 2.18   $ 2.09   $ 8.45   $ 8.26  
Core FFO per common share - diluted $ 2.25   $ 2.12   $ 8.62   $ 8.19  
(1) In 2016, the Company received insurance proceeds, net of
additional costs incurred, of $5,732 related to the severe winter
storms that occurred in the Company's Northeast markets in 2015. For
full year 2016, the Company recognized $4,195 of this recovery as an
offset to the impairment on depreciable real estate of $4,195
recognized in the prior year period. The balance of the net
insurance proceeds received in 2016 of $1,537 is recognized as a
casualty gain and is included in the reconciliation of FFO to Core
FFO.
 
(2) Amounts for 2016 and 2017 are primarily composed of (i) the
Company's portion of yield maintenance charges incurred for the
early repayment of debt associated with joint venture disposition
activity, (ii) the write-off of asset management fee intangibles
primarily associated with the disposition of communities in the U.S.
Fund and (iii) the Company's proportionate share of operating
results for joint ventures formed with Equity Residential as part of
the Archstone acquisition.
 
(3) Amounts for 2017 and 2016 are composed of the Company's
recognition of its promoted interest in Fund II.
 
(4) Amount for full year 2017 includes an impairment charge for a
land parcel the Company had acquired for development and sold in
July 2017. Amount for full year 2016 includes impairment charges
relating to ancillary land parcels.
 

(5) Amounts for 2017 include $5,438 in legal settlement proceeds
relating to construction defects at a community acquired as part
of the Archstone acquisition. Amount for full year 2017 also
includes $19,481 for the Maplewood casualty loss, partially offset
by $17,143 of property damage insurance proceeds. Amount for full
year 2016 includes $8,702 in property damage insurance proceeds
for the Edgewater casualty loss, and $1,537 in insurance proceeds
in excess of the total recognized loss related to severe winter
storms in the Company's Northeast markets that occurred in 2015.

 

(6) Aggregate impact of (i) Casualty and impairment (recovery)
loss, net on real estate, (ii) Impairment loss on real estate, and
(iii) Casualty (gain) loss, net on real estate, is a gain of
$5,438 for Q4 2017 and a loss of $6,250 for full year 2017, and a
gain of $3,935 for full year 2016.

 
(7) Amount for full year 2017 is composed of business interruption
insurance proceeds resulting from the final insurance settlement of
the Maplewood casualty loss. Amount for full year 2016 is primarily
composed of business interruption insurance proceeds resulting from
the final insurance settlement of the Edgewater casualty loss.
 
(8) Amounts for 2016 and 2017 primarily relate to a casualty event
at Edgewater in Q1 2015, for which the Company received $20,306 in
business interruption insurance proceeds in Q1 2016. Amounts for
2017 also include amounts related to the Maplewood casualty loss in
Q1 2017, for which the Company recognized $3,495 in business
interruption insurance proceeds in Q3 2017.
 
(9) Amounts for 2017 are primarily composed of a loss resulting from
the non-cash write-off of prepaid rent associated with the purchase
of land previously under a ground lease. Amount for the full year
2016 includes a gain of $10,621 for the land contributed by the
Company to the AVA North Point joint venture.
 
 
 

Gross Levered IRR is calculated as the
internal rate of return on the Company's equity investment in Fund II
considering the timing and amounts of capital contributions and
distributions, including promoted interest earned on the Company's
general partnership interest.

Gross Levered Cash Flow Multiple is
calculated as the ratio of the Company's share of distributions from
Fund II, including promoted interest earned, to the Company's share of
contributions in Fund II.

The calculation of Gross Levered IRR and Gross Levered Cash Flow
Multiple excludes all management fees earned by the Company during the
investment period.

Initial Year Market Cap Rate is defined by
the Company as Projected NOI of a single community for the first 12
months of operations (assuming no repositioning), less estimates for
non-routine allowance of approximately $300 - $500 per apartment home,
divided by the gross sales price for the community. Projected NOI, as
referred to above, represents management's estimate of projected rental
revenue minus projected operating expenses before interest, income taxes
(if any), depreciation and amortization. For this purpose, management's
projection of operating expenses for the community includes a management
fee of 2.5% - 3.5%. The Initial Year Market Cap Rate, which may be
determined in a different manner by others, is a measure frequently used
in the real estate industry when determining the appropriate purchase
price for a property or estimating the value for a property. Buyers may
assign different Initial Year Market Cap Rates to different communities
when determining the appropriate value because they (i) may project
different rates of change in operating expenses and capital expenditure
estimates and (ii) may project different rates of change in future
rental revenue due to different estimates for changes in rent and
occupancy levels. The weighted average Initial Year Market Cap Rate is
weighted based on the gross sales price of each community.

Interest Coverage is calculated by the
Company as Core EBITDA divided by the sum of interest expense, net, and
preferred dividends, if applicable. Interest Coverage is presented by
the Company because it provides rating agencies and investors an
additional means of comparing our ability to service debt obligations to
that of other companies. EBITDA is defined by the Company as net income
or loss attributable to the Company before interest income and expense,
income taxes, depreciation and amortization.

A reconciliation of Core EBITDA and a calculation of Interest Coverage
for the three months ended December 31, 2017 are as follows (dollars in
thousands):

 
   
Net income attributable to common stockholders $ 237,573
Interest expense, net, inclusive of loss on extinguishment of debt,
net
53,833
Income tax expense 39
Depreciation expense 157,100  
EBITDA $ 448,545  
 
NOI from real estate assets sold or held for sale (1,369 )
Gain on sale of communities (92,845 )
Loss on other real estate transactions 11,153
Joint venture income (358 )
Consolidated EBITDA after disposition activity $ 365,126  
 

Casualty and impairment gain

(5,438

)

Lost NOI from casualty losses covered by business interruption
insurance
1,662
Acquisition costs 92
Severance related costs (66 )
Development pursuit and other write-offs 232
Legal settlements

589

 

Core EBITDA $ 362,197  
 
Interest expense, net $ 52,523  
 
Interest Coverage 6.9 times
       
 

Net Debt-to-Core EBITDA is calculated by
the Company as total debt that is consolidated for financial reporting
purposes, less consolidated cash and cash in escrow, divided by
annualized fourth quarter 2017 Core EBITDA, as adjusted. For a
calculation of Core EBITDA, see "Interest Coverage" above. A calculation
of Net Debt-to-Core EBITDA is as follows (dollars in thousands):

 
     
Total debt principal (1) $ 7,404,313
Cash and cash in escrow (201,906 )
Net debt $ 7,202,407  
 
Core EBITDA $ 362,197
 
Core EBITDA, annualized $ 1,448,788
 
Net Debt-to-Core EBITDA 5.0 times
(1) Balance at December 31, 2017 excludes $10,850 of debt discount
and $36,386 of deferred financing costs as reflected in unsecured
notes, net, and $16,351 of debt discount and $11,256 of deferred
financing costs as reflected in notes payable on the Condensed
Consolidated Balance Sheets.
 
 

NOI is defined by the Company 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, investments and
investment management expenses, expensed acquisition, development and
other pursuit costs, net of recoveries, interest expense, net, loss
(gain) on extinguishment of debt, net, general and administrative
expense, joint venture income, depreciation expense, corporate income
tax expense, casualty and impairment loss (gain), net, gain on sale of
communities, loss (gain) on other real estate transactions and net
operating income from real estate assets sold or held for sale. The
Company considers NOI to be an important and appropriate supplemental
performance measure to Net Income of operating performance of a
community or communities 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 property management overhead 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 groups of assets.

A reconciliation of NOI to Net Income, as well as a breakdown of NOI by
operating segment, is as follows (dollars in thousands):

                 
  Q4   Q4   Q3   Q2   Q1   Full Year   Full Year
2017 2016 2017 2017 2017 2017 2016
Net income $ 237,486 $ 242,183 $ 238,199 $ 165,194 $ 235,781 $ 876,660 $ 1,033,708
Indirect operating expenses, net of corporate income 16,926 14,443 15,752 16,423 16,297 65,398 61,403
Investments and investment management expense 1,659 1,277 1,501 1,455 1,321 5,936 4,822
Expensed acquisition, development and other pursuit costs, net of
recoveries
649 1,220 789 570 728 2,736 9,922
Interest expense, net 52,523 49,648 47,741 50,102 49,295 199,661 187,510
Loss on extinguishment of debt, net 1,310 4,614 24,162 25,472 7,075
General and administrative expense 11,904 10,638 11,679 14,005 13,226 50,814 46,076
Joint venture income (358 ) (10,184 ) (52,568 ) (1,146 ) (16,672 ) (70,744 ) (64,962 )
Depreciation expense 157,100 140,020 144,990 141,439 140,621 584,150 531,434
Casualty and impairment (gain) loss, net (5,438 ) 11,688 6,250 (3,935 )
Gain on sale of communities (92,845 ) (90,041 ) (27,738 ) (44,067 ) (87,949 ) (252,599 ) (374,623 )
Loss (gain) on other real estate transactions 11,153 697 120 (366 ) 10,907 (10,224 )
NOI from real estate assets sold or held for sale (1,369 ) (7,474 ) (3,072 ) (4,241 ) (5,891 ) (14,573 ) (44,263 )
NOI $ 390,700   $ 357,041   $ 377,393   $ 363,896   $ 358,079   $ 1,490,068   $ 1,383,943  
 
Established:
New England $ 38,322 $ 38,074 $ 38,055 $ 36,820 $ 37,056 $ 150,253 $ 147,219
Metro NY/NJ 63,286 61,857 61,932 61,538 60,964 247,720 242,600
Mid-Atlantic 39,071 38,791 38,242 37,829 38,608 153,750 151,441
Pacific NW 16,008 14,674 15,687 15,017 14,815 61,527 57,857
No. California 64,812 64,237 64,557 64,587 63,717 257,673 253,582
So. California 61,166   59,570   60,024   59,808   60,551   241,549   232,582  
Total Established 282,665   277,203   278,497   275,599   275,711   1,112,472   1,085,281  
Other Stabilized (1) 52,469 46,612 48,519 48,186 47,559 196,733 155,069
Redevelopment 29,758 29,587 29,328 29,522 29,454 118,062 139,749
Development (2) 25,808   3,639   21,049   10,589   5,355   62,801   3,844  
NOI $ 390,700   $ 357,041   $ 377,393   $ 363,896   $ 358,079   $ 1,490,068   $ 1,383,943  
 
(1) NOI for Full Year 2016 Other Stabilized Communities includes
$20,306 of business interruption insurance proceeds related to the
Edgewater casualty loss.
 
(2) NOI for Q3 and Full Year 2017 Development includes $3,495 of
business interruption insurance proceeds related to the Maplewood
casualty loss.
 
 

NOI as reported by the Company does not include the operating results
from assets sold or classified as held for sale. A reconciliation of NOI
from communities sold or classified as held for sale is as follows
(dollars in thousands):

         
    Q4   Q4   Full Year   Full Year
2017 2016 2017 2016
 
Revenue from real estate assets sold or held for sale $ 2,245 $ 11,021 $ 23,457 $ 70,273
Operating expenses from real estate assets sold or held for sale (876 ) (3,547 ) (8,884 ) (26,010 )
NOI from real estate assets sold or held for sale $ 1,369   $ 7,474   $ 14,573   $ 44,263  
                                   
 

Other Stabilized Communities are completed
consolidated communities that the Company owns, which have Stabilized
Operations as of January 1, 2017. Other Stabilized Communities do not
include communities that are conducting or planning to conduct
substantial redevelopment activities.

Projected FFO and Projected Core FFO, as
provided within this release in the Company's outlook, are calculated on
a basis consistent with historical FFO and Core FFO, and are therefore
considered to be appropriate supplemental measures to projected Net
Income from projected operating performance. A reconciliation of the
ranges provided for Projected FFO per share (diluted) for the first
quarter and full year 2018 to the ranges provided for projected EPS
(diluted) and corresponding reconciliation of the ranges for Projected
FFO per share to the ranges for Projected Core FFO per share are as
follows:

 
     

Low
Range

 

High
Range

Projected EPS (diluted) - Q1 2018 $ 0.99 $ 1.05
Depreciation (real estate related) 1.14   1.14  
Projected FFO per share (diluted) - Q1 2018 2.13   2.19  
 
Lost NOI from casualty losses covered by business interruption
insurance
0.01   0.01  
Projected Core FFO per share (diluted) - Q1 2018 $ 2.14   $ 2.20  
 
Projected EPS (diluted) - Full Year 2018 $ 5.83 $ 6.23
Depreciation (real estate related) 4.40 4.60
Gain on sale of communities (1.56 ) (1.76 )
Projected FFO per share (diluted) - Full Year 2018 8.67   9.07  
 
Joint venture promote and other income, development pursuit, other
write-offs and other
0.03 0.03
Lost NOI from casualty losses covered by business interruption
insurance
0.01 0.01
Loss on extinguishment of consolidated debt 0.02   0.02  
Projected Core FFO per share (diluted) - Full Year 2018 $ 8.73   $ 9.13  
                   
 

Projected NOI, as used within this release
for certain development communities and in calculating the Initial Year
Market Cap Rate for dispositions, represents management's estimate, as
of the date of this release (or as of the date of the buyer's valuation
in the case of dispositions), of projected stabilized rental revenue
minus projected stabilized operating expenses. For development
communities, Projected NOI is calculated based on the first twelve
months of Stabilized Operations following the completion of
construction. In calculating the Initial Year Market Cap Rate, Projected
NOI for dispositions is calculated for the first twelve months following
the date of the buyer's valuation. Projected stabilized rental revenue
represents management's estimate of projected gross potential minus
projected stabilized economic vacancy and adjusted for projected
stabilized concessions plus projected stabilized other rental revenue.
Projected stabilized operating expenses do not include interest, income
taxes (if any), depreciation or amortization, or any allocation of
corporate-level property management overhead or general and
administrative costs. In addition, projected stabilized operating
expenses for development communities do not include property management
fee expense. Projected gross potential for development communities and
dispositions is based on leased rents for occupied homes and
management's best estimate of rental levels for homes which are
currently unleased, as well as those homes which will become available
for lease during the twelve month forward period used to develop
Projected NOI. The weighted average Projected NOI as a percentage of
Total Capital Cost is weighted based on the Company's share of the Total
Capital Cost of each community, based on its percentage ownership.

Management believes that Projected NOI of the development communities,
on an aggregated weighted average basis, assists investors in
understanding management's estimate of the likely impact on operations
of the development communities when the assets are complete and achieve
stabilized occupancy (before allocation of any corporate-level property
management overhead, general and administrative costs or interest
expense). However, in this release the Company has not given a
projection of NOI on a company-wide basis. Given the different dates and
fiscal years for which NOI is projected for these communities, the
projected allocation of corporate-level property management overhead,
general and administrative costs and interest expense to communities
under development is complex, impractical to develop, and may not be
meaningful. Projected NOI of these communities is not a projection of
the Company's overall financial performance or cash flow. There can be
no assurance that the communities under development will achieve the
Projected NOI as described in this release.

Projected Stabilized Yield (also expressed
as "weighted average initial stabilized yield" or words of similar
meaning) means Projected NOI as a percentage of Total Capital Cost.

Rental Revenue with Concessions on a Cash Basis
is considered by the Company to be a supplemental measure to rental
revenue in conformity with GAAP to help investors evaluate the impact of
both current and historical concessions on GAAP-based rental revenue and
to more readily enable comparisons to revenue as reported by other
companies. In addition, Rental Revenue with Concessions on a Cash Basis
allows an investor to understand the historical trend in cash
concessions.

A reconciliation of rental revenue from Established Communities in
conformity with GAAP to Rental Revenue with Concessions on a Cash Basis
is as follows (dollars in thousands):

         
    Q4   Q4   Full Year   Full Year
2017 2016 2017 2016
Rental revenue (GAAP basis) $ 396,735 $ 388,245 $ 1,574,395 $ 1,535,747
Concessions amortized 305 469 1,670 2,449
Concessions granted (330 ) (816 ) (1,118 ) (1,902 )
 
Rental Revenue with Concessions
on a Cash Basis $ 396,710   $ 387,898   $ 1,574,947   $ 1,536,294  
 
% change -- GAAP revenue 2.2 % 2.5 %
 
% change -- cash revenue 2.3 % 2.5 %
                       
 

Stabilized Operations/Restabilized Operations
is defined as the earlier of (i) attainment of 95% physical occupancy or
(ii) the one-year anniversary of completion of development or
redevelopment.

Total Capital Cost includes all capitalized
costs projected to be or actually incurred to develop the respective
development or redevelopment community, or development right, including
land acquisition costs, construction costs, real estate taxes,
capitalized interest and loan fees, permits, professional fees,
allocated development overhead and other regulatory fees, offset by
proceeds from the sale of any associated land or improvements, all as
determined in accordance with GAAP. For redevelopment communities, Total
Capital Cost excludes costs incurred prior to the start of redevelopment
when indicated. With respect to communities where development or
redevelopment was completed in a prior or the current period, Total
Capital Cost reflects the actual cost incurred, plus any contingency
estimate made by management. Total Capital Cost for communities
identified as having joint venture ownership, either during construction
or upon construction completion, represents the total projected joint
venture contribution amount. For joint ventures not in construction,
Total Capital Cost is equal to gross real estate cost.

Unencumbered NOI as calculated by the
Company represents NOI generated by real estate assets unencumbered by
outstanding secured debt as of December 31, 2017 as a percentage of
total NOI generated by real estate assets. The Company believes that
current and prospective unsecured creditors of the Company view
Unencumbered NOI as one indication of the borrowing capacity of the
Company. Therefore, when reviewed together with the Company's Interest
Coverage, EBITDA and cash flow from operations, the Company believes
that investors and creditors view Unencumbered NOI as a useful
supplemental measure for determining the financial flexibility of an
entity. A calculation of Unencumbered NOI for the year ended December
31, 2017 is as follows (dollars in thousands):

 
  Full Year
NOI
NOI for Established Communities $ 1,112,472
NOI for Other Stabilized Communities 196,733
NOI for Redevelopment Communities 118,062
NOI for Development Communities (1) 62,801
NOI from real estate assets sold or held for sale 14,573  
Total NOI generated by real estate assets 1,504,641
NOI on encumbered assets 168,005  
NOI on unencumbered assets $ 1,336,636  
 
Unencumbered NOI 89 %
 
(1) NOI for Development includes $3,495 of business interruption
insurance proceeds related to the Maplewood casualty loss.
 
 

Unleveraged IRR on sold communities refers
to the internal rate of return calculated by the Company considering the
timing and amounts of (i) total revenue during the period owned by the
Company and (ii) the gross sales price net of selling costs, offset by
(iii) the undepreciated capital cost of the communities at the time of
sale and (iv) total direct operating expenses during the period owned by
the Company. Each of the items (i), (ii), (iii) and (iv) is calculated
in accordance with GAAP.

The calculation of Unleveraged IRR does not include an adjustment for
the Company's general and administrative expense, interest expense, or
corporate-level property management and other indirect operating
expenses. Therefore, Unleveraged IRR is not a substitute for Net Income
as a measure of our performance. Management believes that the
Unleveraged IRR achieved during the period a community is owned by the
Company is useful because it is one indication of the gross value
created by the Company's acquisition, development or redevelopment,
management and sale of a community, before the impact of indirect
expenses and Company overhead. The Unleveraged IRR achieved on the
communities as cited in this release should not be viewed as an
indication of the gross value created with respect to other communities
owned by the Company, and the Company does not represent that it will
achieve similar Unleveraged IRRs upon the disposition of other
communities. The weighted average Unleveraged IRR for sold communities
is weighted based on all cash flows over the investment period for each
respective community, including net sales proceeds.

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