AvalonBay Communities, Inc. (the "Company," which term, unless the context otherwise requires, refers to AvalonBay Communities, Inc. together with its subsidiaries), is a Maryland corporation that has elected to be treated as a real estate investment trust ("REIT") for federal income tax purposes under the Internal Revenue Code of 1986 (the "Code"). The Company focuses on the development, redevelopment, acquisition, ownership and operation of multifamily communities in New England, the New York/New Jersey metro area, the Mid-Atlantic, the Pacific Northwest, and Northern and Southern California, as well as in the Company's expansion markets in Southeast Florida and Denver, Colorado (the "Expansion Markets").

At September 30, 2020, the Company owned or held a direct or indirect ownership interest in 275 operating apartment communities containing 80,292 apartment homes in 11 states and the District of Columbia, of which one community containing 344 apartment homes was under redevelopment. In addition, the Company owned or held a direct or indirect ownership interest in 19 communities under development that are expected to contain an aggregate of 6,384 apartment homes when completed, as well as The Park Loggia, which contains 172 for-sale residential condominiums, of which 59 have been sold as of September 30, 2020, and 67,000 square feet of commercial space, of which 64% has been leased as of September 30, 2020. The Company also owned or held a direct or indirect ownership interest in land or rights to land on which the Company expects to develop an additional 27 communities that, if developed as expected, will contain an estimated 9,320 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 2019 Annual Report on Form 10-K. The results of operations for the three and nine months ended September 30, 2020 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.

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):


	For the three months ended				For the nine months ended
	9/30/2020		9/30/2019		9/30/2020		9/30/2019
Basic and diluted shares outstanding
Weighted average common shares - basic	140,271,574		139,340,142		140,366,438		138,931,955
Weighted average DownREIT units outstanding	7,500		7,500		7,500		7,500
Effect of dilutive securities	324,648		505,032		328,865		498,609
Weighted average common shares - diluted	140,603,722		139,852,674		140,702,803		139,438,064

Calculation of Earnings per Share - basic
Net income attributable to common stockholders	$	147,703	$	279,677	$	486,502	$	618,324
Net income allocated to unvested restricted shares	(342)		(704)		(1,158)		(1,655)
Net income attributable to common stockholders, adjusted	$	147,361	$	278,973	$	485,344	$	616,669

Weighted average common shares - basic	140,271,574		139,340,142		140,366,438		138,931,955

Earnings per common share - basic	$	1.05	$	2.00	$	3.46	$	4.44

Calculation of Earnings per Share - diluted
Net income attributable to common stockholders	$	147,703	$	279,677	$	486,502	$	618,324
Add: noncontrolling interests of DownREIT unitholders in consolidated partnerships	12		11		36		34
Adjusted net income attributable to common stockholders	$	147,715	$	279,688	$	486,538	$	618,358

Weighted average common shares - diluted	140,603,722		139,852,674		140,702,803		139,438,064

Earnings per common share - diluted	$	1.05	$	2.00	$	3.46	$	4.43

The Company enters into interest rate swap and interest rate cap agreements (collectively, "Hedging Derivatives") for interest rate risk management purposes and in conjunction with certain variable rate secured debt to satisfy lender requirements. The Company does not enter into Hedging Derivative transactions for trading or other speculative purposes. The Company assesses the effectiveness of qualifying cash flow and fair value hedges, both at inception and on an on-going basis. Hedge ineffectiveness is reported as a component of interest expense, net. The fair values of Hedging Derivatives that are in an asset position are recorded in prepaid expenses and other assets. The fair value of Hedging Derivatives that are in a liability position are included in accrued expenses and other liabilities. The Company does not present or disclose the fair value of Hedging Derivatives on a net basis. Fair value changes for derivatives that are not in qualifying hedge relationships are reported as a component of interest expense, net. For the Hedging Derivative positions that the Company has determined qualify as effective cash flow hedges, the Company has recorded the cumulative changes in the fair value of Hedging Derivatives in other comprehensive loss. Amounts recorded in accumulated other comprehensive loss will be reclassified into earnings in the periods in which earnings are affected by the hedged cash flow. The effective portion of the change in fair value of the Hedging Derivatives that the Company has determined qualified as effective fair value hedges is reported as an adjustment to the carrying amount of the corresponding debt being hedged. See Note 11, "Fair Value," for further discussion of derivative financial instruments.

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

The Company accounts for acquisitions of investments in real estate in accordance with the authoritative guidance for the initial measurement, which first requires that the Company determine if the real estate investment is the acquisition of an asset or a business combination. Under either model, the Company must identify and determine the fair value of any assets acquired, liabilities assumed and any noncontrolling interest in the acquiree. Typical assets acquired and liabilities assumed include land, building, furniture, fixtures and equipment, debt and identified intangible assets and liabilities, consisting of the value of above or below market leases and in-place leases. In making estimates of fair values for purposes of allocating purchase price, the Company utilizes various sources, including its own analysis of recently acquired and existing comparable properties in its portfolio and other market data. Consideration for acquisitions is typically in the form of cash unless otherwise disclosed. For a business combination, the Company records the assets acquired and liabilities assumed based on the fair value of each respective item. For an asset acquisition, the allocation of the purchase price is based on the relative fair value of the net assets. The Company expenses all applicable acquisition costs for a business combination and capitalizes all applicable acquisition costs for an asset acquisition. The Company expects that acquisitions of individual operating communities will generally be viewed as asset acquisitions.

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.

The Company assesses whether a contract is or contains a lease based on whether the contract conveys the right to control the use of an identified asset, including specified portions of larger assets, for a period of time in exchange for consideration. The Company’s leases include both fixed and variable lease payments, which are based on an index or rate such as the consumer price index (CPI) or percentage rents based on total sales. Lease payments included in the lease liability include only payments that depend on an index or rate. For leases that have options to extend the term or terminate the lease early, the Company only factored the impact of such options into the lease term if the option was considered reasonably certain to be exercised. The Company determined the discount rate associated with its ground and office leases on a lease by lease basis using the Company’s actual borrowing rates as well as indicative market pricing for longer term rates and taking into consideration the remaining term of each of the lease agreements.

The Company evaluates leases in which it is the lessor, which are composed of residential and commercial leases at its apartment communities, and determined these leases to be operating leases. For lease agreements that provide for rent concessions and/or scheduled fixed and determinable rent increases, rental income is recognized on a straight-line basis over the noncancellable term of the lease, which, for residential leases, is generally one year. Some of the Company’s commercial leases have fixed-price renewal options, and the lessee may be able to exercise its renewal option at an amount less than the fair value of the rent at such time. The Company only includes renewal options in the lease term if, at the commencement of the lease, it is reasonably certain that the lessee will exercise this option.

Revenue from contracts with customers is recognized in accordance with the transfer of goods and services to customers at an amount that reflects the consideration that the Company expects to be entitled to for those goods and services. The majority of the Company’s revenue is derived from residential and commercial rental income and other lease income, which are accounted for under ASC 842, Leases, discussed above. The Company's revenue streams that are not accounted for under ASC 842 include (i) management fees, (ii) rental and non-rental related income and (iii) gains or losses on the sale of real estate.

The following table provides details of the Company’s revenue streams disaggregated by the Company’s reportable operating segments, further discussed in Note 8, “Segment Reporting,” for the three and nine months ended September 30, 2020 and 2019. Segment information for total revenue has been adjusted to exclude the real estate assets that were sold from January 1, 2019 through September 30, 2020, or otherwise qualify as held for sale as of September 30, 2020, as described in Note 6, "Real Estate Disposition Activities" (dollars in thousands):


	For the three months ended
	Established Communities		Other Stabilized Communities		Development/ Redevelopment Communities		Non- allocated (1)		Total
For the period ended September 30, 2020
Management, development and other fees	$	—	$	—	$	—	$	1,017	$	1,017
Rental and non-rental related income (2)	1,959		477		337		—		2,773
Total non-lease revenue (3)	1,959		477		337		1,017		3,790

Lease income (4)	506,587		34,333		20,963		—		561,883
Business interruption insurance proceeds	12		270		—		—		282

Total revenue	$	508,558	$	35,080	$	21,300	$	1,017	$	565,955

For the period ended September 30, 2019
Management, development and other fees	$	—	$	—	$	—	$	1,231	$	1,231
Rental and non-rental related income (2)	1,796		445		133		—		2,374
Total non-lease revenue (3)	1,796		445		133		1,231		3,605

Lease income (4)	539,634		29,754		8,219		—		577,607
Business interruption insurance proceeds	307		—		—		—		307

Total revenue	$	541,737	$	30,199	$	8,352	$	1,231	$	581,519


	For the nine months ended
	Established Communities		Other Stabilized Communities		Development/ Redevelopment Communities		Non- allocated (1)		Total
For the period ended September 30, 2020
Management, development and other fees	$	—	$	—	$	—	$	2,950	$	2,950
Rental and non-rental related income (2)	5,416		1,271		884		—		7,571
Total non-lease revenue (3)	5,416		1,271		884		2,950		10,521

Lease income (4)	1,567,170		103,705		57,519		—		1,728,394
Business interruption insurance proceeds	115		270		—		—		385

Total revenue	$	1,572,701	$	105,246	$	58,403	$	2,950	$	1,739,300

For the period ended September 30, 2019
Management, development and other fees	$	—	$	—	$	—	$	3,484	$	3,484
Rental and non-rental related income (2)	5,753		1,078		224		—		7,055
Total non-lease revenue (3)	5,753		1,078		224		3,484		10,539

Lease income (4)	1,599,224		76,671		15,596		—		1,691,491
Business interruption insurance proceeds	914		—		—		—		914

Total revenue	$	1,605,891	$	77,749	$	15,820	$	3,484	$	1,702,944

(2)Amounts include revenue streams related to leasing activities that are not considered components of a lease, including but not limited to, apartment hold fees and application fees, as well as revenue streams not related to leasing activities, including but not limited to, vendor revenue sharing, building advertising, vending and dry cleaning revenue.

In March 2020, the World Health Organization designated COVID-19 as a pandemic. While the Company has taken various actions in response to the COVID-19 pandemic, the ultimate impact on its consolidated results of operations, cash flows, financial condition and liquidity will depend on (i) the duration and severity of the pandemic, (ii) the duration and nature of governmental responses to contain the spread of the disease and assist consumers and businesses, (iii) consumer and business responses to the pandemic, including preference for where and how to live and work, and (iv) how quickly and to what extent normal economic and operating conditions can resume. Because of this uncertainty, the Company is not able to estimate the expected impact of the COVID-19 pandemic on its results of operations, cash flows, financial condition, or liquidity for the year ending December 31, 2020 at this time.

As of September 30, 2020, the Company assessed the collectibility of the outstanding lease income receivables as a result of the impact of the COVID-19 pandemic on its residential and commercial lease portfolios. The Company recorded an aggregate offset to income for uncollectible lease revenue for its residential and commercial portfolios of $18,755,000 and $43,034,000 for the three and nine months ended September 30, 2020, respectively, under ASC 842 and ASC 450, Contingencies.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This ASU requires entities to estimate a lifetime expected credit loss for most financial assets, including (i) trade and other receivables, (ii) other long term financings including available for sale and held-to-maturity debt securities and (iii) loans. Subsequently, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which amends the scope of ASU 2016-13 and clarified that receivables arising from operating leases are not within the scope of the standard and should continue to be accounted for in accordance with the leases standard (Topic 842). The new standard was adopted on January 1, 2020 and does not have a material effect on the Company’s financial position or results of operations.