Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the results of operations and financial condition of the Company and the Operating Partnership should be read in connection with the Consolidated Financial Statements and Notes thereto. Due to the Company’s ability to control the Operating Partnership and its subsidiaries, the Operating Partnership and each such subsidiary entity has been consolidated with the Company for financial reporting purposes, except for any unconsolidated properties/entities. Capitalized terms used herein and not defined are as defined elsewhere in this Annual Report on Form 10-K.

Forward-Looking Statements

Forward-looking statements in this Item 7 as well as elsewhere in this Annual Report on Form 10-K are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations, estimates, projections and assumptions made by management. While the Company’s management believes the assumptions underlying its forward-looking statements are reasonable, such information is inherently subject to uncertainties and may involve certain risks, which could cause actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Many of these uncertainties and risks are difficult to predict and beyond management’s control. Forward-looking statements are not guarantees of future performance, results or events. The forward-looking statements contained herein are made as of the date hereof and the Company undertakes no obligation to update or supplement these forward-looking statements. Factors that might cause such differences are discussed in Part I of this Annual Report on Form 10-K, particularly those under Item 1A, Risk Factors.

Forward-looking statements and related uncertainties are also included in the Notes to Consolidated Financial Statements in this report. The 2020 guidance assumptions disclosed throughout this Item 7 are based on current expectations and are forward-looking.

Overview

See Item 1, Business, for discussion regarding the Company’s overview.

Business Objectives and Operating and Investing Strategies

See Item 1, Business, for discussion regarding the Company’s business objectives and operating and investing strategies.

Results of Operations

2019 and 2018 Transactions

In conjunction with our business objectives and operating strategy, the Company continued to invest in apartment properties located primarily in our urban and high-density suburban communities and sell apartment properties that we believe will have inferior long-term returns. The following tables provide a rollforward of the transactions that occurred during the years ended December 31, 2019 and 2018:

Portfolio Rollforward

($ in thousands)

		Properties				Apartment Units				Purchase Price				Acquisition Cap Rate
12/31/2018			307				79,482
Acquisitions:
Consolidated:
Rental Properties			9				2,412			$	1,039,830				4.6	%
Rental Properties – Not Stabilized (1)			4				1,128			$	454,859				4.9	%
Land Parcels			—				—			$	19,832
										Sales Price				Disposition Yield
Dispositions:
Consolidated:
Rental Properties			(11	)			(2,361	)		$	(1,080,675	)			(4.6	)%
Land Parcels			—				—			$	(2,100	)
Unconsolidated:
Rental Properties (2)			(2	)			(945	)		$	(394,500	)			(4.7	)%
Completed Developments – Consolidated			2				221
Configuration Changes			—				25
12/31/2019			309				79,962

(1)	The Company acquired four properties during the year ended December 31, 2019, consisting of two properties in the Denver market and two properties in the Seattle market, all of which are in the final stages of completing lease-up and are expected to stabilize in the second year of ownership at the Acquisition Cap Rate listed above.

(2)	The Company owned a 20% interest in unconsolidated rental properties located in San Jose, CA and South Florida. Sales price listed is the gross sales price. The Company received net sales proceeds of approximately $78.3 million and recognized a GAAP gain on sale of approximately $69.5 million.

The consolidated properties acquired were located in the New York, Seattle, Washington D.C., San Francisco, Los Angeles and Denver markets. The consolidated properties disposed of were located in the New York, Washington D.C., San Francisco and Boston markets and the sales generated an Unlevered IRR of 7.8%. The consolidated properties development completions were located in the Boston and Seattle markets. Finally, the Company started construction on two consolidated projects, located in the San Francisco and Washington D.C. markets, consisting of 354 apartment units totaling approximately $193.1 million of expected development costs.

Portfolio Rollforward

($ in thousands)

		Properties				Apartment Units				Purchase Price				Acquisition Cap Rate
12/31/2017			305				78,611
Acquisitions:
Consolidated:
Rental Properties			5				1,478			$	707,005				4.4	%
										Sales Price				Disposition Yield
Dispositions:
Consolidated:
Rental Properties			(5	)			(1,292	)		$	(706,120	)			(4.1	)%
Land Parcels			—				—			$	(2,700	)
Completed Developments – Consolidated			2				671
Configuration Changes			—				14
12/31/2018			307				79,482

The consolidated properties acquired were located in the Seattle, New York, Denver and Boston markets. The consolidated properties disposed of were located in the Seattle, Los Angeles and New York markets and the sales generated an Unlevered IRR of 8.7%. The consolidated properties development completions were located in the San Francisco and Washington D.C. markets. Finally, the Company started construction on one consolidated project, located in the Boston market, consisting of 469 apartment units totaling approximately $409.7 million of expected development costs.

See the Definitions section below for the definition of Acquisition Cap Rate, Development Yield, Disposition Yield and Unlevered IRR. See also Note 4 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s real estate transactions.

The Company’s guidance assumes consolidated rental acquisitions of $1.25 billion and consolidated rental dispositions of $1.0 billion, and the Company expects that the Acquisition Cap Rate will be 0.25% lower than the Disposition Yield for the full year ending December 31, 2020. We currently budget spending approximately $365.0 million on development costs during the year ending December 31, 2020 (inclusive of approximately $50.0 million of construction mortgage and joint venture partner obligations), primarily for properties currently under construction.

Same Store Results

Properties that the Company owned and were stabilized (see definition below) for all of both 2019 and 2018 (the “2019 Same Store Properties”), which represented 71,830 apartment units, impacted the Company’s results of operations. The 2019 Same Store Properties are discussed in the following paragraphs.

The Company’s primary financial measure for evaluating each of its apartment communities is net operating income (“NOI”). NOI represents rental income less direct property operating expenses (including real estate taxes and insurance). The Company believes that NOI is helpful to investors as a supplemental measure of its operating performance because it is a direct measure of the actual operating results of the Company’s apartment properties.

The following tables provide a rollforward of the apartment units included in Same Store Properties and a reconciliation of apartment units included in Same Store Properties to those included in Total Properties for the year ended December 31, 2019:

		Year Ended December 31, 2019
		Properties				Apartment Units
Same Store Properties at December 31, 2018			281				71,721
2017 acquisitions			2				437
2019 dispositions			(11	)			(2,361	)
Properties added back to same store (1)			2				356
Lease-up properties stabilized			5				1,652
Other			—				25
Same Store Properties at December 31, 2019			279				71,830

		Year Ended December 31, 2019
		Properties				Apartment Units
Same Store			279				71,830
Non-Same Store:
2019 acquisitions			13				3,540
2018 acquisitions			5				1,461
2017 acquisitions – not stabilized			2				510
Master-Leased properties (2)			1				162
Lease-up properties not yet stabilized (3)			8				2,458
Other			1				1
Total Non-Same Store			30				8,132
Total Properties and Apartment Units			309				79,962

Note: Properties are considered “stabilized” when they have achieved 90% occupancy for three consecutive months. Properties are included in same store when they are stabilized for all of the current and comparable periods presented.

(1)	Consists of two properties which were added back to the same store portfolio as discussed further below:

	a.	Playa Pacifica in Hermosa Beach, California containing 285 apartment units was removed from the same store portfolio in the first quarter of 2015 due to a major renovation in which significant portions of the property were taken offline for extended time periods. Playa Pacifica was added back to same store for the year ended December 31, 2019 as the property achieved greater than 90% occupancy for all of the current and comparable periods presented.

	b.	Acton Courtyard in Berkeley, California containing 71 apartment units was removed from the same store portfolio in the third quarter of 2016 due to an affordable housing dispute which required significant portions of the property to be vacant for an extended re-leasing period. Acton Courtyard was added back to same store for the year ended December 31, 2019 as the property achieved greater than 90% occupancy for all of the current and comparable periods presented.

(2)	Consists of one property containing 162 apartment units that is wholly owned by the Company where the entire project is master-leased to a third party corporate housing provider.

(3)	Consists of properties in various stages of lease-up and properties where lease-up has been completed but the properties were not stabilized for the comparable periods presented. Also includes two former master-leased properties that were not stabilized for the comparable periods presented.

The following table provides comparative same store results and statistics for the 2019 Same Store Properties:

2019 vs. 2018

Same Store Results/Statistics for 71,830 Same Store Apartment Units

$ in thousands (except for Average Rental Rate)

		Results												Statistics
Description		Revenues				Expenses				NOI				Average Rental Rate (1)				Physical Occupancy (2)				Turnover (3)
2019		$	2,453,259			$	734,553			$	1,718,706			$	2,843				96.4	%			49.5		%
2018		$	2,377,066			$	708,616			$	1,668,450			$	2,762				96.2	%			51.4		%
Change		$	76,193			$	25,937			$	50,256			$	81				0.2	%			(1.9		%)
Change			3.2	%			3.7	%			3.0	%			2.9	%

Note: Same store revenues for all leases are reflected on a straight line basis in accordance with GAAP for the current and comparable periods.

(1)	Average Rental Rate – Total residential rental revenues reflected on a straight-line basis in accordance with GAAP divided by the weighted average occupied apartment units for the reporting period presented.

(2)	Physical Occupancy – The weighted average occupied apartment units for the reporting period divided by the average of total apartment units available for rent for the reporting period.

(3)	Turnover – Total residential move-outs (including inter-property and intra-property transfers) divided by total residential apartment units.

The following tables present reconciliations of operating income per the consolidated statements of operations to NOI, along with rental income, operating expenses and NOI per the consolidated statements of operations allocated between same store and non-same store results for the 2019 Same Store Properties (amounts in thousands):

		Year Ended December 31,
		2019				2018
Operating income		$	1,356,544			$	1,115,370
Adjustments:
Fee and asset management revenue			(384	)			(753	)
Property management			95,344				92,485
General and administrative			52,757				53,813
Depreciation			831,083				785,725
Net (gain) loss on sales of real estate properties			(447,637	)			(256,810	)
Impairment			—				702
Total NOI		$	1,887,707			$	1,790,532
Rental income:
Same store		$	2,453,259			$	2,377,066
Non-same store/other			247,432				200,615
Total rental income			2,700,691				2,577,681
Operating expenses:
Same store			734,553				708,616
Non-same store/other			78,431				78,533
Total operating expenses			812,984				787,149
NOI:
Same store			1,718,706				1,668,450
Non-same store/other			169,001				122,082
Total NOI		$	1,887,707			$	1,790,532

The Company anticipates the following same store results for the full year ending December 31, 2020, which assumptions are based on current expectations and are forward-looking:

2020 Same Store Assumptions
Physical Occupancy		96.4%
Revenue change		2.3% to 3.3%
Expense change		3.0% to 4.0%
NOI change		1.5% to 3.5%

The following table provides the actual same store revenue growth during the year ended December 31, 2019 as compared to the same period in 2018 and our expected full year same store revenue growth for 2020:

Markets/Metro Areas		Actual Full Year 2019 Same Store Revenue Growth			Projected Full Year 2020 Same Store Revenue Growth
Boston		4.0%			2.6% to 3.6%
New York		2.3%			2.1% to 3.1%
Washington D.C.		2.3%			2.1% to 3.1%
Seattle		3.4%			3.5% to 4.5%
San Francisco		3.7%			2.6% to 3.6%
Los Angeles		3.7%			1.8% to 2.8%
Orange County		3.8%			2.7% to 3.7%
San Diego		3.3%			2.3% to 3.3%
Overall		3.2%			2.3% to 3.3%

Same store revenues for the full year of 2019 were slightly lower than our most recent expectations but still performed at the high end of our expectations from the beginning of the year. Revenue increased due to record low turnover, strong occupancy and favorable overall demand. The Company’s primary focus in 2019 was on providing remarkable experiences for our residents which resulted in record levels of customer satisfaction and resident retention. The Company’s primary goals for 2020 will be to continue the 2019 trends while accelerating the deployment of various operating initiatives such as smart home technology and other sales and service related innovation improvements. We expect consistent demand that should help with the absorption of the continued elevated supply that we expect in many of our markets.

New rent control regulations enacted in both the New York and California markets during 2019 are expected to negatively impact our overall same store revenue results by approximately 20 basis points for 2020. Of the approximately 9,600 apartment units located in our New York market, approximately 3,100 apartment units are "rent stabilized" (primarily as a result of the 421(a) real estate tax abatement program) and therefore more directly impacted by these new regulations. Once the abatement expires, the apartment units can be brought to market rents and will no longer be subject to the rent control regulations. We estimate that the new regulations will have a negative impact on renewal rates for some of these 3,100 apartment units and will impact our ability to charge certain fees at all of our New York City properties (approximately 6,600 apartment units). California’s new rent control regulations, which became effective on January 1, 2020, among other things limits the ability to raise rents on renewals to the local California consumer price index + 5% on properties fifteen years or older. It does not, however, impose such a cap upon vacancy of an apartment unit. Of our approximately 37,600 apartment units located in California, approximately 24,400 are subject to these new regulations.

Boston performed better than expected with strong demand across the market. Strong occupancy, new lease and renewal pricing increases drove our improved performance in 2019. However, with competitive new supply pressures increasing in 2020, we anticipate consistent occupancy but less growth from renewals and new leases that will lead to lower anticipated overall same store revenue growth levels in 2020.

Strong occupancy and pricing power continued to improve in New York as 2019 progressed. This market, however, experienced some seasonal softness near year-end, resulting in a concessionary environment that was greater than expected. For 2020, while we continue to believe the new rent control regulations will have a modestly negative impact on our New York market results, we expect overall same store revenue growth to improve from 2019 as pricing power returns to the market given the anticipated almost complete lack of competitive new supply. Additionally, we expect slightly higher occupancy and renewal rates, favorable market conditions and new lease growth in 2020.

Washington D.C. continued to demonstrate strength in demand with strong occupancy, renewal rates achieved and new lease change despite elevated supply in 2019. The economy, particularly in Northern Virginia, remains strong with gains in the professional and business services sector which are aiding in the absorption of new supply being delivered. In 2020, we anticipate improved results mostly driven by stronger embedded growth starting the year and similar operating outcomes for occupancy, new lease change and achieved renewal increase.

The Seattle market performed better than expected due to stronger than anticipated demand despite elevated new supply. Job growth continued to be very strong and we experienced the highest occupancy gains, renewal rates achieved and new lease pricing of any of our markets in 2019. We expect to produce better same store revenue growth in 2020 with similar occupancy, slight improvement to achieved renewal rates and the majority of growth coming from gains in new leases as we look to capitalize on the current and near-term pricing power in the portfolio.

San Francisco performed slightly below our most recent expectations due to lower occupancy and elevated supply, especially in the East Bay, impacting performance towards the end of 2019. While these trends are consistent with normal seasonal declines, they were modestly more pronounced. In 2020, we expect similar new supply levels with the concentration of competitive supply impacting the downtown and South Bay areas the most. Expected revenue growth in 2020 is lower compared to 2019 due to the impact of this new supply and the new rent control regulations. While we expect some softness when new supply is concentrated around us, this market has a critical mass of technology talent and growth drivers for strong long-term performance.

While the Los Angeles market continued to maintain steady occupancy and solid renewal rates, the market performed slightly below our expectations due to pricing power declines and negative new lease changes as new supply was delivered during the second half of 2019. We expect Los Angeles to be our most challenged market in 2020 due to elevated new supply, implementation of the new rent control regulations and restrictions on short-term lease pricing. Therefore, we expect slightly lower occupancy, modest gains in new lease change and a decline in renewal rate achieved growth.

In Orange County, results continued to be strong and in line with our expectations primarily due to high occupancy levels and in-line renewal rate achieved and new lease change. Our properties performed well against competitive new supply during 2019. For 2020, we expect to deliver similar occupancy, slight gains in new lease change and a decline in renewal rate achieved growth due to the impact of the new rent control regulations, leading to expected 2020 results below 2019. With strong occupancy, we believe that we are well-positioned heading into a competitive environment.

In San Diego, occupancy was better than expected but renewal rate achieved and new lease pricing were both lower than anticipated, resulting in same store revenue slightly below our expectations. Overall, military spending in this market remains strong but supply pressure limits our pricing power. We expect to deliver strong but lower same store revenue growth in 2020 with similar occupancy, slight gains in new lease change and a decline in renewal rate achieved growth based on the impact of the new rent control regulations. With strong occupancy, we believe that we are well-positioned heading into a competitive environment.

The following table provides comparative same store operating expenses for the 2019 Same Store Properties:

2019 vs. 2018

Same Store Operating Expenses for 71,830 Same Store Apartment Units

$ in thousands

																		% of Actual
																		2019
		Actual				Actual				$				%				Operating
		2019				2018				Change (5)				Change				Expenses
Real estate taxes		$	315,033			$	301,969			$	13,064				4.3	%			42.9	%
On-site payroll (1)			157,120				155,901				1,219				0.8	%			21.4	%
Utilities (2)			98,015				94,949				3,066				3.2	%			13.4	%
Repairs and maintenance (3)			92,361				90,050				2,311				2.6	%			12.6	%
Insurance			20,869				18,973				1,896				10.0	%			2.8	%
Leasing and advertising			9,774				9,883				(109	)			(1.1	)%			1.3	%
Other on-site operating expenses (4)			41,381				36,891				4,490				12.2	%			5.6	%
Same store operating expenses		$	734,553			$	708,616			$	25,937				3.7	%			100.0	%

(1)	On-site payroll – Includes payroll and related expenses for on-site personnel including property managers, leasing consultants and maintenance staff.

(2)	Utilities – Represents gross expenses prior to any recoveries under the Resident Utility Billing System (“RUBS”). Recoveries are reflected in rental income.

(3)	Repairs and maintenance – Includes general maintenance costs, apartment unit turnover costs including interior painting, routine landscaping, security, exterminating, fire protection, snow removal, elevator, roof and parking lot repairs and other miscellaneous building repair and maintenance costs.

(4)	Other on-site operating expenses – Includes ground lease costs and administrative costs such as office supplies, telephone and data charges and association and business licensing fees.

(5)	The changes are due primarily to:

	•	Real estate taxes – Increase above expectations due primarily to fewer recoveries from appeals activity.

	•	On-site payroll – Increase below expectations. Payroll pressures continue but were offset by lower than expected employee benefit-related costs.

	•	Utilities – Growth generally in line with expectations for the year.

	•	Insurance – Increase due to higher premiums on property insurance renewal as a result of challenging conditions in the insurance market.

	•	Other on-site operating expenses – Increase primarily driven by higher ground lease costs due to a contractual revaluation at one property along with higher association fees.

Same store expenses increased 3.7% during the year ended December 31, 2019 as compared to the same period in 2018, which was towards the low end of our original expectations (3.5% to 4.5%) and slightly lower than our most recent guidance provided in October 2019 (3.8%).

We anticipate same store expenses to increase between 3.0% to 4.0% for 2020 as compared to 2019 primarily due to the following items:

	•	Real estate taxes are estimated to remain elevated with an increase between 3.75% and 4.75% primarily due to the 421-a tax abatement benefits continuing to burn-off in New York, a slight decline in forecasted year-over-year appeals activity and anticipated rate pressure in Seattle;

	•	Payroll costs are estimated to increase approximately 2.25% to 3.25% primarily due to continued pressures from a tight labor market and anticipated increases in medical insurance and other employee benefits due to these costs being lower than expected in 2019. Excluding these anticipated medical expense/benefit pressures, we would expect growth to be very modest;

	•	Utilities are estimated to increase between 2.5% and 3.5% primarily due to continued modest commodity cost pressures along with increases in trash and sewer costs; and

	•	Repairs and maintenance costs are estimated to increase between 2.5% and 3.5% primarily due to significant pressure from increases in minimum wages for contract labor and additional cost from our operating initiatives offset by forecasted better utilization of our internal workforce.

Same store NOI increased 3.0% for the full year 2019 as compared to the same period in 2018, which was at the high end of our original expectations (1.5% to 3.0%) and slightly lower than our most recent guidance provided in October 2019 (3.1%). The Company anticipates same store NOI growth for the full year 2020 of approximately 1.5% to 3.5% as a result of the same store revenue and expense expectations discussed above.

See also Note 17 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s segment disclosures.

Non-Same Store/Other Results

Non-same store/other NOI results for the year ended December 31, 2019 increased approximately $46.9 million compared to the same period of 2018 and consist primarily of properties acquired in calendar years 2018 and 2019, operations from the Company’s development properties and operations prior to disposition from 2018 and 2019 sold properties. This difference is due primarily to:

	•	A positive impact of higher NOI from development and newly stabilized development properties in lease-up of $13.4 million;

	•	A positive impact of higher NOI from properties mainly acquired in 2018 and 2019 of $53.2 million;

	•	A positive impact of higher NOI from other non-same store properties (including one current and two former master leased properties) of $0.8 million; and

	•	A negative impact of lost NOI from 2018 and 2019 dispositions of $31.7 million.

Comparison of the year ended December 31, 2019 to the year ended December 31, 2018**.**

The following table presents a reconciliation of diluted earnings per share/unit for the year ended December 31, 2019 as compared to the same period in 2018:

		Year Ended December 31
Diluted earnings per share/unit for full year 2018		$	1.77
Property NOI			0.25
Debt extinguishment costs			0.05
Depreciation expense			(0.09	)
Net gain/loss on property/unconsolidated sales			0.67
Other			(0.05	)
Diluted earnings per share/unit for full year 2019		$	2.60

The increase in consolidated NOI is primarily a result of the Company’s improved NOI from same store and lease-up properties along with NOI from the Company’s recent transaction activity. The following table presents the changes in the components of consolidated NOI for the year ended December 31, 2019 as compared to the same period in 2018:

		Year Ended December 31, 2019
Consolidated rental income			4.8	%
Consolidated operating expenses (1)			3.3	%
Consolidated NOI			5.4	%

(1)	Consolidated operating expenses are comprised of property and maintenance and real estate taxes and insurance.

Property management expenses include off-site expenses associated with the self-management of the Company’s properties as well as management fees paid to any third party management companies. These expenses increased approximately $2.9 million or 3.1% during the year ended December 31, 2019 as compared to 2018. These increases are primarily attributable to increases in legal and professional fees, computer operations and education/conferences cost. The Company anticipates that property management expenses will approximate $100.0 million to $102.0 million for the year ending December 31, 2020, inclusive of $1.5 million of additional expenses for various operating initiatives such as sales-focused improvements and service enhancements along with personnel costs to support these initiatives.

General and administrative expenses, which include corporate operating expenses, decreased approximately $1.1 million or 2.0% during the year ended December 31, 2019 as compared to 2018, primarily due to decreases in payroll-related costs, partially offset by increases in office rent. The Company anticipates that general and administrative expenses will approximate $50.0 million to $52.0 million for the year ending December 31, 2020.

Depreciation expense, which includes depreciation on non-real estate assets, increased approximately $45.4 million or 5.8% during the year ended December 31, 2019 as compared to 2018, primarily as a result of additional depreciation expense on properties acquired in 2018 and 2019 and development properties placed in service during 2018 and 2019, offset by lower depreciation from properties sold in 2018 and 2019.

Net gain on sales of real estate properties increased approximately $190.8 million or 74.3% during the year ended December 31, 2019 as compared to 2018, primarily as a result of a higher sales volume with the sale of eleven consolidated apartment properties in 2019 as compared to five consolidated apartment properties in 2018.

Interest and other income decreased approximately $12.5 million or 81.6% during the year ended December 31, 2019 as compared to 2018, primarily due to a decline in insurance/litigation settlement proceeds received during 2019 as compared to 2018. The Company anticipates that interest and other income will approximate $1.5 million to $2.0 million for the year ending December 31, 2020, excluding certain non-comparable insurance/litigation settlement proceeds.

Other expenses increased approximately $0.9 million or 5.3% during the year ended December 31, 2019 as compared to 2018, primarily due to an increase in expenses related to litigation settlements, pursuit costs and various consulting costs related to a data analytics project, partially offset by a decrease in advocacy contributions in 2019 as compared to 2018.

Interest expense, including amortization of deferred financing costs, decreased approximately $22.9 million or 5.4% during the year ended December 31, 2019 as compared to 2018. The decrease is due primarily to $17.3 million in lower debt extinguishment costs in 2019 as compared to 2018. The effective interest cost on all indebtedness, excluding debt extinguishment costs/prepayment

penalties, for the year ended December 31, 2019 was 4.20% as compared to 4.32% in 2018. The Company capitalized interest of approximately $6.9 million and $6.3 million during the years ended December 31, 2019 and 2018, respectively. The Company anticipates that interest expense, excluding debt extinguishment costs/prepayment penalties, will approximate $340.0 million to $348.0 million and capitalized interest will approximate $12.0 million to $14.0 million for the year ending December 31, 2020.

Income and other tax benefit increased approximately $3.2 million during the year ended December 31, 2019 as compared to 2018, primarily due to various alternative minimum tax credit refunds recognized in 2019 that did not occur in 2018. The Company anticipates that income and other tax expense will approximate $0.7 million to $1.2 million for the year ending December 31, 2020.

Income from investments in unconsolidated entities increased approximately $69.6 million during the year ended December 31, 2019 as compared to 2018, primarily as a result of a $69.5 million gain on the sale of two unconsolidated properties in 2019 that did not occur in 2018.

Net gain on sales of land parcels increased approximately $1.1 million during the year ended December 31, 2019 as compared to 2018, primarily due to a higher gain on the sale of two land parcels in 2019 as compared to one land parcel sale in 2018.

For comparison of the year ended December 31, 2018 to the year ended December 31, 2017, refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2018.

Liquidity and Capital Resources

Short-Term Liquidity and Cash Proceeds

The Company generally expects to meet its short-term liquidity requirements, including capital expenditures related to maintaining its existing properties and scheduled unsecured note and mortgage note repayments, through its working capital, net cash provided by operating activities and borrowings under the Company’s revolving credit facility and commercial paper program. Under normal operating conditions, the Company considers its cash provided by operating activities to be adequate to meet operating requirements and payments of distributions.

As of January 1, 2019, the Company had approximately $47.4 million of cash and cash equivalents and approximately $68.9 million of restricted deposits, and the available borrowing capacity on its revolving credit facility was $1.40 billion. After the effect of the various transactions discussed in the following paragraphs and the net cash provided by operating activities, at December 31, 2019, the Company’s cash and cash equivalents balance was approximately $45.8 million, the restricted deposits balance was approximately $71.2 million and the available borrowing capacity on its revolving credit facility was $1.38 billion. See Note 9 in the Notes to Consolidated Financial Statements for further discussion of the availability on the Company’s revolving credit facility.

During the year ended December 31, 2019, the Company generated proceeds from various transactions, which included the following:

	•	Disposed of eleven consolidated rental properties, two unconsolidated rental properties and two land parcels, receiving combined net proceeds of approximately $1.1 billion;

	•	Obtained $295.8 million of mortgage loan proceeds;

	•	Issued $600.0 million of ten-year 3.00% unsecured notes, receiving net proceeds of approximately $597.5 million before underwriting fees, hedge termination costs and other expenses;

	•	Issued $600.0 million of ten-year 2.50% unsecured notes, receiving net proceeds of approximately $597.0 million before underwriting fees and other expenses; and

	•	Issued Common Shares related to share option exercises and ESPP purchases and received net proceeds of $80.9 million, which were contributed to the capital of the Operating Partnership in exchange for additional OP Units (on a one-for-one Common Share per OP Unit basis).

During the year ended December 31, 2019, the above proceeds along with net cash flow from operations and borrowings from the Company’s revolving line of credit and commercial paper program were primarily utilized to:

	•	Acquire thirteen consolidated rental properties and four land parcels for approximately $1.5 billion in cash;

	•	Invest $195.7 million primarily in development projects;

	•	Repay $749.8 million of mortgage loans (inclusive of scheduled principal repayments) and incur prepayment penalties of approximately $3.4 million; and

	•	Repay $1.1 billion of unsecured notes and incur prepayment penalties of approximately $10.3 million.

Credit Facility and Commercial Paper Program

The Company has a $2.5 billion unsecured revolving credit facility maturing November 1, 2024. The Company has the ability to increase available borrowings by an additional $750.0 million by adding lenders to the facility, obtaining the agreement of existing lenders to increase their commitments or incurring one or more term loans. The interest rate on advances under the facility will generally be LIBOR plus a spread (currently 0.775%), or based on bids received from the lending group, and the Company pays a quarterly facility fee (currently 0.125%). Both the spread and the facility fee are dependent on the Company’s senior unsecured credit rating.

The unsecured revolving credit agreement contains provisions that establish a process for entering into an amendment to replace LIBOR under certain circumstances, such as the anticipated phase-out of LIBOR by the end of 2021. At this time, it cannot be determined what interest rate(s) may succeed LIBOR, if any, and how any successor or alternative rates for LIBOR may affect borrowing costs or the availability of variable interest rate borrowings.

The Company has an unsecured commercial paper note program in the United States. The Company may borrow up to a maximum of $1.0 billion under this program subject to market conditions. The notes will be sold under customary terms in the United States commercial paper note market and will rank pari passu with all of the Company’s other unsecured senior indebtedness.

The Company limits its utilization of the revolving credit facility in order to maintain liquidity to support its $1.0 billion commercial paper program along with certain other obligations. The following table presents the availability on the Company’s unsecured revolving credit facility as of February 14, 2020 (amounts in thousands):

		February 14, 2020
Unsecured revolving credit facility commitment		$	2,500,000
Commercial paper balance outstanding			(1,000,000	)
Unsecured revolving credit facility balance outstanding			(10,000	)
Other restricted amounts			(100,949	)
Unsecured revolving credit facility availability		$	1,389,051

Dividend Policy

The Company determines its dividends/distributions based on actual and projected financial conditions, the Company’s actual and projected liquidity and operating results, the Company’s projected cash needs for capital expenditures and other investment activities and such other factors as the Company’s Board of Trustees deems relevant. The Company declared a dividend/distribution for each quarter in 2019 of $0.5675 per share/unit, an annualized increase of 5.1% over the amount paid in 2018. This increase is supported by the Company’s strong growth in property operations and a significant reduction in its development activity resulting in a material increase in available cash flow. The Company’s 2019 operating cash flow was sufficient to cover capital expenditures and regular dividends/distributions.

The Company expects to declare a dividend/distribution of $0.6025 per share/unit for the first quarter of 2020, an annualized increase of 6.2% over the amount paid in 2019. This increase is driven by the Company’s continued strong cash flow performance, solid balance sheet and modest payout ratio. The Company believes that its expected 2020 operating cash flow will be sufficient to cover capital expenditures and regular dividends/distributions. All future dividends/distributions remain subject to the discretion of the Company’s Board of Trustees.

Total dividends/distributions paid in January 2020 amounted to $218.3 million (excluding distributions on Partially Owned Properties), which consisted of certain distributions declared during the fourth quarter ended December 31, 2019.

Long-Term Financing and Capital Needs

The Company expects to meet its long-term liquidity requirements, such as lump sum unsecured note and mortgage debt maturities, property acquisitions and financing of development activities, through the issuance of secured and unsecured debt and equity securities, including additional OP Units, proceeds received from the disposition of certain properties and joint ventures and cash generated from operations after all distributions. In addition, the Company has a significant number of unencumbered properties available to secure additional mortgage borrowings in the event that unsecured capital is unavailable or the cost of alternative sources of capital is too high. The value of and cash flow from these unencumbered properties are in excess of the requirements the Company must maintain in order to comply with covenants under its unsecured notes and line of credit. Of the $27.5 billion in investment in real estate on the Company’s balance sheet at December 31, 2019, $23.9 billion or 86.9% was unencumbered. However, there can be no assurances that these sources of capital will be available to the Company in the future on acceptable terms or otherwise.

EQR issues public equity and guarantees certain debt of the Operating Partnership from time to time. EQR does not have any indebtedness as all debt is incurred by the Operating Partnership.

The Company’s total debt summary and debt maturity schedules as of December 31, 2019 are as follows:

Debt Summary as of December 31, 2019

($ in thousands)

		Amounts				% of Total				Weighted Average Rates				Weighted Average Maturities (years)
Secured		$	1,941,610				21.5	%			3.84	%			6.5
Unsecured			7,095,346				78.5	%			4.07	%			9.2
Total		$	9,036,956				100.0	%			4.02	%			8.6
Fixed Rate Debt:
Secured – Conventional		$	1,574,699				17.4	%			4.28	%			4.3
Unsecured – Public			6,077,513				67.3	%			4.24	%			10.8
Fixed Rate Debt			7,652,212				84.7	%			4.25	%			9.5
Floating Rate Debt:
Secured – Conventional			7,050				0.1	%			3.28	%			2.5
Secured – Tax Exempt			359,861				4.0	%			1.94	%			16.0
Unsecured – Public			—				—				3.34	%			—
Unsecured – Revolving Credit Facility			20,000				0.2	%			3.12	%			4.8
Unsecured – Commercial Paper Program			997,833				11.0	%			2.42	%			—
Floating Rate Debt			1,384,744				15.3	%			2.49	%			4.3
Total		$	9,036,956				100.0	%			4.02	%			8.6

Debt Maturity Schedule as of December 31, 2019

($ in thousands)

Year		Fixed Rate				Floating Rate				Total				% of Total				Weighted Average Coupons on Fixed Rate Debt				Weighted Average Coupons on Total Debt
2020		$	27,542			$	1,000,000		(1)	$	1,027,542				11.3	%			4.56	%			2.07	%
2021			926,404				—				926,404				10.1	%			4.64	%			4.64	%
2022			264,185				7,650				271,835				3.0	%			3.25	%			3.23	%
2023			1,325,588				3,500				1,329,088				14.5	%			3.74	%			3.73	%
2024			—				26,100		(2)		26,100				0.3	%		N/A					2.37	%
2025			450,000				8,200				458,200				5.0	%			3.38	%			3.34	%
2026			592,025				9,000				601,025				6.6	%			3.58	%			3.56	%
2027			400,000				9,800				409,800				4.5	%			3.25	%			3.21	%
2028			900,000				42,380				942,380				10.3	%			3.79	%			3.70	%
2029			888,120				11,500				899,620				9.9	%			3.30	%			3.28	%
2030+			1,950,850				288,135				2,238,985				24.5	%			3.81	%			3.53	%
Subtotal			7,724,714				1,406,265				9,130,979				100.0	%			3.75	%			3.47	%
Deferred Financing Costs and Unamortized (Discount)			(72,502	)			(21,521	)			(94,023	)		N/A				N/A				N/A
Total		$	7,652,212			$	1,384,744			$	9,036,956				100.0	%			3.75	%			3.47	%

(1)	Represents principal outstanding on the Company’s commercial paper program.

(2)	Includes $20.0 million in principal outstanding on the Company’s revolving credit facility.

See the Definitions section below for the definition of Weighted Average Coupons and Weighted Average Rates. See also Note 9 in the Notes to Consolidated Financial Statements for additional discussion of debt at December 31, 2019.

The Company’s “Consolidated Debt-to-Total Market Capitalization Ratio” as of December 31, 2019 is presented in the following table. The Company calculates the equity component of its market capitalization as the sum of (i) the total outstanding Common Shares and assumed conversion of all Units at the equivalent market value of the closing price of the Company’s Common Shares on the New York Stock Exchange and (ii) the liquidation value of all perpetual preferred shares outstanding.

Equity Residential

Capital Structure as of December 31, 2019

(Amounts in thousands except for share/unit and per share amounts)

Secured Debt										$	1,941,610				21.5	%
Unsecured Debt											7,095,346				78.5	%
Total Debt											9,036,956				100.0	%			22.4	%
Common Shares (includes Restricted Shares)			371,670,884				96.4	%
Units (includes OP Units and Restricted Units)			13,731,315				3.6	%
Total Shares and Units			385,402,199				100.0	%
Common Share Price at December 31, 2019		$	80.92
											31,186,746				99.9	%
Perpetual Preferred Equity											37,280				0.1	%
Total Equity											31,224,026				100.0	%			77.6	%
Total Market Capitalization										$	40,260,982								100.0	%

The Operating Partnership’s “Consolidated Debt-to-Total Market Capitalization Ratio” as of December 31, 2019 is presented in the following table. The Operating Partnership calculates the equity component of its market capitalization as the sum of (i) the total outstanding Units at the equivalent market value of the closing price of the Company’s Common Shares on the New York Stock Exchange and (ii) the liquidation value of all perpetual preference units outstanding.

ERP Operating Limited Partnership

Capital Structure as of December 31, 2019

(Amounts in thousands except for unit and per unit amounts)

Secured Debt								$	1,941,610				21.5	%
Unsecured Debt									7,095,346				78.5	%
Total Debt									9,036,956				100.0	%			22.4	%
Total Outstanding Units			385,402,199
Common Share Price at December 31, 2019		$	80.92
									31,186,746				99.9	%
Perpetual Preference Units									37,280				0.1	%
Total Equity									31,224,026				100.0	%			77.6	%
Total Market Capitalization								$	40,260,982								100.0	%

EQR and ERPOP currently have an active universal shelf registration statement for the issuance of equity and debt securities that automatically became effective upon filing with the SEC in June 2019 and expires in June 2022. Per the terms of ERPOP’s partnership agreement, EQR contributes the net proceeds of all equity offerings to the capital of ERPOP in exchange for additional OP Units (on a one-for-one Common Share per OP Unit basis) or preference units (on a one-for-one preferred share per preference unit basis).

The Company has an At-The-Market (“ATM”) share offering program which allows EQR to sell Common Shares from time to time into the existing trading market at current market prices as well as through negotiated transactions. In June 2019, the Company extended the program maturity to June 2022. In connection with the extension, the Company may now also sell Common Shares under forward sale agreements. The use of a forward sale agreement would allow the Company to lock in a price on the sale of Common Shares at the time the agreement is executed, but defer receiving the proceeds from the sale until a later date. EQR has the authority to issue 13.0 million shares but has not issued any shares under this program since September 2012. EQR may, but shall have no obligation to, sell Common Shares through the ATM share offering program in amounts and at times to be determined by EQR. Actual sales will depend on a variety of factors, including (among others) market conditions, the trading price of EQR’s Common Shares and determinations of the appropriate sources of funding for EQR. Through February 14, 2020, EQR has cumulatively issued approximately 16.7 million Common Shares at an average price of $48.53 per share for total consideration of approximately $809.9 million.

The Company may repurchase up to 13.0 million Common Shares under its share repurchase program. No open market repurchases have occurred since 2008, and no repurchases of any kind have occurred since February 2014. EQR may, but shall have no obligation to, repurchase Common Shares through the share repurchase program in amounts and at times to be determined by EQR. Actual repurchases will depend on a variety of factors, including (among others) market conditions, the trading price of EQR’s Common Shares and other opportunities for the investment of available capital. As of February 14, 2020, EQR has remaining authorization to repurchase up to 13.0 million of its shares.

ERPOP’s long-term senior debt ratings and short-term commercial paper ratings as well as EQR’s long-term preferred equity ratings, which all have a stable outlook, as of February 14, 2020 are as follows:

		Standard & Poor’s		Moody’s		Fitch
ERPOP’s long-term senior debt rating		A-		A3		A
ERPOP’s short-term commercial paper rating		A-2		P-2		F-1
EQR’s long-term preferred equity rating		BBB		Baa1		BBB+

See Note 18 in the Notes to Consolidated Financial Statements for discussion of the events, if any, which occurred subsequent to December 31, 2019.

Capitalization of Fixed Assets and Improvements to Real Estate

Our policy with respect to capital expenditures is generally to capitalize expenditures that improve the value of the property or extend the useful life of the component asset of the property. We track improvements to real estate in three major categories and several subcategories:

	▪	Replacements (inside the apartment unit). These include:

	•	flooring such as carpets, hardwood, vinyl or tile;

	•	appliances;

	•	mechanical equipment such as individual furnace/air units, hot water heaters, smoke/carbon monoxide/water alarms, etc.;

	•	furniture and fixtures such as kitchen/bath cabinets, light fixtures, ceiling fans, sinks, tubs, toilets, mirrors, countertops, etc.; and

	•	blinds and window coverings.

All replacements are depreciated over a five to ten-year estimated useful life. We expense as incurred all make-ready maintenance and turnover costs such as cleaning, interior painting of individual apartment units and the repair of any replacement item noted above.

	▪	Building improvements (outside the apartment unit). These include:

	•	roof replacement and major repairs;

	•	paving or major resurfacing of parking lots, curbs and sidewalks;

	•	amenities and common areas such as pools, exterior sports and playground equipment, lobbies, clubhouses, laundry rooms, alarm and security systems and offices;

	•	major building mechanical equipment systems;

	•	interior and exterior structural repair and exterior painting and siding;

	•	major landscaping and grounds improvement; and

	•	vehicles and office and maintenance equipment.

All building improvements are depreciated over a five to fifteen-year estimated useful life. We capitalize building improvements and upgrades only if the item: (i) exceeds $2,500 (selected projects may be restricted by other thresholds); (ii) extends the useful life of the asset; and (iii) improves the value of the asset.

The third major category is renovations, which primarily consists of expenditures for kitchens and baths designed to reposition the apartment units/properties for higher rental levels in their respective markets. All renovation expenditures are depreciated over a ten-year estimated useful life.

For the year ended December 31, 2019, our actual capital expenditures to real estate included the following (amounts in thousands except for apartment unit and per apartment unit amounts):

Capital Expenditures to Real Estate

For the Year Ended December 31, 2019

		Same Store Properties (4)				Non-Same Store Properties/Other (5)				Total				Same Store Avg. Per Apartment Unit
Total Apartment Units			71,830				8,132				79,962
Building Improvements (1)		$	91,256			$	7,469			$	98,725			$	1,270
Renovation Expenditures (2)			37,466				2,607				40,073				522
Replacements (3)			37,063				2,562				39,625				516
Total Capital Expenditures to Real Estate		$	165,785			$	12,638			$	178,423			$	2,308

(1)	Building Improvements – Includes roof replacement, paving, building mechanical equipment systems, exterior siding and painting, major landscaping, furniture, fixtures and equipment for amenities and common areas, vehicles and office and maintenance equipment.

(2)	Renovation Expenditures – Apartment unit renovation costs (primarily kitchens and baths) designed to reposition these units for higher rental levels in their respective markets. Amounts for 2,415 same store apartment units approximated $15,515 per apartment unit renovated.

(3)	Replacements – Includes appliances, mechanical equipment, fixtures and flooring (including hardwood and carpeting).

(4)	Same Store Properties – Primarily includes all properties acquired or completed that are stabilized prior to January 1, 2018, less properties subsequently sold.

(5)	Non-Same Store Properties/Other – Primarily includes all properties acquired during 2018 and 2019, plus any properties in lease-up and not stabilized as of January 1, 2018. Also includes capital expenditures for properties sold.

For the year ended December 31, 2018, our actual capital expenditures to real estate included the following (amounts in thousands except for apartment unit and per apartment unit amounts):

Capital Expenditures to Real Estate

For the Year Ended December 31, 2018

		Same Stores Properties (5)				Non-Same Store Properties/Other (6)				Total				Same Store Avg. Per Apartment Unit
Total Apartment Units (1)			71,721				6,816				78,537
Building Improvements (2)		$	100,382			$	3,830			$	104,212			$	1,399
Renovation Expenditures (3)			39,431				1,922				41,353				550
Replacements (4)			41,746				1,190				42,936				582
Total Capital Expenditures to Real Estate		$	181,559			$	6,942			$	188,501			$	2,531

(1)	Total Apartment Units – Excludes 945 unconsolidated apartment units for which capital expenditures to real estate are self-funded and do not consolidate into the Company’s results.

(2)	Building Improvements – Includes roof replacement, paving, building mechanical equipment systems, exterior siding and painting, major landscaping, furniture, fixtures and equipment for amenities and common areas, vehicles and office and maintenance equipment.

(3)	Renovation Expenditures – Apartment unit renovation costs (primarily kitchens and baths) designed to reposition these units for higher rental levels in their respective markets. Amounts for 2,850 same store apartment units approximated $13,800 per apartment unit renovated.

(4)	Replacements – Includes appliances, mechanical equipment, fixtures and flooring (including hardwood and carpeting).

(5)	Same Store Properties – Primarily includes all properties acquired or completed that are stabilized prior to January 1, 2017, less properties subsequently sold.

(6)	Non-Same Store Properties/Other – Primarily includes all properties acquired during 2017 and 2018, plus any properties in lease-up and not stabilized as of January 1, 2017. Also includes capital expenditures for properties sold.

The Company estimates that during 2020 it will spend approximately $2,600 per same store apartment unit or $195.0 million of total capital expenditures to real estate for same store properties. Included in these total expected expenditures are approximately $50.0 million for apartment unit renovation expenditures on approximately 2,500 same store apartment units at an average cost of approximately $20,000 per apartment unit renovated and approximately $10.0 million on smart home technology upgrades on approximately 10,000 same store apartment units at an average cost of approximately $1,000 per apartment unit. The anticipated total capital expenditures to real estate for same store properties represent a higher absolute and per unit dollar amount and percentage of same store revenues as compared to 2019, primarily due to the higher expected renovation expenditures and smart home technology upgrades.

During the year ended December 31, 2019, the Company’s total non-real estate capital additions, such as computer software, computer equipment, and furniture and fixtures and leasehold improvements to the Company’s property management offices and its corporate offices, were approximately $5.0 million. The Company expects to fund approximately $22.7 million in total non-real estate capital additions in 2020. These anticipated fundings are significantly higher than 2019 and are primarily driven by corporate office renovations during 2020.

Derivative Instruments

In the normal course of business, the Company is exposed to the effect of interest rate changes. The Company may seek to manage these risks by following established risk management policies and procedures including the use of derivatives to hedge interest rate risk on debt instruments. The Company may also use derivatives to manage commodity prices in the daily operations of the business.

The Company has a policy of only entering into derivative contracts with major financial institutions based upon their credit ratings and other factors. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, the Company has not sustained a material loss from these instruments nor does it anticipate any material adverse effect on its net income or financial position in the future from the use of derivatives it currently has in place.

See Note 10 in the Notes to Consolidated Financial Statements for additional discussion of derivative instruments at December 31, 2019.

Definitions

The definition of certain terms described above or below are as follows:

	•	Acquisition Cap Rate – NOI that the Company anticipates receiving in the next 12 months (or the year two or three stabilized NOI for properties that are in lease-up at acquisition) less an estimate of property management costs/management fees allocated to the project (generally ranging from 2.0% to 4.0% of revenues depending on the size and income streams of the asset) and less an estimate for in-the-unit replacement capital expenditures (generally ranging from $100-$450 per apartment unit depending on the age and condition of the asset) divided by the gross purchase price of the asset. The weighted average Acquisition Cap Rate for acquired properties is weighted based on the projected NOI streams and the relative purchase price for each respective property.

	•	Development Yield – NOI that the Company anticipates receiving in the next 12 months following stabilization less an estimate of property management costs/management fees allocated to the project (generally ranging from 2.0% to 4.0% of revenues depending on the size and income streams of the asset) and less an estimate for in-the-unit replacement capital expenditures (generally ranging from $50-$150 per apartment unit depending on the type of asset) divided by the Total Budgeted Capital Cost of the asset. The weighted average Development Yield for development properties is weighted based on the projected NOI streams and the relative Total Budgeted Capital Cost for each respective property.

	•	Disposition Yield – NOI that the Company anticipates giving up in the next 12 months less an estimate of property management costs/management fees allocated to the project (generally ranging from 2.0% to 4.0% of revenues depending on the size and income streams of the asset) and less an estimate for in-the-unit replacement capital expenditures (generally ranging from $100-$450 per apartment unit depending on the age and condition of the asset) divided by the gross sales price of the asset. The weighted average Disposition Yield for sold properties is weighted based on the projected NOI streams and the relative sales price for each respective property.

	•	Unlevered Internal Rate of Return (“IRR”) – The Unlevered IRR on sold properties is the compound annual rate of return calculated by the Company based on the timing and amount of: (i) the gross purchase price of the property plus any direct acquisition costs incurred by the Company; (ii) total revenues earned during the Company’s ownership period; (iii) total direct property operating expenses (including real estate taxes and insurance) incurred during the Company’s ownership period; (iv) capital expenditures incurred during the Company’s ownership period; and (v) the gross sales price of the property net of selling costs.

	•	Weighted Average Coupons – Contractual interest rate for each debt instrument weighted by principal balances as of December 31, 2019. In case of debt for which fair value hedges are in place, the rate payable under the corresponding derivatives is used in lieu of the contractual interest rate.

	•	Weighted Average Rates – Interest expense for each debt instrument for the year ended December 31, 2019 weighted by its average principal balance for the same period. Interest expense includes amortization of premiums, discounts and other comprehensive income on debt and related derivative instruments. In case of debt for which derivatives are in place, the income or expense recognized under the corresponding derivatives is included in the total interest expense for the period.

Off-Balance Sheet Arrangements and Contractual Obligations

The Company has various unconsolidated interests in certain joint ventures. The Company does not believe that these unconsolidated investments have a materially different impact on its liquidity, cash flows, capital resources, credit or market risk than its consolidated operating and/or other activities. See also Note 6 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s investments in partially owned entities. See also Note 16 in the Notes to Consolidated Financial Statements for discussion regarding the Company’s development projects.

The following table summarizes the Company’s contractual obligations for the next five years and thereafter as of December 31, 2019:

Payments Due by Year (in thousands)
Contractual Obligations		2020				2021				2022				2023				2024				Thereafter				Unamortized Cost/Discounts				Total
Debt:
Principal (1)		$	1,027,542			$	926,404			$	271,835			$	1,329,088			$	26,100			$	5,550,010			$	(94,023	)		$	9,036,956
Interest (2)			293,787				285,821				246,209				224,351				191,102				1,654,552				—				2,895,822
Finance Leases (3):
Minimum Rent Payments			567				578				590				601				614				33,850				—				36,800
Operating Leases (3):
Minimum Rent Payments			16,914				17,161				16,907				16,998				17,330				979,172				—				1,064,482
Other Long-Term Liabilities (3):
Deferred Compensation			761				1,116				1,116				991				709				3,897				—				8,590
Total		$	1,339,571			$	1,231,080			$	536,657			$	1,572,029			$	235,855			$	8,221,481			$	(94,023	)		$	13,042,650

(1)	Amounts include aggregate principal payments only.

(2)	Amounts include interest expected to be incurred on the Company’s secured and unsecured debt based on obligations outstanding at December 31, 2019 and inclusive of capitalized interest. For floating rate debt, the current rate in effect for the most recent payment through December 31, 2019 is assumed to be in effect through the respective maturity date of each instrument.

(3)	See Note 8 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s lease disclosures. See Note 16 in the Notes to Consolidated Financial Statements for discussion regarding the Company’s deferred compensation.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to use judgment in the application of accounting policies, including making estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different or different assumptions were made, it is possible that different accounting policies would have been applied, resulting in different financial results or different presentation of our financial statements.

The Company’s significant accounting policies are described in Note 2 in the Notes to Consolidated Financial Statements. These policies were followed in preparing the consolidated financial statements at and for the year ended December 31, 2019.

The Company has identified the significant accounting policies below as critical accounting policies. These critical accounting policies are those that have the most impact on the reporting of our financial condition and those requiring significant judgments and estimates. With respect to these critical accounting policies, management believes that the application of judgments and estimates is consistently applied and produces financial information that fairly presents the results of operations for all periods presented.

Impairment of Long-Lived Assets

The Company periodically evaluates its long-lived assets, including its investment in real estate, for indicators of impairment. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, legal, regulatory and environmental concerns, the Company’s intent and ability to hold the related asset, as well as any significant cost overruns on development properties. Future events could occur which would cause the Company to conclude that impairment indicators exist and an impairment loss is warranted. Assessing impairment can be complex and involves a high degree of subjectivity in determining if indicators are present and in estimating the future undiscounted cash flows or the fair value of an asset. In particular, these estimates are sensitive to significant assumptions, including the estimation of future rental revenues, operating expenses, discount and capitalization rates and our intent and ability to hold the related asset, all of which could be affected by our expectations about future market or economic conditions. These estimates can have a significant impact on the undiscounted cash flows or estimated fair value of an asset.

Acquisition of Investment Properties

The Company allocates the purchase price of properties that meet the definition of an asset acquisition to net tangible and identified intangible assets acquired based on their relative fair values. In making estimates of relative fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property, our own analysis of recently acquired and existing comparable properties in our portfolio and other market data. The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the relative fair value of the tangible and intangible assets acquired.

Funds From Operations and Normalized Funds From Operations

The following is the Company’s and the Operating Partnership’s reconciliation of net income to FFO available to Common Shares and Units / Units and Normalized FFO available to Common Shares and Units / Units for each of the five years ended December 31, 2019:

Funds From Operations and Normalized Funds From Operations

(Amounts in thousands)

		Year Ended December 31,
		2019				2018				2017				2016				2015
Net income		$	1,009,708			$	685,192			$	628,381			$	4,480,104			$	908,018
Net (income) loss attributable to Noncontrolling Interests – Partially Owned Properties			(3,297	)			(2,718	)			(2,323	)			(16,430	)			(3,657	)
Preferred/preference distributions			(3,090	)			(3,090	)			(3,091	)			(3,091	)			(3,357	)
Premium on redemption of Preferred Shares/Preference Units			—				—				—				—				(3,486	)
Net income available to Common Shares and Units / Units			1,003,321				679,384				622,967				4,460,583				897,518
Adjustments:
Depreciation			831,083				785,725				743,749				705,649				765,895
Depreciation – Non-real estate additions			(5,585	)			(4,561	)			(5,023	)			(5,224	)			(4,981	)
Depreciation – Partially Owned Properties			(3,599	)			(3,740	)			(4,526	)			(3,805	)			(4,332	)
Depreciation – Unconsolidated Properties			2,997				4,451				4,577				4,745				4,920
Net (gain) loss on sales of unconsolidated entities – operating assets			(69,522	)			—				(73	)			(8,841	)			(100	)
Net (gain) loss on sales of real estate properties			(447,637	)			(256,810	)			(157,057	)			(4,044,055	)			(335,134	)
Noncontrolling Interests share of gain (loss) on sales of real estate properties			—				(284	)			290				14,521				—
Discontinued operations:
Net (gain) loss on sales of discontinued operations			—				—				—				(43	)			—
Impairment – operating assets			—				702				—				—				—
FFO available to Common Shares and Units / Units (1) (3) (4)			1,311,058				1,204,867				1,204,904				1,123,530				1,323,786
Adjustments:
Impairment – non-operating assets			—				—				1,693				—				—
Write-off of pursuit costs			5,529				4,450				3,106				4,092				3,208
Debt extinguishment and preferred share redemption (gains) losses			23,991				41,335				11,789				121,694				5,704
Non-operating asset (gains) losses			(940	)			(161	)			(18,884	)			(73,301	)			(18,805	)
Other miscellaneous items			8,430				(1,781	)			(3,371	)			3,635				3,909
Normalized FFO available to Common Shares and Units / Units (2) (3) (4)		$	1,348,068			$	1,248,710			$	1,199,237			$	1,179,650			$	1,317,802
FFO (1) (3)		$	1,314,148			$	1,207,957			$	1,207,995			$	1,126,621			$	1,330,629
Preferred/preference distributions			(3,090	)			(3,090	)			(3,091	)			(3,091	)			(3,357	)
Premium on redemption of Preferred Shares/Preference Units			—				—				—				—				(3,486	)
FFO available to Common Shares and Units / Units (1) (3) (4)		$	1,311,058			$	1,204,867			$	1,204,904			$	1,123,530			$	1,323,786
Normalized FFO (2) (3)		$	1,351,158			$	1,251,800			$	1,202,328			$	1,182,741			$	1,321,159
Preferred/preference distributions			(3,090	)			(3,090	)			(3,091	)			(3,091	)			(3,357	)
Normalized FFO available to Common Shares and Units / Units (2) (3) (4)		$	1,348,068			$	1,248,710			$	1,199,237			$	1,179,650			$	1,317,802

(1)

The National Association of Real Estate Investment Trusts (“Nareit”) defines funds from operations (“FFO”) (December 2018 White Paper) as net income (computed in accordance with accounting principles generally accepted in the United States (“GAAP”)), excluding gains or losses from sales and impairment write-downs of depreciable real estate and land when connected to the main business of a REIT, impairment write-downs of investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity and depreciation and amortization related to real estate. Adjustments for partially owned consolidated and unconsolidated partnerships and joint ventures are calculated to reflect funds from operations on the same basis.

(2)	Normalized funds from operations (“Normalized FFO”) begins with FFO and excludes:

	•	the impact of any expenses relating to non-operating asset impairment;

	•	pursuit cost write-offs;

	•	gains and losses from early debt extinguishment and preferred share redemptions;

	•	gains and losses from non-operating assets; and

	•	other miscellaneous items.

(3)

The Company believes that FFO and FFO available to Common Shares and Units / Units are helpful to investors as supplemental measures of the operating performance of a real estate company, because they are recognized measures of performance by the real estate industry and by excluding gains or losses from sales and impairment write-downs of depreciable real estate and excluding depreciation related to real estate (which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates), FFO and FFO available to Common Shares and Units / Units can help compare the operating performance of a company’s real estate between periods or as compared to different companies. The Company also believes that Normalized FFO and Normalized FFO available to Common Shares and Units / Units are helpful to investors as supplemental measures of the operating performance of a real estate company because they allow investors to compare the Company’s operating performance to its performance in prior reporting periods and to the operating performance of other real estate companies without the effect of items that by their nature are not comparable from period to period and tend to obscure the Company’s actual operating results. FFO, FFO available to Common Shares and Units / Units, Normalized FFO and Normalized FFO available to Common Shares and Units / Units do not represent net income, net income available to Common Shares / Units or net cash flows from operating activities in accordance with GAAP. Therefore, FFO, FFO available to Common Shares and Units / Units, Normalized FFO and Normalized FFO available to Common Shares and Units / Units should not be exclusively considered as alternatives to net income, net income available to Common Shares / Units or net cash flows from operating activities as determined by GAAP or as a measure of liquidity. The Company’s calculation of FFO, FFO available to Common Shares and Units / Units, Normalized FFO and Normalized FFO available to Common Shares and Units / Units may differ from other real estate companies due to, among other items, variations in cost capitalization policies for capital expenditures and, accordingly, may not be comparable to such other real estate companies.

(4)

FFO available to Common Shares and Units / Units and Normalized FFO available to Common Shares and Units / Units are calculated on a basis consistent with net income available to Common Shares / Units and reflects adjustments to net income for preferred distributions and premiums on redemption of preferred shares/preference units in accordance with GAAP. The equity positions of various individuals and entities that contributed their properties to the Operating Partnership in exchange for OP Units are collectively referred to as the “Noncontrolling Interests – Operating Partnership”. Subject to certain restrictions, the Noncontrolling Interests – Operating Partnership may exchange their OP Units for Common Shares on a one-for-one basis.