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PROSPECTUS SUPPLEMENT Filed pursuant to Rule 424(b)(5)
(TO PROSPECTUS DATED DECEMBER 16, 1997) of the Securities Act of 1933
(File No. 333-41511)
1,244,147 SHARES
BAY APARTMENT COMMUNITIES, INC
COMMON STOCK
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All of the shares of common stock offered hereby (the "Shares") are being
sold by Bay Apartment Communities, Inc. (the "Company"). The outstanding shares
of the Company's common stock, par value $.01 per share (the "Common Stock"),
are, and the Shares will be, listed on the New York Stock Exchange (the "NYSE")
and the Pacific Exchange (the "PCX") under the symbol "BYA." On April 23, 1998,
the reported last sale price of the Common Stock on the NYSE was $37.375 per
share.
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SEE "RISK FACTORS" COMMENCING ON PAGE S-2 FOR A DISCUSSION OF CERTAIN RISK
FACTORS RELEVANT TO AN INVESTMENT IN THE SHARES.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS TO WHICH IT RELATES. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The Underwriter has agreed to purchase the Shares from the Company at a
price of $35.4128 per share, resulting in aggregate proceeds to the Company of
$44,058,729 before payment of expenses by the Company estimated at $50,000,
subject to the terms and conditions in the Underwriting Agreement. The
Underwriter intends to deposit the Shares, valued at the reported last sale
price on the NYSE, with the trustee of the Equity Investor Fund Cohen & Steers
Realty Majors Portfolio Unit Investment Trust (a Unit Investment Trust) (the
"Trust") in exchange for units in the Trust. The units of the Trust will be sold
to investors at a price based upon the net asset value of the securities in the
Trust. For purposes of this calculation, the value of the Common Stock as of the
evaluation time for units of the Trust on April 23, 1998 was $37.375 per share.
If all of the Shares so deposited with the trustee of the Trust are valued at
their reported last sale price on the NYSE on April 23, 1998, the aggregate
underwriting commission would be $2,441,265. See "Underwriting."
The Shares offered hereby are offered by the Underwriter, subject to prior
sale, when, as and if issued to and accepted by the Underwriter and subject to
approval of certain legal matters by Davis Polk & Wardwell and O'Melveny & Myers
LLP, counsel for the Underwriter. The Underwriter reserves the right to reject
orders in whole or in part. It is expected that delivery of the Shares offered
hereby will be made against payment therefor in New York, New York on or about
April 29, 1998.
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MERRILL LYNCH & CO.
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The date of this Prospectus Supplement is April 23, 1998.
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF THE COMMON STOCK TO
STABILIZE ITS MARKET PRICE. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
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Unless the context otherwise requires, all references in this Prospectus
Supplement to the "Company" refer to Bay Apartment Communities, Inc. and its
subsidiaries on a consolidated basis. This Prospectus Supplement 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. The Company's actual results could differ materially from those set
forth in the forward-looking statements. Certain factors that might cause such a
difference are discussed below in the section entitled "Risk Factors." The
Company cautions the reader, however, that this list may not be exhaustive.
THE COMPANY
The Company is a self-administered and self-managed real estate investment
trust ("REIT") that currently owns, or holds substantially all of the ownership
interests in, and manages 59 apartment communities (the "Communities")
containing 16,741 apartment homes, including homes delivered at Toscana, a
partially developed Community. A substantial majority of the Communities, 37 out
of 59, are located in Northern California (principally in the San Francisco Bay
Area). In addition to the Communities, the Company owns five land sites on which
it is building five communities (the "Current Development Communities"), which
will contain an aggregate of approximately 1,216 apartment homes, including the
remaining apartment homes under construction at Toscana. The Company owns two
additional land sites in the San Francisco Bay Area for future development.
The Company was incorporated under the laws of the State of California in
1978 and was reincorporated in the State of Maryland in July 1995. Its executive
offices are located at 4340 Stevens Creek Boulevard, Suite 275, San Jose,
California 95129 and its telephone number is (408) 983-1500.
RISK FACTORS
An investment in the Shares involves various risks. In addition to general
investment risks and those factors set forth elsewhere herein, prospective
investors should consider, among other things, the following risk factors.
DEVELOPMENT AND ACQUISITION RISKS
The Company intends to continue to pursue the development and construction
of apartment home communities in accordance with the Company's development and
underwriting policies. Risks associated with the Company's development and
construction activities may include: the abandonment of development and
acquisition opportunities explored by the Company; construction costs of a
community may exceed original estimates due to increased materials, labor or
other expenses, which could make completion of the community uneconomical;
occupancy rates and rents at a newly completed community are dependent on a
number of factors, including market and general economic conditions, and may not
be sufficient to make the community profitable; financing may not be available
on favorable terms for the development of a community; and construction and
lease-up may not be completed on schedule, resulting in increased debt service
expense and construction costs. Development activities are also subject to risks
relating to the inability to obtain, or delays in obtaining, all necessary
zoning, land-use, building, occupancy, and other required governmental permits
and authorizations. The occurrence of any of the events described above could
adversely affect the Company's ability to achieve its projected yields on
communities under development or redevelopment and could prevent the Company
from making expected distributions to stockholders. See "-- Real Estate
Investment Risks."
For new development communities, the Company's goal, on average, is to
achieve projected earnings before interest, income taxes, depreciation and
amortization ("EBITDA") as a percentage of total budgeted construction
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cost of approximately 10%. Projected EBITDA as a percentage of total budgeted
construction cost represents EBITDA projected to be received in the first
calendar year after a community reaches stabilized occupancy (i.e., the first
month when the community has a weighted average physical occupancy of at least
95%), based on current market rents, less projected stabilized property
operating and maintenance expenses, before interest, income taxes, depreciation
and amortization. Total budgeted construction cost is based on current
construction costs, including interest capitalized during the construction
period. Market rents and construction costs reflect those prevailing in the
community's market at the time the Company's development budgets are prepared
while taking into consideration certain changes to those market conditions
anticipated by the Company at the time. Although the Company attempts to
anticipate changes in market conditions, the Company cannot predict with
certainty what those changes will be. For example, upon the acquisition of the
Toscana land site in May 1996, the Company estimated that the total budgeted
construction cost for this Current Development Community would be $95.7 million.
Since that time, construction costs have been increasing and management believes
that the total construction cost for this development will be higher than the
original budget. Nonetheless, because of increases in prevailing market rents
management believes that it will still be able to achieve projected EBITDA as a
percentage of total budgeted construction cost of at least 10%. Management
believes that it will experience similar increases in construction costs and
market rents with respect to the CentreMark and Paseo Alameda Current
Development Communities. However, there can be no assurances that market rents
in effect at the time the Current Development Communities are leased-up will be
sufficient to offset the effects of any increased construction costs.
Acquisitions entail risks that investments will fail to perform in
accordance with expectations and that judgments with respect to the costs of
improvements to bring an acquired community up to standards established for the
market position intended for that community will prove inaccurate, as well as
general investment risks associated with any new real estate investment.
Although the Company undertakes an evaluation of the physical condition of each
new community before it is acquired, certain defects or necessary repairs may
not be detected until after the community is acquired, which could significantly
increase the Company's total acquisition costs.
As described above, construction costs are increasing and the cost to
redevelop Communities that have been acquired has, in some cases, exceeded
management's original estimates. Management believes that it may experience
similar increases in the future. There can be no assurances that the Company
will be able to charge rents upon completing the redevelopment of the
Communities that will be sufficient to fully offset the effects of any increases
in construction costs.
REAL ESTATE INVESTMENT RISKS
General Risks. Real property investments are subject to varying degrees of
risk. The yields available from equity investments in real estate depend on the
amount of income generated and expenses incurred. If the Communities do not
generate revenues sufficient to meet operating expenses, including debt service
and capital expenditures, the Company's cash flow and ability to pay
distributions to its stockholders will be adversely affected.
An apartment community's revenues and value may be adversely affected by a
number of factors, including the national economic climate; the local economic
climate (which may be adversely impacted by plant closings, industry slowdowns,
military base closings and other factors); local real estate conditions (such as
an oversupply of or a reduced demand for apartment homes); the perceptions by
prospective residents of the safety, convenience and attractiveness of the
community; the ability of the owner to provide adequate management, maintenance
and insurance; and increased operating costs (including real estate taxes and
utilities). Certain significant expenditures associated with each equity
investment (such as mortgage payments, if any, real estate taxes, insurance and
maintenance costs) are generally not reduced when circumstances cause a
reduction in income from the investment. If a community is mortgaged to secure
payment of indebtedness, and if the Company is unable to meet its mortgage
payments, a loss could be sustained as a result of foreclosure on the community
or the exercise of other remedies by the mortgagee. In addition, real estate
values and income from communities are also affected by such factors as the cost
of compliance with government regulation, including zoning and tax laws,
interest rate levels and the availability of financing.
Operating Risks. Each of the Communities is subject to all operating risks
common to apartment communities in general, any and all of which might adversely
affect apartment home occupancy or rental rates. Increases in unemployment and a
decline in household formation in one or more of the Company's target markets
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might adversely affect occupancy or rental rates. Increases in operating costs
due to inflation and other factors may not be offset by increased rents.
Residents may be unable or unwilling to pay rent increases. Rent control or rent
stabilization laws or other laws regulating housing are applicable in certain of
the cities in the markets where the Company owns Communities and may be enacted
in the future in the jurisdictions in which one or more communities are located
or may be acquired; if enacted, compliance with these laws may prevent the
Company from raising rents to offset increases in operating costs. Similarly,
the local rental market may limit the extent to which rents may be increased to
meet increased expenses without decreasing occupancy rates. If any of the above
occurs, the Company's ability to achieve its desired yields on the Communities
and to make expected distributions to stockholders could be adversely affected.
Market Illiquidity. Equity real estate investments are relatively illiquid.
Such illiquidity will tend to limit the ability of the Company to vary its
portfolio promptly in response to changes in economic or other conditions. In
addition, the Internal Revenue Code of 1986, as amended (the "Code"), limits the
Company's ability to sell properties held for fewer than four years, which may
affect the Company's ability to sell properties without adversely affecting
returns to holders of Common Stock.
Competition. There are numerous housing alternatives that compete with the
Communities in attracting residents. The Communities compete directly with other
rental apartments and single-family homes that are available for rent in the
markets in which the Communities are located. The Communities also compete for
residents with the new and existing home markets. The number of competitive
residential properties in a particular area could have a material adverse effect
on the Company's ability to lease apartment homes and on the rents charged. In
addition, competitors for acquisitions and development projects may have greater
resources than the Company, thereby putting the Company at a competitive
disadvantage.
Affordable Housing Laws or Restrictions. A number of the Communities are,
and will be in the future, subject to federal, state and local statutes or other
restrictions requiring that a percentage of apartment homes be made available to
residents satisfying certain income requirements. The Company must comply with
these restrictions as a condition to obtaining tax-exempt financing for these
Communities. These laws and restrictions, as well as any changes thereto making
it more difficult to meet such requirements, or a reduction in or elimination of
certain financing advantages available in some instances to persons satisfying
such requirements, could adversely affect the Company's profitability and its
development and acquisition projects in the future.
DEPENDENCE ON NORTHERN CALIFORNIA
Although the Company may expand further outside of Northern California, and
intends to make additional selective acquisitions in Southern California, the
State of Washington and the State of Oregon from time to time, currently a
substantial majority of the Communities are located in Northern California
(primarily in the San Francisco Bay Area), where the Company has most of its
acquisition, development, redevelopment, construction, reconstruction and
marketing expertise. The Company's performance, therefore, is dependent upon
economic conditions in these markets. A decline in the economy in these markets
may adversely affect the ability of the Company to make expected distributions
to stockholders. Similarly, a decline in demand for discretionary consumer goods
and leisure travel, as well as heightened competition in high technology
industries, could have an adverse impact upon Northern California. Reductions in
the level of government spending in the defense industry may also have an impact
upon employment and demand for residential real estate in the Company's markets.
NEW MARKETS
In 1996, the Company expanded beyond Northern California and has since
acquired 19 Communities located in Southern California (including Orange, Los
Angeles and San Diego Counties), two Communities located in the State of
Washington and one Community in Oregon. The Company has also agreed to purchase
a 264 apartment home community in Redmond, Washington. The proposed acquisition
will not be consummated until 90 days after construction has been completed and
the community is 90% occupied by residents. Construction at this community has
recently been completed and the community is currently 90% occupied, and the
proposed acquisition is expected to close during the second quarter of 1998. The
Company also intends to make other selective acquisitions in these markets from
time to time. The Company's historical experience is in Northern California,
primarily in the San Francisco Bay Area, and it is possible that the Company's
expertise in those
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markets may not assist the Company in its new markets. In such event, the
Company may be exposed to, among others, risks associated with (i) a lack of
market knowledge and understanding of the local economy, (ii) an inability to
obtain land for development and to identify property acquisition opportunities,
(iii) an inability to obtain construction tradespeople, (iv) sudden adverse
shifts in supply and demand factors and (v) an unfamiliarity with local
governmental and permitting procedures.
NATURAL DISASTERS
Many of the Communities are located in the general vicinity of active
earthquake faults. In June 1997, the Company obtained a seismic risk analysis
from an engineering firm which estimated the probable maximum loss ("PML") for
each of the 41 Communities owned at that time and Toscana, a Current Development
Community, individually and for all of such Communities and Toscana combined. To
establish a PML, the engineers first define a severe earthquake event for the
applicable geographic area, which is an earthquake that has only a 10%
likelihood of occurring over a 50-year period. The PML is determined as the
structural and architectural damage and business interruption loss that has a
10% probability of being exceeded in the event of such an earthquake. Because
the Communities are concentrated in the San Francisco Bay Area, the engineers'
analysis defined an earthquake on the San Andreas Fault with a Richter Scale
magnitude of 8.0 as a severe earthquake with a 10% probability of occurring
within a 50-year period. The engineers then established an aggregate PML at that
time of $63.8 million for the 41 Communities owned at that time and Toscana. The
$63.8 million PML for those Communities was a PML level that the engineers
expected to be exceeded only 10% of the time in the event of such a severe
earthquake. The actual aggregate PML could be higher as a result of variations
in soil classifications and structural vulnerabilities. For each Community, the
engineers' analysis calculated an individual PML as a percentage of the
Community's replacement cost and projected revenue. Two of the Communities had
individual PMLs of 30%, while seven Communities had PMLs of 25%, and the
remaining 32 Communities owned at such time and Toscana each had PMLs of 20% or
less. The Company has obtained an individual PML assessment for each of the
seventeen Communities acquired since June 1997. One Community had an individual
PML of 50%, one had an individual PML of 30%, three had individual PMLs of 24%,
one had an individual PML of 21%, and the remaining 11 Communities had
individual PMLs of 20% or less. While the Company has not yet obtained an
engineers' analysis establishing an aggregate PML for all of the Communities on
a combined basis, the Company currently intends to do so in the future on an
annual basis in order to assist it in evaluating appropriate levels of insurance
coverage. No assurance can be given that an earthquake would not cause damage or
losses greater than the PML assessments indicate, that future PML levels will
not be higher than the current PML levels for the Communities, or that future
acquisitions or developments will not have PML assessments indicating the
possibility of greater damage or losses than currently indicated.
In July 1997, the Company renewed its earthquake insurance, both for
physical damage and lost revenue, with respect to the 41 Communities then owned
and Toscana. In addition, the seventeen Communities acquired subsequent to June
1997 are included under the Company's earthquake insurance policy. For any
single occurrence, the Company self-insures the first $25 million of loss, and
has in place $35 million of coverage above this amount. In addition, the
Company's general liability and property casualty insurance provides coverage
for personal liability and fire damage. In the event that an uninsured disaster
or a loss in excess of insured limits were to occur, the Company could lose its
capital invested in the affected Community, as well as anticipated future
revenue from such Community, and would continue to be obligated to repay any
mortgage indebtedness or other obligations related to the Community. Any such
loss could materially and adversely affect the business of the Company and its
financial condition and results of operations.
REAL ESTATE FINANCING RISKS
Risks Relating to the Credit Enhancement. As of December 31, 1997, the
Company was obligated for certain mortgage indebtedness funded by tax-exempt
bonds (the "Bonds") in the aggregate principal amount of approximately $223.5
million on 12 Communities (Waterford, Villa Mariposa, Fairway Glen, Foxchase,
Barrington Hills, Crossbrook, Rivershore, Canyon Creek, Sea Ridge, City Heights,
CountryBrook and Larkspur Canyon). Principal and interest payments due to
holders of the Bonds are secured by a first deed of trust on the Community
associated with the respective Bond issue.
Scheduled principal and interest payments due on the Bonds financing
Foxchase, Fairway Glen, Waterford and Villa Mariposa (the "1994 Bonds") are
guaranteed by an insurance policy (the "FGIC Credit Enhancement")
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issued by Financial Guaranty Insurance Company ("FGIC"). The FGIC Credit
Enhancement will terminate on March 17, 2004 and, if the FGIC Credit Enhancement
is not renewed or replaced, the 1994 Bond documents may require balloon payments
in 2004 aggregating approximately $87.4 million, less any unscheduled principal
amortization. Scheduled interest and principal payments due on the Bonds
financing Barrington Hills, Crossbrook, Rivershore, Canyon Creek, Sea Ridge,
City Heights and Larkspur Canyon are supported by a 30-year credit enhancement,
expiring June 15, 2025 (the "FNMA Credit Enhancement" and, together with the
FGIC Credit Enhancement, the "Credit Enhancements"), provided by the Federal
National Mortgage Association ("FNMA"). The Bonds financing CountryBrook are
also supported by a credit enhancement provided by FNMA through April 1, 2002.
Each of the Credit Enhancements contains certain provisions under which a
default of certain payment obligations or covenants would entitle FGIC or FNMA,
as the case may be, to declare a default under its respective Credit Enhancement
documents and exercise its remedies (including foreclosure) under mortgages that
encumber 11 of the 12 Bond-financed Communities and eight additional
Communities, with a consequent loss of income and asset value to the Company. In
addition, gross rents collected from the residents of these 19 Communities have
been and will continue to be deposited in cash collateral accounts established
with financial institutions acceptable to FGIC or FNMA, as applicable. The
Company does not have access to some of the funds until all required monthly
debt service payments due on the Bonds and certain other payments are made. A
default under either of the Credit Enhancements or the Bond documents may
adversely affect the ability of the Company to make expected distributions to
stockholders, including distributions required to maintain its REIT status. See
"Certain Federal Income Tax Considerations."
Bond Compliance Requirements. The 12 Bond-financed Communities are subject
to deed restrictions or restrictive covenants relating to tax-exempt bond
financing. In addition, the Code and the regulations promulgated thereunder
impose various restrictions, conditions and requirements relating to the
exclusion from gross income for federal income tax purposes of interest on
qualified Bond obligations, including requirements that at least 20% of
apartment homes be made available to residents with gross incomes that do not
exceed 80% of the median income (50% in the case of the Canyon Creek, City
Heights and Sea Ridge Communities) in the area, measured annually. Some of the
Communities financed with Bonds are also subject to a requirement that the
rental rates for the 20% of the apartment homes that are subject to the
foregoing requirement may not exceed 30% of one-half of the applicable median
income. In addition to federal requirements, certain state and local authorities
have imposed rental restrictions. The Bond compliance requirements and the
requirements of any future tax-exempt bond financing utilized by the Company may
have the effect of limiting the Company's income from the Bond-financed
Communities if the Company is required to lower its rental rates materially to
attract residents who satisfy the median income test. If the required number of
apartment homes are not reserved for residents satisfying these income
requirements or, in some cases, the Company does not comply with the rent
limitations, the tax-exempt status of the Bonds may be terminated, the
obligations of the Company under the Bond documents may be accelerated and other
contractual remedies against the Company may be available.
Risk of Rising Interest Rates. As of December 31, 1997, the Company had
variable rate indebtedness aggregating approximately $427.9 million, consisting
of $203.7 million of tax-exempt financing and $224.2 million of borrowings under
the Company's $350 million unsecured line of credit from Union Bank of
Switzerland and other participating banks (the "Unsecured Credit Facility"). All
of the Company's $203.7 million of variable rate tax-exempt financing had been
fixed through interest rate swap agreements, of which an aggregate of $87.4
million had been fixed at an all-inclusive interest rate of 5.88% until March
2004, an aggregate of $88.0 million had been fixed at an all-inclusive interest
rate of 6.48% until June 2010, $20.7 million had been fixed at an all-inclusive
interest rate of 5.80% until July 2007 and $7.6 million had been fixed at an
all-inclusive interest rate of 5.50% until September 2002. Subsequent to
December 31, 1997, the Company assumed $10.4 million of variable rate tax-exempt
bonds in connection with the acquisition of the Laguna Brisas Community. These
bonds mature in March 2009 and have a current all-in interest rate of 5.37%.
Additional indebtedness that the Company may incur under the Unsecured Credit
Facility will also bear interest at a variable rate. To the extent the Company
uses variable rate debt for future financings, and with respect to the portion
of the Company's outstanding indebtedness that will bear interest at a variable
rate, increases in these interest rates could adversely affect the Company's
ability to make distributions to stockholders. Consideration will be given to
acquiring interest rate hedging or protection agreements, if appropriate and
cost effective, with respect to future variable rate indebtedness to reduce
exposure to interest rate increases on such debt.
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POTENTIAL ENVIRONMENTAL LIABILITIES
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required (typically regardless of knowledge or responsibility) to investigate
and remediate the effects of hazardous or toxic substances or petroleum product
releases at such property, and may be held liable to a governmental entity or to
third parties for property damage and for investigation and remediation costs
incurred by such parties in connection with the contamination, which costs may
be substantial. The presence of such substances (or the failure to properly
remediate the contamination) may adversely affect the owner's ability to borrow
against, sell or rent such property. In addition, some environmental laws create
a lien on the contaminated site in favor of the government for damages and costs
it incurs in connection with the contamination.
Certain federal, state and local laws and regulations govern the removal,
encapsulation or disturbance of asbestos-containing materials ("ACMs") when such
materials are in poor condition or in the event of construction, remodeling,
renovation or demolition of a building. Such laws may impose liability for
release of ACMs and may provide for third parties to seek recovery from owners
or operators of real properties for personal injury associated with ACMs. In
connection with its ownership and operation of the Communities, the Company
potentially may be liable for such costs.
The Company is not aware that any ACMs were used in connection with the
construction of the Communities developed by the Company, all of which were
constructed after 1983. The Company is aware that ACMs were used in connection
with the construction of the following Communities acquired by the Company:
Regatta Bay, Sea Ridge, Village Square, Parc Centre, Sunset Towers, Mill Creek,
Crowne Ridge, Lafayette Place, SummerWalk, TimberWood, SunScape, The Arbors
(formerly Cardiff Gardens), Mission Woods, Cedar Ridge, The Park, Lakeside,
Creekside, Governor's Square, Viewpointe, Mission Bay Club, Westwood Club,
Pacifica Club, Warner Oaks, Amberway, Arbor Park and Cabrillo Square. The
Company currently has in place or intends to implement an operations and
maintenance program for ACMs at these Communities. The Company does not
anticipate that it will incur any material liabilities in connection with the
presence of ACMs at the Communities.
All of the Communities, and all of the Current Development Communities,
have been subjected to a Phase I or similar environmental assessment (which
involves general inspections without soil sampling or groundwater analysis and
generally without radon testing) completed by an independent environmental
consultant. These assessments have not revealed any environmental liability that
the Company believes would have a material adverse effect on the Company's
business, assets or results of operations. However, two Current Development
Communities are subject to soil and groundwater remediation of contamination
from adjacent landowners. In the case of one of the Current Development
Communities, Toscana, National Semiconductor Corporation is causing remediation
to occur and has provided an indemnity which the Company may rely upon for
certain environmental liabilities. Additionally, another Current Development
Community, Paseo Alameda, required underground storage tank removal and other
environmental cleanup. The Company is also aware that certain of the Communities
have lead paint and the Company is undertaking or intends to undertake
appropriate remediation or management activity. Nevertheless, it is possible
that the assessments do not reveal all environmental liabilities or there are
material environmental liabilities of which the Company is unaware. Furthermore,
prior to March 17, 1994, the date of the Company's initial public offering, the
Company had been occasionally involved in developing, managing, leasing and
operating various properties for third parties and may be considered an operator
of such properties and, therefore, potentially liable for removal or remediation
costs or other potential costs which could relate to hazardous or toxic
substances. The Company is not aware of any environmental liabilities with
respect to properties it has managed or developed for such third parties.
However, no assurances can be given that (i) future laws, ordinances or
regulations will not impose any material environmental liability, or (ii) the
current environmental condition of the Communities or the Current Development
Communities will not be affected by the condition of land or operations in the
vicinity of such communities (such as the presence of underground storage
tanks), or by third parties unrelated to the Company.
RISK FACTORS RELATING TO THE PROPOSED MERGER WITH AVALON PROPERTIES, INC.
On March 9, 1998, the Company announced that it had signed a definitive
merger agreement (the "Merger Agreement") with Avalon Properties, Inc.
("Avalon"), pursuant to which Avalon will be merged with and into the Company,
with the Company as the surviving entity (the "Merger"). See "Recent
Developments." Following consummation of the Merger, the Company's actual
results could differ materially from those set forth in the
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forward-looking statements contained in this Prospectus Supplement. In addition
to general investment risks and those factors set forth elsewhere herein,
prospective investors should consider, among other things, the following risk
factors relating to the proposed Merger, although the Company cautions the
reader that this list may not be exhaustive.
Failure to Manage Rapid Growth and Integrate Operations Following the
Merger. Based upon the respective portfolios of the Company and Avalon as of
March 8, 1998, after giving effect to the Merger, the Company will own 140
apartment communities with 40,506 apartment homes, which would represent an
increase in the Company's apartment homes portfolio of over 22,500 apartment
homes. The integration of departments, systems, operating procedures and
information technology of the Company and Avalon, as well as future acquisitions
and developments, which will involve a substantial number of new management and
operations personnel, present a significant management challenge, and any
failure to successfully integrate such systems and procedures into one operating
philosophy could have a material adverse effect on the results of operations and
financial condition of the Company. There can be no assurance that the Company
will be able to integrate and manage these operations effectively or maintain or
improve its historical financial performance.
Possibility that the Expected Benefits of the Merger Will Not Be Realized.
Based on anticipated savings in expenses and other factors, the Merger is
anticipated to have an accretive (rather than a dilutive) effect on the
Company's Funds from Operations ("FFO") per share on a pro forma basis for the
second half of fiscal year 1998. The Merger also is expected to have an
accretive effect on FFO for future periods. However, no assurance can be given
that the anticipated accretive effect on FFO and expense reductions will be
realized or that unanticipated costs will not arise as a result of the Merger.
For example, although we believe that we have reasonably estimated the likely
costs of integrating the operations of the Company and Avalon, as well as the
incremental costs of operating as a combined company, it is possible that
unexpected transaction costs (such as transfer taxes, consent fees or
professional expenses) or unexpected future operating expenses (such as
increased personnel costs, increased property taxes or increased travel
expenses) could have a material adverse effect on the results of operations and
financial condition of the Company. If the expected savings are not realized or
unexpected costs are incurred, the Merger could have a significant dilutive
effect on the Company's FFO per share.
Inability to Continue External Growth Rate. Following the consummation of
the Merger, the Company will have an asset base of approximately $3.4 billion,
which is significantly larger than either the Company's or Avalon's respective
management teams have managed in the past. This should make it possible for the
Company to access capital for its acquisitions and developments on more
favorable terms. However, the Company may be forced to temporarily limit its
acquisition, development and reconstruction activities as it attempts to
integrate the two companies' operations. Therefore, there can be no assurances
that the Company's external growth rate following consummation of the Merger
will equal or exceed its external growth rate for prior periods.
Substantial Expenses Related to the Merger. The Company has incurred
substantial expenses in connection with the Merger, and cannot provide any
assurance that the Merger will be completed. In addition, in the event the
Merger Agreement is terminated for certain reasons or certain other events occur
under the Merger Agreement, the Merger Agreement provides that termination
expenses of up to $10 million may be payable by the Company. If the Merger is
not completed, these expenses and termination fees could have a material adverse
impact on the ability of the Company to pay future distributions to
stockholders.
Development and Acquisition Risks. Following consummation of the Merger,
the Company intends to continue to pursue the development and construction of
apartment home communities in accordance with an integrated development and
underwriting policy derived from the respective strengths of the Company and
Avalon. In addition to the inherent risk of unsuccessfully integrating the
development and construction policies of the Company with those of Avalon, those
risks associated with the Company's development and construction identified
above may also be associated with the Company following consummation of the
Merger. See "--Development and Acquisition Risks" and "-- Real Estate Investment
Risks."
New Markets. Like the Company, Avalon has expanded its ownership and
operations of apartment communities into new markets in recent years, including
certain Midwest and Pacific Northwest markets. Following consummation of the
Merger, the Company intends to make other selective acquisitions in these
markets from time to time, and may also make other selected acquisitions in
markets outside of the Company's and Avalon's current market areas if
appropriate opportunities arise. The Company's expertise in its and Avalon's
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historical markets may not assist it in its expansion into new markets following
consummation of the Merger, and accordingly, the Company may be exposed to
certain risks more fully detailed above. See "--New Markets."
Dependence on Primary Markets. The Company's performance will be dependent
upon economic conditions in its and Avalon's historical markets. A decline in
the economy in one or more of these markets, or in the United States generally,
may adversely affect the Company's operating results and its ability to make
expected distributions to stockholders.
Portfolio Acquisition Risks. The Company has increasingly emphasized, and
following consummation of the Merger intends to continue to emphasize,
acquisitions of multiple apartment communities in single transactions in order
to reduce acquisition expenses per apartment community and to enable the Company
to gain a critical mass of assets that provides operating leverage. However,
portfolio acquisitions are more complex than single-property acquisitions, and
the risk that a multiple-property acquisition will not close may be greater than
in a single-property acquisition. In addition, the Company's costs for a
portfolio acquisition that does not close are generally greater than for a
single property acquisition that does not close. If the Company fails to close
portfolio acquisitions, its ability to increase its FFO will be limited and a
charge to earnings for costs related to the failed acquisition may occur.
Portfolio acquisitions may also result in the Company owning apartment
communities in geographically dispersed markets that are geographically removed
from the Company's or Avalon's principal markets. This geographic diversity will
place additional demands on the Company's ability to manage such operations.
Another risk associated with portfolio acquisitions is that a seller may
require that a group of apartment communities be purchased as a package, even
though one or more of the apartment communities in the portfolio does not meet
the Company's investment criteria. In such cases, the Company may attempt to
make a joint bid with another buyer, or the Company may purchase a portfolio of
apartment communities with the intent to subsequently dispose of those which do
not meet its criteria. In the case of joint bids, however, it is possible that
the other buyer may default in its obligations, which increases the risk that
the acquisition may not close, with the adverse consequences described above. In
cases where the Company intends to dispose of apartment communities it does not
wish to own, there can be no assurance as to how quickly it could sell or
exchange such apartment communities or the terms on which they could be sold or
exchanged. In addition, any gains on the sale of such apartment communities
within four years of the date of acquisition could be subject to a 100% tax.
Inclement Weather. The concentration of Avalon's communities in the
Northeast and Midwest will expose the Company to risks associated with inclement
weather following consummation of the Merger. For example, unusually harsh
winters may result in increased costs in the Northeast and Midwest markets due
to such factors as the removal of snow and ice, as well as delays in the
construction or development of apartment communities. In addition, such
inclement weather could increase the need for maintenance and repairs on the
communities.
Federal Income Tax Risks - Failure to Qualify as a REIT. It is intended
that, following consummation of the Merger, the Company will continue to operate
in a manner so that it will continue to qualify as a REIT. No assurance can be
given that the Company or Avalon qualifies as a REIT or that the Company will
remain qualified as a REIT following the Merger. Qualification as a REIT
involves the application of highly technical and complex Code provisions for
which there are only limited judicial or administrative interpretations and
involves the determination of various factual matters and circumstances not
entirely within the companies' control. Failure of either the Company or Avalon
to have qualified as a REIT prior to the Merger could also disqualify the
Company as a REIT following consummation of the Merger and/or subject it to
significant tax liabilities.
If the Company fails to qualify as a REIT, it will be subject to federal
income tax at regular corporate rates. In this event, the Company could be
subject to potentially significant tax liabilities, and the amount of cash
available for distribution to stockholders would be reduced and possibly
eliminated. Unless entitled to relief under certain statutory provisions, the
Company would be disqualified from treatment as a REIT for the four taxable
years following the year during which qualification was lost.
Shareholder Rights Agreement Could Inhibit Changes in Control. The Company
has adopted a shareholder rights agreement (the "Rights Agreement"). The Company
will continue to have the Rights Agreement following consummation of the Merger.
Under the terms of the Rights Agreement, in general, if
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a person or group (an "Acquiring Person") acquires more than 10% of the
outstanding shares of the Company's Common Stock, then all other stockholders
will have the right to purchase securities from the Company at a discount to
those securities, thus causing substantial dilution to the Acquiring Person. The
Rights Agreement may have the effect of delaying, deferring or preventing a
change in control and, therefore, could adversely effect the stockholders'
ability to realize a premium over the then-prevailing market price for the
Common Stock in connection with such a transaction. Following the Merger, the
Board of Directors of the Company can prevent the Rights Agreement from
operating in the event the Board approves of an Acquiring Person. Therefore, the
Rights Agreement gives the Board of Directors significant discretion over
whether a potential acquiror's efforts to acquire a large interest in the
Company will be successful.
RECENT DEVELOPMENTS
On March 9, 1998, the Company announced that it had signed the Merger
Agreement with Avalon. Under the terms of the Merger Agreement, Avalon will be
merged with and into the Company, with the Company being the surviving entity
and renamed Avalon Bay Communities, Inc., through an exchange of shares in which
the Avalon common stockholders will receive 0.7683 of a share of the Company's
Common Stock for each share of Avalon common stock they own. Avalon preferred
stockholders will receive comparable preferred shares of the Company as a result
of the Merger. The Merger, which has been unanimously approved by the board of
directors of both companies and is expected to close in June 1998, is intended
to qualify as a tax-free transaction and will be accounted for as a purchase of
Avalon by the Company. The Merger is subject to the approval of the stockholders
of both companies and other customary closing conditions. In connection with the
execution of the Merger Agreement, the Company and Avalon each issued to the
other an option to buy 19.9% of its outstanding common stock under certain
circumstances. Following consummation of the Merger, the Company will be
governed by a twelve-member Board of Directors, six of whom will be from the
Company's Board of Directors and six of whom will be from Avalon's Board of
Directors. Nine of the twelve Board members will not be employees of the
Company.
The Board of Directors of the Company also has adopted the Rights
Agreement. In connection with the adoption of the Rights Agreement, the Board of
Directors declared a dividend distribution of one Preferred Stock Purchase Right
(a "Right") for each outstanding share of Common Stock to stockholders of record
as of the close of business on March 10, 1998 (the "Record Date"). Each Right
entitles the registered holder thereof to purchase from the Company a unit
consisting of one one-thousandth (1/1000th) of a share of Series E Junior
Participating Cumulative Preferred Stock, par value $0.01 per share, of the
Company, at a cash exercise price of $160.00 per Unit, subject to adjustment.
Initially, the Rights are not exercisable and are attached to and trade with all
shares of Common Stock outstanding as of, or issued subsequent to, the Record
Date. Under the Rights Agreement, the Rights generally become exercisable if a
person becomes an Acquiring Person by acquiring 10% or more of the Common Stock
or if a person commences a tender offer that would result in that person owning
10% or more of the Common Stock.
In the case of certain stockholders of the Company who beneficially owned
10% or more of the outstanding shares of Common Stock as of March 9, 1998 (such
stockholders are referred to in the Rights Agreement as "grandfathered
persons"), the Rights generally will be distributed only if any such stockholder
acquires or proposes to acquire additional shares of Common Stock. In addition,
a "grandfathered person" generally will become an Acquiring Person only if such
person acquires additional shares of Common Stock. See "Risk Factors--Risks
Relating to the Proposed Merger with Avalon Properties, Inc."
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,244,147 shares of Common
Stock pursuant to this Prospectus Supplement are estimated at approximately
$44,008,729. The Company will use the net proceeds from this Offering to reduce
borrowings under its Unsecured Credit Facility, which were used to fund the
acquisition and development of additional apartment communities, including
amounts borrowed to fund the acquisition of the Amberway, Arbor Park, Laguna
Brisas and Cabrillo Square Communities and one land site in San Jose,
California. The Unsecured Credit Facility bears interest at the London Interbank
Offered Rate (based on a maturity selected by the Company) plus 0.90% per annum
(6.46% per annum as of March 31, 1998) and matures in May 2000.
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UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
of even date herewith (the "Underwriting Agreement"), between Merrill Lynch &
Co. (the "Underwriter") and the Company, the Underwriter has agreed to purchase
from the Company, and the Company has agreed to sell to the Underwriter,
1,244,147 shares of Common Stock at the offering price less the underwriting
discounts set forth on the cover page of this Prospectus Supplement. Pursuant to
the terms and conditions of the Underwriting Agreement, the Underwriter is
obligated to purchase all of the shares of Common Stock if any are purchased.
The Underwriter intends to deposit the Shares offered hereby with the
trustee of the Trust, a registered unit investment trust under the Investment
Company Act of 1940, as amended, for which the Underwriter acts as sponsor and
depositor, in exchange for units in the Trust. If all of the shares of Common
Stock so deposited with the trustee of the Trust are valued at their reported
last sale price on April 23, 1998, the aggregate underwriting commission would
be $2,441,265. The Underwriter is an affiliate of the Trust.
In the Underwriting Agreement, the Company has agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the Underwriter
may be required to make in respect thereof.
In connection with the offering, the rules of the Securities and Exchange
Commission permit the Underwriter to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions may consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock. If the Underwriter creates a short position in the Common Stock in
connection with the offering (i.e., if it sells more shares of Common Stock than
are set forth on the cover page of this Prospectus Supplement), the Underwriter
may reduce that short position by purchasing Common Stock in the open market.
Neither the Company nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor the Underwriter makes any representation that the Underwriter
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
The Common Stock is listed on the NYSE and the PCX under the symbol "BYA".
The Company has applied for listing of the Shares offered herein with the NYSE
and the PCX.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Goodwin,
Procter & Hoar LLP, Boston, Massachusetts. Certain legal matters related to the
offering are being passed upon for the Underwriter by Davis Polk & Wardwell, New
York, New York, and O'Melveny & Myers LLP, San Francisco, California.
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================================================================================
No dealer, salesperson or other individual has been authorized to give any
information or make any representations not contained in this Prospectus
Supplement or the accompanying Prospectus. If given or made, such information or
representations must not be relied upon as having been authorized by the Company
or any other person. This Prospectus Supplement and the accompanying Prospectus
do not constitute an offer to sell, or a solicitation of an offer to buy, any of
the Securities offered hereby to any person or by anyone in any jurisdiction in
which it is unlawful to make such offer or solicitation. Neither the delivery of
this Prospectus Supplement nor the accompanying Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any date subsequent to the date
hereof.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PROSPECTUS SUPPLEMENT
<S> <C>
The Company............................................................ S-2
Risk Factors........................................................... S-2
Recent Developments.................................................... S-10
Use of Proceeds........................................................ S-10
Underwriting........................................................... S-11
Legal Matters.......................................................... S-11
PROSPECTUS
Available Information.................................................. 2
Incorporation of Certain Documents by
Reference............................................................ 2
The Company............................................................ 3
Use of Proceeds........................................................ 3
Ratios of Earnings to Combined Fixed Charges
and Preferred Stock Dividends........................................ 4
Description of Debt Securities......................................... 4
Description of Preferred Stock......................................... 18
Description of Common Stock............................................ 24
Restrictions on Transfers of Capital Stock............................. 25
Federal Income Tax Considerations...................................... 26
Plan of Distribution................................................... 27
Legal Matters.......................................................... 29
Experts................................................................ 29
</TABLE>
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1,244,147 SHARES
BAY APARTMENT
COMMUNITIES, INC.
COMMON STOCK
-----------------
PROSPECTUS SUPPLEMENT
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MERRILL LYNCH & CO.
APRIL 23, 1998
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