<PAGE>
PROSPECTUS SUPPLEMENT Filed pursuant to Rule 424(b)(2)
(TO PROSPECTUS DATED AUGUST 18, 1998) Registration No. 333-60875
[AVALONBAY LOGO APPEARS HERE]
4,000,000 SHARES
AVALONBAY COMMUNITIES, INC.
8.70% SERIES H CUMULATIVE REDEEMABLE PREFERRED STOCK
----------------
AvalonBay Communities, Inc. is a real estate investment trust that owns
institutional-quality apartment communities in high barrier-to-entry markets
across the United States. We are offering to the public shares of 8.70% Series
H Cumulative Redeemable Preferred Stock. The terms of the Series H Preferred
Stock can be summarized as follows:
. We will pay cumulative dividends on the Series H Preferred Stock, from
the date of original issuance, in the amount of $2.175 per share each
year (equivalent to 8.70% of the $25.00 liquidation preference).
. We will pay dividends on the Series H Preferred Stock quarterly,
beginning on December 15, 1998.
. We are not allowed to redeem the Series H Preferred Stock before October
15, 2008, except in order to preserve our status as a real estate
investment trust.
. On and after October 15, 2008, we may, at our option, redeem the Series H
Preferred Stock by paying the holder $25.00 per share, plus any accrued
and unpaid dividends through the date of such redemption.
. The Series H Preferred Stock has no stated maturity and will not be
subject to any sinking fund or mandatory redemption and will not be
convertible into any other securities of AvalonBay.
. Investors in the Series H Preferred Stock generally have no voting
rights, except if we fail to pay dividends for six or more quarters.
We have applied to list the Series H Preferred Stock on the New York Stock
Exchange ("NYSE") and the Pacific Exchange ("PCX") under the symbol "AVB PrH".
If these applications are approved, trading of the Series H Preferred Stock on
the NYSE and the PCX is expected to begin within a 30-day period following
initial delivery of the Series H Preferred Stock.
INVESTING IN THE SERIES H PREFERRED STOCK INVOLVES CERTAIN RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE S-9.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- ------------
<S> <C> <C>
Public Price(/1/)................................ $ 25.00 $100,000,000
Underwriting Discounts(/2/)...................... $ 0.7875 $ 3,150,000
Company Proceeds(/3/)............................ $ 24.2125 $ 96,850,000
</TABLE>
(1) Plus accrued dividends, if any, from the date of original issuance.
(2) We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(3) Before deducting expenses payable by AvalonBay estimated at $250,000.
We expect that the shares of Series H Preferred Stock will be ready for
delivery on or about October 15, 1998. We have granted the underwriters an
option to purchase up to 600,000 additional shares of Series H Preferred Stock
as part of the offering. The underwriters may exercise this option for a period
of 30 days after the date of the offering. See "Underwriting." This offering is
being underwritten by the underwriters on a firm commitment basis, which means
that they must purchase all of the shares of Series H Preferred Stock if any
are purchased.
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this Prospectus Supplement or the accompanying Prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
----------------
PAINEWEBBER INCORPORATED
A.G. EDWARDS & SONS, INC.
LEGG MASON WOOD WALKER
INCORPORATED
MORGAN STANLEY DEAN WITTER
PRUDENTIAL SECURITIES
INCORPORATED
SALOMON SMITH BARNEY
WHEAT FIRST
UNION
----------------
PROSPECTUS SUPPLEMENT DATED OCTOBER 7, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary............................................. S-3
Risk Factors.............................................................. S-9
The Company May Fail to Manage Growth and Integrate Operations After the
Merger................................................................. S-9
The Company May Not Realize the Expected Benefits of the Merger......... S-9
The Company May Not Be Able to Continue Its External Growth Rate........ S-9
Market Conditions and the Cost of Financing New Acquisitions and
Development May Limit Our Growth Rate.................................. S-9
Risks Related to Acquisitions of Apartment Communities.................. S-10
Risks Related to Development and Redevelopment of Apartment Communi-
ties................................................................... S-10
Risks Associated With Entering New Markets.............................. S-10
Dependence on Market Conditions in Primary Markets...................... S-11
Real Estate Financing Risks............................................. S-11
Real Estate Investment Risks............................................ S-12
Risk of Earthquake Damage in California Markets......................... S-13
Risks of Property Damage and Increased Expenses Resulting from Inclement
Weather................................................................ S-13
Potential Liability for Environmental Contamination..................... S-13
Federal Income Tax Risks--Failure to Qualify as a Real Estate Investment
Trust.................................................................. S-15
Forward-Looking Statements................................................ S-16
The Company............................................................... S-17
Recent Developments....................................................... S-21
The Communities........................................................... S-22
Use of Proceeds........................................................... S-29
Capitalization............................................................ S-30
Description of the Preferred Stock........................................ S-31
Certain Federal Income Tax Considerations................................. S-37
Underwriting.............................................................. S-40
Legal Matters............................................................. S-41
PROSPECTUS
Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 2
The Company............................................................... 3
Use of Proceeds........................................................... 4
Ratios of Earnings to Combined Fixed Charges and Preferred Stock Divi-
dends.................................................................... 4
Ratios of Earnings to Fixed Charges....................................... 5
Description of Debt Securities............................................ 5
Description of Preferred Stock............................................ 18
Description of Common Stock............................................... 24
Restrictions on Transfers of Stock........................................ 26
Federal Income Tax Considerations......................................... 27
Plan of Distribution...................................................... 28
Legal Matters............................................................. 29
Experts................................................................... 29
</TABLE>
S-2
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights information contained elsewhere in this Prospectus
Supplement. Because this is a summary, it may not contain all of the
information that is important to you. You should read this entire Prospectus
Supplement and the accompanying Prospectus carefully before deciding whether to
invest in the Series H Preferred Stock.
THE COMPANY
AvalonBay Communities, Inc. is a real estate investment trust (a "REIT") that
is focused exclusively on the ownership of institutional-quality apartment
communities in high barrier-to-entry markets of the United States. These
markets include Northern and Southern California and selected states in the
Mid-Atlantic, Northeast, Midwest and Pacific Northwest regions of the country.
AvalonBay is the surviving entity from the merger of Avalon Properties, Inc.
("Avalon") with and into Bay Apartment Communities, Inc. (before the merger,
"Bay") on June 4, 1998. In connection with the merger, we changed our name to
AvalonBay Communities, Inc. The merger brought together a senior management
team with over 150 years of real estate experience. Collectively, we have
demonstrated proficiency in the acquisition, development, redevelopment,
construction, reconstruction, financing, leasing, marketing and management of
institutional-quality apartment communities.
We believe that ownership of institutional-quality apartment communities in
markets where new supply of apartment homes is limited helps assure more
predictable cash flows. Combined with an emphasis on superior service to
residents, this should result in longer average lease periods (as measured by
annual turnover) and reduced operating costs. Further, we believe that
maintaining a conservative financial strategy allows greater flexibility in
responding to changing financial market conditions and enhances our access to
cost effective capital.
We currently own 146 communities containing 42,563 apartment homes, which
consist of 118 stabilized operating communities (including 11 communities for
which reconstruction is scheduled but has not begun), 16 communities that are
under development and 12 communities for which redevelopment has begun. We also
have rights to develop an additional 20 communities, which are controlled
primarily through options on land. These include three land parcels owned by us
or partnerships in which we have a controlling interest. We expect to start
construction of new apartment communities on these three land parcels by the
end of 1999.
We obtain apartment communities either by developing vacant land into a new
community or by acquiring an existing community. After acquiring an existing
community, we frequently redevelop it or reposition it in the rental market.
Our goal is to select sites for development, redevelopment or acquisition that
are close to expanding employment centers, recreation areas, entertainment,
shopping and dining. As a result, we believe that our current communities (and
the land parcels we have the right to develop) are well-located to attract
residents who will pay premium rental rates.
For the month ended August 31, 1998, the stabilized operating communities had
an economic occupancy rate of 96.9% and the average rental rate per apartment
home was $1,091. Our communities are located in 29 geographically diverse
markets, which can be summarized by region as follows (based on the number of
apartment homes):
<TABLE>
<S> <C>
Northern California....................................................... 26.3%
Northeast................................................................. 25.2%
Mid-Atlantic.............................................................. 23.8%
Southern California....................................................... 13.7%
Midwest................................................................... 7.8%
Pacific Northwest......................................................... 3.2%
</TABLE>
We elected to be taxed as a REIT for federal income tax purposes for the year
ending December 31, 1994 and have not revoked that election. This means that if
we meet certain requirements under the Internal Revenue Code, we do not pay
income tax at the corporate level.
S-3
<PAGE>
We were incorporated under the laws of the State of California in 1978 and
were reincorporated in the State of Maryland in July 1995. Our principal
executive offices are located at 2900 Eisenhower Avenue, Suite 300, Alexandria,
Virginia 22314 and our telephone number at this location is (703) 329-6300. We
also maintain super-regional offices in San Jose, California and Wilton,
Connecticut and acquisition, development, redevelopment, construction,
reconstruction or administrative offices in Boston, Massachusetts; Chicago,
Illinois; Minneapolis, Minnesota; New York, New York; Newport Beach,
California; Princeton, New Jersey; Richmond, Virginia; and Seattle, Washington.
RECENT DEVELOPMENTS
Operating Results. Our Funds from Operations ("FFO") for the second quarter
of 1998 were $0.70 per share on a diluted basis for the second quarter of 1998.
Our FFO per share for this period reflects the operating results for Bay
through June 4, 1998 and for the combined company after that date. This
represents an increase of 18.6% from Bay's FFO per share on a diluted basis for
the second quarter of 1997 of $0.59, which does not reflect any of Avalon's
operating results. We generally consider FFO to be an appropriate measure of
our operating performance because it provides investors with an understanding
of our ability to incur and service debt and to make capital expenditures.
We calculate FFO in accordance with a resolution adopted by the Board of
Governors of the National Association of Real Estate Investment Trusts, Inc.
("NAREIT"). NAREIT defines FFO as net income (or loss), computed in accordance
with generally accepted accounting principles ("GAAP"), excluding gains (or
losses) from debt restructuring and sales of property, plus depreciation of
real estate assets and after adjustments for unconsolidated partnerships and
joint ventures.
FFO does not represent cash generated from operating activities in accordance
with GAAP and therefore should not be considered an alternative to net income
as an indication of the Company's performance, or to net cash flows from
operating activities (as determined by GAAP) as a measure of liquidity.
Moreover, FFO is not necessarily indicative of cash available to fund cash
needs. Further, our calculation of FFO may not be comparable to FFO as
disclosed by other REITs.
Financing Activities. On July 7, 1998, we sold $100 million of 6.50% Senior
Notes due 2003 and $150 million of 6.80% Senior Notes due 2006 for aggregate
net proceeds of approximately $247.6 million, which we used to reduce our
borrowings under our $600 million unsecured credit facility.
Completed Acquisitions and Dispositions. Since June 30, 1998 we have
purchased one apartment community and three land sites and have sold three
apartment communities. On July 16, 1998, we purchased the residential component
of the Prudential Center in Boston, Massachusetts from The Prudential Insurance
Company of America. We acquired this community for a total purchase price of
approximately $130 million and expect to spend an additional $11.6 million in
renovation costs. This property contains 781 apartment homes and related
underground parking. We expect the initial year (1998/1999) unleveraged return
on cost for this community to be 8.2% and the first year (1999/2000) stabilized
unleveraged return on cost to be 9.1%. However, we cannot assure you that we
will be able to achieve these anticipated returns.
Since June 30, 1998 we have announced the purchase of three land sites on
which we have begun development. We intend to develop a total of 700 apartment
homes on these land sites, which are located in Stamford, Connecticut; Herndon,
Virginia; and Melville, New York. The total budgeted construction cost for
these three communities is $93 million and the weighted average of projected
EBITDA as a percentage of total budgeted construction cost is 10.8% for these
three communities. Because of the time it will take to complete construction,
we cannot assure you that actual construction costs will be only $93 million.
Since June 30, 1998 we have entered into a purchase and sale agreement and
have received approval from our Board of Directors to acquire Hanover Hall, a
388 apartment home community located in Stamford, CT. We expect to complete
this acquisition on or about November 14, 1998 for a
S-4
<PAGE>
total purchase price of approximately $37.5 million and we expect to incur
approximately $13.7 million in renovation costs related to this community
commencing in 1999. However, we cannot assure you that we will acquire this
community.
Since June 30, 1998 we have disposed of three communities, Village Park of
Troy and Aspen Meadows, both of which are located in suburban Detroit,
Michigan, and Arbor Park, located in Upland, California. Proceeds from the sale
of the two Michigan communities, which contain a total of 758 apartment homes,
were approximately $44 million. We reinvested $24 million of the proceeds in a
participating mortgage note with an expected yield of 10.1% for 1999 and used
the balance of the proceeds to repay amounts outstanding under our $600 million
unsecured credit facility. The participating mortgage note is secured by
Fairlane Woods, a 288 apartment home community located in Dearborn, Michigan.
We are pursuing the purchase of a 100% equity interest in this community, but
we cannot assure you that we will be able to acquire such an equity interest.
Proceeds from the sale of Arbor Park, which contains 260 apartment homes, were
approximately $12.4 million. We used the proceeds to repay amounts outstanding
under our $600 million unsecured credit facility.
Charter Amendments. On October 2, 1998, we held a Special Meeting of
Stockholders at which our stockholders approved certain amendments to our
charter. Specifically, our stockholders approved (i) amendments to the charter
reducing the number of authorized shares of our common stock ("Common Stock")
which we may issue from 300,000,000 to 140,000,000, and (ii) an amendment to
the charter changing our name from "Avalon Bay Communities, Inc." to "AvalonBay
Communities, Inc." These amendments became effective on October 2, 1998.
BUSINESS STRATEGY
Our principal operating objectives are to increase operating cash flow
growth, FFO and, as a result, long-term stockholder value. Our strategies to
achieve these objectives include the following:
. generating consistent, sustained earnings growth at each community
through increased revenue (balancing high occupancy with premium pricing)
and increased operating margins (from aggressive operating expense
management);
. investing selectively in new acquisition, development and redevelopment
communities in certain targeted market areas with high barriers-to-entry
and, when appropriate, selectively disposing of communities that no
longer meet our investment objectives; and
. maintaining a conservative capital structure to provide continued access
to capital markets at the lowest possible cost.
We believe these strategies are generally best implemented by acquiring,
building, rebuilding and managing institutional-quality communities in supply-
constrained markets while maintaining the financial discipline to ensure
maximum balance sheet flexibility. We believe that these strategies will lead
to higher occupancy levels, increased rental rates and predictable and growing
cash flow, although we cannot assure you that we will achieve these results.
The current market environment has slowed our pace of investment, especially
for acquisitions. If the current market conditions continue for an extended
period, our current earnings growth rate may decline.
S-5
<PAGE>
THE OFFERING
Securities Offered.......... 4,000,000 shares of 8.70% Series H Cumulative
Redeemable Preferred Stock.
Price Per Share ............ $25.00.
Ranking..................... With respect to the payment of dividends and
amounts upon liquidation, the Series H Preferred
Stock will rank (i) senior to our Common Stock
and (ii) on a parity with our 8.50% Series C
Cumulative Redeemable Preferred Stock ("Series C
Preferred Stock"), 8.00% Series D Cumulative
Redeemable Preferred Stock ("Series D Preferred
Stock"), 9.00% Series F Cumulative Redeemable
Preferred Stock ("Series F Preferred Stock"), and
8.96% Series G Cumulative Redeemable Preferred
Stock ("Series G Preferred Stock"). Following the
conversion of all of the outstanding shares of
our Series A Preferred Stock and Series B
Preferred Stock in the second quarter of 1998,
the Common Stock, Series C Preferred Stock,
Series D Preferred Stock, Series F Preferred
Stock and Series G Preferred Stock represent our
only currently outstanding stock. See
"Description of the Preferred Stock--Series C
Preferred Stock," "--Series D Preferred Stock,"
"--Series F Preferred Stock" and "--Series G
Preferred Stock." We have also authorized the
issuance of Series E Junior Participating
Cumulative Preferred Stock ("Series E Preferred
Stock") in connection with our Shareholders
Rights Agreement. No shares of Series E Preferred
Stock are currently outstanding.
Use of Proceeds............. We will use the net proceeds from the sale of the
Series H Preferred Stock to reduce borrowings
under our $600 million unsecured credit facility
with Morgan Guaranty Trust Company of New York,
Union Bank of Switzerland and Fleet National
Bank, serving as co-agents for a syndicate of
commercial banks. See "Use of Proceeds."
Dividends................... Dividends on the Series H Preferred Stock are
cumulative from the date of original issuance and
are payable quarterly on or before the 15th day
of each March, June, September and December,
commencing on December 15, 1998, in the amount of
$2.175 per share each year (equivalent to 8.70%
of the $25.00 liquidation preference). The first
dividend will be for less than a full quarter.
Dividends on the Series H Preferred Stock will
accrue whether or not our credit facilities at
any time prohibit the current payment of
dividends, whether or not we have earnings,
whether or not we have funds legally available
for the payment of such dividends and whether or
not we declare such dividends. See "Description
of the Preferred Stock--Series H Preferred
Stock--Dividends."
Liquidation Preference...... The liquidation preference for each share of
Series H Preferred Stock is $25.00, plus an
amount equal to all accrued and unpaid dividends.
See "Description of the Preferred Stock--Series H
Preferred Stock--Liquidation Preference."
S-6
<PAGE>
Redemption.................. Except in certain circumstances relating to the
preservation of our status as a REIT (see
"Restrictions on Transfers of Stock" in the
accompanying Prospectus), we may not redeem the
Series H Preferred Stock prior to October 15,
2008. On and after October 15, 2008, we may
redeem Series H Preferred Stock for cash at our
option, in whole or in part, at $25.00 per share,
plus all accrued and unpaid dividends thereon
through the date fixed for redemption. The
redemption price (other than the portion thereof
consisting of accrued and unpaid dividends) shall
be payable solely out of the sale proceeds of our
other stock, which may include other series of
preferred stock, and from no other source. See
"Description of the Preferred Stock--Series H
Preferred Stock--Redemption."
Voting Rights............... As a holder of Series H Preferred Stock, you will
generally have no voting rights except as
required by law. However, if we fail to pay
dividends on any shares of Series H Preferred
Stock for six or more quarterly periods, our
Board of Directors will increase the number of
directors of AvalonBay by two. As a holder of
Series H Preferred Stock, you will be entitled to
vote, separately as a class with the holders of
all other series of preferred stock upon which
like voting rights have been conferred and are
exercisable, for the election of such two
additional directors until we have fully paid all
dividends accrued on the shares of Series H
Preferred Stock (or until we have declared such
full dividends and set aside a sum sufficient for
the payment thereof). See "Description of the
Preferred Stock--Series H Preferred Stock--Voting
Rights."
Conversion.................. The Series H Preferred Stock is not convertible
into or exchangeable for any other property or
securities of AvalonBay, except that shares of
Series H Preferred Stock may be automatically
converted into shares of our excess stock
("Excess Stock") in order to ensure that we
preserve our status as a REIT for federal income
tax purposes. See "Restrictions on Transfers of
Stock" in the accompanying Prospectus.
Ownership Restrictions...... Ownership by a person or certain groups of
persons of more than 9.8% (or 15% in the case of
certain pension plans and mutual funds) of any
class or series of our stock, including the
Series H Preferred Stock, is restricted in order
to ensure that we preserve our status as a REIT
for federal income tax purposes. See
"Restrictions on Transfers of Stock" in the
accompanying Prospectus.
Trading..................... We have applied to list the Series H Preferred
Stock on the NYSE and the PCX under the symbol
"AVB PrH". If approved, trading of the Series H
Preferred Stock on the NYSE and the PCX is
expected to commence within 30 days after the
initial delivery of the shares of Series H
Preferred Stock.
S-7
<PAGE>
RATIOS OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
The following table sets forth our consolidated ratios of earnings to
combined fixed charges and preferred stock dividends for the periods shown:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE YEAR ENDED YEAR ENDED YEAR ENDED MARCH 17- JANUARY 1- YEAR ENDED
30, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 16, DECEMBER 31,
1998 1997 1996 1995 1994 1994(1) 1993(1)
----------- ------------ ------------ ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio................... 1.49x 1.84x 1.61x 1.26x 1.76x .71x .96x
</TABLE>
- --------
(1) Ratios for the period January 1 through March 16, 1994 and the year ended
1993 reflect periods prior to our recapitalization and initial public
offering on March 17, 1994. The earnings for these periods were inadequate
to cover fixed charges as follows:
<TABLE>
<S> <C>
Period January 1 through March 16, 1994............................ $716,000
Year ended December 31, 1993....................................... 447,000
</TABLE>
The ratios of earnings to combined fixed charges and preferred stock
dividends were computed by dividing earnings by combined fixed charges and
preferred stock dividends. For this purpose, earnings consist of pre-tax income
from continuing operations plus fixed charges less capitalized interest. Fixed
charges consist of interest expense, capitalized interest and the amortization
of debt issuance costs.
We issued (i) 2,308,800 shares of Series A Preferred Stock, par value $.01
per share, in October 1995, of which 1,358,736 shares were converted into
1,358,736 shares of Common Stock on April 27, 1998 and 950,064 shares were
converted into 950,064 shares of Common Stock on June 15, 1998, (ii) 405,022
shares of Series B Preferred Stock, par value $.01 per share, in May 1996, all
of which were converted into 405,022 shares of Common Stock on June 15, 1998,
(iii) 2,300,000 shares of Series C Preferred Stock in June 1997, all of which
are currently outstanding, (iv) 3,267,700 shares of Series D Preferred Stock in
December 1997, all of which are currently outstanding, (v) 4,455,000 shares of
Series F Preferred Stock in June 1998, all of which are currently outstanding
and (vi) 4,300,000 shares of Series G Preferred Stock in June 1998, all of
which are currently outstanding.
S-8
<PAGE>
RISK FACTORS
An investment in the Series H Preferred Stock involves various risks. You
should carefully consider the following risk factors:
THE COMPANY MAY FAIL TO MANAGE GROWTH AND INTEGRATE OPERATIONS AFTER THE MERGER
We have experienced a period of rapid growth as a result of the merger and
through the acquisition and development of additional apartment communities. We
currently own 146 apartment communities with approximately 42,563 apartment
homes (including those under development and redevelopment). This represents an
increase of 23,922 from the number of apartment homes in Bay's pre-merger
portfolio. In addition, the integration of the departments, systems, operating
procedures and information technologies of Bay and Avalon, as well as future
acquisitions, developments and redevelopments, will be challenging, and we
cannot assure you that we will be able to integrate and manage these operations
effectively. If we are unable to successfully manage our growth or integrate
these systems and procedures into one operating philosophy, it could materially
and adversely affect our results of operations and financial condition.
THE COMPANY MAY NOT REALIZE THE EXPECTED BENEFITS OF THE MERGER
Based on anticipated savings in expenses and other factors related to the
merger, we expect that our FFO per share for the second half of fiscal year
1998 and for future periods will increase compared to FFO per share for Bay
prior to the merger. However, these anticipated savings may not be realized and
unanticipated costs may 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 Bay and Avalon, as well as the incremental costs of operating
as a combined company, unexpected future operating expenses (such as increased
personnel costs, increased property taxes or increased travel expenses) could
materially and adversely affect our operations and financial condition. If we
do not realize the expected savings or if we incur unexpected costs, the merger
could significantly dilute our FFO per share. For a description of the manner
in which FFO is calculated, see "The Company--Business Strategy--Strong
Earnings Growth Record."
THE COMPANY MAY NOT BE ABLE TO CONTINUE ITS EXTERNAL GROWTH RATE
We now have a real estate asset base in excess of $3.7 billion. Our asset
base should allow us to access capital for the acquisition, development and
redevelopment of apartment communities on more favorable terms than would be
available with a smaller asset base. However, we may be forced to limit our
acquisition, development and redevelopment activities as we attempt to
integrate the operations of Bay and Avalon. Furthermore, we have increased our
minimum target returns, particularly for new community acquisitions that do not
require redevelopment. As a result of this increase, as well as current market
conditions, we anticipate that we will acquire significantly fewer apartment
communities during the remainder of 1998, and we believe that this is also
likely to be true in 1999. Accordingly, we cannot assure you that our external
growth rate will equal or exceed our recent historical external growth rates.
MARKET CONDITIONS AND THE COST OF FINANCING NEW ACQUISITIONS AND DEVELOPMENT
MAY LIMIT OUR GROWTH RATE
The cost of equity and debt financing for new acquisitions and development
has recently been increasing. The increased cost of financing, combined with
increases in the sales prices of existing apartment communities, results in a
lower margin of profit on new acquisitions. While these market conditions
continue, we expect that we will acquire fewer existing apartment communities.
If the current market conditions continue for an extended period, our current
earnings growth rates may decline. As a result, there could be material adverse
effects on our ability to pay distributions to our stockholders and on the
market prices of our equity securities.
S-9
<PAGE>
RISKS RELATED TO ACQUISITIONS OF APARTMENT COMMUNITIES
The acquisition of apartment communities has historically been an important
component of our business strategy. When we acquire an apartment community, we
expose ourselves to the risk that our investment will fail to generate
expected returns, and that estimates of the costs of improvements to bring the
acquired community up to standards established for the market position
intended for that community, will prove inaccurate. Acquisitions also involve
general investment risks associated with any new real estate investment.
Although we will undertake 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 our total acquisition costs and reduce the profitability of the
acquired community.
RISKS RELATED TO DEVELOPMENT AND REDEVELOPMENT OF APARTMENT COMMUNITIES
We intend to continue to develop and redevelop apartment home communities
using integrated development, redevelopment and underwriting policies derived
from the respective strengths of Bay and Avalon. In addition to the risk that
we will be unable to successfully integrate these policies, our development
and redevelopment activities may be exposed to the following risks:
. we may abandon development and redevelopment opportunities we have already
begun to explore;
. we may incur construction or reconstruction costs for a community which
exceed our original estimates due to increased materials, labor or other
costs, which could make completion of the community uneconomical;
. occupancy rates and rents at a newly completed development or
redevelopment community may fluctuate depending on a number of factors,
including market and economic conditions, and may not be sufficient to
make the original estimated unleveraged returns on cost for the
community;
. we may not be able to obtain financing with favorable terms for the
development or redevelopment of a community; and
. we may be unable to complete construction or reconstruction and lease-up
of a community on schedule, resulting in increased debt service expense
and construction or reconstruction costs.
Our development activities are also subject to the risk that we will be
unable to obtain, or will face delays in obtaining, necessary zoning, land-
use, building, occupancy, and other required governmental permits and
authorizations. If any of these events occurs, it could adversely affect our
ability to achieve our projected yields on communities under development or
redevelopment and could prevent us from making expected distributions to
stockholders. See "--Real Estate Investment Risks."
Construction costs have been increasing in our target markets, and the cost
to develop new communities and redevelop acquired communities has, in some
cases, exceeded our original estimates. We may experience similar cost
increases in the future. We cannot assure you that we will be able to charge
rents upon completing the development or redevelopment of communities that
will be sufficient to offset the effects of any increases in construction or
reconstruction costs.
RISKS ASSOCIATED WITH ENTERING NEW MARKETS
Although our historical management expertise is in Northern California, the
Mid-Atlantic and the Northeast, we have expanded our ownership and operation
of apartment communities into new markets in recent years. If appropriate
opportunities arise, we may also make other selective investments in high
barrier-to-entry markets outside of our current market areas. Our entry into
new market areas will require us to apply our experience to these new market
areas, but we cannot assure you that we will be able to successfully
accomplish this or that our historical expertise will assist us in our
expansion into new markets. If we expand into new markets in the future, we
may be exposed to risks associated with:
. a lack of market knowledge and understanding of the local economy;
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. an inability to obtain land for development or to identify property
acquisition opportunities;
. an inability to obtain construction tradespeople;
. sudden adverse shifts in supply and demand factors; and
. an unfamiliarity with local governmental and permitting procedures.
DEPENDENCE ON MARKET CONDITIONS IN PRIMARY MARKETS
Of the 146 communities we currently own, 41 are located in Northern
California (primarily in the San Francisco Bay Area), 18 are located in
Southern California and 70 are located in the Mid-Atlantic and Northeast
markets. Consequently, economic conditions in these primary markets will
significantly influence our future performance. As a result of the merger, we
have a more geographically diverse portfolio than either Bay or Avalon had
before the merger. We believe that our increased geographical diversity will
provide additional stability in the event of adverse economic conditions in any
one region or market. However, a decline in the economy in one or more of our
primary markets, or in the United States generally, could materially and
adversely affect our operating results and our ability to make expected
distributions to stockholders.
REAL ESTATE FINANCING RISKS
No Limitation on the Company's Debt. As of August 31, 1998, our ratio of
debt-to-total market capitalization was 37.9%. Debt covenants in our credit
facilities and our unsecured senior notes limit the amount of debt we can
incur, but our charter and bylaws do not contain any such limitations. Because
we do not have any debt incurrence restrictions in our charter or bylaws, we
could increase the amount of outstanding debt at any time.
Existing Debt Maturities, Balloon Payments and Refinancing Risks. We are
subject to the risks normally associated with debt financing, including the
risk that our cash flow will be insufficient to meet required payments of
principal and interest. We anticipate that only a small portion of the
principal of our debt will be repaid prior to maturity. Although we may be able
to use cash flow to make future principal payments, we cannot assure you that
sufficient cash flow will be available to make all required principal payments.
Therefore, we may need to refinance at least a portion of our outstanding debt
as it matures. Accordingly, there is a risk that we may not be able to
refinance existing debt or that the terms of any refinancing will not be as
favorable as the terms of the existing debt.
Risk of Rising Interest Rates. We expect to incur variable rate debt under
credit facilities or in connection with the acquisition, construction and
reconstruction of apartment communities in the future, as well as for other
purposes. Accordingly, if interest rates increase, so will our interest costs.
Bond Compliance Requirements. Some of our apartment communities are financed
with obligations issued by various local government agencies or
instrumentalities, the interest on which is exempt from federal income
taxation. These obligations are commonly referred to as "tax-exempt bonds."
Compared to unsecured debt, tax-exempt bonds are less cost competitive than in
prior years and, moreover, generally must be secured by communities. Since we
plan to use more unsecured debt in the future compared to prior experience, we
expect that our use of tax-exempt bonds to finance communities will decline.
Nevertheless, the bond compliance requirements for our current tax-exempt
bonds, and the requirements of any future tax-exempt bond financing, may have
the effect of limiting our income from communities subject to such financing.
Under the terms of our tax-exempt bonds, we must comply with various
restrictions on the use of the communities financed by such bonds, including a
requirement that a percentage of apartments be made available to low and middle
income households.
In addition, some of our tax-exempt bond financing documents require that a
financial institution guarantee payment of the principal of, and interest on,
the bonds (a "credit enhancement"). The credit enhancement may
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take the form of a letter of credit, surety bond, guarantee agreement or other
additional collateral. If the financial institution defaults in its credit
enhancement obligations, or we are unable to renew the applicable credit
enhancement or otherwise post satisfactory collateral, a default will occur
under the applicable tax-exempt bonds and the community could be foreclosed
upon.
REAL ESTATE INVESTMENT RISKS
General Real Estate Ownership Risks. If our communities do not generate
revenues sufficient to meet our operating expenses, including debt service and
capital expenditures, our cash flow and ability to pay distributions to our
stockholders will be adversely affected. The following factors, among others,
may adversely affect the revenues generated by our apartment communities:
. the national economic climate;
. the perceptions by prospective residents of the safety, convenience and
attractiveness of the communities;
. our ability to provide adequate management, maintenance and insurance;
. increased operating costs (including real estate taxes and utilities); and
. other market and economic conditions that may affect the local economy,
which are described below.
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. For example, if we mortgage a
community to secure payment of debt and are unable to meet the mortgage
payments, we could sustain a loss 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 regulations, including zoning and tax laws,
interest rate levels and the availability of financing.
Risks Associated with Local Market Conditions. Local market and economic
conditions may significantly affect apartment home occupancy or rental rates
in that market. Occupancy and rental rates, in turn, may significantly affect
our profitability and our ability to satisfy our financial obligations. These
risks include:
. the local economic climate (which may be adversely impacted by plant
closings, industry slowdowns and other factors);
. local real estate conditions (such as an oversupply of, or a reduced
demand for, apartment homes);
. a decline in household formation that adversely affects occupancy or
rental rates;
. the inability or unwillingness of residents to pay rent increases;
. the potential effect of rent control or rent stabilization laws, or other
laws regulating housing, on some of our communities, which could prevent
us from raising rents to offset increases in operating costs; and
. the local rental market may limit the extent to which rents may be
increased to meet increased expenses without decreasing occupancy rates.
Any of these risks could adversely affect our ability to achieve our desired
yields on our communities and to make expected distributions to stockholders.
Difficulty of Selling Apartment Communities. Real estate can be hard to
sell, especially if local market conditions are poor. This may limit our
ability to change our portfolio promptly in response to changes in economic or
other conditions. In addition, federal tax laws limit our ability to sell
communities that we have owned for fewer than four years, and this may affect
our ability to sell communities without adversely affecting returns to
stockholders.
Competition. Our apartment communities compete with numerous housing
alternatives in attracting residents, including other rental apartments and
single-family homes that are available for rent, as well as new
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and existing single-family homes for sale. Competitive residential housing in a
particular area could adversely affect our ability to lease apartment homes and
increase or maintain rents.
In addition, competitors for acquisitions and development communities may
have greater resources than us, putting us at a competitive disadvantage.
RISK OF EARTHQUAKE DAMAGE IN CALIFORNIA MARKETS
Many of our West Coast communities are located in the general vicinity of
active earthquake faults. In July 1998, we obtained a seismic risk analysis
from an engineering firm which estimated the probable maximum damage ("PMD")
for each of the 60 West Coast communities that we owned at that time and for
each of the five West Coast communities under development, individually and for
all of those communities combined. To establish a PMD, 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 PMD 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 a significant number of our communities
are located in the San Francisco Bay Area, the engineers' analysis defined an
earthquake on the Hayward Fault with a Richter Scale magnitude of 7.1 as a
severe earthquake with a 10% probability of occurring within a 50-year period.
The engineers then established an aggregate PMD at that time of $113 million
for the 60 West Coast communities that we owned at that time and the five West
Coast communities under development. The $113 million PMD for those communities
was a PMD level that the engineers expected to be exceeded only 10% of the time
in the event of such a severe earthquake. The actual aggregate PMD could be
higher or lower as a result of variations in soil classification and structural
vulnerabilities. For each community, the engineers' analysis calculated an
individual PMD as a percentage of the community's replacement cost and
projected revenues. We cannot assure you that an earthquake would not cause
damage or losses greater than the PMD assessments indicate, that future PMD
levels will not be higher than the current PMD levels for our communities
located on the West Coast, or that future acquisitions or developments will not
have PMD assessments indicating the possibility of greater damages or losses
than currently indicated.
In August 1998, we renewed our earthquake insurance, both for physical damage
and lost revenue, with respect to all of the communities we owned at that time
and all of the communities under development. For any single occurrence, we
self-insure the first $25 million of loss, and we have in place $75 million of
coverage above this amount. In addition, our 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, we could lose the capital we have invested in the affected community,
as well as anticipated future revenue from that community, and we 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 our business and our financial condition and results of
operations.
RISKS OF PROPERTY DAMAGE AND INCREASED EXPENSES RESULTING FROM INCLEMENT
WEATHER
Our communities in the Northeast and Midwest expose us to risks associated
with inclement winter weather, including increased costs for the removal of
snow and ice as well as from delays in the construction, reconstruction,
development or redevelopment of apartment communities. In addition, inclement
weather could increase the need for maintenance and repair of our communities.
Similarly, unusually high rainfall or other inclement weather could result in
increased costs due to delays in the construction, reconstruction, development
or redevelopment of apartment communities. These costs and delays could
adversely effect our financial performance.
POTENTIAL LIABILITY FOR ENVIRONMENTAL CONTAMINATION
Under various federal, state and local environmental laws, a current or
previous owner or operator of real estate may be required (often regardless of
knowledge or responsibility) to investigate and remediate the effects
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of hazardous or toxic substances or petroleum product releases at its
properties, and may be held liable to a governmental entity or to third parties
for property damage and for investigation and remediation costs incurred by
them in connection with the contamination. These costs could be substantial.
The presence of such substances (or the failure to properly remediate the
contamination) may materially and adversely affect the owner's ability to
borrow against, sell or rent the affected property. In addition, certain
environmental laws create liens on contaminated sites in favor of the
government for damages and costs it incurs in connection with the
contamination.
Certain federal, state and local laws govern the removal, encapsulation or
disturbance of asbestos-containing materials ("ACMs") when such materials are
in poor condition or in the event of reconstruction, remodeling, renovation, or
demolition of a building. Those 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
our ownership and operation of the communities, we may potentially be liable
for such costs.
We are not aware that any ACMs were used in connection with the construction
of the communities we developed. However, ACMs were used in connection with the
construction of several of the communities that we have acquired. We do not
anticipate that we will incur any material liabilities in connection with the
presence of ACMs at our communities. We currently have or intend to implement
an operations and maintenance program for each of the communities at which ACMs
have been detected.
All of our stabilized operating communities, and all of the communities that
we are currently developing or redeveloping, have been subjected to a Phase I
or similar environmental assessment (which generally does not involve invasive
techniques such as soil or ground water sampling). These assessments have not
revealed any environmental conditions that we believe will have a material
adverse effect on our business, assets, financial condition or results of
operations. We are not aware of any other environmental conditions which would
have such a material adverse effect.
However, we are aware that the migration of contamination from an upgradient
landowner near Toscana, one of our communities which is under development, has
affected the groundwater there. The upgradient landowner is undertaking
remedial response actions and we expect that the upgradient landowner will take
all necessary response actions. The upgradient landowner has also provided an
indemnity that runs to current and future owners of the Toscana property and
upon which we may be able to rely if we incur environmental liability arising
from the groundwater contamination at issue.
We are also aware that certain communities have lead paint and we are
undertaking or intend to undertake appropriate remediation or management
activity.
Additionally, prior to their respective initial public offerings, Bay and
Avalon had each been occasionally involved in developing, managing, leasing and
operating various properties for third parties. Consequently, each may be
considered to have been 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. We are not aware of any
material environmental liabilities with respect to properties managed or
developed by either Bay or Avalon for such third parties.
We cannot assure you that:
. the environmental assessments identified all potential environmental
liabilities;
. that no prior owner created any material environmental condition not known
to us or the consultants who prepared the assessments;
. that no environmental liabilities developed since such environmental
assessments were prepared;
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. that the condition of land or operations in the vicinity of our
communities (such as the presence of underground storage tanks) will not
affect the environmental condition of such communities; or
. that future uses or conditions (including, without limitation, changes in
applicable environmental laws and regulations) will not result in the
imposition of environmental liability.
FEDERAL INCOME TAX RISKS--FAILURE TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST
We intend to operate in a manner that will allow us to continue to qualify
as a REIT. Although we believe that we have been organized and our past and
present operations qualify us as a REIT, we cannot assure you that this is
true, or that we will remain qualified as a REIT in the future. This is
because qualification as a REIT involves the application of highly technical
and complex Internal Revenue 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 our control.
If either Bay or Avalon failed to qualify as a REIT prior to the merger,
this failure could disqualify us as a REIT. If we fail to qualify as a REIT,
we will be subject to federal income tax at regular corporate rates for both
current and past years. In this event, we 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, we would also be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification was lost.
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FORWARD-LOOKING STATEMENTS
Certain statements incorporated by reference or made in this prospectus
under the captions "Prospectus Supplement Summary," "Risk Factors" and "The
Company," and elsewhere in this Prospectus Supplement are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Act of 1934. Such forward-looking statements
include, without limitation, statements and information concerning the
acquisition, construction, reconstruction, development, redevelopment,
occupancy, and completion of our apartment communities and related cost and
EBITDA estimates. When we use the words "anticipate," "assume," "believe,"
"estimate," "expect," "intend," and other similar expressions in this
Prospectus Supplement, they are generally intended to identify forward-looking
statements. You should not rely on forward-looking statements since they
involve known and unknown risks, uncertainties and other factors which are, in
some cases, beyond our control and which could materially affect our actual
results, performance or achievements. Factors that could cause our actual
results, performance or achievements to differ materially from those expressed
or implied by such forward-looking statements include, but are not limited to,
the following:
. we may fail to secure or may abandon development or redevelopment
opportunities;
. construction or reconstruction costs of a community may exceed original
estimates;
. construction or reconstruction and lease-up may not be completed on
schedule, resulting in increased debt service expense and construction
or reconstruction costs, and reduced rental revenues;
. occupancy rates and market rents may be adversely affected by local
economic and market conditions which are beyond our control;
. financing may not be available, or may not be available on favorable
terms; and
. our cash flow may be insufficient to meet required payments of principal
and interest, and existing indebtedness may mature in an unfavorable credit
environment, preventing such indebtedness from being refinanced, or if
refinanced, causing such refinancing to occur on terms that are not as
favorable as the terms of existing indebtedness.
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THE COMPANY
GENERAL
AvalonBay is a REIT that focuses exclusively on the ownership of
institutional-quality apartment communities in high barrier-to-entry markets of
the United States. These markets include Northern and Southern California and
selected states in the Mid-Atlantic, Northeast, Midwest and Pacific Northwest
regions of the country. AvalonBay is the surviving entity from the merger of
Avalon Properties, Inc. with and into Bay Apartment Communities, Inc. on June
4, 1998. In connection with the merger we changed our name to "AvalonBay
Communities, Inc." Our senior management team has over 150 years of real estate
experience. Collectively, we have demonstrated proficiency in the acquisition,
development, redevelopment, construction, reconstruction, financing, leasing,
marketing and management of institutional-quality apartment communities.
The merger of Avalon and Bay combined two companies of similar size with
similar business strategies and operating philosophies. Bay traditionally
focused on the acquisition, development, redevelopment and management of
institutional-quality communities in high barrier-to-entry markets in Northern
and Southern California and the Pacific Northwest. Avalon traditionally focused
on the development, acquisition and management of institutional-quality
communities in high barrier-to-entry markets in the Northeast and Mid-Atlantic
regions of the United States. In December 1997, Avalon entered certain high
barrier-to-entry markets in the Midwest when it acquired selected properties
and operations of Trammell Crow Residential Midwest ("TCR/MW"). Concurrently
with the announcement of the merger, Avalon announced that it had entered into
a definitive agreement to acquire eight communities, which are expected to
contain an aggregate of approximately 2,411 apartment homes, in the Seattle and
Portland markets on a presale basis from Trammell Crow Residential--Pacific
Northwest for a total investment of up to $279 million. The presale
acquisitions are expected to be completed during the next two to three years.
Before the merger, Avalon and Bay each focused on providing well-maintained
communities with numerous amenities designed to enhance their market appeal.
Additionally, each emphasized the delivery of superior service to the residents
of their apartment communities. Avalon and Bay also utilized similar financing
strategies, including the maintenance of conservative ratios of debt-to-total
market capitalization and debt and preferred stock to total market
capitalization. As a result of the merger, we anticipate that by successfully
implementing the best practices of both Avalon and Bay, we will improve both
our ability to profitably acquire, develop and redevelop institutional-quality
apartment communities as well as our ability to deliver superior service to our
residents. We believe that we will benefit from continued utilization of the
respective strengths previously possessed by Bay and Avalon, such as Bay's
redevelopment expertise and Avalon's advanced information systems. To assist in
the identification and implementation of these and other such best practices,
Avalon and Bay each engaged the services of outside merger integration
consultants prior to the merger. We have identified, and are currently
implementing, these best practices, which should result in greater
efficiencies.
We believe that ownership of institutional-quality apartment communities in
markets where the new supply of apartment homes is limited helps assure more
predictable cash flows. Barriers to competitors entering these markets, which
provide constraints on supply, include a difficult and lengthy entitlement
process with local jurisdictions, and dense infill locations where zoned and
entitled land is not available. In addition, high single family home prices in
most of our markets serve to create a "barrier-to-exit" for residents of our
communities which are located in such markets. Combined with an emphasis on
superior service to residents, this should result in longer average lease
periods (as measured by annual turnover) and reduced operating costs. Further,
we believe that maintaining a conservative financial strategy allows greater
flexibility in responding to changing financial market conditions, and enhances
our access to cost effective capital.
We currently own 146 communities containing 42,563 apartment homes, of which
118 are stabilized operating communities (the "Current Communities"), including
11 communities for which redevelopment is scheduled but has not yet begun, 16
are communities that are under development (the "Development Communities") and
12 are communities for which redevelopment has begun (the "Redevelopment
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Communities"). We also have rights to develop an additional 20 communities (the
"Development Rights") which are controlled primarily through options on land.
The Development Rights include three land parcels owned by us or partnerships
in which we have a controlling interest. We expect to start construction of new
apartment communities on these three land parcels by the end of 1999. We obtain
ownership in apartment communities by developing vacant land into a new
community or by acquiring and either repositioning or redeveloping an existing
community. In selecting sites for development, redevelopment or acquisition, we
favor locations with close proximity to expanding employment centers and
convenience to recreation areas, entertainment, shopping and dining. As a
result, we consider the Current Communities, the Development Communities, the
Redevelopment Communities and the land underlying the Development Rights to be
well-located.
BUSINESS STRATEGY
Our principal operating objectives are to increase operating cash flow
growth, FFO and, as a result, long-term stockholder value. Our strategies to
achieve these objectives include:
. generating consistent, sustained earnings growth at each community
through increased revenue (balancing high occupancy with premium pricing)
and increased operating margins (from aggressive operating expense
management);
. investing selectively in new acquisition, development and redevelopment
communities in certain targeted market areas with high barriers-to-entry
and, when appropriate, selectively disposing of communities which no
longer meet our investment objectives; and
. maintaining a conservative capital structure to provide continued access
to capital markets at the lowest possible cost.
We believe that these strategies are generally best implemented by acquiring,
building, rebuilding and managing institutional-quality assets in supply-
constrained markets while maintaining the financial discipline to ensure
maximum balance sheet flexibility. We believe that these strategies will lead
to higher occupancy levels, increased rental rates and predictable and growing
cash flow, although we cannot assure you that we will achieve such results.
Acquisition Strategy. Historically, our acquisition strategy focused on
individual, opportunistic investments. During 1997, however, Bay and Avalon
each completed significant portfolio acquisitions, Bay in Southern California
and Avalon in the Midwest. In addition, during 1997 Avalon agreed to purchase
communities to be developed on a presale basis from unaffiliated developers.
These portfolio acquisitions achieved both rapid penetration of supply-
constrained markets new to Avalon and Bay and the addition of a skilled
management team (in the case of Avalon's acquisition of the Midwest portfolio)
with the experience to use the acquired portfolio as a platform for future
growth. We believe that through our acquisition strategy we have now targeted
and penetrated many of the high barrier-to-entry markets of the United States.
We have historically maintained a core competency in new development that
allowed us to be selective in evaluating acquisition candidates. We continue
this capability and will seek to take advantage of our industry- leading
development, redevelopment, construction and reconstruction capabilities.
As a result of our increased minimum target returns for new community
acquisitions and recent increases in the cost of financing new purchases of
communities, we anticipate that we will acquire significantly fewer apartment
communities during the remainder of 1998, and we believe that this is also
likely to be true in 1999. Consequently, we will refocus our efforts toward
development and redevelopment of apartment communities where we believe we are
more likely to achieve attractive initial and long-term return targets. In
addition, we expect to expand the redevelopment and reconstruction expertise
that we have implemented on the West Coast to selected high barrier-to-entry
markets in the Midwest, Mid-Atlantic and Northeast. We will also focus on
dispositions of assets that do not meet our current operating, market or growth
requirements. While current market conditions prevail, we anticipate
reinvesting capital obtained from dispositions in new Development Communities
and Redevelopment Communities that offer greater investment returns and long-
term growth
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potential greater than those that we plan to sell. However, we cannot assure
you that we will be successful in disposing of any communities, or in investing
the proceeds in new communities without adverse tax consequences.
Development Strategy. Our development strategy is to carefully select land
for development and to follow established procedures that are designed to
minimize both the cost and the risks of development. As one of the largest
developers of multifamily apartment communities in high barrier-to-entry
markets of the United States, we are able to capitalize on local market
presence and access to local market information through regional and super-
regional offices. In addition to our principal executive offices in Alexandria,
Virginia, we maintain super-regional offices in San Jose, California and
Wilton, Connecticut. We also have regional acquisition, development,
redevelopment, construction, reconstruction or administrative offices in
Boston, Massachusetts; Chicago, Illinois; Minneapolis, Minnesota; New York, New
York; Newport Beach, California; Princeton, New Jersey; Richmond, Virginia; and
Seattle, Washington.
After selecting a target site, we negotiate for the right to acquire the site
either through an option or a long-term conditional contract, generally subject
to obtaining zoning and permitting approvals and appropriate environmental
review. We generally begin design work before we purchase the land, and we
carefully monitor the expenditure of design funds based on the likelihood of
our obtaining approvals and financing.
After land is acquired, we shift our focus to construction. Except for
certain mid-rise and high-rise apartment communities where we have historically
used third-party general contractors, we have acted as our own general
contractor. We believe this has enabled us to achieve higher quality, more
control over schedules and significant cost savings. Construction progress is
monitored by the development team and the property management team to ensure
high quality workmanship and a smooth and timely transition into the leasing
and operational phase.
Redevelopment Strategy. Our redevelopment strategy is to selectively seek
existing under-managed apartment communities in fully-developed neighborhoods
and create value by substantially re-building them at significantly below
replacement cost to a quality which we believe to be the highest quality
apartment community or best rental value for an institutional-quality apartment
community in its local area. We have established procedures that are designed
to minimize both the cost and risks of redevelopment. After an apartment
community is acquired, we focus on redevelopment. Again, we believe that we
achieve significant cost savings by acting as our own general contractor.
Redevelopment progress is monitored by the redevelopment team, which includes
key redevelopment, construction and property management personnel. This ensures
high quality design and workmanship and a smooth and timely transition into the
lease-up and re-stabilization phase.
Property Management Strategy. We intend to increase earnings through
innovative, proactive property management that will result in higher revenue
from our communities. Intense focus on resident satisfaction, increasing rents
as market conditions permit and managing community occupancy for optimal rental
revenue levels comprise our principal strategies for maximizing revenue. We
generally stagger lease terms based on vacancy exposure by apartment type, so
that lease expirations are better matched to each community's traffic patterns.
On-site property management teams receive bonuses based largely upon the net
operating income produced at their respective communities.
Controlling operating expenses is another way in which we intend to increase
earnings growth. An increase in growth in our portfolio and the resulting
increase in revenue allows us to spread fixed operating costs over a larger
volume of revenue, thereby increasing operating margins. We also aggressively
pursue real estate tax appeals and scrutinize other operating costs. Invoices
are recorded on-site to ensure the careful monitoring of budgeted versus actual
expenses, supplies are purchased in bulk where possible, third-party
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contracts are bid on a volume basis, turnover work is performed in-house or by
third-parties generally depending upon the least costly alternative, and
preventive maintenance is undertaken regularly to maximize resident
satisfaction and property and equipment life. In addition, we strive to retain
residents through high levels of service in order to eliminate the cost of
preparing an apartment home for a new resident and to reduce marketing and
utilities costs.
We will also consider managing properties for third parties, if we believe
that doing so will provide information about new markets or provide an
acquisition opportunity, thereby enhancing our opportunities for growth.
Financing Strategy. We have consistently maintained, and we intend to
continue to maintain, a conservative capital structure, largely comprised of
common equity. As of August 31, 1998, our debt-to-total market capitalization
was 37.9%, and long-term floating rate debt was only 1.6% of total market
capitalization. We currently intend to limit long-term floating rate debt to
less than 10% of total market capitalization, although that policy may change
from time to time.
Strong Earnings Growth Record. Historically, we have consistently achieved
both strong internal growth as well as an increase in FFO per share. Since our
initial public offering in March 1994, we have increased our quarterly FFO per
share on a diluted basis from $0.41 per share to $0.70 per share, representing
an annualized growth rate of approximately 14.3%. For the second quarter of
1998, our FFO per share on a diluted basis (reflecting the operating results
for Bay through June 4, 1998 and for the combined company after that date)
increased 18.6% from our FFO per share on a diluted basis for the second
quarter of 1997 of $0.59 per share.
We generally consider FFO to be an appropriate measure of our operating
performance because it provides investors with an understanding of our ability
to incur and service debt and to make capital expenditures. We believe that in
order to facilitate a clear understanding of our operating results, FFO should
be examined in conjunction with net income as presented in our consolidated
financial statements, which are incorporated by reference in the accompanying
Prospectus.
FFO is determined in accordance with a resolution adopted by NAREIT, and is
defined as net income (loss), computed in accordance with GAAP, excluding gains
(or losses) from debt restructuring and sales of property, plus depreciation of
real estate assets and after adjustments for unconsolidated partnerships and
joint ventures. FFO does not represent cash generated from operating activities
in accordance with GAAP and therefore should not be considered an alternative
to net income as an indication of our performance, or to net cash flows from
operating activities as determined by GAAP as a measure of our liquidity, and
is not necessarily indicative of cash available to fund cash needs. Further,
FFO as disclosed by other REITs may not be comparable to our calculation of
FFO.
S-20
<PAGE>
RECENT DEVELOPMENTS
OPERATING RESULTS
On July 16, 1998, we reported FFO of $0.70 per share on a diluted basis for
the second quarter of 1998. Our FFO per share for this period reflects the
operating results for Bay through June 4, 1998 and for the combined company
after that date, and represents an increase of 18.6% from our FFO per share on
a diluted basis for the second quarter of 1997 of $0.59.
Our earnings before interest, income taxes, depreciation and amortization
("EBITDA") on a "same store" basis in the second quarter of 1998 increased by
approximately 10.1% from our EBITDA on a "same store" basis for the second
quarter of 1997. This increase in EBITDA is attributable to a number of
factors, including the merger on June 4, 1998.
FINANCING ACTIVITIES
Sale of Senior Notes. On July 7, 1998, we sold $100 million of Senior Notes
due 2003 and $150 million of Senior Notes due 2006 for aggregate net proceeds
of approximately $247.6 million. We used the net proceeds from the offering to
reduce our borrowings under our $600 million unsecured credit facility.
COMPLETED ACQUISITIONS AND DISPOSITIONS
Acquisition of Existing Community. On July 16, 1998, we completed the
purchase of the residential component of the Prudential Center in Boston,
Massachusetts from The Prudential Insurance Company of America. We acquired
this community for approximately $130 million and expect to spend an additional
$11.6 million in renovation costs. This community contains 781 apartment homes
and related underground parking. We expect the initial year (1998/1999)
unleveraged return on cost for this community to be 8.2% and the first year
(1999/2000) stabilized unleveraged return on cost to be 9.1%. However, we
cannot assure you that we will be able to achieve these anticipated returns.
Land Acquisition for New Development. Since June 30, 1998, we have announced
the purchase of three land sites on which we have begun development. We
acquired a three acre land site in Stamford, Connecticut on which we have begun
development of a 195 apartment home community. We also acquired land sites in
Herndon, Virginia, on which we intend to develop a 165 apartment home
community, and Melville, New York, on which we plan to develop a 340 apartment
home community. The total budgeted construction cost for these three
communities is $93.0 million and the weighted average of projected EBITDA as a
percentage of total budgeted construction cost for these three communities is
10.8%.
Sale of Communities and Reinvestment of Proceeds. Since June 30, 1998, we
have disposed of three communities, Village Park of Troy and Aspen Meadows,
both of which are located in suburban Detroit, Michigan, and Arbor Park,
located in Upland, California. Proceeds from the sale of the two Michigan
communities, which contained a total of 758 apartment homes, were approximately
$44 million. We reinvested $24 million of the proceeds in a participating
mortgage note with an expected yield of 10.1% in the first stabilized year and
used the balance of the proceeds to repay amounts outstanding under our $600
million unsecured credit facility. The participating note is secured by
Fairlane Woods, a 288 apartment home community located in Dearborn, Michigan.
We are pursuing the purchase of a 100% equity interest in this community, but
we cannot assure you that we will be able to acquire such an equity interest.
Proceeds from the sale of Arbor Park, which contained 260 apartment homes, were
approximately $12.4 million. The proceeds were used to repay amounts
outstanding under our $600 million unsecured credit facility.
CHARTER AMENDMENTS
On October 2, 1998, we held a Special Meeting of Stockholders at which our
stockholders approved certain amendments to our charter. Specifically, the
stockholders approved (i) amendments to the charter reducing the number of
authorized shares of Common Stock which we may issue from 300,000,000 to
140,000,000, and (ii) an amendment to the charter changing our name from
"Avalon Bay Communities, Inc." to "AvalonBay Communities, Inc." These
amendments became effective on October 2, 1998.
S-21
<PAGE>
INDUSTRY AWARDS
On April 22, 1998, Avalon was named Development Firm of the Year and its
Avalon Grove community was named the Best Mid- or High-Rise Apartment Community
of the Year under the National Association of Home Builders' highly competitive
"Pillars of the Industry" awards program, the second consecutive year that one
of our communities has been named the Best Mid- or High-Rise Community of the
Year. In addition, Avalon was named Property Management Company of the Year in
1996/1997 under the same awards program. The Pillars of the Industry awards
program is conducted annually to recognize companies that demonstrate the
highest standards in multifamily housing design and management, and who promote
a positive image of the multifamily housing industry. A panel of 11 industry
professionals who judged the award selected this year's winners from more than
200 entries submitted nationally. In making their selection of Avalon as the
Development Firm of the Year, the judges considered Avalon's consistent level
of delivery and high quality execution of its development activity. The panel
further noted that Avalon had achieved an extremely high volume of quality
development opportunities in areas of the country with particularly difficult
permitting and approval processes. Additionally, Avalon was congratulated for
the active involvement by a variety of Avalon associates in many professional,
governmental and local organizations. In their selection of Avalon Grove, which
is located in Stamford, Connecticut, the judges cited the long and difficult
approval process, the outstanding architecture, and the very attractive yield.
THE COMMUNITIES
THE CURRENT COMMUNITIES
The Current Communities are primarily upscale, garden-style apartment
communities consisting of two-and three-story buildings in landscaped settings.
All of the Current Communities are institutional-quality assets. The Current
Communities offer many attractive amenities designed to enhance their market
appeal to discriminating residents who are willing to pay premium rental rates
to live in these communities. Such amenities include vaulted ceilings, lofts,
fireplaces, patios/decks and modern appliances. Other features include swimming
pools, fitness centers, tennis courts and business centers. As of the date of
this Prospectus Supplement, there were 118 Current Communities.
We own a fee simple interest in 102 Current Communities, 12 Redevelopment
Communities, and 16 Development Communities. We own 16 of our Current
Communities through a variety of organizational structures, including general
partnership interests (including four communities presented as non-majority
interests); controlling general partner interests in DownREIT limited
partnerships (11 communities); and a 100% interest in a senior participating
mortgage note secured by one operating community which is accounted for as an
investment in real estate.
The existing DownREITs have been structured so that substantially all of the
economic interest of these partnerships, other than the stated distributions to
the limited partners on their operating partnership units ("OP Units"), accrue
to our benefit. We believe that it is unlikely that the limited partners in
these partnerships will receive any financial return on their limited
partnership interest other than the stated distributions on their OP Units or
the possible future conversion of their OP Units into shares of Common Stock.
We manage and operate all of the Current Communities. As of August 31, 1998
(the latest practicable date for which this information is available), the
Current Communities had an economic occupancy rate of 96.9% for the month then
ended. The average age of the Current Communities, weighted according to the
applicable number of apartment homes and adjusted to reflect the year of
completion for substantial reconstruction, is approximately eight years.
S-22
<PAGE>
The following is a summary by major market of our Current Communities,
Development Communities and Redevelopment Communities as of the date of this
Prospectus Supplement:
APARTMENT HOMES BY MARKET
<TABLE>
<CAPTION>
CURRENT DEVELOPMENT REDEVELOPMENT TOTAL
COMMUNITIES(1) COMMUNITIES(2) COMMUNITIES(3) COMMUNITIES
--------------- --------------- --------------- ------------
# OF % OF # OF % OF # OF % OF # OF % OF
MARKET HOMES TOTAL HOMES TOTAL HOMES TOTAL HOMES TOTAL
------ ------- ------- ------- ------- ------- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1. Santa Clara County,
CA.................. 3,438 10.1% 1,482 33.4% 252 6.4% 5,172 12.2%
2. Northern Virginia... 3,509 10.3% 625 14.1% -- -- 4,134 9.7%
3. Boston, MA.......... 2,375 6.9% 204 4.6% -- -- 2,579 6.1%
4. Los Angeles, CA..... 590 1.7% -- -- 1,973 49.9% 2,563 6.0%
5. Alameda County, CA.. 2,523 7.4% -- -- -- -- 2,523 5.9%
6. Fairfield County,
CT.................. 1,846 5.4% 598 13.5% -- -- 2,444 5.7%
7. Southern Maryland... 2,179 6.4% -- -- -- -- 2,179 5.1%
8. Orange County, CA... 1,622 4.7% -- -- 400 10.1% 2,022 4.8%
9. Philadelphia, PA.... 1,504 4.4% 351 7.9% -- -- 1,855 4.4%
10. Central Valley, CA.. 1,502 4.4% -- -- -- -- 1,502 3.5%
11. Baltimore, MD....... 1,348 4.0% -- -- -- -- 1,348 3.2%
12. San Francisco, CA... 819 2.4% 226 5.1% 243 6.1% 1,288 3.0%
13. Richmond, VA........ 1,243 3.6% -- -- -- -- 1,243 2.9%
14. Westchester, NY..... 897 2.6% 337 7.6% -- -- 1,234 2.9%
15. San Diego, CA....... 1,033 3.0% -- -- 200 5.1% 1,233 2.9%
16. Minneapolis, MN..... 1,102 3.2% -- -- -- -- 1,102 2.6%
17. Seattle, WA......... 684 2.0% -- -- 412 10.4% 1,096 2.6%
18. Hartford, CT........ 932 2.7% -- -- -- -- 932 2.2%
19. Long Island, NY..... 575 1.7% 340 7.7% -- -- 915 2.1%
20. Norfolk, VA......... 904 2.6% -- -- -- -- 904 2.1%
21. Chicago, IL......... 887 2.6% -- -- -- -- 887 2.1%
22. Northern New
Jersey.............. 504 1.5% 269 6.1% -- -- 773 1.8%
23. San Mateo County,
CA.................. 508 1.5% -- -- 195 4.9% 703 1.7%
24. St. Louis, MO....... 480 1.4% -- -- -- -- 480 1.1%
25. Indianapolis, IN.... 376 1.1% -- -- -- -- 376 0.9%
26. Washington, DC...... 308 0.9% -- -- -- -- 308 0.7%
27. Portland, OR........ -- -- -- -- 279 7.1% 279 0.7%
28. Cincinnati, OH...... 264 0.8% -- -- -- -- 264 0.6%
29. Detroit, MI......... 225 0.7% -- -- -- -- 225 0.5%
------- ------ ------- ------- ------- ------- ------ -----
Total................. 34,177 100.0% 4,432 100.0% 3,954 100.0% 42,563 100.0%
======= ====== ======= ======= ======= ======= ====== =====
</TABLE>
- --------
(1) Current Communities include apartment communities on which construction or
reconstruction has been completed, or on which reconstruction has been
scheduled but has not yet begun, and which have either reached stabilized
occupancy or are in the lease-up process. All of the Current Communities
are stabilized communities that have completed lease-up and have attained
a physical occupancy level of 95%, or have been completed for one year
(without regard to physical occupancy level), whichever occurs earlier.
(2) Development Communities are communities that are under construction and
may be partially complete and operating and for which a final certificate
of occupancy has not been received or a physical occupancy level of 95%
has not been attained.
(3) Redevelopment Communities are communities for which redevelopment has
commenced and for which the redevelopment costs are expected to exceed the
lesser of $5,000,000 or 10% of the community's acquisition cost.
S-23
<PAGE>
DEVELOPMENT COMMUNITIES
There are currently 16 Development Communities under construction. The total
capitalized cost of these Development Communities when completed is currently
expected to be approximately $683 million, of which $334 million has already
been expended. We cannot assure you that we will complete the Development
Communities, that our budgeted costs, leasing, start dates, completion dates,
occupancy or estimates of "EBITDA as % of Total Budgeted Cost" will be realized
or that future developments will realize comparable returns. Historically,
construction costs have, in some cases, exceeded our original estimates and it
is possible that we may experience similar increases in construction costs in
the future. See "Risk Factors--Risks Related to Development and Redevelopment
of Apartment Communities."
We maintain an active development capacity that we believe provides a
continuing source of portfolio growth. During the lease-up period of the
development process, the Development Communities will generally experience
operating deficits for three to six months until such time as new communities
approach stabilized occupancy. The amount and duration of operating deficits to
be incurred are dependent upon a number of factors, including the size of the
community, the season in which leasing activity occurs and the extent to which
delivery of new apartment homes coincides with leasing and occupancy of these
new apartment homes (which is dependent on local market conditions).
S-24
<PAGE>
The following is a summary of our Development Communities as of the date of
this Prospectus Supplement:
DEVELOPMENT COMMUNITIES SUMMARY
<TABLE>
<CAPTION>
PROJECTED
EBITDA AS %
NUMBER OF BUDGETED ESTIMATED ESTIMATED OF TOTAL
APARTMENT COST(1) CONSTRUCTION INITIAL COMPLETION STABILIZED BUDGETED
COMMUNITY HOMES ($ MILLIONS) START OCCUPANCY DATE DATE(2) COST(3)
- --------- --------- ------------ ------------ --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1. Toscana............. 710 $116.5 Q3 1996 Q3 1997 Q4 1998 Q2 1999 11.1%
Sunnyvale, CA
2. Avalon Fox Mill..... 165 20.1 Q3 1998 Q2 1999 Q4 1999 Q2 2000 10.2%
Herndon, VA
3. CentreMark.......... 311 47.5 Q1 1997 Q3 1998 Q1 1999 Q2 1999 10.5%
San Jose, CA
4. Avalon Corners...... 195 32.5 Q3 1998 Q3 1999 Q2 2000 Q3 2000 10.4%
Stamford, CT
5. Avalon Willow....... 227 41.8 Q2 1997 Q4 1998 Q1 1999 Q2 1999 9.2%
Mamaroneck, NY
6. Avalon at Cameron
Court............... 460 44.7 Q2 1997 Q1 1998 Q4 1998 Q1 1999 11.3%
Alexandria, VA
7. Paseo Alameda....... 305 52.7 Q3 1997 Q4 1998 Q2 1999 Q3 1999 10.1%
San Jose, CA
8. Avalon Court North.. 340 40.4 Q4 1998 Q2 1999 Q1 2000 Q2 2000 11.7%
Melville, NY
9. Bay Towers.......... 226 65.9 Q4 1997 Q3 1999 Q4 1999 Q1 2000 9.6%
San Francisco, CA
10. Avalon Crest........ 351 57.4 Q4 1997 Q2 1999 Q4 1999 Q1 2000 10.1%
Fort Lee, NJ
11. Rosewalk II......... 156 20.3 Q4 1997 Q4 1998 Q1 1999 Q2 1999 11.1%
San Jose, CA
12. Avalon Cove South... 269 51.8 Q1 1998 Q2 1999 Q3 1999 Q4 1999 10.0%
Jersey City, NJ
13. The Avalon.......... 110 26.4 Q1 1998 Q2 1999 Q3 1999 Q4 1999 9.7%
Bronxville, NY
14. Avalon Valley....... 268 26.1 Q1 1998 Q1 1999 Q3 1999 Q1 2000 10.1%(4)
Danbury, CT
15. Avalon Lake......... 135 17.0 Q2 1998 Q2 1999 Q3 1999 Q1 2000 10.1%(4)
Danbury, CT
16. Avalon Oaks (5)..... 204 21.9 Q2 1998 Q1 1999 Q3 1999 Q1 2000 10.3%
----- ------ ----
Wilmington, MA
Total/Weighted
Average............. 4,432 $683.0 10.4%
===== ====== ====
</TABLE>
- --------
(1) Total budgeted cost includes all capitalized costs projected to be incurred
to develop the community, including land acquisition costs, construction
costs, real estate taxes, capitalized interest and loan fees, permits,
professional fees, allocated development overhead and other regulatory fees
determined in accordance with GAAP.
(2) Stabilized occupancy is defined as the first full quarter of 95% or greater
physical occupancy after initial lease-up, or one year after completion
(without regard to physical occupancy level), whichever occurs earlier.
(3) Projected EBITDA represents gross potential earnings projected to be
achieved based on current rents prevailing in the respective community's
local market and before interest, income taxes, depreciation, amortization
and extraordinary items, minus (a) economic vacancy and (b) projected
stabilized operating expenses. Total budgeted cost includes all capitalized
costs projected to be incurred to develop the community, including land
acquisition costs, construction costs, real estate taxes, capitalized
interest and loan fees, permits, professional fees, allocated development
overhead and other regulatory fees. EBITDA is relevant to an understanding
of our economics because it indicates cash flow available from our
S-25
<PAGE>
operations to service fixed obligations. EBITDA should not be considered as
an alternative to operating income (as determined in accordance with GAAP)
as an indicator of our operating performance, or to cash flows from
operating activities (as determined in accordance with GAAP) as a measure
of liquidity. EBITDA as disclosed by other REITs may not be comparable to
our calculation of EBITDA.
(4) Represents a combined yield for Avalon Valley and Avalon Lake.
(5) Financed with tax-exempt bonds.
REDEVELOPMENT COMMUNITIES
We currently have 12 Redevelopment Communities. The total budgeted cost of
these Redevelopment Communities, including the cost of acquisition and
redevelopment when completed, is expected to be approximately $379.7 million,
of which approximately $89.5 million is the additional capital invested or
expected to be invested above the original purchase cost. Of the $89.5 million
that we have invested or expect to invest in excess of the purchase cost,
$55.9 million has already been expended.
The cost to redevelop an existing apartment community is difficult to budget
and estimate. Accordingly, we expect that actual costs may vary over a wider
range than for a new development community. In addition, costs to reposition
communities that have been acquired have, in some cases, exceeded our original
estimates and it is possible that we may experience similar increases in the
future. We cannot provide any assurance that we will not exceed budgeted
costs, either individually or in the aggregate, or that projected unleveraged
returns on cost will be achieved.
S-26
<PAGE>
The following is a summary of our Redevelopment Communities as of the date of
this Prospectus Supplement:
REDEVELOPMENT COMMUNITIES SUMMARY(1)
<TABLE>
<CAPTION>
EBITDA AS
NUMBER OF BUDGETED ESTIMATED % OF TOTAL
APARTMENT COST(2) RECONSTRUCTION RECONSTRUCTION RESTABILIZED BUDGETED
HOMES ($ MILLIONS) START COMPLETION OPERATIONS(3) COST(4)
--------- ------------ -------------- -------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
1. Sunset Towers
San Francisco, CA... 243 $ 27.6 Q4 1997 Q3 1998 Q4 1998 9.3%
2. TimberWood
West Covina, CA..... 209 $ 14.9 Q3 1997 Q3 1998 Q1 1999 10.5%
3. SunScape
Huntington Beach,
CA.................. 400 $ 36.6 Q3 1997 Q3 1998 Q1 1999 9.9%
4. The Arbors
Campbell, CA........ 252 $ 30.0 Q4 1997 Q4 1998 Q1 1999 8.9%
5. Mission Woods
San Diego, CA....... 200 $ 20.8 Q3 1997 Q3 1998 Q4 1998 8.0%
6. Cedar Ridge
Daly City, CA....... 195 $ 24.8 Q3 1997 Q4 1998 Q1 1999 9.0%
7. The Park
Hacienda Heights,
CA.................. 351 $ 28.7 Q2 1998 Q3 1999 Q1 2000 9.4%
8. Lakeside
Burbank, CA......... 750 $ 67.1 Q2 1998 Q2 2000 Q4 2000 9.2%
9. Gallery Place
Redmond, WA......... 222 $ 24.9 Q1 1998 Q1 1999 Q2 1999 8.6%
10. Viewpointe
Woodland Hills, CA.. 663 $ 72.6 Q2 1998 Q1 1999 Q3 1999 9.7%
11. Landing West
Seattle, WA......... 190 $ 12.3 Q1 1998 Q4 1998 Q1 1999 9.4%
12. Waterhouse Place
Beaverton, OR....... 279 $ 19.4 Q2 1998 Q2 1999 Q3 1999 9.3%
----- ------- ----
Total/Weighted
Average............ 3,954 $ 379.7 9.3%
===== ======= ====
</TABLE>
- --------
(1) Redevelopment Communities are communities acquired where redevelopment has
commenced and for which redevelopment costs are expected to exceed the
lesser of $5,000,000 or 10% of the original acquisition cost.
(2) Total budgeted cost includes all capitalized costs projected to be incurred
to redevelop the respective Redevelopment Community, including costs to
acquire the community, reconstruction costs, real estate taxes, capitalized
interest and loan fees, permits, professional fees, allocated redevelopment
overhead and other regulatory fees determined in accordance with GAAP.
(3) Restabilized operations is defined as the first full quarter of 95% or
greater occupancy after completion of redevelopment.
(4) Projected EBITDA represents gross potential earnings projected to be
achieved at completion of redevelopment before interest, income taxes,
depreciation, amortization and extraordinary items, minus (a) projected
economic vacancy and (b) projected stabilized operating expenses.
DEVELOPMENT RIGHTS
We are considering the development of 20 new apartment communities. The
status of these Development Rights ranges from land under contract for which
design and architectural planning has just commenced, to
S-27
<PAGE>
land under contract or owned by us with completed site plans and drawings where
construction can commence almost immediately. We cannot assure you that we will
succeed in obtaining zoning and other necessary governmental approvals or the
financing required to develop these communities, or that we will decide to
develop any particular community. Further, we cannot assure you that
construction of any particular community will be undertaken or, if undertaken,
will begin at the expected times assumed in the financial projections or be
completed at the total budgeted cost. Although we cannot assure you that all or
any of these communities will proceed to development, the successful completion
of all of these communities would ultimately add approximately 6,007
institutional-quality apartment homes to our portfolio. See "Risk Factors--
Risks Related to Development and Redevelopment of Apartment Communities." At
June 30, 1998, the cumulative capitalized costs incurred in pursuit of the
Development Rights was approximately $32.7 million, of which $20.3 million was
expended to acquire land for three of such developments. Many of these
apartment communities will offer features like those offered by the communities
that we currently own. The Development Rights that we are currently pursuing
are summarized below.
DEVELOPMENT RIGHTS SUMMARY
<TABLE>
<CAPTION>
ESTIMATED TOTAL
NUMBER OF BUDGETED COST
LOCATION APT. HOMES ($ MILLIONS)
-------- ---------- -------------
<C> <S> <C> <C>
1. Peabody, MA................................ 434 $ 35.9
2. Bellevue, WA............................... 200 29.1
3. San Jose, CA(1)............................ 288 53.8
4. Mountain View, CA(1)....................... 200 50.0
5. Hull, MA................................... 162 17.0
6. New Rochelle, NY........................... 408 63.1
7. Freehold, NJ............................... 452 38.4
8. Orange, CT................................. 168 15.4
9. New Canaan, CT(1)(2)....................... 104 23.8
10. Darien, CT................................. 172 26.1
11. Yonkers, NY................................ 256 33.7
12. Greenburgh-II, NY ......................... 500 74.5
13. Greenburgh-III, NY......................... 266 39.6
14. Arlington, VA.............................. 635 68.9
15. Florham Park, NJ........................... 270 37.5
16. Edgewater, NJ.............................. 404 68.6
17. Hopewell, NJ............................... 280 29.8
18. Naperville, IL............................. 200 20.4
19. Westbury, NY............................... 361 49.8
20. Providence, RI............................. 247 30.4
----- -------
Total...................................... 6,007 $ 805.8
===== =======
</TABLE>
--------
(1) AvalonBay owns land, but construction has not yet begun.
(2) Currently anticipated that the land seller will retain a
minority limited partner interest.
S-28
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds from this offering of
approximately $96.6 million, after all anticipated issuance costs. We will use
the net proceeds from this offering to reduce borrowings under our $600 million
unsecured credit facility, which were used to fund the acquisition, development
and redevelopment of additional apartment communities. As a lender under our
$600 million unsecured credit facility, First Union National Bank, an affiliate
of one of the underwriters, will receive its proportionate share of such
repayment. The $600 million unsecured credit facility currently bears interest
at the London Interbank Offered Rate (based on a maturity selected by us) plus
0.60% per annum and matures in June 2001.
S-29
<PAGE>
CAPITALIZATION
The following table sets forth the historical capitalization for AvalonBay as
of August 31, 1998 and the pro forma capitalization for AvalonBay as of that
date to reflect the acquisition of two land parcels (Avalon Fox Mill and Avalon
Court North), the disposition of one community (Arbor Park), and the probable
acquisition of one community (Hanover Hall), and as adjusted to give effect to
this offering and the use of the net proceeds as described in "Use of
Proceeds."
<TABLE>
<CAPTION>
AUGUST 31, 1998
-------------------------------------
HISTORICAL PRO FORMA AS ADJUSTED
------------ ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
DEBT:
$600 million unsecured credit
facility............................. $ 311,400 $ 369,238 $ 272,638
Mortgages and other notes payable..... 496,529 496,529 496,529
Senior unsecured notes payable........ 710,000 710,000 710,000
----------- ----------- -----------
Total debt.......................... 1,517,929 1,575,767 1,479,167
----------- ----------- -----------
Minority interest of unitholders in
consolidated operating partnerships.. 32,251 32,251 32,251
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.01 par value;
50,000,000 shares authorized;
14,322,700 (Historical and Pro Forma)
and 18,322,700
(As Adjusted) issued and outstanding
at August 31, 1998................... 143 143 183
Common Stock, $0.01 par value;
300,000,000 shares authorized;
63,670,126 (Historical, Pro Forma and
As Adjusted) issued and outstanding
at August 31, 1998(1)................ 637 637 637
Additional paid-in capital............ 2,321,145 2,321,145 2,417,705
Deferred compensation................. (5,852) (5,852) (5,852)
Dividends in excess of accumulated
earnings............................. (45,515) (45,364) (45,364)
----------- ----------- -----------
Total stockholders' equity.......... 2,270,558 2,270,709 2,367,309
----------- ----------- -----------
Total capitalization................ $ 3,820,738 $ 3,878,727 $ 3,878,727
=========== =========== ===========
</TABLE>
- --------
(1) Excludes 2,500,000 shares of Common Stock reserved for issuance under the
1994 Stock Incentive Plan, as amended and restated, and 2,769,530 shares
of Common Stock issuable pursuant to Avalon stock options outstanding at
the time of the merger and assumed in the merger and 898,041 shares of
Common Stock that may be issuable upon conversion of OP Units in
DownREITs. On October 2, 1998, AvalonBay amended its Charter to reduce the
number of authorized shares of Common Stock from 300,000,000 to
140,000,000.
S-30
<PAGE>
DESCRIPTION OF THE PREFERRED STOCK
In addition to the information below, you should also read the general terms
of "Preferred Stock" set forth in the accompanying Prospectus before deciding
whether to invest in the Series H Preferred Stock. However, if the terms set
forth herein differ from the terms set forth in the Prospectus, rely on the
terms set forth herein.
GENERAL
We are authorized to issue up to 50,000,000 shares of preferred stock
("Preferred Stock") in one or more series, with such terms, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption, in each case, if any, as are permitted by Maryland law and as our
Board of Directors may determine by adoption of an amendment to our charter, as
amended (the "Charter"), without any further vote or action by our
stockholders. See "Description of Preferred Stock" in the accompanying
Prospectus. The Series H Preferred Stock is a series of our Preferred Stock.
Prior to the completion of the offering, our Board of Directors will adopt an
amendment to the Charter determining the terms of a series of Preferred Stock
consisting of up to 4,600,000 shares, designated 8.70% Series H Cumulative
Redeemable Preferred Stock. The following summary of the terms and provisions
of the Preferred Stock does not purport to be complete and is qualified in its
entirety by reference to the pertinent sections of the Charter relating to the
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock,
Series F Preferred Stock and Series G Preferred Stock and the Articles
Supplementary to be adopted which will designate the Series H Preferred Stock
(the "Designating Amendment"), each of which you may obtain from us.
The transfer agent, registrar and dividend disbursing agent for the Series H
Preferred Stock will be First Union National Bank, Charlotte, North Carolina.
SERIES C PREFERRED STOCK
We currently have outstanding 2,300,000 shares of Series C Preferred Stock.
Holders of shares of the Series C Preferred Stock are entitled to receive, when
and as declared by the Board of Directors, out of funds legally available for
the payment of dividends, cumulative preferential cash dividends at the rate of
8.50% per annum of their $25.00 liquidation preference (equivalent to a fixed
annual amount of $2.125 per share). Such dividends are cumulative from the date
of original issue and are payable quarterly in arrears on or before the 15th
day of each March, June, September and December or, if such day is not a
business day, the next succeeding business day. The Series C Preferred Stock is
not redeemable prior to June 20, 2002. On and after June 20, 2002, we may, at
our option upon not less than 30 nor more than 60 days prior written notice,
redeem shares of the Series C Preferred Stock, in whole or in part, at any time
or from time to time, for cash at a redemption price of $25.00 per share, plus
all accrued and unpaid dividends thereon to the date fixed for redemption.
Except with respect to the foregoing description of the dividend rate and
redemption date of the Series C Preferred Stock, the terms of the Series C
Preferred Stock are substantially identical to the terms of the Series D
Preferred Stock, Series F Preferred Stock, Series G Preferred Stock and Series
H Preferred Stock. See "--Series D Preferred Stock," "--Series F Preferred
Stock," "--Series G Preferred Stock, and "--Series H Preferred Stock." The
Series C Preferred Stock ranks on a parity with the Series D Preferred Stock,
Series F Preferred Stock and Series G Preferred Stock, and shall rank on a
parity with the Series H Preferred Stock, with respect to the payment of
dividends and payments upon liquidation.
SERIES D PREFERRED STOCK
We currently have outstanding 3,267,700 shares of Series D Preferred Stock.
Holders of shares of Series D Preferred Stock are entitled to receive, when and
as declared by the Board of Directors, out of funds legally
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available for the payment of dividends, cumulative preferential cash dividends
at the rate of 8.00% per annum of their $25.00 liquidation preference
(equivalent to a fixed annual amount of $2.00 per share). Such dividends are
cumulative from the date of original issue and are payable quarterly in arrears
on or before the 15th day of each March, June, September and December or, if
such day is not a business day, the next succeeding business day. The Series D
Preferred Stock is not redeemable prior to December 15, 2002. On and after
December 15, 2002, we may, at our option upon not less than 30 nor more than 60
days prior written notice, redeem shares of the Series D Preferred Stock, in
whole or in part, at any time or from time to time, for cash at a redemption
price of $25.00 per share, plus all accrued and unpaid dividends thereon to the
date fixed for redemption. Except with respect to the foregoing description of
the dividend rate and redemption date of the Series D Preferred Stock, the
terms of the Series D Preferred Stock are substantially identical to the terms
of the Series C Preferred Stock, Series F Preferred Stock, Series G Preferred
Stock and Series H Preferred Stock. See "--Series C Preferred Stock," "--Series
F Preferred Stock," "--Series G Preferred Stock" and "--Series H Preferred
Stock." The Series D Preferred Stock ranks on a parity with the Series C
Preferred Stock, Series F Preferred Stock and Series G Preferred Stock, and
shall rank on a parity with the Series H Preferred Stock, with respect to the
payment of dividends and payments upon liquidation.
SERIES E PREFERRED STOCK
We have authorized 1,000,000 shares of Series E Preferred Stock for issuance
pursuant to our Shareholder Rights Agreement. If issued, the Series E Preferred
Stock would rank senior to the Common Stock and junior to all currently
authorized classes and series of our Preferred Stock. There are currently no
shares of Series E Preferred Stock outstanding. For a detailed discussion of
the Shareholder Rights Agreement, see "Description of Common Stock--Shareholder
Rights Agreement" in the accompanying Prospectus.
SERIES F PREFERRED STOCK
We currently have outstanding 4,455,000 shares of Series F Preferred Stock.
Holders of shares of Series F Preferred Stock are entitled to receive, when and
as declared by the Board of Directors, out of funds legally available for the
payment of dividends, cumulative preferential cash dividends at the rate of
9.00% per annum of their $25.00 liquidation preference (equivalent to a fixed
annual amount of $2.25 per share). Such dividends are cumulative from the date
of original issue and are payable quarterly in arrears on or before the 15th
day of each February, May, August and November or, if such day is not a
business day, the next succeeding business day. The Series F Preferred Stock is
not redeemable prior to February 15, 2001. On and after February 15, 2001, we
may, at our option upon not less than 30 nor more than 60 days prior written
notice, redeem shares of the Series F Preferred Stock, in whole or in part, at
any time or from time to time, for cash at a redemption price of $25.00 per
share, plus all accrued and unpaid dividends thereon to the date fixed for
redemption. Except with respect to the foregoing description of the dividend
rate and redemption date of the Series F Preferred Stock, the terms of the
Series F Preferred Stock are substantially identical to the terms of the Series
C Preferred Stock, Series D Preferred Stock, Series G Preferred Stock and
Series H Preferred Stock. See "--Series C Preferred Stock," "--Series D
Preferred Stock," "--Series G Preferred Stock" and "--Series H Preferred
Stock." The Series F Preferred Stock ranks on a parity with the Series C
Preferred Stock, Series D Preferred Stock and Series G Preferred Stock, and
shall rank on a parity with the Series H Preferred Stock, with respect to the
payment of dividends and payments upon liquidation.
SERIES G PREFERRED STOCK
We currently have outstanding 4,300,000 shares of Series G Preferred Stock.
Holders of shares of Series G Preferred Stock are entitled to receive, when and
as declared by the Board of Directors, out of funds legally available for the
payment of dividends, cumulative preferential cash dividends at the rate of
8.96% per annum of their $25.00 liquidation preference (equivalent to a fixed
annual amount of $2.24 per share). Such dividends are cumulative from the date
of original issue and are payable quarterly in arrears on or before the 15th
day of each February, May, August and November or, if such day is not a
business day, the next succeeding business day. The Series G Preferred Stock is
not redeemable prior to October 15, 2001. On and after October 15, 2001,
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we may, at our option upon not less than 30 nor more than 60 days prior written
notice, redeem shares of the Series G Preferred Stock, in whole or in part, at
any time or from time to time, for cash at a redemption price of $25.00 per
share, plus all accrued and unpaid dividends thereon to the date fixed for
redemption. Except with respect to the foregoing description of the dividend
rate and redemption date of the Series G Preferred Stock, the terms of the
Series G Preferred Stock are substantially identical to the terms of the Series
C Preferred Stock, Series D Preferred Stock, Series F Preferred Stock and
Series H Preferred Stock. See "--Series C Preferred Stock," "--Series D
Preferred Stock," "--Series F Preferred Stock" and "--Series H Preferred
Stock." The Series G Preferred Stock ranks on a parity with the Series C
Preferred Stock and Series D Preferred Stock and Series F Preferred Stock, and
shall rank on a parity with the Series H Preferred Stock, with respect to the
payment of dividends and payments upon liquidation.
SERIES H PREFERRED STOCK
Dividends
Holders of shares of Series H Preferred Stock shall be entitled to receive,
when and as declared by the Board of Directors, out of funds legally available
for the payment of dividends, cumulative preferential cash dividends at the
rate of 8.70% per annum of their $25.00 liquidation preference (equivalent to a
fixed annual amount of $2.175 per share). Such dividends shall be cumulative
from the date of original issue and shall be payable quarterly in arrears on or
before the 15th day of each March, June, September and December or, if such day
is not a business day, the next succeeding business day (each, a "Dividend
Payment Date"). The first dividend, which will be paid on December 15, 1998,
will be for less than a full quarter. Such dividend and any dividend payable on
the Series H Preferred Stock for any partial dividend period will be computed
on the basis of a 360-day year consisting of twelve 30-day months. Dividends
will be payable to holders of record as they appear in our stock records at the
close of business on the applicable record date, which shall be the first day
of the calendar month in which the applicable Dividend Payment Date falls or on
such other date designated by the Board of Directors for the payment of
dividends that is not more than 30 nor less than 10 days prior to such Dividend
Payment Date (each, a "Dividend Record Date"). The Series H Preferred Stock
will rank senior to the Common Stock and Series E Preferred Stock, and on a
parity with the Series C Preferred Stock, Series D Preferred Stock, Series F
Preferred Stock and Series G Preferred Stock, with respect to the payment of
dividends.
No dividends on shares of the Series H Preferred Stock shall be declared by
the Board of Directors or paid or set apart for payment by AvalonBay at such
time as the terms and provisions of any agreement of ours, including any
agreement relating to our indebtedness, prohibits such declaration, payment or
setting apart for payment or provides that such declaration, payment or setting
apart for payment would constitute a breach thereof or a default thereunder, or
if such declaration or payment shall be restricted or prohibited by law.
Notwithstanding the foregoing, dividends on the Series H Preferred Stock will
accrue whether or not we have earnings, whether or not there are funds legally
available for the payment of such dividends and whether or not such dividends
are declared. Accrued but unpaid dividends on the Series H Preferred Stock will
accumulate as of the Dividend Payment Date on which they first become payable.
Except as set forth in the next sentence, we will not declare or pay or set
apart for payment any dividends on any stock or any other series of Preferred
Stock of AvalonBay ranking, as to dividends, on a parity with or junior to the
Series H Preferred Stock (other than a dividend in shares of Common Stock or in
any other class of stock ranking junior to the Series H Preferred Stock as to
dividends and upon liquidation) for any period unless full cumulative dividends
have been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof is set apart for such payment on the Series
H Preferred Stock for all past dividend periods and the then current dividend
period. When dividends are not paid in full (and a sum sufficient for such full
payment is not so set apart) upon the Series H Preferred Stock and the shares
of any other series of Preferred Stock ranking on a parity as to dividends with
the Series H Preferred Stock, all dividends declared upon the Series H
Preferred Stock, and any other series of Preferred Stock ranking on a parity as
to dividends with the Series H Preferred Stock, shall be declared pro rata so
that the amount of dividends declared per share of Series H Preferred Stock and
such other series of Preferred Stock shall in all cases bear to each other the
same ratio
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that accrued dividends per share on the Series H Preferred Stock and such other
series of Preferred Stock (which shall not include any accrual in respect of
unpaid dividends for prior dividend periods if such preferred stock does not
have a cumulative dividend) bear to each other. No interest, or sum of money in
lieu of interest, shall be payable in respect of any dividend payment or
payments on the Series H Preferred Stock which may be in arrears.
Except as provided in the immediately preceding paragraph, unless full
cumulative dividends on the Series H Preferred Stock have been or
contemporaneously are declared and paid, or declared and a sum sufficient for
the payment thereof is set apart for payment for all past dividend periods and
the then current dividend period, no dividends (other than in shares of Common
Stock or other shares of stock ranking junior to the Series H Preferred Stock
as to dividends and upon liquidation) shall be declared or paid or set aside
for payment nor shall any other distribution be declared or made upon the
Common Stock, or any other stock of AvalonBay ranking junior to or on a parity
with the Series H Preferred Stock as to dividends or upon liquidation, nor
shall any shares of Common Stock, or any other shares of stock of AvalonBay
ranking junior to or on a parity with the Series H Preferred Stock as to
dividends or upon liquidation, be redeemed, purchased or otherwise acquired for
any consideration (or any moneys be paid to or made available for a sinking
fund for the redemption of any such shares) by AvalonBay (except by conversion
into or exchange for other stock of AvalonBay ranking junior to the Series H
Preferred Stock as to dividends and upon liquidation). Holders of shares of
Series H Preferred Stock shall not be entitled to any dividend, whether payable
in cash, property or stock, in excess of full cumulative dividends on the
Series H Preferred Stock as provided above. Any dividend payment made on shares
of the Series H Preferred Stock shall first be credited against the earliest
accrued but unpaid dividend due with respect to such shares which remains
payable. See "Description of Preferred Stock--Dividends" in the accompanying
Prospectus.
Liquidation Preference
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of AvalonBay, the holders of shares of Series H Preferred Stock are
entitled to be paid, out of such assets of ours that are legally available for
distribution to our stockholders, a liquidation preference of $25.00 per share,
plus an amount equal to any accrued and unpaid dividends to the date of
payment, before any distribution of assets is made to holders of Common Stock
or any other class or series of our stock that ranks junior to the Series H
Preferred Stock as to liquidation rights. After payment of the full amount of
the liquidating distributions to which they are entitled, the holders of Series
H Preferred Stock will have no right or claim to any of our remaining assets.
If we consolidate or merge with or into any other corporation, trust or entity
or if any other corporation consolidates or merges with or into us, or if all
or substantially all of our property or business is sold, leased or conveyed,
we shall not be deemed to have been liquidated, dissolved or wound up. For
further information regarding the rights of the holders of Series H Preferred
Stock upon the liquidation, dissolution or winding up of AvalonBay, see
"Description of Preferred Stock--Liquidation Preference" in the accompanying
Prospectus. The Series H Preferred Stock will rank senior to the Common Stock
and Series E Preferred Stock, and on a parity with the Series C Preferred
Stock, Series D Preferred Stock, Series F Preferred Stock and Series G
Preferred Stock, with respect to payments upon liquidation.
Redemption
The Series H Preferred Stock is not redeemable prior to October 15, 2008.
However, in order to ensure that we remain a qualified REIT for federal income
tax purposes, shares of Series H Preferred Stock owned by a person or certain
groups of persons in excess of the Ownership Limit or the Look-Through
Ownership Limit (as such terms are defined in the accompanying Prospectus), as
applicable, may be automatically converted into shares of Excess Stock, and we
will have the right to purchase such Excess Stock from the holder(s) thereof.
See "Restrictions on Transfers of Stock" in the accompanying Prospectus. On and
after October 15, 2008, we may, at our option upon not less than 30 nor more
than 60 days written notice, redeem shares of Series H Preferred Stock, in
whole or in part, at any time or from time to time, for cash at a redemption
price of $25.00
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per share, plus all accrued and unpaid dividends thereon to the date fixed for
redemption (except as provided below), without interest. The redemption price
of the Series H Preferred Stock (other than the portion thereof consisting of
accrued and unpaid dividends) is payable solely out of the sale proceeds of
other capital stock of AvalonBay, which may include other series of preferred
stock, and from no other source. For purposes of the preceding sentence,
"capital stock" means any equity securities (including Common Stock and
preferred stock), shares, interest, participation or other ownership interests
(however designated) and any rights (other than debt securities convertible
into or exchangeable for equity securities) or options to purchase any of the
foregoing. Holders of Series H Preferred Stock to be redeemed shall surrender
such Series H Preferred Stock at the place designated in such notice and shall
be entitled to the redemption price and any accrued and unpaid dividends
payable upon such redemption following such surrender. If notice of redemption
of any shares of Series H Preferred Stock has been given and if we have set
aside the funds necessary for such redemption in trust for the benefit of the
holders of any shares of Series H Preferred Stock so called for redemption,
then from and after the redemption date dividends will cease to accrue on such
shares of Series H Preferred Stock, such shares of Series H Preferred Stock
shall no longer be deemed outstanding and all rights of the holders of such
shares will terminate, except the right to receive the redemption price. If
less than all of the outstanding shares of Series H Preferred Stock are to be
redeemed, the Series H Preferred Stock to be redeemed shall be selected pro
rata (as nearly as may be practicable without creating fractional shares) or by
any other equitable method we choose.
Unless full cumulative dividends on all shares of Series H Preferred Stock
shall have been or contemporaneously are declared and paid, or declared and a
sum sufficient for the payment thereof set apart for payment for all past
dividend periods and the then current dividend period, no shares of Series H
Preferred Stock shall be redeemed unless all outstanding shares of Series H
Preferred Stock are simultaneously redeemed and we shall not purchase or
otherwise acquire directly or indirectly any shares of Series H Preferred Stock
(except by exchange for capital stock of AvalonBay ranking junior to the Series
H Preferred Stock as to dividends and upon liquidation); provided, however,
that the foregoing shall not prevent us from purchasing shares of Excess Stock
in order to ensure that we remain qualified as a REIT for federal income tax
purposes, as described under "Restrictions on Transfers of Stock" in the
accompanying Prospectus, or the purchase or acquisition of shares of Series H
Preferred Stock pursuant to a purchase or exchange offer made on the same terms
to holders of all outstanding shares of such Series H Preferred Stock.
Notice of redemption will be given by publication in a newspaper of general
circulation in the City of New York, such publication to be made once a week
for two successive weeks commencing not less than 30 nor more than 60 days
prior to the redemption date. We will mail a similar notice, postage prepaid,
not less than 30 nor more than 60 days prior to the redemption date, addressed
to the respective holders of record of the Series H Preferred Stock to be
redeemed at their respective addresses as they appear on our stock transfer
records. No failure to give such notice or any defect thereto or in the mailing
thereof shall affect the validity of the proceedings for the redemption of any
shares of Series H Preferred Stock except as to the holder to whom notice was
defective or not given. Each notice shall state: (i) the redemption date; (ii)
the redemption price; (iii) the number of shares of Series H Preferred Stock to
be redeemed; (iv) the place or places where the Series H Preferred Stock is to
be surrendered for payment of the redemption price; and (v) that dividends on
the shares to be redeemed will cease to accrue on such redemption date. If less
than all of the Series H Preferred Stock held by any holder is to be redeemed,
the notice mailed to such holder shall also specify the number of shares of
Series H Preferred Stock held by such holder to be redeemed.
The holders of Series H Preferred Stock at the close of business on a
Dividend Record Date will be entitled to receive the dividend payable with
respect to such Series H Preferred Stock on the corresponding Dividend Payment
Date notwithstanding the redemption thereof between such Dividend Record Date
and the corresponding Dividend Payment Date or our default in the payment of
the dividend due. Except as provided above, we will make no payment or
allowance for unpaid dividends, whether or not in arrears, on called Series H
Preferred Stock.
The Series H Preferred Stock has no stated maturity and will not be subject
to any sinking fund or mandatory redemption.
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Voting Rights
Holders of the Series H Preferred Stock will not have any voting rights,
except as set forth below or as otherwise from time to time required by law.
Whenever dividends on any shares of Series H Preferred Stock shall be in
arrears for six or more quarterly periods (a "Preferred Dividend Default"), the
Board of Directors of AvalonBay shall take such action as may be necessary to
increase the number of directors of AvalonBay by two, and the holders of such
shares of Series H Preferred Stock (voting separately as a class with all other
series of Preferred Stock ranking on a parity with the Series H Preferred Stock
as to dividends or upon liquidation ("Parity Preferred") upon which like voting
rights have been conferred and are exercisable), will be entitled to vote for
the election of a total of two directors of AvalonBay (the "Preferred Stock
Directors") at a special meeting called by the holders of record of at least
20% of the Series H Preferred Stock or the holders of any other series of
Parity Preferred so in arrears (unless such request is received less than 90
days before the date fixed for the next annual or special meeting of the
stockholders) or at the next annual meeting of stockholders, and at each
subsequent annual meeting until all dividends accrued on such shares of Series
H Preferred Stock for the past dividend periods and the then current dividend
period shall have been fully paid or declared and a sum sufficient for the
payment thereof set aside for payment. If and when all accumulated dividends
and the dividend for the then current dividend period on the Series H Preferred
Stock shall have been paid in full or set aside for payment in full, the
holders thereof shall be divested of the foregoing voting rights (subject to
revesting in the event of each and every Preferred Dividend Default) and, if
all accumulated dividends and the dividend for the then current dividend period
have been paid in full or set aside for payment in full on all series of Parity
Preferred upon which like voting rights have been conferred and are
exercisable, the term of office of each Preferred Stock Director so elected
shall terminate. Any Preferred Stock Director may be removed at any time with
or without cause by, and shall not be removed otherwise than by the vote of,
the holders of record of a majority of the outstanding shares of the Series H
Preferred Stock when they have the voting rights described above (voting
separately as a class with all other series of Parity Preferred upon which like
voting rights have been conferred and are exercisable). So long as a Preferred
Dividend Default shall continue any vacancy in the office of a Preferred Stock
Director may be filled by written consent of the Preferred Stock Director
remaining in office, or if none remains in office, by a vote of the holders of
record of a majority of the outstanding shares of Series H Preferred Stock when
they have the voting rights described above (voting separately as a class with
all other series of Parity Preferred upon which like voting rights have been
conferred and are exercisable). The Preferred Stock Directors shall each be
entitled to one vote per director on any matter.
So long as any shares of Series H Preferred Stock remain outstanding, we will
not, without the affirmative vote or consent of the holders of at least two-
thirds of the shares of the Series H Preferred Stock outstanding at the time,
given in person or by proxy, either in writing or at a meeting (voting
separately as a class), (a) authorize or create, or increase the authorized or
issued amount of, any class or series of stock ranking senior to the Series H
Preferred Stock with respect to payment of dividends or the distribution of
assets upon liquidation, dissolution or winding up or reclassify any authorized
stock of AvalonBay into such shares, or create, authorize or issue any
obligation or security convertible into or evidencing the right to purchase any
such shares; or (b) amend, alter or repeal the provisions of the Charter or the
Designating Amendment, whether by merger, consolidation or otherwise (an
"Event"), so as to materially and adversely affect any right, preference,
privilege or voting power of the Series H Preferred Stock or the holders
thereof; provided, however, with respect to the occurrence of any Event set
forth in (b) above, so long as the Series H Preferred Stock remains outstanding
with the terms thereof materially unchanged, taking into account that upon the
occurrence of an Event AvalonBay may not be the surviving entity, the
occurrence of any such Event shall not be deemed to materially and adversely
affect such rights, preferences, privileges or voting power of holders of
Series H Preferred Stock; and provided, further, that (i) any increase in the
amount of the authorized Preferred Stock or the creation or issuance of any
other series of Preferred Stock, or (ii) any increase in the amount of
authorized shares of such series, in each case ranking on a parity with or
junior to the Series H Preferred Stock with respect to payment of dividends or
the distribution of assets upon liquidation, dissolution or winding up, shall
not be deemed to materially and adversely affect such rights, preferences,
privileges or voting powers.
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The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of Series H Preferred Stock shall have been
redeemed or called for redemption upon proper notice and sufficient funds shall
have been deposited in trust to effect such redemption.
Conversion
The Series H Preferred Stock is not convertible into or exchangeable for any
other property or securities of AvalonBay, except that shares of Series H
Preferred Stock may be automatically converted into shares of Excess Stock in
order to ensure that we remain qualified as a REIT for federal income tax
purposes. See "Restrictions on Transfers of Stock" in the accompanying
Prospectus.
Restrictions on Ownership
For information regarding restrictions on ownership of the Series H Preferred
Stock, see "Restrictions on Transfers of Stock" in the accompanying Prospectus.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain federal income tax considerations is based
on current law, is for general information only, and is not tax advice. This
discussion does not purport to address all aspects of taxation that may be
relevant to particular stockholders in light of their personal investment or
tax circumstances, or to certain types of stockholders (including insurance
companies, tax-exempt organizations, financial institutions or broker dealers,
foreign corporations and persons who are not citizens or residents of the
United States) subject to special treatment under the federal income tax laws.
We intend to operate in a manner that will enable us to qualify as a REIT
under the Internal Revenue Code of 1986, as amended (the "Code"). Although we
believe that we are organized and operate in such a manner, we cannot assure
you that we qualify or will remain qualified as a REIT. Qualification as a REIT
involves the application of highly technical and complex Code provisions for
which there are only limited judicial and administrative interpretations. The
determination of various factual matters and circumstances not entirely within
our control may affect our ability to qualify as a REIT. If we fail to qualify
as a REIT, we will be subject to federal income tax (including any applicable
alternative minimum tax) on our taxable income at regular corporate rates. In
addition, unless entitled to relief under certain statutory provisions, we will
be disqualified from treatment as a REIT for the four taxable years following
the year during which qualification is lost. The additional tax would
significantly reduce the cash flow available for distribution to stockholders.
This Prospectus Supplement does not address the taxation of AvalonBay or the
impact on AvalonBay of its election to be taxed as a REIT. The discussion set
forth below assumes that we qualify as a REIT under the Code.
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
Dividends and Other Distributions. As long as we qualify as a REIT,
distributions made to our taxable domestic stockholders (including holders of
Series H Preferred Stock) out of current or accumulated earnings and profits
(and not designated as capital gain dividends) will be taken into account by
them as ordinary income and will not be eligible for the dividends received
deduction for corporations. For purposes of determining whether distributions
on the Series H Preferred Stock are out of current or accumulated earnings and
profits, our earnings and profits will be allocated first to the outstanding
Series C Preferred Stock, Series D Preferred Stock, Series F Preferred Stock,
Series G Preferred Stock and Series H Preferred Stock on a pari passu basis,
and then to the Common Stock. Distributions that are designated as capital gain
dividends will be taxed as long-term capital gains (to the extent they do not
exceed our actual net capital gain for the taxable year) without regard to the
period for which the holder has held its Series H Preferred Stock. However,
corporate holders may be required to treat up to 20% of certain capital gain
dividends as ordinary income.
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Distributions in excess of current and accumulated earnings and profits will
not be taxable to a holder to the extent that they do not exceed the adjusted
tax basis of the holder's shares, but rather will reduce the adjusted basis of
such shares. To the extent that such distributions exceed the adjusted basis of
a holder's shares they will be included in income as long-term gain (or short-
term capital gain if the shares have been held for one year or less) assuming
the shares are a capital asset in the hands of the holder. In addition, any
dividend declared by AvalonBay in October, November or December of any year
payable to a stockholder of record on a specified date in any such month shall
be treated as both paid by AvalonBay and received by the stockholder on
December 31 of such year, provided that the dividend is actually paid by us
during January of the following calendar year. Stockholders may not include in
their individual income tax returns any of our net operating losses or capital
losses.
Sale or Redemption of Series H Preferred Stock. On the sale of shares of the
Series H Preferred Stock, gain or loss will be recognized by the holder in an
amount equal to the difference between (i) the amount of cash and fair market
value of any property received on such sale, and (ii) the holder's adjusted
basis in the Series H Preferred Stock. Such gain or loss will be capital gain
or loss if the shares of the Series H Preferred Stock are held as capital
assets, and will be long-term gain or loss if such shares are held for more
than one year. In general, any loss upon a sale or exchange of shares by a
holder who has held such shares for six months or less (after applying certain
holding period rules), will be treated as a long-term capital loss to the
extent of distributions from AvalonBay required to be treated by such holder as
long-term capital gain.
A redemption of the Series H Preferred Stock will be treated under Section
302 of the Code as a distribution that is taxable at ordinary income tax rates
as a dividend (to the extent of our current or accumulated earnings and
profits), unless the redemption satisfies certain tests set forth in Section
302(b) of the Code enabling the redemption to be treated as a sale of the
Series H Preferred Stock. The redemption will satisfy such tests if it (i) is
"substantially disproportionate" with respect to the holder (which will not be
the case if only the Series H Preferred Stock is redeemed, since it generally
does not have voting rights), (ii) results in a "complete termination" of the
holder's stock interest in AvalonBay, or (iii) is "not essentially equivalent
to a dividend" with respect to the holder, all within the meaning of Section
302(b) of the Code. In determining whether any of these tests have been met,
shares considered to be owned by the holder by reason of certain constructive
ownership rules set forth in the Code, as well as shares actually owned, must
generally be taken into account. Because the determination as to whether any of
the alternative tests of Section 302(b) of the Code will be satisfied with
respect to any particular holder of the Series H Preferred Stock depends upon
the facts and circumstances at the time that the determination must be made,
prospective investors are advised to consult their own tax advisors to
determine such tax treatment.
If a redemption of the Series H Preferred Stock is treated as a distribution
that is taxable as a dividend, the amount of the distribution will be measured
by the amount of cash and the fair market value of any property received by the
stockholders. The stockholder's adjusted tax basis in such redeemed Series H
Preferred Stock will be transferred to the holder's remaining stockholdings in
AvalonBay. If, however, the stockholder has no remaining stockholdings in
AvalonBay, such basis could be transferred to a related person or it may be
lost.
BACKUP WITHHOLDING
We will report to our domestic stockholders and the Internal Revenue Service
(the "IRS") the amount of dividends paid during each calendar year, and the
amount of tax withheld, if any. Under the backup withholding rules, a
stockholder may be subject to backup withholding at the rate of 31% with
respect to dividends paid and redemptions unless such holder (a) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact, or (b) provides a taxpayer identification number,
certifies that the holder is not subject to backup withholding, and otherwise
complies with applicable requirements of the backup withholding rules. A
stockholder that does not provide us with his correct taxpayer identification
number may also be subject to penalties imposed by the IRS. Any amount paid as
backup withholding will be creditable against the stockholder's income tax
liability.
S-38
<PAGE>
TAXATION OF CERTAIN TAX-EXEMPT STOCKHOLDERS
Generally, a tax-exempt investor that is exempt from tax on its investment
income, such as an individual retirement account ("IRA") or a Section 401(k)
plan, that holds the Series H Preferred Stock as an investment will not be
subject to tax on dividends paid by AvalonBay. However, if such tax-exempt
investor is treated as having purchased its Series H Preferred Stock with
borrowed funds, some or all of its dividends from the Series H Preferred Stock
will be subject to tax. In addition, under some circumstances certain pension
plans (including Section 401(k) plans but not, for example, IRAs) that own more
than 10% (by value) of our outstanding stock, including Common Stock, could be
subject to tax on a portion of their Series H Preferred Stock dividends even if
their Series H Preferred Stock is held for investment and is not treated as
acquired with borrowed funds.
OTHER TAX CONSEQUENCES
AvalonBay and its stockholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which it or they own
property, transact business or reside. The state and local tax treatment of
AvalonBay and its stockholders may not conform to the federal income tax
consequences discussed above. Consequently, prospective stockholders should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in AvalonBay.
S-39
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement") between AvalonBay and the underwriters named
below (the "Underwriters"), we have agreed to sell to the Underwriters, and
each Underwriter has severally agreed to purchase from us, the respective
number of shares of Series H Preferred Stock set forth opposite its name below.
Pursuant to the terms of the Underwriting Agreement, the Underwriters are
obligated to purchase all of such shares of the Series H Preferred Stock if any
are purchased.
<TABLE>
<CAPTION>
NUMBER OF
SHARES TO BE
UNDERWRITERS PURCHASED
------------ ------------
<S> <C>
PaineWebber Incorporated................................... 571,600
A.G. Edwards & Sons, Inc................................... 571,400
Legg Mason Wood Walker, Incorporated....................... 571,400
Morgan Stanley & Co. Incorporated.......................... 571,400
Prudential Securities Incorporated......................... 571,400
Salomon Smith Barney Inc. ................................. 571,400
Wheat First Union, a division of Wheat First Securities,
Inc....................................................... 571,400
---------
Total.................................................... 4,000,000
=========
</TABLE>
The Underwriters have advised us that they propose initially to offer the
shares of Series H Preferred Stock in part to the public at the public offering
price set forth in the table below, and in part to certain securities dealers
(which may include the Underwriters) at that price less a concession not in
excess of $0.50 per share. The Underwriters may allow, and such dealers may
reallow, a discount not in excess of $0.45 per share to certain other dealers,
including the Underwriters. Following the completion of the initial offering of
the shares of Series H Preferred Stock, the public offering price, concession,
and reallowance may change.
We have granted to the Underwriters an option, exercisable during the 30-day
period after the date of this prospectus supplement, to purchase up to 600,000
additional shares of Series H Preferred Stock to cover over-allotments, if any,
at the public offering price, less the underwriting discounts set forth in the
table below. The proceeds shown below do not reflect estimated expenses of
$250,000 payable by AvalonBay.
<TABLE>
<CAPTION>
TOTAL, ASSUMING
FULL EXERCISE
OF OVER-
ALLOTMENT
PER SHARE TOTAL OPTION
--------- ------------ ---------------
<S> <C> <C> <C>
Public Offering Price............. $25.00 $100,000,000 $115,000,000
Underwriting Discounts............ $ 0.7875 $ 3,150,000 $ 3,622,500
Company Proceeds.................. $24.2125 $ 96,850,000 $111,377,500
</TABLE>
In the Underwriting Agreement, we agreed to indemnify the Underwriters
against certain civil liabilities, including liabilities under the Securities
Act of 1933, as amended, or to contribute to payments the Underwriters may be
required to make in respect thereof.
The shares of Series H Preferred Stock offered hereby are new securities with
no established trading market. We have applied to list the Series H Preferred
Stock on the NYSE and the PCX. The Underwriters have advised us that they
intend to make a market in the Series H Preferred Stock prior to the
commencement of listing on the NYSE and the PCX. However, the Underwriters are
not obligated to do so and may discontinue market making at any time without
notice.
S-40
<PAGE>
Until the distribution of the Series H Preferred Stock is completed, rules of
the Securities and Exchange Commission may limit the ability of the
Underwriters to bid for and purchase the Series H Preferred Stock. As an
exception to these rules, the Underwriters may engage in certain transactions
that stabilize the price of the Series H Preferred Stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Series H Preferred Stock.
If the Underwriters create a short position in the Series H Preferred Stock
in connection with the offering, i.e., if the Underwriters sell more shares of
Series H Preferred Stock than are set forth on the cover page of this
prospectus supplement, they may reduce that short position by purchasing shares
of Series H Preferred Stock in the open market. The Underwriters may also elect
to reduce any short position by purchasing all or part of the over-allotment
option described above.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Underwriters nor AvalonBay makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above might have on the price of the Series H Preferred Stock. In addition,
neither the Underwriters nor AvalonBay makes any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
In the ordinary course of their business, the Underwriters and certain of
their affiliates have engaged, and may in the future engage, in investment
banking transactions with us and our affiliates. In addition, First Union
National Bank (an affiliate of Wheat First Union, one of the Underwriters) is a
lender under AvalonBay's $600 million unsecured credit facility. The net
proceeds from this offering will be used to reduce borrowings under the $600
million unsecured credit facility, and First Union National Bank will receive
its proportionate share of such repayment. See "Use of Proceeds."
LEGAL MATTERS
Certain legal matters will be passed upon for us by Goodwin, Procter & Hoar
LLP, Boston, Massachusetts as our securities and tax counsel, and for the
Underwriters by O'Melveny & Myers LLP, San Francisco, California.
S-41
<PAGE>
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YOU SHOULD RELY ONLY ON THE INFORMATION INCORPORATED BY REFERENCE OR
CONTAINED IN THIS PROSPECTUS OR ANY SUPPLEMENT. WE HAVE NOT AUTHORIZED ANYONE
ELSE TO PROVIDE YOU WITH DIFFERENT OR ADDITIONAL INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS OR
ANY SUPPLEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF
THOSE DOCUMENTS.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary............................................ S-3
Risk Factors............................................................. S-9
Forward-Looking Statements............................................... S-16
The Company.............................................................. S-17
Recent Developments...................................................... S-21
The Communities.......................................................... S-22
Use of Proceeds.......................................................... S-29
Capitalization........................................................... S-30
Description of the Preferred Stock....................................... S-31
Certain Federal Income Tax Considerations................................ S-37
Underwriting............................................................. S-40
Legal Matters............................................................ S-41
PROSPECTUS
Available Information.................................................... 2
Incorporation of Certain Documents by Reference.......................... 2
The Company.............................................................. 3
Use of Proceeds.......................................................... 4
Ratios of Earnings to Combined Fixed Charges and Preferred Stock
Dividends............................................................... 4
Ratios of Earnings to Fixed Charges...................................... 5
Description of Debt Securities........................................... 5
Description of Preferred Stock........................................... 18
Description of Common Stock.............................................. 24
Restrictions on Transfers of Stock....................................... 26
Federal Income Tax Considerations........................................ 27
Plan of Distribution..................................................... 28
Legal Matters............................................................ 29
Experts.................................................................. 29
</TABLE>
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4,000,000 SHARES
[AVALONBAY LOGO APPEARS HERE]
8.70% SERIES H CUMULATIVE
REDEEMABLE PREFERRED STOCK
--------------------------
PROSPECTUS SUPPLEMENT
--------------------------
PAINEWEBBER INCORPORATED
A.G. EDWARDS & SONS, INC.
LEGG MASON WOOD WALKER
INCORPORATED
MORGAN STANLEY DEAN WITTER
PRUDENTIAL SECURITIES INCORPORATED
SALOMON SMITH BARNEY
WHEAT FIRST UNION
--------------
OCTOBER 7, 1998
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