<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission file number 1-12672
AVALONBAY COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
--------------------
Maryland 77-0404318
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2900 Eisenhower Avenue, Suite 300
Alexandria, Virginia 22314
(Address of principal executive offices, including zip code)
(703) 329-6300
(Registrant's telephone number, including area code)
Avalon Bay Communities, Inc.
(Former name, if changed since last report)
--------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past ninety (90) days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
63,843,927 shares outstanding as of November 3, 1998
================================================================================
<PAGE> 2
AVALONBAY COMMUNITIES, INC.
FORM 10-Q
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of September 30,
1998 and December 31, 1997..................................... 2
Condensed Consolidated Statements of Operations for the
three months and nine months ended September 30, 1998
and 1997....................................................... 3
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and 1997.................. 4-5
Notes to Condensed Consolidated Financial Statements........... 6-13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 14-35
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 36
Item 2. Changes in Securities.......................................... 36
Item 3. Defaults Upon Senior Securities................................ 36
Item 4. Submission of Matters to a Vote of Security Holders............ 36
Item 5. Other Information.............................................. 36
Item 6. Exhibits and Reports on Form 8-K............................... 36-37
Signatures.............................................................. 38
1
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
9-30-98
(unaudited) 12-31-97
----------- ----------
<S> <C> <C>
ASSETS
Real estate:
Land $ 730,168 $ 299,885
Buildings and improvements 2,620,882 839,638
Furniture, fixtures and equipment 105,872 63,631
---------- ----------
3,456,922 1,203,154
Less acccumulated depreciation (120,448) (79,031)
---------- ----------
Net operating real estate 3,336,474 1,124,123
Construction in progress (including land) 354,870 170,361
Communities held for sale 128,978 --
---------- ----------
Total real estate, net 3,820,322 1,294,484
Cash and cash equivalents 9,458 3,188
Cash in escrow 7,606 1,597
Resident security deposits 9,785 --
Investments in unconsolidated joint ventures 17,265 --
Deferred financing costs, net 12,661 8,174
Deferred development costs 13,132 --
Prepaid expenses and other assets 68,337 10,207
---------- ----------
TOTAL ASSETS $3,958,566 $1,317,650
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Variable rate unsecured credit facility $ 327,600 $ 224,200
Unsecured senior notes 710,000 --
Notes payable 496,258 263,284
Dividends payable 41,040 12,591
Payables for construction 28,134 3,853
Accrued expenses and other liabilities 43,158 5,598
Accrued interest payable 11,901 84
Resident security deposits 19,224 6,212
---------- ----------
TOTAL LIABILITIES 1,677,315 515,822
---------- ----------
Minority interest of unitholders in consolidated operating partnerships 32,260 9,133
Stockholders' equity:
Preferred stock, $.01 par value; 50,000,000 shares authorized;
0 and 2,308,800 shares of Series A outstanding at
September 30, 1998 and December 31, 1997, respectively;
0 and 405,022 shares of Series B outstanding at
September 30, 1998 and December 31, 1997, respectively;
2,300,000 shares of Series C outstanding at both
September 30, 1998 and December 31, 1997; 3,267,700
shares of Series D outstanding at both September 30,
1998 and December 31, 1997; 4,455,000 and 0 shares of
Series F outstanding at September 30, 1998 and
December 31, 1997, respectively; and 4,300,000 and 0
shares of Series G outstanding at September 30, 1998
and December 31, 1997, respectively 143 83
Common stock, $.01 par value; 300,000,000 shares authorized;
63,683,676 and 26,077,518 shares outstanding at
September 30, 1998 and December 31, 1997, respectively 637 261
Additional paid-in capital 2,321,891 823,520
Deferred compensation (5,647) --
Dividends in excess of accumulated earnings (68,033) (31,169)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 2,248,991 792,695
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,958,566 $1,317,650
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE> 4
AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
-------------------------- -------------------------
9-30-98 9-30-97 9-30-98 9-30-97
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenue:
Rental income $117,693 $33,164 $233,794 $89,805
Management fees 342 -- 457 --
Other income 29 12 43 25
-------- ------- -------- -------
Total revenue 118,064 33,176 234,294 89,830
-------- ------- -------- -------
Expenses:
Operating expenses 32,848 8,403 63,554 23,095
Property taxes 10,183 2,506 19,576 6,665
Interest expense 18,385 3,243 35,748 10,360
Depreciation and amortization 23,579 6,927 48,082 19,053
General and administrative 2,579 1,265 5,525 2,933
Provision for unrecoverable deferred
development costs 350 140 750 670
-------- ------- -------- -------
Total expenses 87,924 22,484 173,235 62,776
-------- ------- -------- -------
Equity in income of unconsolidated joint ventures 608 -- 846 --
Interest income 1,222 52 1,690 163
Minority interest (470) (91) (874) (315)
-------- ------- -------- -------
Net income before gain on sale of communities 31,500 10,653 62,721 26,902
Gain on sale of communities 40 -- 40 --
-------- ------- -------- -------
Net income 31,540 10,653 62,761 26,902
Dividends attributable to preferred stock (7,769) (2,396) (16,292) (4,837)
-------- ------- -------- -------
Net income available to common stockholders $ 23,771 $ 8,257 $ 46,469 $22,065
======== ======= ======== =======
Per common share:
Net income - basic $ 0.37 $ 0.36 $ 1.05 $ 1.01
======== ======= ======== =======
Net income - diluted $ 0.37 $ 0.36 $ 1.03 $ 1.01
======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 5
AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
For the nine months ended
-------------------------
9-30-98 9-30-97
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 62,761 $ 26,902
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 48,082 19,053
Amortization of deferred compensation 574 --
Equity in income of unconsolidated joint ventures (846) --
Income allocated to minority interest 874 315
Gain on sale of communities (40) --
Decrease in cash in escrow, net (1,902) (471)
Increase (decrease) in prepaid expenses and other assets 1,377 (18,235)
Increase in accrued expenses, other liabilities and accrued
interest payable 10,004 5,695
--------- ---------
Total adjustments 58,123 6,357
--------- ---------
Net cash provided by operating activities 120,884 33,259
CASH FLOWS USED IN INVESTING ACTIVITIES:
Investments in unconsolidated joint ventures 615 --
Increase in construction payables 10,119 1,820
Distributions from equity investments 351 --
Acquisition of participating mortgage note (24,000) --
Proceeds from sale of communities, net of selling costs 56,665 --
Purchase and development of real estate (532,449) (301,473)
--------- ---------
Net cash used in investing activities (488,699) (299,653)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net 59,294 262,391
Dividends paid (71,176) (29,912)
Proceeds from sale of unsecured senior notes 400,000 --
Payment of deferred financing costs (5,590) --
Repayments of notes payable (1,836) (739)
Borrowings under unsecured facilities 545,926 294,900
Repayments of unsecured facilities (551,526) (256,900)
Distributions to minority partners (1,007) (437)
--------- ---------
Net cash provided by financing activities 374,085 269,303
--------- ---------
Net increase in cash 6,270 2,909
Cash and cash equivalents, beginning of period 3,188 920
--------- ---------
Cash and cash equivalents, end of period $ 9,458 $ 3,829
========= =========
Cash paid during period for interest, net of amount capitalized $ 23,818 $ 9,578
========= =========
</TABLE>
4
<PAGE> 6
Supplemental disclosures of non-cash investing and financing activities:
In connection with the merger of Avalon Properties, Inc. with and into the
Company (the "Merger") in June 1998, the Company issued Common and Preferred
Shares valued at $1,433,513 in exchange for the net real estate assets of Avalon
Properties, Inc. The Company also assumed $643,410 in debt, $6,221 in deferred
compensation expense, $25,866 in net other assets, $1,013 in cash and cash
equivalents and minority interest of $19,409.
The Company assumed debt in connection with acquisitions totaling $10,400 and
$25,603 during the nine months ended September 30, 1998 and 1997, respectively.
The Company issued $3,851 in operating partnership units for acquisitions during
1998.
During the nine months ended September 30, 1998, 2,308,800 shares of Series A
Preferred Stock and 405,022 shares of Series B Preferred Stock totaling $28 were
converted into an aggregate of 2,713,822 shares of Common Stock.
Dividends declared but not paid as of September 30, 1998 and 1997 totaled
$41,040 and $11,878, respectively.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 7
AVALONBAY COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Recent Developments
AvalonBay Communities, Inc. (in conjunction with its partnerships and
subsidiaries, the "Company"), is a real estate investment trust ("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.
The Company is the surviving corporation from the merger (the "Merger") of
Avalon Properties, Inc. ("Avalon") with and into the Company (sometimes
hereinafter referred to as "Bay" before the Merger) on June 4, 1998. The Merger
was accounted for as a purchase of Avalon by Bay. Concurrently with the Merger,
the Company changed its name from Bay Apartment Communities, Inc. to Avalon Bay
Communities, Inc. On October 2, 1998, the Company changed its name from Avalon
Bay Communities, Inc. to AvalonBay Communities, Inc.
At September 30, 1998, the Company owned or held an ownership interest in 130
operating apartment communities containing 38,132 apartment homes in sixteen
states and the District of Columbia. The Company also owned 16 communities with
an estimated 4,432 apartment homes under construction and rights to develop an
additional 23 communities that will contain an estimated 6,377 apartment homes.
Of the operating apartment communities, there were 13 communities containing
4,855 apartment homes under reconstruction.
During the third quarter of 1998, the Company's acquisition investments totaled
$154,000 comprised principally of the acquisition of the Prudential Center
Apartments for $130,000. The remaining $24,000 related to the acquisition of a
participating mortgage note secured by Fairlane Woods, a 288 apartment home
community located in Dearborn, Michigan. Management is pursuing the purchase of
a 100% equity interest in Fairlane Woods, but no assurance can be provided that
such an equity interest can be acquired. The Company also acquired land on which
development of two new communities with 505 new apartment homes will begin in
the fourth quarter of 1998. The total budgeted construction cost for these
communities is approximately $60,400.
Dispositions during the third quarter of 1998 consisted of the sale of three
communities, two in suburban Detroit, Michigan and one in suburban Los Angeles,
California. Proceeds from the sale of the Michigan communities, which contained
a total of 758 apartment homes, were approximately $44,000. Proceeds from the
sale of the California community, which contained 260 apartment homes, were
approximately $12,500. The net proceeds were used to repay amounts outstanding
under the Company's unsecured credit facility and to acquire the participating
mortgage note secured by Fairlane Woods.
The interim unaudited financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements required by GAAP have been condensed or omitted
pursuant to such rules and regulations. These unaudited financial statements
should be read in conjunction with the financial statements and notes included
in the Company's and Avalon's Annual Reports on Form 10-K for the year ended
December 31, 1997. The results of operations for the three and nine months ended
September 30, 1998 are not necessarily indicative of the operating results for
the full year. Management believes the disclosures are adequate to make the
information presented not misleading. In the opinion of management, all
adjustments and eliminations, consisting only of normal, recurring adjustments
necessary for a fair presentation of the financial statements for the interim
periods have been included.
6
<PAGE> 8
Principles of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly-owned partnerships and subsidiaries and
the operating partnerships structured as DownREITs. All significant intercompany
balances and transactions have been eliminated in consolidation.
Real Estate
Significant expenditures which improve or extend the life of the asset are
capitalized. The operating real estate assets are stated at cost and consist of
land, buildings and improvements, furniture, fixtures and equipment, and other
costs incurred during development, redevelopment and acquisition. Expenditures
for maintenance and repairs are charged to operations as incurred.
The capitalization of costs during the development of assets (including interest
and related loan fees, property taxes and other direct and indirect costs)
begins when active development commences and ends when the asset is delivered
and a final certificate of occupancy is issued. Cost capitalization during
redevelopment of assets (including interest and related loan fees, property
taxes and other direct and indirect costs) begins when an apartment home is
taken out-of-service for redevelopment and ends when the apartment home
redevelopment is completed and the apartment home is placed-in-service. The
accompanying condensed consolidated financial statements include a charge to
expense for unrecoverable deferred development costs related to pre-development
communities that are unlikely to be developed.
Depreciation is calculated on buildings and improvements using the straight-line
method over their estimated useful lives, which range from ten to thirty years.
Furniture, fixtures and equipment are generally depreciated using the
straight-line method over their estimated useful lives, which range from three
to seven years.
Lease terms for apartment homes are generally one year or less. Rental income
and operating costs incurred during the initial lease-up or post-redevelopment
lease-up period are fully recognized as they accrue.
Income Taxes
The Company elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended, for the year ended December 31, 1994 and has not revoked such
election. A corporate REIT is a legal entity which holds real estate interests
and, if certain conditions are met (including but not limited to the payment of
a minimum level of dividends to stockholders), the payment of federal and state
income taxes at the corporate level is avoided or reduced. Management believes
that all such conditions for the avoidance of taxes have been met for the
periods presented. Accordingly, no provision for federal and state income taxes
has been made.
Deferred Financing Costs
Deferred financing costs include fees and costs incurred to obtain debt
financing and are amortized on a straight-line basis over the shorter of the
term of the loan or the related credit enhancement facility, if applicable.
Unamortized financing costs are written-off when debt is retired before the
maturity date.
Cash and Cash Equivalents
Cash and cash equivalents include all cash and liquid investments with an
original maturity of three months or less from the date acquired. The majority
of the Company's cash, cash equivalents, and cash in escrows is held at major
commercial banks.
7
<PAGE> 9
Earnings per Common Share
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share." In accordance with the provisions of SFAS No. 128,
basic earnings per share for the three and nine months ended September 30, 1998
and 1997 is computed by dividing earnings available to common shares (net income
less preferred stock dividends) by the weighted average number of shares
outstanding during the period. Additionally, other potentially dilutive common
shares are considered when calculating earnings per share on a diluted basis.
The Company's basic and diluted weighted average shares outstanding for the
three and nine months ended September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- --------------------------
9-30-98 9-30-97 9-30-98 9-30-97
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding - basic 64,317,021 22,745,075 44,432,272 21,532,999
Shares issuable from assumed conversion of:
Preferred stock -- 2,713,822 -- 2,713,822
Common stock options 374,780 344,473 447,268 284,386
Unvested restricted stock grants 240,765 -- 240,765 --
---------- ---------- ---------- ----------
Weighted average common shares
outstanding - diluted 64,932,566 25,803,370 45,120,305 24,531,207
========== ========== ========== ==========
</TABLE>
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make certain estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the dates of the financial statements
and the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to amounts in prior years' financial
statements to conform with current year presentations.
Newly Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income" and SFAS No. 131 "Disclosure of Segment
Information." SFAS No. 130 establishes the disclosure requirements for reporting
comprehensive income in an entity's annual and interim financial statements and
becomes effective for the Company for the fiscal year ending December 31, 1998.
Comprehensive income includes unrealized gains and losses on securities
currently reported by the Company as a component of stockholders' equity which
the Company would be required to include in a financial statement and display
the accumulated balance of other comprehensive income separately in the equity
section of the consolidated balance sheet. At September 30, 1998 this
pronouncement has no material effect on the Company's results of operations.
SFAS No. 131 establishes standards for determining an entity's operating
segments and the type and level of financial information to be disclosed. SFAS
No. 131 becomes effective for the Company for the fiscal year ending December
31, 1998. The Company does not believe this pronouncement will have a material
impact on the Company's consolidated financial statements.
8
<PAGE> 10
In March 1998, the Emerging Issues Task Force of the Financial Accounting
Standards Board issued Ruling 97-11 entitled "Accounting for Internal Costs
Relating to Real Estate Property Acquisitions," which requires that internal
costs of identifying and acquiring operating property be expensed as incurred.
Costs associated with the acquisition of non-operating property may still be
capitalized. The ruling is effective for acquisitions completed subsequent to
March 19, 1998. This ruling does not have a material effect on the Company's
condensed consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
pronouncement establishes accounting and reporting standards requiring that
every derivative instrument be recorded in the balance sheet as either an asset
or liability measured at its fair value. SFAS No. 133 requires that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999 and cannot be applied retroactively. The Company
currently plans to adopt this pronouncement effective January 1, 2000, and will
determine both the method and impact of adoption prior to that date.
2. MERGER BETWEEN BAY AND AVALON
In June 1998, the Company completed its merger with Avalon. The Merger and
related transactions were accounted for using the purchase method of accounting
in accordance with GAAP. Accordingly, the assets and liabilities of Avalon were
adjusted to fair value for financial accounting purposes and the results of
operations of Avalon are included in the results of operations of the Company
beginning June 4, 1998.
In connection with the Merger, the following related transactions occurred:
The Company issued .7683 of a share of Common Stock for each outstanding
share of Avalon Common Stock;
The Company issued one share of Series F and G Preferred Stock for each
outstanding share of Avalon Series A and B Preferred Stock, respectively.
The following unaudited pro forma information has been prepared as if the Merger
and related transactions had occurred on January 1, 1997. The pro forma
financial information is presented for informational purposes only and is not
necessarily indicative of what actual results would have been nor does it
purport to represent the results of operations for future periods had the Merger
been consummated on January 1, 1997.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
---------------------------
9-30-98 9-30-97
-------- --------
<S> <C> <C>
Pro forma total revenue $330,168 $212,712
======== ========
Pro forma net income available to common
stockholders $ 60,258 $ 39,163
======== ========
Per common share:
Pro forma net income-basic $ .95 $ .78
======== ========
Pro forma net income-diluted $ .94 $ .77
======== ========
</TABLE>
9
<PAGE> 11
3. INTEREST CAPITALIZED
Capitalized interest associated with projects under development or redevelopment
totaled $4,847 and $2,009 for the three months ended September 30, 1998 and
1997, respectively, and $11,372 and $4,430 for the nine months ended September
30, 1998 and 1997, respectively.
4. NOTES PAYABLE, UNSECURED SENIOR NOTES AND CREDIT FACILITY
The Company's notes payable, unsecured senior notes and credit facility are
summarized as follows:
<TABLE>
<CAPTION>
9-30-98 12-31-97
---------- --------
<S> <C> <C>
Fixed rate notes payable (conventional and tax-exempt) $ 432,606 $263,284
Variable rate notes payable (tax-exempt) 63,652 --
Fixed rate unsecured senior notes 710,000 --
Variable rate unsecured credit facility 327,600 224,200
---------- --------
$1,533,858 $487,484
========== ========
</TABLE>
Notes payable are collateralized by certain apartment communities and mature at
various dates from July 1999 through December 2036. The weighted average
interest rate of variable rate notes (tax-exempt) was 4.5% at September 30,
1998. The weighted average interest rate of fixed rate notes (conventional and
tax-exempt) was 6.6% and 6.4% at September 30, 1998 and December 31, 1997,
respectively.
The Company has a $600,000 variable rate unsecured credit facility (the
"Unsecured 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. The Unsecured Facility bears interest at the London Interbank
Offered Rate ("LIBOR") based on rating levels achieved on the Company's senior
unsecured notes and on a maturity selected by the Company. The current pricing
is LIBOR plus .60% per annum. The Unsecured Facility, which was put into place
during June 1998, replaced three separate credit facilities previously available
to the separate companies prior to the Merger. The terms of the retired
facilities were similar to the Unsecured Facility. In addition, the Unsecured
Facility includes a competitive bid option for up to $400,000. The interest rate
for borrowings under the Unsecured Facility as of September 30, 1998 was 6.1%.
The Company is subject to certain customary covenants under the Unsecured
Facility, including, but not limited to, maintaining certain maximum leverage
ratios, a minimum fixed charge coverage ratio, minimum unencumbered assets and
equity levels and restrictions on paying dividends in amounts that exceed 95% of
the Company's Funds from Operations ("FFO"), as defined therein. The Unsecured
Facility matures in July 2001 and has two, one-year extension options.
The Company's unsecured senior notes consist of the following:
Interest Maturity
Principal Rate Date
--------- -------- --------
$100,000 7.375% 2002
$ 50,000 6.25% 2003
$100,000 6.5% 2003
$100,000 6.625% 2005
$ 50,000 6.5% 2005
$150,000 6.8% 2006
$110,000 6.875% 2007
$ 50,000 6.625% 2008
10
<PAGE> 12
The Company's unsecured senior notes contain a number of financial and other
covenants with which the Company must comply, including, but not limited to,
limits on the aggregate amount of total and secured indebtedness the Company may
have on a consolidated basis and limits on the Company's required debt service
payments.
5. STOCKHOLDERS' EQUITY
The following summarizes the changes in stockholders' equity for the nine months
ended September 30, 1998:
<TABLE>
<CAPTION>
Dividends
Additional in excess of
Preferred Common paid-in Deferred accumulated
stock stock capital compensation earnings Total
--------- ------ ---------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity, December 31, 1997 $ 83 $261 $ 823,520 $ -- $(31,169) $ 792,695
Dividends declared -- -- -- -- (99,625) (99,625)
Issuance of common stock -- 17 59,277 -- -- 59,294
Merger of Avalon and the Company 88 331 1,439,094 (6,221) -- 1,433,292
Conversion of preferred stock to
common stock (28) 28 -- -- -- --
Amortization of deferred compensation -- -- -- 574 -- 574
Net income -- -- -- -- 62,761 62,761
---- ---- ---------- ------- -------- ----------
Stockholders' equity, September 30, 1998 $143 $637 $2,321,891 $(5,647) $(68,033) $2,248,991
==== ==== ========== ======= ======== ==========
</TABLE>
6. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
At September 30, 1998, investments in unconsolidated joint ventures consist of a
50% general partnership interest in Falkland Partners, a 49% equity interest in
Avalon Run and a 50% general partnership interest in Avalon Grove. The
unconsolidated joint venture interests were obtained in connection with the
Merger. The following is a combined summary of the financial position of these
joint ventures for the periods presented:
9-30-98 12-31-97
-------- --------
Assets:
Real estate, net $ 96,676 $ 97,964
Other assets 4,694 10,790
-------- --------
Total assets $101,370 $108,754
======== ========
Liabilities and partners' equity:
Mortgage notes payable $ 26,000 $ 26,000
Other liabilities 4,752 4,164
Partners' equity 70,618 78,590
-------- --------
Total liabilities and partners' equity $101,370 $108,754
======== ========
11
<PAGE> 13
The following is a combined summary of the operating results of these joint
ventures for the periods presented:
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -------------------
9-30-98 9-30-97 9-30-98 9-30-97
------- ------- ------- -------
<S> <C> <C> <C> <C>
Rental income $ 5,019 $ 4,505 $14,719 $11,794
Other income 8 11 20 36
Operating expenses (1,500) (1,384) (4,156) (3,793)
Mortgage interest expense (205) (222) (628) (661)
Depreciation and amortization (764) (735) (2,279) (1,991)
-------- -------- -------- --------
$ 2,558 $ 2,175 $ 7,676 $ 5,385
======== ======== ======== ========
</TABLE>
7. COMMUNITIES HELD FOR SALE
During the third quarter of 1998, the Company determined that it would pursue a
disposition strategy for certain assets in markets that were in primarily
outlying locations. In connection with this decision, the Company's Board of
Directors authorized management to pursue the disposition of select communities
within specific markets. The Company will solicit competing bids from unrelated
parties for these individual assets, and will consider the sales price and tax
ramifications of each proposal. Management anticipates these assets will be sold
during the upcoming twelve months. One of these communities authorized for sale,
Arbor Park, was disposed during September 1998, resulting in a net gain of $40.
The assets to be disposed include land, buildings and improvements and
furniture, fixtures and equipment, and are recorded at the lower of carrying
amount or fair value less selling costs. At September 30, 1998, total real
estate, net of accumulated depreciation, subject to sale totaled $128,978.
Certain individual assets are secured by mortgage indebtedness which may be
assumed by the purchaser or repaid by the Company from the net sales proceeds.
The Company's condensed consolidated statements of operations includes net
income of the communities held for sale of $1,463 and $546 for the three months
ended September 30, 1998 and 1997, respectively and $2,994 and $1,558 for the
nine months ended September 30, 1998 and 1997, respectively.
8. SUBSEQUENT EVENTS
On October 2, 1998, the Company held a Special Meeting of Stockholders at which
stockholders approved (i) amendments to the charter reducing the number of
authorized shares of the Company's Common Stock from 300,000,000 to 140,000,000,
and (ii) an amendment to the charter changing the Company's name from "Avalon
Bay Communities, Inc." to "AvalonBay Communities, Inc."
On October 15, 1998, the Company completed the sale of 4,000,000 shares of 8.7%
Series H Cumulative Redeemable Preferred Stock at a public price of $25 per
share (the "Offering"). The net proceeds from the Offering of approximately
$96,600 were used to reduce borrowings under the Company's Unsecured Facility.
12
<PAGE> 14
As disclosed in Footnote 7 of these financial statements, during the third
quarter of 1998 the Company's Board of Directors authorized management to pursue
the disposition of select communities within specific markets. During October
1998, the Board of Directors authorized additional communities to be disposed.
The additional assets to be disposed include land, buildings and improvements
and furniture, fixtures and equipment and are recorded at the lower of carrying
amount or fair value less selling costs. At September 30, 1998, total real
estate, net of accumulated depreciation, subject to sale totaled $105,444 for
these assets. Certain individual assets are secured by mortgage indebtedness
which may be assumed by the purchaser or repaid by the Company from the net
sales proceeds.
The Company's condensed consolidated statements of operations include net income
of the communities held for sale of $762 and $249 for the three months ended
September 30, 1998 and 1997, respectively and $1,347 and $703 for the nine
months ended September 30, 1998 and 1997, respectively.
13
<PAGE> 15
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q constitute "forward-looking statements" as
that term is defined under the Private Securities Litigation Reform Act of 1995
(the "Reform Act"). The words "believe," "expect," "anticipate," "intend,"
"estimate," "assume" and other similar expressions which are predictions of or
indicate future events and trends and which do not relate to historical matters
identify forward-looking statements. In addition, information concerning
construction, occupancy and completion of Development Communities and
Development Rights (as each term is hereinafter defined) and related cost and
EBITDA estimates, as well as the cost, timing and effectiveness of Year 2000
compliance, are forward-looking statements. Reliance should not be placed on
forward-looking statements as they involve known and unknown risks,
uncertainties and other factors, which are in some cases beyond the control of
the Company and may cause the actual results, performance or achievements of the
Company to differ materially from anticipated future results, performance or
achievements expressed or implied by such forward-looking statements.
Certain factors that might cause such differences include, but are not limited
to, the following: the Company may not be successful in managing its current
growth in the number of apartment communities and the related growth of its
business operations; the Company's expansion into new geographic market areas
may not produce financial results that are consistent with its historical
performance; acquisitions of portfolios of apartment communities may result in
the Company acquiring communities that are more expensive to manage and
portfolio acquisitions may not be successfully completed, resulting in charges
to earnings; the Company may fail to secure or may abandon development
opportunities; construction costs of a community may exceed original estimates;
construction and lease-up may not be completed on schedule, resulting in
increased debt service expense and construction costs and reduced rental
revenues; occupancy rates and market rents may be adversely affected by local
economic and market conditions which are beyond management's control; financing
may not be available on favorable terms; the Company's cash flow may be
insufficient to meet required payments of principal and interest; existing
indebtedness may not be able to be refinanced or the terms of such refinancing
may not be as favorable as the terms of existing indebtedness; and the Company
and its suppliers may experience unanticipated delays or expenses in achieving
Year 2000 compliance.
The following discussion should be read in conjunction with the consolidated
financial statements and notes included in this report.
GENERAL
The Company is a real estate investment trust ("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. The Company is
the surviving corporation from the merger (the "Merger") of Avalon Properties,
Inc. ("Avalon") with and into the Company (sometimes hereinafter referred to as
"Bay" before the Merger) on June 4, 1998. The Merger was accounted for as a
purchase of Avalon by Bay. Concurrently with the Merger, the Company changed its
name from Bay Apartment Communities, Inc. to Avalon Bay Communities, Inc. On
October 2, 1998, the Company changed its name from Avalon Bay Communities, Inc.
to AvalonBay Communities, Inc.
The Company is a fully-integrated real estate organization with in-house
acquisition, development, redevelopment, construction, reconstruction,
financing, marketing, leasing and management expertise. With its experience and
in-house capabilities, the Company believes it is well-positioned to continue to
14
<PAGE> 16
pursue opportunities to develop and acquire upscale apartment homes in its
target markets.
The Company's real estate investments as of November 6, 1998 consist primarily
of apartment communities in various stages of the development cycle and land or
land options held for development and can be divided into three categories:
Number of Number of
Communities Apartment Homes
----------- ---------------
Current Communities 130 38,132
Development Communities 16 4,432(*)
Development Rights 23 6,377(*)
(*) Represents an estimate
"Current Communities" are apartment communities where construction is
complete and the community has either reached stabilized occupancy or
is in the initial lease-up process. A "Stabilized Community" is a
Current Community that has completed its initial lease-up and has
attained a physical occupancy level of at least 95% or has been
completed for one year, whichever occurs earlier. An "Established
Community" is a Current Community that has been a Stabilized Community
with stabilized operating costs during the current and as of the
beginning of the previous calendar year such that its year-to-date
operating results are comparable between periods. Included in the
Current Communities are "Redevelopment Communities," which are
communities for which substantial redevelopment has either begun or is
scheduled to begin. Redevelopment is considered substantial when
additional capital invested during the reconstruction effort exceeds
the lesser of $5 million or 10% of the community's acquisition cost.
There are currently 13 Redevelopment Communities containing 4,855
apartment homes.
"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.
"Development Rights" are development opportunities in the very earliest
phase of the development process for which the Company has an option to
acquire land or owns land to develop a new community and where related
pre-development costs have been incurred and capitalized in pursuit of
these new developments.
Of the Current Communities, the Company held a fee simple ownership interest in
112 operating communities (one of which is on land subject to a 149 year land
lease), a general partnership interest in four other operating communities, a
general partnership interest in partnerships structured as DownREITs, which own
13 communities, and a 100% interest in a senior participating mortgage note
secured by another operating community. The Company holds a fee simple ownership
interest in each of the Development Communities except for two communities for
which the Company holds a general partnership interest. The existing DownREITs
have been structured so that substantially all of the economic interests of
these partnerships accrue to the benefit of the Company. The Company believes
that it is unlikely that the limited partners in these partnerships will receive
any financial return on their limited partnership interests other than the
stated distributions on their units of the operating partnerships ("Units") or
as a result of the possible future conversion of their Units into shares of
common stock. The DownREIT partnerships are consolidated for financial reporting
purposes.
Management believes apartment communities present an attractive investment
opportunity compared to other real estate investments because a broad potential
resident base results in relatively stable demand during all phases of a real
estate cycle. The Company intends to pursue appropriate new investments (both
acquisitions of communities and new developments) where constraints to new
supply exist and where new household formations have out-paced multifamily
permit activity in recent years.
15
<PAGE> 17
At September 30, 1998, the Company's management ("Management") had positioned
the Company's portfolio of Stabilized Communities, excluding communities owned
by joint ventures, to a physical occupancy level of 96.5% and achieved an
average economic occupancy of 96.7% and 96.5% for the three and nine months
ended September 30, 1998, respectively. Average economic occupancy for the
portfolio for the three and nine months ended September 30, 1997 was 95.8% and
95.6%, respectively. This continued high occupancy was achieved through
aggressive marketing efforts combined with limited and targeted pricing
adjustments. This positioning has resulted in overall growth in rental revenue
from Established Communities between periods. It is Management's strategy to
maximize total rental revenue through management of rental rates and occupancy
levels. If market and economic conditions change, Management's strategy of
maximizing total rental revenue could lead to lower occupancy levels. Given the
high occupancy level of the portfolio, Management anticipates that any rental
revenue and net income gains from the Company's Established Communities would be
achieved primarily through higher rental rates and enhanced operating cost
leverage provided by high occupancy.
The Company elected to be taxed as a REIT for federal income tax purposes for
the year ended December 31, 1994 and has not revoked that election. The Company
was incorporated under the laws of the State of California in 1978 and was
reincorporated in the State of Maryland in July 1995. Its principal executive
offices are located at 2900 Eisenhower Avenue, Suite 300, Alexandria, Virginia
22314, and its telephone number at that location is (703) 329-6300. The Company
also maintains 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
Acquisitions of Existing Communities. Since June 30, 1998, the Company has
acquired the following community and land held for development communities
(dollars in millions):
<TABLE>
<CAPTION>
Period Purchase Apartment
Current Communities Location Acquired Price Homes
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. Avalon at Prudential Center Boston, MA 3Q98 $130.0 781
<CAPTION>
Period Budgeted Apartment
Development Communities Location Acquired Cost(1) Homes
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. Avalon Corners Stamford, CT 3Q98 $ 32.5 195
2. Avalon Fox Mill Herndon, VA 3Q98 $ 20.1 165
3. Avalon Court North Melville, NY 3Q98 $ 40.3 340
</TABLE>
(1) Budgeted Cost includes all capitalized costs projected to be incurred to
develop the respective Development 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.
Acquisitions entail risks that investments will fail to perform in accordance
with expectations and that judgments with respect to the cost of improvements to
bring an acquired community up to standards established for the market position
intended for that community will prove inaccurate, as well as general investment
risks associated with any new real estate investment. Although the Company
undertakes an evaluation of the physical condition of each new community before
it is acquired, certain defects or necessary repairs may not be detected until
after the community is acquired, which could significantly increase the
Company's total acquisition costs and decrease the Company's percentage return
on that investment.
Historically, construction costs and the costs to reposition communities that
have been acquired have, in some cases, exceeded management's original
estimates. Management believes that it may experience similar increases in the
future. There can be no assurance that the Company will be able to charge rents
upon completing either the development or redevelopment of the communities that
will be sufficient to offset the effects of increases in construction costs in
order to achieve the original projected yield on the investment.
16
<PAGE> 18
Sale of Existing Communities and Re-Investment of Proceeds. In connection with
an agreement executed by Avalon in March 1998 which provided for the buyout of
certain limited partners in DownREIT V Limited Partnership, the Company sold two
communities, Village Park of Troy and Aspen Meadows, located in suburban
Detroit, Michigan, in July 1998. Gross proceeds from the sale of the two
communities, containing an aggregate of 758 apartment homes, were approximately
$44 million and were used to acquire the participating mortgage note secured by
the Fairlane Woods community in Dearborn, Michigan, with the balance used to
repay amounts outstanding under the Company's $600 million variable rate
unsecured credit facility (the "Unsecured Facility"). The Company also sold
Arbor Park, a 260 apartment home community located in suburban Los Angeles,
California. The gross proceeds of approximately $12.5 million were used to repay
amounts outstanding under the Unsecured Facility.
RESULTS OF OPERATIONS
The changes in operating results from period-to-period are primarily the result
of increases in the number of apartment homes owned due to the Merger as well as
the development and acquisition of additional communities. Where appropriate,
comparisons are made on a weighted average basis for the number of occupied
apartment homes in order to adjust for such changes in the number of apartment
homes. For Stabilized Communities (excluding communities owned by joint
ventures), all occupied apartment homes are included in the calculation of
weighted average occupied apartment homes for each reporting period. For
communities in the initial lease-up phase, only apartment homes of communities
that are completed and occupied are included in the weighted average number of
occupied apartment homes calculation for each reporting period.
The analysis that follows compares the operating results of the Company for the
three and nine months ended September 30, 1998 and 1997.
Net income increased $20,887,000 (196.1%) to $31,540,000 for the three months
ended September 30, 1998 compared to $10,653,000 for the comparable period of
the preceding year. Net income increased $35,859,000 (133.3%) to $62,761,000 for
the nine months ended September 30, 1998 compared to $26,902,000 for the
comparable period of the preceding year. The primary reasons for these increases
are additional operating income from the former Avalon communities, communities
developed or acquired during 1998 and 1997, as well as growth in operating
income from Established Communities.
Rental income increased $84,529,000 (254.9%) to $117,693,000 for the three
months ended September 30, 1998 compared to $33,164,000 for the comparable
period of the preceding year. Rental income increased $143,989,000 (160.3%) to
$233,794,000 for the nine months ended September 30, 1998 compared to
$89,805,000 for the comparable period of the preceding year. Of the increase for
the nine month period, $4,118,000 relates to rental revenue increases from
Established Communities, $86,046,000 relates to rental revenue attributable to
the former Avalon communities, and $53,825,000 is attributable to the addition
of newly completed or acquired apartment homes.
Overall Portfolio - The $143,989,000 increase in rental income for the nine
month period is primarily due to increases in the weighted average number
of occupied apartment homes as well as an increase in the weighted average
monthly rental income per occupied apartment home. The weighted average
number of occupied apartment homes increased from 9,535 apartment homes for
the nine months ended September 30, 1997 to 24,034 apartment homes for the
nine months ended September 30, 1998 as a result of additional apartment
homes from the former Avalon communities and the development and
acquisition of new communities. For the three months ended September 30,
1998, the weighted average monthly revenue per occupied apartment home
increased $46 (4.4%) to $1,100 compared to $1,054 for the comparable period
of the preceding year. For the nine months ended September 30, 1998, the
weighted average monthly revenue per occupied apartment home increased $34
(3.3%) to $1,070 compared to $1,036 for the comparable period of the
preceding year.
17
<PAGE> 19
Established Communities - Rental revenue increased $1,107,000 and
$4,118,000 for the three and nine months ended September 30, 1998,
respectively, compared to the comparable periods of the preceding year due
to market conditions that allowed for higher average rents at relatively
stable occupancy. For the three months ended September 30, 1998, weighted
average monthly revenue per occupied apartment home increased $67 (6.3%) to
$1,131 compared to $1,064 for the comparable period of the preceding year.
The average economic occupancy decreased 0.7% from 98.0% for the three
months ended September 30, 1997 to 97.3% for the three months ended
September 30, 1998. For the nine months ended September 30, 1998, weighted
average monthly revenue per occupied apartment home increased $73 (7.0%) to
$1,111 compared to $1,038 for the comparable period of the preceding year.
The average economic occupancy increased 0.1% from 97.6% for the nine
months ended September 30, 1997 to 97.7% for the nine months ended
September 30, 1998.
The Company's Established Communities consist entirely of communities
located within the Northern California market. Compared to the prior year,
most of the sub-markets within Northern California have maintained a strong
economic environment that has allowed for high occupancy levels and rent
growth. However, Management has seen in recent periods that certain
Northern California sub-markets, that are dependent on Silicon Valley
employment markets are being negatively impacted by tightening employment
conditions caused by recent Asian economic difficulties. These impacted
sub-markets have not experienced the same rent growth or occupancy levels
that are prevalent in other Northern California sub-markets.
Management fees totaling $342,000 and $457,000 for the three and nine months
ended September 30, 1998, respectively, represent revenue from certain
third-party contracts obtained from the Merger with Avalon.
Operating expenses increased $24,445,000 (290.9%) to $32,848,000 for the three
months ended September 30, 1998 compared to $8,403,000 for the comparable period
of the preceding year. These expenses increased $40,459,000 (175.2%) to
$63,554,000 for the nine months ended September 30, 1998 compared to $23,095,000
for the comparable period of the preceding year.
Overall Portfolio - The increases for the three and nine months ended
September 30, 1998 are primarily due to additional expense from the former
Avalon communities, the acquisition of new communities as well as the
completion of Development Communities for which maintenance, insurance and
other costs are expensed as communities move from the initial construction
and lease-up phase to the stabilized operating phase.
Established Communities - Operating expenses increased $41,000 (0.9%) to
$4,428,000 for the three months ended September 30, 1998 compared to
$4,387,000 for the comparable period of the preceding year. These expenses
decreased $69,000 (0.5%) to $12,948,000 for the nine months ended September
30, 1998 compared to $13,017,000 for the comparable period of the preceding
year. The net changes are the result of higher maintenance costs, offset
by lower insurance costs.
Property taxes increased $7,677,000 (306.3%) to $10,183,000 for the three months
ended September 30, 1998 compared to $2,506,000 for the comparable period of the
preceding year. Property taxes increased $12,911,000 (193.7%) to $19,576,000 for
the nine months ended September 30, 1998 compared to $6,665,000 for the
comparable period of the preceding year.
Overall Portfolio - The increases for the three and nine months ended
September 30, 1998 are primarily due to additional expense from the former
Avalon communities, the acquisition of new communities as well as the
completion of Development Communities for which property taxes are expensed
as communities move from the initial construction and lease-up phase to the
stabilized operating phase.
Established Communities - Property taxes increased $42,000 (3.1%) to
$1,395,000 for the three months ended September 30, 1998 compared to
$1,353,000 for the comparable period of the preceding year. Property taxes
increased $163,000 (4.1%) to $4,132,000 for the nine months ended September
30, 1998 compared to $3,969,000 for the comparable period of the preceding
year. These increases are primarily the result of increased assessments of
property values.
18
<PAGE> 20
Interest expense increased $15,142,000 (466.9%) to $18,385,000 for the three
months ended September 30, 1998 compared to $3,243,000 for the comparable period
of the preceding year. Interest expense increased $25,388,000 (245.1%) to
$35,748,000 for the nine months ended September 30, 1998 compared to $10,360,000
for the comparable period of the preceding year. These increases are primarily
attributable to $643,410,000 of debt assumed in connection with the Merger as
well as increased borrowings under the Unsecured Facility offset in part by
higher capitalization of interest from increased development, redevelopment,
construction and reconstruction activity.
Depreciation and amortization increased $16,652,000 (240.4%) to $23,579,000 for
the three months ended September 30, 1998 compared to $6,927,000 for the
comparable period of the preceding year. Depreciation and amortization increased
$29,029,000 (152.4%) to $48,082,000 for the nine months ended September 30, 1998
compared to $19,053,000 for the comparable period of the preceding year. These
increases reflect additional expense from the former Avalon communities, as well
as acquisitions and development of communities in 1998 and 1997.
General and administrative expenses increased $1,314,000 (103.9%) to $2,579,000
for the three months ended September 30, 1998 compared to $1,265,000 for the
comparable period of the preceding year. General and administrative expenses
increased $2,592,000 (88.4%) to $5,525,000 for the nine months ended September
30, 1998 compared to $2,933,000 for the comparable period of the preceding year.
These increases are primarily due to the Merger and staff additions related to
the growth of the Company's portfolio.
Provision for unrecoverable deferred development costs increased $210,000
(150.0%) to $350,000 for the three months ended September 30, 1998 compared to
$140,000 for the comparable period of the preceding year. These costs increased
$80,000 (11.9%) to $750,000 for the nine months ended September 30, 1998
compared to $670,000 for the comparable period of the preceding year. These
increases are the result of higher provisions related to abandoned projects in
the current year, offset by a significant one time charge in the prior year
related to a large west coast portfolio acquisition that was not completed.
Equity in income of unconsolidated joint ventures of $608,000 and $846,000 for
the three and nine months ended September 30, 1998, respectively, represents the
Company's share of income of certain joint ventures that were acquired in
conjunction with the Merger.
Interest income increased $1,170,000 to $1,222,000 for the three months ended
September 30, 1998 compared to $52,000 for the comparable period of the
preceding year. Interest income increased $1,527,000 to $1,690,000 for the nine
months ended September 30, 1998 compared to $163,000 for the comparable period
of the preceding year. These increases are primarily due to the interest on the
Avalon Arbor note that was obtained from the Merger and the Fairlane Woods note
acquired during August 1998.
Management generally considers Funds from Operations ("FFO") to be an
appropriate measure of the operating performance of the Company because it
provides investors an understanding of the ability of the Company to incur and
service debt and to make capital expenditures. The Company believes that in
order to facilitate a clear understanding of the operating results of the
Company, FFO should be examined in conjunction with the net income as presented
in the condensed consolidated financial statements included elsewhere in this
report. FFO is determined in accordance with a resolution adopted by the Board
of Governors of the National Association of Real Estate Investment Trusts(R),
and is defined as net income (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
19
<PAGE> 21
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 and is not necessarily indicative of cash available to
fund cash needs. Further, FFO as calculated by other REITs may not be comparable
to the Company's calculation of FFO.
For the three months ended September 30, 1998, FFO increased to $47,492,000 from
$16,178,000 for the comparable period in the preceding year. This increase is
primarily due to the delivery of high yielding new development and redevelopment
communities from the Merger with Avalon as well as the Company's existing
redevelopment programs. Growth in earnings from Established Communities also
contributed to the increase. Acquisition activity in 1998 and 1997 was also an
important component of FFO growth between years.
FFO for the three months ended September 30, 1998 and the preceding four
quarters are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
For the three months ended
-------------------------------------------------------------------
9-30-98 6-30-98 3-31-98 12-31-97 9-30-97
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Net income $31,540 $18,242 $12,979 $12,039 $10,653
Preferred dividends (7,769) (4,494) (2,856) (1,469) (1,222)
Depreciation - real estate assets 23,018 14,164 9,523 7,669 6,659
Joint venture adjustments 183 62 -- -- --
Minority interest expense 470 250 -- -- --
Gain on sale of communities (40) -- -- -- --
Non-recurring adjustments to net income:
Amortization of non-recurring costs,
primarily legal, from the issuance of
tax exempt bonds (1) 90 90 90 90 88
------- ------- ------- ------- -------
Funds from Operations $47,492 $28,314 $19,736 $18,329 $16,178
======= ======= ======= ======= =======
</TABLE>
(1) Represents the amortization of pre-1986 bond issuance costs carried forward
to the Company and costs associated with the reissuance of tax-exempt bonds
incurred prior to the initial public offering of Bay in March 1994 (the
"Initial Offering") in order to preserve the tax-exempt status of the bonds
at the Initial Offering.
CAPITALIZATION OF FIXED ASSETS AND COMMUNITY IMPROVEMENTS
The Company maintains a policy with respect to capital expenditures that
generally provides that only non-recurring expenditures are capitalized.
Improvements and upgrades are capitalized only if the item exceeds $15,000,
extends the useful life of the asset and is not related to making an apartment
home ready for the next resident. Under this policy, virtually all capitalized
costs are non-recurring, as recurring make ready costs are expensed as incurred,
including costs of carpet and appliance replacements, floor coverings, interior
painting and other redecorating costs. Purchases of personal property (such as
computers and furniture) are capitalized only if the item is a new addition
(i.e., not a replacement) and only if the item exceeds $2,500. The application
of these policies for the nine months ended September 30, 1998 resulted in
non-revenue generating capitalized expenditures for Stabilized Communities of
approximately $3,373,000 or $100 per apartment home on a pro forma basis. For
the nine months ended September 30, 1998, the Company charged to maintenance
expense, including carpet and appliance replacements, a total of approximately
$20,666,000 for Stabilized Communities or $745 per apartment home on a pro
forma basis. Management anticipates that capitalized costs per apartment home
will gradually rise as the Company's portfolio of communities matures.
20
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. A primary source of liquidity to the Company is cash flows from
operations. Operating cash flows have historically been determined by the number
of apartment homes, rental rates, occupancy levels and the Company's expenses
with respect to such apartment homes. The cash flows used in investing
activities and provided by financing activities have historically been dependent
on the number of apartment homes under active development and construction or
that were acquired during any given period.
Cash and cash equivalents increased from $3,829,000 at September 30, 1997 to
$9,458,000 at September 30, 1998 due to the excess of cash provided by financing
and operating activities over cash flow used in investing activities.
Net cash provided by operating activities increased by $87,625,000 from
$33,259,000 for the nine months ended September 30, 1997 to $120,884,000
for the nine months ended September 30, 1998 primarily due to an increase
in operating income from newly developed and acquired communities and
Established Communities.
Cash used in investing activities increased by $189,046,000 from
$299,653,000 for the nine months ended September 30, 1997 to $488,699,000.
This increase reflects the expenditures for the 1998 and 1997 communities
acquired, and the amounts used to acquire, develop, and construct the
Development and Redevelopment Communities.
Net cash provided by financing activities increased by $104,782,000 from
$269,303,000 for the nine months ended September 30, 1997 to $374,085,000
for the nine months ended September 30, 1998 primarily due to the proceeds
from the sale of unsecured senior notes and a net increase in borrowings
under the Unsecured Facilities compared to the comparable period in the
prior year, offset by a reduction in proceeds raised through the sale of
common stock and an increase in dividends paid.
The Company regularly reviews its short-term liquidity needs and the adequacy of
FFO and other expected liquidity sources to meet these needs. The Company
believes that its principal short-term liquidity needs are to fund normal
recurring operating expenses, debt service payments and the minimum dividend
payment required to maintain the Company's REIT qualification under the Internal
Revenue Code of 1986, as amended. Management anticipates that these needs will
be fully funded from cash flows provided by operating activities. Any short-term
liquidity needs not provided by current operating cash flows would be funded
from the Company's Unsecured Facility.
Management anticipates that no significant portion of the principal of any
indebtedness will be repaid prior to maturity, and if the Company does not have
funds on hand sufficient to repay such indebtedness, it will be necessary for
the Company to refinance this debt. Such refinancing may be accomplished
through additional debt financing, which may be collateralized by mortgages on
individual communities or groups of communities, by uncollateralized private or
public debt offerings or by additional equity offerings. There can be no
assurance that such additional debt financing or debt offerings will be
available or, if available, that they will be on terms satisfactory to the
Company.
Capital Resources. To sustain the Company's active development program,
continuous access to the capital markets is required. Management intends to
match the long-term nature of its real estate assets with long-term cost
effective capital. Management follows a focused strategy to help facilitate
uninterrupted access to capital. This strategy includes:
1. Hire, train and retain associates with a strong resident service focus,
which should lead to higher rents, lower turnover and reduced operating
costs;
21
<PAGE> 23
2. Manage, acquire and develop institutional-quality communities with in-fill
locations that should provide consistent, sustained earnings growth;
3. Operate in markets with growing demand (as measured by household formation
and job growth) and high barriers-to-entry. These characteristics combine
to provide a favorable demand-supply balance, which the Company believes
will create a favorable environment for future rental rate growth while
protecting existing and new communities from new supply. This strategy is
expected to result in a high level of quality to the revenue stream;
4. Maintain a conservative capital structure largely comprised of equity and
with modest, cost-effective leverage. Secured debt will generally be
avoided and used primarily to obtain low cost, tax-exempt debt. Such a
structure should promote an environment whereby current ratings levels can
be maintained;
5. Accounting practices that provide a high level of quality to reported
earnings; and
6. Timely, accurate and detailed disclosures to the investment community.
Management believes that these strategies provide a disciplined approach to
capital access to help position the Company to fund portfolio growth.
Recent volatility in the capital markets has resulted in a shortage of
liquidity for most companies. See "Future Financing Needs" for a discussion of
Management's response to the current capital markets environment.
The following is a discussion of specific capital transactions, arrangements and
agreements that are important to the capital resources of the Company.
UNSECURED FACILITY
The Company's Unsecured Facility is provided by a consortium of banks that
provides for $600,000,000 in short-term credit and is subject to an annual
facility fee of $900,000. The Unsecured Facility bears interest at the London
Interbank Offered Rate ("LIBOR") based on rating levels achieved on the
Company's senior unsecured notes and on a maturity selected by the Company. The
current pricing is LIBOR plus 0.60% per annum and matures in July 2001. The
Unsecured Facility, which was put into place during June 1998, replaced three
separate credit facilities previously available to the separate companies prior
to the Merger, with terms similar to the Unsecured Facility. A competitive bid
option is available for up to $400,000,000 which may result in lower pricing if
market conditions allow. Pricing under the competitive bid option resulted in
average pricing of LIBOR plus 0.47% for balances most recently placed under the
competitive bid option. At September 30, 1998, $327,600,000 was outstanding,
$15,891,000 was used to provide letters of credit and $256,509,000 was available
for borrowing under the Unsecured Facility. The Company will use borrowings
under the Unsecured Facility for capital expenditures, acquisitions of developed
or undeveloped communities, construction, development and renovation costs,
credit enhancement for tax-exempt bonds and for working capital purposes.
INTEREST RATE PROTECTION AGREEMENTS
The Company is not a party to any long-term interest rate agreements, other than
interest rate protection and swap agreements on certain tax-exempt indebtedness.
The Company intends, however, to evaluate the need for long-term interest rate
protection agreements as interest rate market conditions dictate and has engaged
a consultant to assist in managing the Company's interest rate risks and
exposure.
FINANCING COMMITMENTS/TRANSACTIONS COMPLETED
Sale of senior unsecured notes. On July 7, 1998, the Company issued $250 million
of senior unsecured notes, of which $100 million of the notes bear interest at
6.5% and will mature in July 2003 and $150 million of the notes bear interest at
6.8% and will mature in July 2006. The net proceeds of $247.6 million to the
Company were used to reduce borrowings under the Company's Unsecured Facility.
22
<PAGE> 24
Preferred offering. In October 1998, the Company completed an underwritten
public offering of 4,000,000 shares of 8.7% Series H Cumulative Redeemable
Preferred Stock at a public price of $25 per share (the "Offering"). The net
proceeds from the Offering of approximately $96.6 million were used to reduce
borrowings under the Company's Unsecured Facility.
FUTURE FINANCING NEEDS
Substantially all of the capital expenditures to complete the communities
currently under construction and reconstruction will be funded from the
Unsecured Facility and/or issuance of debt or equity securities. Management
expects to continue to fund deferred development costs related to future
developments from FFO and advances under the Unsecured Facility. The Company
believes that these sources of capital are adequate to take each of the proposed
communities to the point in the development cycle where construction can
commence.
Management anticipates that available borrowing capacity under the Unsecured
Facility and FFO will be adequate to meet future expenditures required to
commence construction of each of the Development Rights. In addition, the
Company currently anticipates funding construction of some (but not all) of the
Development Rights under the expected remaining capacity of the Unsecured
Facility. However, before the construction of a Development Right commences, the
Company intends to ensure that adequate liquidity sources are in place to fund
the construction of a Development Right, although no assurance can be given in
this regard. If necessary, the Company will issue additional equity or debt
securities, arrange additional capacity under the Unsecured Facility (or future
credit facilities) or obtain additional construction loan commitments not
currently in place.
A shortage of liquidity for corporate borrowers emerged during the third quarter
of 1998. Management estimates that a significant portion of the Company's
liquidity needs will be met from retained operating cash and borrowings under
the Company's Unsecured Facility during the next 18 to 24 months. To meet the
balance of the Company's liquidity needs, it will be necessary to arrange
additional capacity under the Company's existing Unsecured Facility, complete
the sale of existing communities or issue additional debt or equity securities.
While Management believes the Company has the financial position to expand its
short term credit capacity and support such capital markets activity, no
assurance can be provided that the Company will be successful in completing
these arrangements, offerings or sales. If these transactions cannot be
completed, the liquidity shortage described herein could have a material and
adverse impact on the operating results and financial condition of the Company.
During the third quarter of 1998, the Company determined that it would pursue a
disposition strategy for certain assets in markets that were in outlying
locations. In connection with this decision, the Company's Board of Directors
authorized Management to pursue the disposition of select communities within
specific markets. During October 1998, the Board of Directors authorized
additional communities to be disposed. The Company will solicit competing bids
from unrelated parties for these individual assets, and will consider the sales
price and tax ramifications of each proposal. Management anticipates these
assets will be sold during the upcoming twelve months. One of these communities
authorized for sale, Arbor Park, was disposed during September 1998, resulting
in a net gain of $40,000.
The assets to be disposed include land, buildings and improvements and
furniture, fixtures and equipment. At September 30, 1998, total real estate, net
of accumulated depreciation, of all communities currently subject to sale
totaled $234,422,000. Certain individual assets are secured by mortgage
indebtedness which may be assumed by the purchaser or repaid by the Company from
the net sales proceeds. The net income of the communities held for sale of
$4,341,000 and $2,261,000 for the nine months ended September 30, 1998 and 1997,
respectively, are included in the Company's condensed consolidated statements of
operations.
The table on the following page summarizes debt maturities for the next five
years (excluding the Unsecured Facility):
23
<PAGE> 25
AVALONBAY COMMUNITIES, INC.
DEBT MATURITY SCHEDULE
(Dollars in thousands)
<TABLE>
<CAPTION>
ALL-IN PRINCIPAL BALANCE OUTSTANDING
INTEREST MATURITY --------------------- ---- -----
Community Rate Date 12-31-97 9-30-98 1998 1999
- ---------------------------------------------- -------- --------- -------- ----------- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Tax-Exempt Bonds:
FIXED RATE
Canyon Creek 6.48% Jun-25 $ 38,534 $ 38,176 $123 $ 517
Waterford 5.88% Aug-14 33,100 33,100 -- --
City Heights 5.80% Jun-25 20,714 20,552 56 233
CountryBrook 7.87% Mar-12 19,850 19,641 73 305
Villa Mariposa 5.88% Mar-17 18,300 18,300 -- --
Sea Ridge 6.48% Jun-25 17,479 17,317 56 235
Foxchase I 5.88% Nov-07 16,800 16,800 -- --
Barrington Hills 6.48% Jun-25 13,185 13,062 43 177
Rivershore 6.48% Nov-22 10,309 10,200 38 158
Foxchase II 5.88% Nov-07 9,600 9,600 -- --
Fairway Glen 5.88% Nov-07 9,580 9,580 -- --
Crossbrook 6.48% Jun-25 8,484 8,408 26 109
Larkspur Canyon 5.50% Jun-25 7,610 7,551 20 85
Avalon Ridge 5.69% Jun-26 -- 26,815 -- --
Avalon View 7.55% Aug-24 -- 19,150 65 290
Chase Lea 5.71% Jun-26 -- 16,835 -- --
Avalon at Lexington 6.56% Feb-25 -- 14,902 56 240
Avalon Knoll 6.95% Jun-26 -- 13,796 42 175
Avalon at Dulles 7.04% Jul-24 -- 12,360 -- --
Avalon Fields 7.57% May-27 -- 11,924 33 137
Avalon at Hampton II 7.04% Jul-24 -- 11,550 -- --
Avalon at Symphony Glen 7.06% Jul-24 -- 9,780 -- --
Avalon West 7.73% Dec-36 -- 8,693 8 50
Avalon Landing 6.85% Jun-26 -- 6,830 22 89
-------- ---------- ---- ------
223,545 374,922 661 2,800
VARIABLE RATE
Avalon Devonshire Dec-25 -- 27,305 -- --
Avalon at Fairway Hills I Jun-26 -- 11,500 -- --
Laguna Brisas Mar-09 -- 10,400 -- --
Avalon at Hampton I Jun-26 -- 8,060 -- --
Avalon Pointe Jun-26 -- 6,387 -- --
-------- ---------- ---- ------
-- 63,652 -- --
CONVENTIONAL LOANS:
FIXED RATE
$100 Million Senior Unsecured Notes 7.375% Sep-02 -- 100,000 -- --
$100 Million Senior Unsecured Notes 6.625% Jan-05 -- 100,000 -- --
$110 Million Senior Unsecured Notes 6.875% Dec-07 -- 110,000 -- --
$50 Million Senior Unsecured Notes 6.25% Jan-03 -- 50,000 -- --
$50 Million Senior Unsecured Notes 6.50% Jan-05 -- 50,000 -- --
$50 Million Senior Unsecured Notes 6.625% Jan-08 -- 50,000 -- --
$100 Million Senior Unsecured Notes 6.500% Jul-03 -- 100,000 -- --
$150 Million Senior Unsecured Notes 6.800% Jul-06 -- 150,000 -- --
Governor's Square 7.65% Aug-04 14,184 14,098 45 142
The Arbors 7.25% May-04 12,870 12,870 -- --
Gallery Place 7.31% May-01 11,685 11,537 34 214
Cedar Ridge 6.50% Jul-99 1,000 1,000 -- --
Avalon Walk II 8.93% Nov-04 -- 12,815 53 221
Avalon Pines 8.00% Dec-03 -- 5,364 34 112
-------- ---------- ---- ------
39,739 767,684 166 689
VARIABLE RATE-NONE -- -- -- --
-------- ---------- ---- ------
TOTAL INDEBTEDNESS - EXCLUDING CREDIT FACILITY $263,284 $1,206,258 $827 $3,489
======== ========== ==== ======
<CAPTION>
ALL-IN PRINCIPAL TOTAL MATURITIES
INTEREST MATURITY ----------------- -------- ----------
Community Rate Date 2000 2001 2002 Thereafter
- ---------------------------------------------- -------- --------- ------ ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Tax-Exempt Bonds:
FIXED RATE
Canyon Creek 6.48% Jun-25 $ 554 $ 594 $ 637 $ 35,751
Waterford 5.88% Aug-14 -- -- -- 33,100
City Heights 5.80% Jun-25 250 268 288 19,457
CountryBrook 7.87% Mar-12 330 357 386 18,190
Villa Mariposa 5.88% Mar-17 -- -- -- 18,300
Sea Ridge 6.48% Jun-25 251 270 289 16,216
Foxchase I 5.88% Nov-07 -- -- -- 16,800
Barrington Hills 6.48% Jun-25 190 203 218 12,231
Rivershore 6.48% Nov-22 171 184 198 9,451
Foxchase II 5.88% Nov-07 -- -- -- 9,600
Fairway Glen 5.88% Nov-07 -- -- -- 9,580
Crossbrook 6.48% Jun-25 117 126 136 7,894
Larkspur Canyon 5.50% Jun-25 91 98 105 7,152
Avalon Ridge 5.69% Jun-26 -- -- -- 26,815
Avalon View 7.55% Aug-24 330 350 373 17,742
Chase Lea 5.71% Jun-26 -- -- -- 16,835
Avalon at Lexington 6.56% Feb-25 255 271 288 13,792
Avalon Knoll 6.95% Jun-26 187 200 214 12,978
Avalon at Dulles 7.04% Jul-24 -- -- -- 12,360
Avalon Fields 7.57% May-27 147 157 169 11,281
Avalon at Hampton II 7.04% Jul-24 -- -- -- 11,550
Avalon at Symphony Glen 7.06% Jul-24 -- -- -- 9,780
Avalon West 7.73% Dec-36 53 57 61 8,464
Avalon Landing 6.85% Jun-26 95 101 108 6,415
------ ------- -------- ----------
3,021 3,236 3,470 361,734
VARIABLE RATE
Avalon Devonshire Dec-25 -- -- -- 27,305
Avalon at Fairway Hills I Jun-26 -- -- -- 11,500
Laguna Brisas Mar-09 -- -- -- 10,400
Avalon at Hampton I Jun-26 -- -- -- 8,060
Avalon Pointe Jun-26 -- -- -- 6,387
------ ------- -------- ----------
-- -- -- 63,652
CONVENTIONAL LOANS:
FIXED RATE
$100 Million Senior Unsecured Notes 7.375% Sep-02 -- -- 100,000 --
$100 Million Senior Unsecured Notes 6.625% Jan-05 -- -- -- 100,000
$110 Million Senior Unsecured Notes 6.875% Dec-07 -- -- -- 110,000
$50 Million Senior Unsecured Notes 6.25% Jan-03 -- -- -- 50,000
$50 Million Senior Unsecured Notes 6.50% Jan-05 -- -- -- 50,000
$50 Million Senior Unsecured Notes 6.625% Jan-08 -- -- -- 50,000
$100 Million Senior Unsecured Notes 6.500% Jul-03 -- -- -- 100,000
$150 Million Senior Unsecured Notes 6.800% Jul-06 -- -- -- 150,000
Governor's Square 7.65% Aug-04 153 165 178 13,415
The Arbors 7.25% May-04 -- -- -- 12,870
Gallery Place 7.31% May-01 230 11,042 -- 17
Cedar Ridge 6.50% Jul-99 -- -- -- 1,000
Avalon Walk II 8.93% Nov-04 241 264 288 11,748
Avalon Pines 8.00% Dec-03 121 131 142 4,824
------ ------- -------- ----------
745 11,602 100,608 653,874
VARIABLE RATE-NONE -- -- -- --
------ ------- -------- ----------
TOTAL INDEBTEDNESS - EXCLUDING CREDIT FACILITY $3,766 $14,838 $104,078 $1,079,260
====== ======= ======== ==========
</TABLE>
24
<PAGE> 26
INFLATION
Substantially all of the leases at the Current Communities are for a term of one
year or less, which may enable the Company to realize increased rents upon
renewal of existing leases or commencement of new leases. Such short-term leases
generally minimize the risk to the Company of the adverse effects of inflation,
although these leases generally permit residents to leave at the end of the
lease term without penalty. Short-term leases combined with relatively
consistent demand allow rents, and therefore cash flow from the Company's
portfolio of apartments, to provide an attractive inflation hedge.
YEAR 2000 COMPLIANCE
The statements in the following section include "Year 2000 readiness disclosure"
within the meaning of the Year 2000 Information and Readiness Disclosure Act of
1998.
The Year 2000 compliance issue concerns the inability of computer systems to
accurately calculate, store or use a date after 1999. This could result in a
system failure causing disruptions of operations or create erroneous results.
The Year 2000 issue affects virtually all companies and organizations.
Management has been taking the necessary steps to understand the nature and
extent of the work required to make its information computer systems and
non-information embedded systems Year 2000 compliant. Management has identified
certain phases necessary to become Year 2000 compliant and has established an
estimated timetable for completion of those phases, as shown in the table on the
following page:
25
<PAGE> 27
<TABLE>
<CAPTION>
PHASE DEFINITION ESTIMATED COMPLETION DATE
----- ---------- -------------------------
<S> <C> <C> <C>
1. Designate Task Force Assign key management personnel to Completed
the Company's Year 2000 Task Force
("the Task Force") to coordinate
compliance efforts
2. Introduce Year 2000 Awareness Communicate the Year 2000 issue to Completed
the Company. Ensure current and
future acquisition, development and
operation processes address Year
2000 compliance
3. Inventory System Identify the Company's information Completed
computer systems ("IT Systems") and
non-information embedded systems
("Non-IT Systems")
4. Contact Vendors Contact vendors of all IT and December 15, 1998
Non-IT Systems to request
information regarding compliance of
those systems
5. Prioritize and Budget Prioritize non-compliant IT and January 31, 1999
Non-IT Systems and prepare initial
budget for cost of becoming
compliant
6. Contingency Plan Develop contingency plan to January 31, 1999
minimize disruptions and data
processing errors in the event
impacted IT and Non-IT Systems are
not Year 2000 compliant on
January 1, 2000
7. Identify Solutions Identify the course of action March 31, 1999
necessary to become Year 2000
compliant, and engage third party
service providers where needed
8. Replace and Test Solutions Replace non-compliant IT and Non-IT August 31, 1999
Systems and ensure functionality.
9. Communicate to Residents Communicate to residents steps the September 30, 1999
Company has taken towards becoming
Year 2000 compliant and remaining
IT and Non-IT Systems that may
still be impacted
</TABLE>
26
<PAGE> 28
The Task Force has completed the Inventory System Phase for computerized IT
Systems. The assessment determined that it will be necessary to modify, update
or replace limited portions of the Company's computer hardware and software
applications.
The Company anticipates that replacing and upgrading its existing IT Systems
(both hardware and software) in the normal course of business will result in
Year 2000 compliance by the end of the second quarter of 1999. The vendor that
provides the Company's existing accounting software has a compliant version of
its product, but growth in the Company's operations is expected to require a
general ledger system with scope and functionality that is not present in either
the system currently in use or the Year 2000 compliant version of that system.
Accordingly, the Company is replacing the current general ledger system with an
enhanced system that, in addition to increased functionality, is Year 2000
compliant. The new general ledger system has been selected and is expected to be
implemented by the third quarter of 1999. The Company is not treating the cost
of this new system as a Year 2000 expense because the implementation date has
not been accelerated due to Year 2000 compliance concerns. The cost of the new
general ledger system, after considering anticipated efficiencies provided by
the new system, is not currently expected to have a material effect (either
beneficial or adverse) on the Company's financial condition or results of
operations.
The Task Force has also completed the Inventory System Phase of the Company's
Non-IT Systems (e.g., security, heating and cooling, fire and elevator systems)
at each community that may not be Year 2000 compliant, and has identified areas
of risks for non-compliance by community type. The high-rises, mid-rises and
newer garden communities represent the greatest risk of non-compliant systems as
they have the most systems per community. The Task Force is currently conducting
an assessment of these systems at all communities to identify and evaluate the
changes and modifications necessary to make these systems compliant for Year
2000 processing. The Company's Task Force is currently in the process of
contacting all system vendors to obtain information regarding the system's Year
2000 compliance, and this process is expected to be completed by December 15,
1998. Upon receipt of the vendors' responses, the Task Force will prioritize the
non-compliant systems, if any, and proceed according to the phases described
above. No assurance, however, can be given that the responses received will
identify all non-compliant systems.
Upon completion of each of the above described upgrades and replacements of the
Company's IT and Non-IT Systems, the Company will commence testing to ensure
Year 2000 compliance. The Company currently expects its testing to be completed
during the third quarter of 1999. While the Company anticipates such tests will
be successful in all material respects, the Task Force intends to closely
monitor the Company's Year 2000 compliance and will develop contingency plans by
January 31, 1999, and continue to review both compliance and contingency plans,
in the event certain systems are not compliant on time.
The Company continues to evaluate the estimated costs associated with these
compliance efforts and, therefore, the total cost of bringing all Non-IT Systems
into Year 2000 compliance has not been determined. Management anticipates that
the costs of becoming Year 2000 compliant for all impacted Non-IT Systems will
be reasonably measurable upon completion of the Prioritize and Budget Phase,
currently scheduled to be completed by January 31, 1998. Based on available
information, the Company believes that these costs will not have a material
adverse effect on its business, financial condition or results of operations.
However, no assurance can be given that all the Company's Non-IT Systems will be
Year 2000 compliant by December 31, 1999 or that the Company will not incur
significant costs pursuing Year 2000 compliance for Non-IT Systems.
The third parties with which the Company has material relationships include the
Company's utility providers and the vendor that will provide the Company's new
accounting software system. The Company is communicating with these, and other,
third party providers and vendors with which it does business to determine the
efforts being made on their part for compliance. The Company is currently
requesting compliance certificates from all third parties that have an impact on
the Company's operations,
27
<PAGE> 29
but no assurance can be given that such certifications will be received by the
Company or that they will prove to be accurate. As described above, the Company
expects that its accounting software will be Year 2000 compliant.
The Company is not aware of third parties other than its residents to which it
could have potential material liabilities should its IT or Non-IT Systems be
non-compliant on January 1, 2000. The inability of the Company to achieve Year
2000 compliance on its Non-IT Systems by January 1, 2000 may cause disruption in
services that could potentially lead to declining occupancy rates, rental
concessions, or higher operating expenses, and other material adverse effects,
which are not quantifiable at this time. These disruptions may include, but are
not limited to, disabled fire control systems, lighting controls, utilities,
telephone and elevator operations.
Currently, the Company has not delayed any information technology or
non-information technology projects due to the Year 2000 compliance efforts.
However, the Company can neither provide assurance that future delays in such
projects will not occur as a result of Year 2000 compliance efforts, nor
anticipate the effects of such delays on the Company's operations.
The Company has not yet begun development of contingency plans for use in the
event certain systems are not compliant on time. However, as previously shown,
the Company does intend to develop contingency plans, and the development of
such plans are scheduled to be completed by January 31, 1999.
NATURAL DISASTERS
Many of the Company's West Coast communities are located in the general vicinity
of active earthquake faults. In July 1998, the Company 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 the Company 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 the Company's
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 the Company 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
classifications 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. No assurance can be given
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 the Company's communities located on the West Coast, or that
future acquisitions or developments will not have PMD assessments indicating the
possibility of greater damage or losses than currently indicated.
In August 1998, the Company renewed its earthquake insurance, both for physical
damage and lost revenue, with respect to all communities it owned at that time
and all of the communities under development. For any single occurrence, the
Company self-insures the first $25 million of loss, and has in place $75 million
of coverage above this amount. In addition, the Company's general liability and
property casualty insurance provides coverage for personal liability and fire
damage. In the event that an uninsured disaster or a loss in excess of insured
limits were to occur, the Company could lose its capital invested in the
affected community, as well as anticipated future revenue from that community,
and would continue to be obligated to repay any mortgage indebtedness or other
obligations related to the community. Any such loss could
28
<PAGE> 30
materially and adversely affect the business of the Company and its financial
condition and results of operations.
DEVELOPMENT COMMUNITIES
Currently 16 Development Communities are under construction. The total
capitalized cost of these Development Communities, when completed, is expected
to be approximately $694.7 million. There can be no assurance that the Company
will complete the Development Communities, that the Company's budgeted costs,
leasing, start dates, completion dates, occupancy or estimates of "EBITDA as %
of Total Budgeted Cost" will be realized or that future developments will
realize comparable returns.
The following page presents a summary of Development Communities:
29
<PAGE> 31
AVALONBAY COMMUNITIES, INC.
DEVELOPMENT COMMUNITIES SUMMARY
<TABLE>
<CAPTION>
Projected
EBITDA as
Number of Budgeted Estimated Estimated % of total
apartment cost (1) Construction Initial completion stabilization budgeted
homes ($ millions) start occupancy date date (2) cost (3)
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1. Avalon at Cameron Court
Alexandria, VA 460 $ 44.7 Q2 1997 Q1 1998 Q4 1998 Q1 1999 11.7%
2. Toscana
Sunnyvale, CA 710 $119.9 Q3 1996 Q3 1997 Q4 1998 Q2 1999 10.8%
3. CentreMark
San Jose, CA 311 $ 47.9 Q1 1997 Q3 1998 Q1 1999 Q2 1999 10.5%
4. Avalon Willow
Mamaroneck, NY 227 $ 46.8 Q2 1997 Q4 1998 Q2 1999 Q3 1999 8.6%
5. Rosewalk II
San Jose, CA 156 $ 20.3 Q4 1997 Q4 1998 Q1 1999 Q2 1999 11.1%
6. Paseo Alameda
San Jose, CA 305 $ 54.0 Q3 1997 Q4 1998 Q2 1999 Q3 1999 9.9%
7. The Tower at Avalon Cove
Jersey City, NJ 269 $ 51.8 Q1 1998 Q2 1999 Q3 1999 Q4 1999 10.0%
8. The Avalon
Bronxville, NY 110 $ 28.1 Q1 1998 Q2 1999 Q3 1999 Q4 1999 9.3%
9. Avalon Valley
Danbury, CT 268 $ 26.1 Q1 1998 Q1 1999 Q3 1999 Q1 2000 10.3% (4)
10. Avalon Lake
Danbury, CT 135 $ 17.0 Q2 1998 Q2 1999 Q3 1999 Q1 2000 10.3% (4)
11. Avalon Oaks (5)
Wilmington, MA 204 $ 21.9 Q2 1998 Q1 1999 Q2 1999 Q4 1999 10.5%
12. Avalon Crest
Fort Lee, NJ 351 $ 57.4 Q4 1997 Q2 1999 Q4 1999 Q1 2000 10.3%
13. Bay Towers
San Francisco, CA 226 $ 65.9 Q4 1997 Q3 1999 Q3 1999 Q1 2000 9.6%
14. Avalon Corners
Stamford, CT 195 $ 32.5 Q3 1998 Q3 1999 Q1 2000 Q3 2000 10.4%
15. Avalon Fox Mill
Herndon, VA 165 $ 20.1 Q4 1998 Q3 1999 Q1 2000 Q2 2000 10.2%
16. Avalon Court North
Melville, NY 340 $ 40.3 Q4 1998 Q3 1999 Q1 2000 Q3 2000 11.7%
------------------- ----
Total/Weighted average 4,432 $694.7 10.3%
=================== ====
</TABLE>
(1) Budgeted cost includes all capitalized costs projected to be incurred to
develop the respective Development 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 operations is defined as the first full quarter of 95% or greater
occupancy after completion of construction.
(3) Projected EBITDA represents gross potential earnings projected to be
achieved at completion of construction before interest, income taxes,
depreciation, amortization and extraordinary items, minus (a) projected
economic vacancy and (b) projected stabilized operating expenses. EBITDA is
relevant to an understanding of the economics of the Company because it
indicates cash flow available from Company 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 the
Company's 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 the Company's calculation
of EBITDA.
(4) Represents a combined yield for Avalon Valley and Avalon Lake.
(5) Financed with tax-exempt bonds.
30
<PAGE> 32
REDEVELOPMENT COMMUNITIES
There are 13 Redevelopment Communities. The total capitalized cost of these
Redevelopment Communities, when completed, is expected to be approximately
$462.5 million. There can be no assurance that the Company will complete the
Redevelopment Communities, that the Company's budgeted costs, leasing, start
dates, completion dates, occupancy or estimates of "EBITDA as % of Total
Budgeted Cost" will be realized or that future redevelopments will realize
comparable returns.
In accordance with GAAP, cost capitalization during redevelopment and
reconstruction of assets (including interest and related loan fees, property
taxes and other direct and indirect costs) begins when an apartment home is
taken out-of-service for reconstruction and ends when the apartment home
reconstruction is completed and the apartment home is placed-in-service.
The following page presents a summary of Redevelopment Communities:
31
<PAGE> 33
AVALONBAY COMMUNITIES, INC.
REDEVELOPMENT COMMUNITIES SUMMARY (1)
<TABLE>
<CAPTION>
Projected
EBITDA as
Number of Budgted Estimated % of total
apartment cost (2) Reconstruction Reconstruction restabilized budgeted
homes ($ millions) start completion operations (3) cost (4)
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. The Arbors
Campbell, CA 252 $ 31.2 Q4 1997 Q1 1999 Q2 1999 9.1%
2. Arbor Heights (5)
Hacienda Heights, CA 351 $ 28.7 Q2 1998 Q3 1999 Q1 2000 9.4%
3. Lakeside
Burbank, CA 750 $ 65.6 Q2 1998 Q4 2000 Q2 2001 9.4%
4. Gallery Place
Redmond, WA 222 $ 25.3 Q1 1998 Q2 1999 Q3 1999 8.3%
5. Viewpointe
Woodland Hills, CA 663 $ 72.7 Q2 1998 Q2 1999 Q3 1999 9.7%
6. Landing West
Seattle, WA 190 $ 11.9 Q1 1998 Q2 1999 Q3 1999 9.3%
7. Waterhouse Place
Beaverton, OR 279 $ 20.3 Q2 1998 Q2 1999 Q3 1999 8.9%
8. Westside Terrace (6)
Los Angeles, CA 363 $ 39.9 Q3 1998 Q1 1999 Q3 1999 9.3%
9. Warner Oaks
Woodland Hills, CA 227 $ 25.0 Q3 1998 Q4 1999 Q1 2000 9.2%
10. Amberway
Anaheim, CA 272 $ 21.2 Q3 1998 Q3 1999 Q1 2000 8.8%
11. Avalon Ridge
Renton, WA 420 $ 35.7 Q3 1998 Q2 2000 Q3 2000 9.8%
12. Governor's Square
Sacramento, CA 302 $ 27.7 Q1 1998 Q1 1999 Q2 1999 8.4%
13. Bay Pointe (7)
San Diego, CA 564 $ 57.3 Q3 1998 Q4 1999 Q1 2000 9.1%
------------------ ---
Total/Weighted average 4,855 $462.5 9.2%
================== ===
</TABLE>
(1) Redevelopment Communities are communities acquired for which redevelopment
costs are expected to exceed the lesser of 10% of the original acquisition
cost or $5,000,000.
(2) 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.
(5) Formerly named "The Park."
(6) Formerly named "Westwood Club."
(7) Formerly named "Mission Bay."
32
<PAGE> 34
DEVELOPMENT RIGHTS
The Company is considering the development of 23 new apartment communities. The
status of these Development Rights range from land owned or under contract for
which design and architectural planning has just commenced to land under
contract or owned by the Company with completed site plans and drawings where
construction can commence almost immediately. There can be no assurance that the
Company will succeed in obtaining zoning and other necessary governmental
approvals or the financing required to develop these communities, or that the
Company will decide to develop any particular community. Further, there can be
no assurance 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 there can be no
assurance that all or any of these communities will proceed to development,
Management estimates that the successful completion of all of these communities
would ultimately add approximately 6,377 institutional-quality apartment homes
to the Company's portfolio. At September 30, 1998, the cumulative capitalized
costs incurred in pursuit of the 23 Development Rights was approximately $35.5
million. Many of these apartment homes will offer features like those offered by
the communities currently owned by the Company. The 23 Development Rights that
the Company is currently pursuing are summarized on the following table.
33
<PAGE> 35
AVALONBAY COMMUNITIES, INC.
DEVELOPMENT RIGHTS SUMMARY
<TABLE>
<CAPTION>
Total
Estimated budgeted
number cost
Location of homes ($ millions)
--------------------------- --------- ------------
<S> <C> <C> <C>
1. Peabody, MA 154 $20.6
2. Bellevue, WA 200 29.1
3. Mountain View, CA (1) 238 58.8
4. San Jose, CA (1) 278 52.9
5. Hull, MA 162 18.9
6. New Rochelle, NY 400 78.8
7. Stamford, CT 319 57.6
8. Freehold, NJ 452 29.8
9. Orange, CT 168 16.4
10. New Canaan, CT (1)(2) 104 23.8
11. Darien, CT 172 28.9
12. Yonkers, NY 256 35.0
13. Greenburgh - II, NY 500 80.3
14. Greenburgh - III, NY 266 42.7
15. Arlington I, VA 566 68.8
16. Arlington II, VA 324 35.5
17. Florham Park, NJ 270 39.1
18. Edgewater, NJ 408 74.6
19. Hopewell, NJ 280 29.8
20. Naperville, IL 100 15.2
21. Westbury, NY 361 49.8
22. Providence, RI 247 30.4
23. Quincy, MA 152 18.7
----- ------
Totals 6,377 $935.5
===== ======
</TABLE>
(1) Company owns land, but construction has not yet begun.
(2) Currently anticipated that the land seller will retain a minority limited
partner interest.
34
<PAGE> 36
RISKS OF DEVELOPMENT AND REDEVELOPMENT
The Company intends to continue to pursue the development and construction of
apartment home communities in accordance with the Company's development and
underwriting policies. Risks associated with the Company's development and
construction activities may include: the abandonment of development and
acquisition opportunities explored by the Company; construction costs of a
community may exceed original estimates due to increased materials, labor or
other expenses, which could make completion of the community uneconomical;
occupancy rates and rents at a newly completed community are dependent on a
number of factors, including market and general economic conditions, and may not
be sufficient to make the community profitable; financing may not be available
on favorable terms for the development of a community; and construction and
lease-up may not be completed on schedule, resulting in increased debt service
expense and construction costs. Development activities are also subject to risks
relating to the inability to obtain, or delays in obtaining, all necessary
zoning, land-use, building, occupancy, and other required governmental permits
and authorizations. The occurrence of any of the events described above could
adversely affect the Company's ability to achieve its projected yields on
communities under development or reconstruction and could prevent the Company
from paying distributions to its stockholders.
For each new development community, the Company establishes a target for
projected EBITDA as a percentage of total budgeted cost. Projected EBITDA
represents gross potential earnings projected to be achieved at completion of
development or redevelopment before interest, income taxes, depreciation,
amortization and extraordinary items, minus (a) projected economic vacancy and
(b) projected stabilized operating expenses. Total budgeted cost includes all
capitalized costs projected to be incurred to develop the respective Development
or Redevelopment 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. Gross potential earnings and construction
costs reflect those prevailing in the community's market at the time the
Company's development budgets are prepared taking into consideration certain
changes to those market conditions anticipated by the Company at the time.
Although the Company attempts to anticipate changes in market conditions, the
Company cannot predict with certainty what those changes will be. Construction
costs have been increasing and, for certain of the Company's Development
Communities, the total construction costs have been or are expected to be higher
than the original budget. Nonetheless, because of increases in prevailing market
rents Management believes that, in the aggregate, the Company will still achieve
its targeted projected EBITDA as a percentage of total budgeted cost for those
communities experiencing costs in excess of the original budget. Management
believes that it could experience similar increases in construction costs and
market rents with respect to other development communities resulting in total
construction costs that exceed original budgets. Likewise, costs to redevelop
communities that have been acquired have, in some cases, exceeded Management's
original estimates and similar increases in costs may be experienced in the
future. There can be no assurances that market rents in effect at the time new
development communities or repositioned communities complete lease-up will be
sufficient to fully offset the effects of any increased construction costs.
CAPITALIZED INTEREST
In accordance with GAAP, the Company capitalizes interest expense during
construction until each building obtains a final certificate of occupancy.
Thereafter, interest for each completed building is expensed. Capitalized
interest for all communities under construction or reconstruction for the three
months ended September 30, 1998 and 1997 totaled $4,847,000 and $2,009,000,
respectively, and for the nine months ended September 30, 1998 and 1997 totaled
$11,372,000 and $4,430,000, respectively.
35
<PAGE> 37
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is involved in certain ordinary routine litigation
incidental to the conduct of its business. While the outcome
of such litigation cannot be predicted with certainty,
management does not expect any current litigation to have a
material effect on the business or financial condition of the
Company.
ITEM 2. Changes in Securities
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
- ----------- -----------
3(i).1 Articles of Amendment and Restatement of Articles of
Incorporation of the Company, dated as of June 4, 1998
(Incorporated by reference to Exhibit 3(i).1 to Form 10-Q of
the Company for the quarter ended June 30, 1998).
3(i).2 Articles of Amendment, dated as of October 2, 1998
(Incorporated by reference to Exhibit 3.1(ii) to Form 8-K of
the Company filed on October 6, 1998).
3(i).3 Articles Supplementary, dated as of October 13, 1998, relating
to the 8.70% Series H Cumulative Redeemable Preferred Stock
(Incorporated by reference to Exhibit 1 to Form 8-A of the
Company filed October 14, 1998).
3(ii).1 Bylaws of the Company, as amended and restated, on July 24,
1998 (Incorporated by reference to Exhibit 3(ii).1 to
Form 10-Q of the Company).
4.1 Indenture, dated as of January 16, 1998, between the Company
and State Street Bank and Trust Company, as Trustee
(Incorporated by reference to Exhibit 4.1 to Form 8-K of the
Company filed on January 21, 1998).
4.2 First Supplemental Indenture, dated as of January 20, 1998,
between the Company and the Trustee (Incorporated by reference
to Exhibit 4.2 to Form 8-K of the Company filed on January 21,
1998).
4.3 Second Supplemental Indenture, dated as of July 7, 1998,
between the Company and the Trustee (Incorporated by reference
to Exhibit 4.2 to Form 8-K of the Company filed on July 9,
1998).
4.4 The Company's 6.50% Senior Note due 2003 (Incorporated by
reference to Exhibit 4.3 to Form 8-K of the Company filed on
July 9, 1998).
36
<PAGE> 38
4.5 The Company's 6.80% Senior Note due 2006 (Incorporated by
reference to Exhibit 4.4 to Form 8-K of the Company filed on
July 9, 1998).
10.1 1994 Stock Incentive Plan, as amended and restated on April
13, 1998 and subsequently amended on July 24, 1998.
12.1 Statements re: Computation of ratios.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
1. Form 8-K of the Company, filed July 9, 1998, announcing the completion
of an underwritten public offering of the Company's Senior Notes.
2. Form 8-K of the Company, filed August 5, 1998, relating to the
Company's acquisition of the Prudential Center Apartments on July 16, 1998.
37
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AVALONBAY COMMUNITIES, INC.
Date: November 16, 1998 /s/ Richard L. Michaux
-------------------------------------
Richard L. Michaux
Chief Executive Officer and Director
Date: November 16, 1998 /s/ Thomas J. Sargeant
-------------------------------------
Thomas J. Sargeant
Chief Financial Officer and Treasurer
38
<PAGE> 1
EXHIBIT 10.1
AVALON BAY COMMUNITIES, INC.
1994 STOCK INCENTIVE PLAN
As Amended and Restated on April 13, 1998
and Subsequently Amended on July 24, 1998
SECTION 1. GENERAL PURPOSE OF THE PLAN; DEFINITIONS
The name of the plan is the Avalon Bay Communities, Inc. 1994 Stock
Incentive Plan (the "Plan"). The purpose of the Plan is to encourage and enable
the officers, employees, Directors and other key persons of Avalon Bay
Communities, Inc. (the "Company") and its Subsidiaries upon whose judgment,
initiative and efforts the Company largely depends for the successful conduct of
its business to acquire a proprietary interest in the Company. It is anticipated
that providing such persons with a direct stake in the Company's welfare will
assure a closer identification of their interests with those of the Company,
thereby stimulating their efforts on the Company's behalf and strengthening
their desire to remain with the Company.
The following terms shall be defined as set forth below:
"Act" means the Securities Exchange Act of 1934, as amended.
"Award" or "Awards," except where referring to a particular category of
grant under the Plan, shall include Incentive Stock Options, Non-Qualified Stock
Options, Restricted Stock Awards, Deferred Stock Awards, Unrestricted Stock
Awards, Performance Share Awards and Dividend Equivalent Rights.
"Board" means the Board of Directors of the Company.
"Cause" means, except as provided in an individual agreement or by the
Committee, a vote of the Board of Directors resolving that the participant
should be dismissed as a result of (i) any material breach by the participant of
any agreement to which the participant and the Company are parties, (ii) any act
(other than retirement) or omission to act by the participant which may have a
material and adverse effect on the business of the Company or any Subsidiary or
on the participant's ability to perform services for the Company or any
Subsidiary, including, without limitation, the commission of any crime (other
than ordinary traffic violations), or (iii) any material misconduct or neglect
of duties by the participant in connection with the business or affairs of the
Company or any Subsidiary.
"Change of Control" is defined in Section 16.
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor Code, and related rules, regulations and interpretations.
<PAGE> 2
"Committee" means the Committee of the Board referred to in Section 2.
"Covered Employee" means a participant designated prior to the grant of a
Qualified Performance-based Award by the Committee who is or may be a "covered
employee" within the meaning of Section 162(m)(3) of the Code in the year in
which the Qualified Performance-based Award is expected to be taxable to such
participant.
"Deferred Stock Award" means Awards granted pursuant to Section 7.
"Disability" means, except as provided in an individual agreement or by the
Committee, an individual's inability to perform his normal required services for
the Company and its Subsidiaries for a period of six consecutive months by
reason of the individual's mental or physical disability, as determined by the
Committee in good faith in its sole discretion.
"Dividend Equivalent Right" means Awards granted pursuant to Section 11.
"Effective Date" means the consummation of the merger contemplated by the
Agreement and Plan of Merger, by and between the Company and Avalon Properties,
Inc. dated as of March 9, 1998.
"Fair Market Value" on any given date means the last reported sale price at
which Stock is traded on such date or, if no Stock is traded on such date, the
most recent date on which Stock was traded, as reflected on the New York Stock
Exchange or, if applicable, any other national stock exchange on which the Stock
is traded.
"Incentive Stock Option" means any Stock Option designated as, and
qualified as, an "incentive stock option" as defined in Section 422 of the Code.
"Non-Employee Director" means a member of the Board who is not also an
employee of the Company or any Subsidiary.
"Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
"Option" or "Stock Option" means any option to purchase shares of Stock
granted pursuant to Section 5.
"Performance Cycle" means one or more periods of time, which may be of
varying and overlapping durations, as the Committee may select, over which the
attainment of one or more performance criteria will be measured for the purpose
of determining a participant's right to and the payment of a Performance Share
Award, Restricted Stock Award or Deferred Stock Award.
"Performance Share Award" means Awards granted pursuant to Section 9.
<PAGE> 3
"Qualified Performance-based Award" means any Restricted Stock Award,
Deferred Stock Award or Performance Share Award that is intended to qualify as
"performance-based compensation" under Section 162(m) of the Code and the
regulations promulgated thereunder.
"Restricted Stock Award" mean Awards granted pursuant to Section 6.
"Retirement" means the employee's termination of employment with the
Company and its Subsidiaries after attainment of the age and/or service
requirements to qualify for early or normal retirement specified in the written
instrument evidencing the Award or, if not so specified, under the Company's
retirement policy as in effect at the time of the Award.
"Stock" means the Common Stock, $.01 par value per share, of the Company,
subject to adjustments pursuant to Section 3.
"Subsidiary" means any corporation or other entity (other than the Company)
in any unbroken chain of corporations or other entities, beginning with the
Company if each of the corporations or entities (other than the last corporation
or entity in the unbroken chain) owns stock or other interests possessing 50% or
more of the total combined voting power of all classes of stock or other
interests in one of the other corporations or entities in the chain.
"Unrestricted Stock Award" means Awards granted pursuant to Section 8.
SECTION 2. ADMINISTRATION OF PLAN; COMMITTEE AUTHORITY TO SELECT PARTICIPANTS
AND DETERMINE AWARDS
(a) COMMITTEE. The Plan shall be administered by all of the Non-Employee
Director members of the Compensation Committee of the Board, or a committee of
not less than two Non-Employee Directors performing similar functions, as
appointed by the Board from time to time. Any authority granted to the Committee
may also be exercised by the full Board. To the extent that any permitted action
taken by the Board conflicts with action taken by the Committee, the Board
action shall control.
(b) POWERS OF COMMITTEE. The Committee shall have the power and authority
to grant Awards consistent with the terms of the Plan, including the power and
authority:
(i) to select the officers, other employees, Non-Employee Directors
and other key persons of the Company and its Subsidiaries to whom
Awards may from time to time be granted;
(ii) to determine the time or times of grant, and the extent, if any,
of Incentive Stock Options, Non-Qualified Stock Options, Restricted
Stock Awards, Deferred Stock Awards, Unrestricted Stock Awards,
Performance Share Awards and Dividend Equivalent Rights, or any
combination of the foregoing, granted to any one or more participants;
<PAGE> 4
(iii) to determine the number of shares to be covered by any Award;
(iv) to determine and modify the terms and conditions, including
restrictions, not inconsistent with the terms of the Plan, of any
Award, which terms and conditions may differ among individual Awards
and participants, and to approve the form of written instruments
evidencing the Awards;
(v) to accelerate the exercisability or vesting of all or any
portion of any Award in circumstances involving a Change of Control or
the death, disability or termination of employment of a Plan
participant;
(vi) subject to the provisions of Section 5(a)(ii), to extend the
period in which Stock Options may be exercised;
(vii) to determine whether, to what extent, and under what
circumstances Stock and other amounts payable with respect to an Award
shall be deferred either automatically or at the election of the
participant and whether and to what extent the Company shall pay or
credit amounts constituting interest (at rates determined by the
Committee) or dividends or deemed dividends on such deferrals; and
(viii) to adopt, alter and repeal such rules, guidelines and practices
for administration of the Plan and for its own acts and proceedings as
it shall deem advisable; to interpret the terms and provisions of the
Plan and any Award (including related written instruments); to make
all determinations it deems advisable for the administration of the
Plan; to decide all disputes arising in connection with the Plan; and
to otherwise supervise the administration of the Plan.
All decisions and interpretations of the Committee shall be binding on
all persons, including the Company and Plan participants.
(c) DELEGATION OF AUTHORITY TO GRANT AWARDS. The Committee, in its
discretion, may delegate to the Chief Executive Officer of the Company all or
part of the Committee's authority and duties with respect to Awards, including
the granting thereof, to individuals who are not subject to the reporting and
other provisions of Section 16 of the Act or Covered Employees. The Committee
may revoke or amend the terms of a delegation at any time but such action shall
not invalidate any prior actions of the Committee's delegate or delegates that
were consistent with the terms of the Plan.
SECTION 3. SHARES ISSUABLE UNDER THE PLAN; MERGERS; SUBSTITUTION
(a) SHARES ISSUABLE. The maximum number of shares of Stock reserved and
available for issuance under the Plan shall be the sum of (a) 2,500,000 shares
of Stock, plus (b) 9.9 percent of any net increase in the total number of shares
of Stock actually outstanding from time to time after April 13, 1998.
Notwithstanding the foregoing, the maximum number of
<PAGE> 5
shares of Stock for which Incentive Stock Options may be issued under the Plan
shall not exceed 2,500,000. For purposes of this limitation, the shares of Stock
underlying any Awards which are forfeited, canceled, reacquired by the Company,
satisfied without the issuance of Stock or otherwise terminated (other than by
exercise) shall be added back to the shares of Stock available for issuance
under the Plan. Stock Options with respect to no more than 300,000 shares of
Stock may be granted to any one individual participant during any one calendar
year period. Shares issued under the Plan may be authorized but unissued shares
or shares reacquired by the Company.
(b) RECAPITALIZATIONS. If, through or as a result of any merger,
consolidation, sale of all or substantially all of the assets of the Company,
reorganization, recapitalization, reclassification, stock dividend, stock split,
reverse stock split or other similar transaction, the outstanding shares of
Stock are increased or decreased or are exchanged for a different number or kind
of shares or other securities of the Company, or additional shares or new or
different shares or other securities of the Company or other non-cash assets are
distributed with respect to such shares of Stock or other securities, the
Committee shall make an appropriate or proportionate adjustment in (i) the
maximum number of shares reserved for issuance under the Plan, (ii) the number
of Stock Options or shares of Stock that can be granted to any one individual
participant, (iii) the number and kind of shares or other securities subject to
any then outstanding Awards under the Plan, and (iv) the price for each share
subject to any then outstanding Stock Options under the Plan, without changing
the aggregate exercise price (i.e., the exercise price multiplied by the number
of Stock Options) as to which such Stock Options remain exercisable. The
adjustment by the Committee shall be final, binding and conclusive. No
fractional shares of Stock shall be issued under the Plan resulting from any
such adjustment, but the Committee in its discretion may make a cash payment in
lieu of fractional shares.
(c) MERGERS. Upon consummation of a consolidation or merger or sale of all
or substantially all of the assets of the Company in which outstanding shares of
Stock are exchanged for securities, cash or other property of an unrelated
corporation or business entity or in the event of a liquidation of the Company
(in each case, a "Transaction"), the Board may, in its discretion, take any one
or more of the following actions, as to outstanding Stock Options: (i) provide
that such Stock Options shall be assumed, or equivalent options shall be
substituted, by the acquiring or succeeding corporation (or an affiliate
thereof), (ii) upon written notice to the optionees, provide that all
unexercised Stock Options will terminate immediately prior to the consummation
of the Transaction unless exercised by the optionee within a specified period
following the date of such notice, and/or (iii) in the event of a business
combination under the terms of which holders of the Stock of the Company will
receive upon consummation thereof a cash payment for each share surrendered in
the business combination, make or provide for a cash payment to the optionees
equal to the difference between (A) the value (as determined by the Committee)
of the consideration payable per share of Stock pursuant to the business
combination (the "Merger Price") times the number of shares of Stock subject to
such outstanding Stock Options (to the extent then exercisable at prices not in
excess of the Merger Price) and (B) the aggregate exercise price of all such
outstanding Stock Options in exchange for the termination of such Stock Options.
In the event Stock
<PAGE> 6
Options will terminate upon the consummation of the Transaction, each optionee
shall be permitted, within a specified period determined by the Committee, to
exercise all non-vested Stock Options, subject to the consummation of the
Transaction.
(d) SUBSTITUTE AWARDS. The Committee may grant Awards under the Plan in
substitution for stock and stock based awards held by employees of another
corporation who concurrently become employees of the Company or a Subsidiary as
the result of a merger or consolidation of the employing corporation with the
Company or a Subsidiary or the acquisition by the Company or a Subsidiary of
property or stock of the employing corporation. The Committee may direct that
the substitute awards be granted on such terms and conditions as the Committee
considers appropriate in the circumstances. Any substitute awards granted under
this Plan shall not count against the share limitation set forth in Section
3(a).
SECTION 4. ELIGIBILITY
Participants in the Plan will be such full or part-time officers, other
employees, Non-Employee Directors and key persons of the Company and its
Subsidiaries who are responsible for or contribute to the management, growth or
profitability of the Company and its Subsidiaries and who are selected from time
to time by the Committee, in its sole discretion. Key persons, for purposes of
this Plan, shall include consultants and prospective employees.
SECTION 5. STOCK OPTIONS
Any Stock Option granted under the Plan shall be in such form as the
Committee may from time to time approve.
Stock Options granted under the Plan may be either Incentive Stock Options
or Non-Qualified Stock Options. Incentive Stock Options may be granted only to
employees of the Company or any Subsidiary that is a "subsidiary corporation"
within the meaning of Section 424(f) of the Code. To the extent that any option
does not qualify as an Incentive Stock Option, it shall constitute a
Non-Qualified Stock Option.
No Awards shall be granted under the Plan after April 13, 2008.
(a) STOCK OPTIONS GRANTED TO EMPLOYEES AND KEY PERSONS. The Committee in
its discretion may grant Stock Options to employees and key persons of the
Company or any Subsidiary. Stock Options granted to employees and key persons
pursuant to this Section 5(a) shall be subject to the following terms and
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable.
If the Committee so determines, Stock Options may be granted in lieu of cash
compensation at the participant's election, subject to such terms and conditions
as the Committee may establish, as well as in addition to other compensation.
(i) EXERCISE PRICE. The exercise price per share for the Stock covered
by a Stock Option granted pursuant to this Section 5(a) shall be determined
by the
<PAGE> 7
Committee at the time of grant but shall be not less than 100% of Fair
Market Value on the date of grant (other than options granted in lieu
of cash compensation). If an employee owns or is deemed to own (by reason
of the attribution rules applicable under Section 424(d) of the Code) more
than 10% of the combined voting power of all classes of stock of the
Company or any Subsidiary or parent corporation and an Incentive Stock
Option is granted to such employee, the option price shall be not less than
110% of Fair Market Value on the grant date.
(ii) OPTION TERM. The term of each Stock Option shall be fixed by the
Committee, but no Incentive Stock Option shall be exercisable more than ten
years after the date the option is granted. If an employee owns or is
deemed to own (by reason of the attribution rules of Section 424(d) of the
Code) more than 10% of the combined voting power of all classes of stock of
the Company or any Subsidiary or parent corporation and an Incentive Stock
Option is granted to such employee, the term of such option shall be no
more than five years from the date of grant.
(iii) EXERCISABILITY; RIGHTS OF A SHAREHOLDER. Stock Options shall
become vested and exercisable at such time or times, whether or not in
installments, as shall be determined by the Committee at or after the grant
date. The Committee may at any time accelerate the exercisability of all or
any portion of any Stock Option. An optionee shall have the rights of a
shareholder only as to shares acquired upon the exercise of a Stock Option
and not as to unexercised Stock Options.
(iv) METHOD OF EXERCISE. Stock Options may be exercised in whole or in
part, by giving written notice of exercise to the Company, specifying the
number of shares to be purchased. Payment of the purchase price may be made
by one or more of the following methods:
(A) In cash, by certified bank check or other instrument
acceptable to the Committee;
(B) Through the delivery (or attestation to the ownership) of
shares of Stock that have been purchased by the optionee on the open
market or that have been beneficially owned by the optionee for at
least six months and are not then subject to restrictions under any
Company plan. Such surrendered shares shall be valued at Fair Market
Value on the exercise date; or
(C) By the optionee delivering to the Company a properly executed
exercise notice together with irrevocable instructions to a broker to
promptly deliver to the Company cash or a check payable and acceptable
to the Company to pay the purchase price; provided that in the event
the optionee chooses to pay the purchase price as so provided, the
optionee and the broker shall comply with such procedures and enter
into such agreements of indemnity and other agreements as the
Committee shall prescribe as a condition of such payment procedure.
Payment instruments will be received subject to collection.
<PAGE> 8
The delivery of certificates representing shares of Stock to be purchased
pursuant to the exercise of a Stock Option will be contingent upon receipt from
the optionee (or a purchaser acting in his stead in accordance with the
provisions of the Stock Option) by the Company of the full purchase price for
such shares and the fulfillment of any other requirements contained in the Stock
Option or applicable provisions of laws. In the event an optionee chooses to pay
the purchase price by previously-owned shares of Stock through the attestation
method, the shares of Stock transferred to the optionee upon the exercise of the
Stock Option shall be net of the number of shares attested to.
(v) TERMINATION BY REASON OF DEATH. If any optionee's employment (or
other business relationship) by the Company and its Subsidiaries terminates
by reason of death, the Stock Option may thereafter be exercised, to the
extent exercisable at the date of death, by the legal representative or
legatee of the optionee, for a period of six months (or such longer period
as the Committee shall specify at any time in the option, employment or
other agreement) from the date of death, or until the expiration of the
stated term of the Option, if earlier.
(vi) TERMINATION BY REASON OF DISABILITY.
(A) Any Stock Option held by an optionee whose
employment (or other business relationship) by the Company
and its Subsidiaries has terminated by reason of Disability
may thereafter be exercised, to the extent it was
exercisable at the time of such termination, for a period of
twelve months (or such longer period as the Committee shall
specify at any time in the option, employment or other
agreement) from the date of such termination of employment
(or other business relationship), or until the expiration of
the stated term of the Option, if earlier.
(B) Except as otherwise provided by the Committee at
the time of grant, the death of an optionee during a period
provided in this Section 5(a)(vi) for the exercise of a
Non-Qualified Stock Option shall extend such period for six
months from the date of death, subject to termination on the
expiration of the stated term of the Option, if earlier.
(vii) TERMINATION BY REASON OF RETIREMENT.
(A) Any Stock Option held by an optionee whose
employment by the Company and its Subsidiaries is terminated
by reason of Retirement may thereafter be exercised, to the
extent it was exercisable at the time of such termination,
for a period of twelve months (or such other period as the
Committee shall specify at any time in the option,
employment or other agreement) from the date of such
termination of employment, or until the expiration of the
stated term of the Option, if earlier.
<PAGE> 9
(B) Except as otherwise provided by the Committee at
any time, the death of an optionee during a period provided
in this Section 5(a)(viii) for the exercise of a Stock
Option shall extend such period for six months from the date
of death, subject to termination on the expiration of the
stated term of the Option, if earlier.
(viii) TERMINATION FOR CAUSE. If any optionee's employment (or
other business relationship) by the Company and its Subsidiaries has
been terminated for Cause, any Stock Option held by such optionee
shall immediately terminate and be of no further force and effect;
provided, however, that the Committee may, in its sole discretion,
provide that such stock option can be exercised for a period of up to
30 days from the date of termination of employment (or other business
relationship) or until the expiration of the stated term of the
Option, if earlier.
(ix) OTHER TERMINATION. Unless otherwise determined by the
Committee, if an optionee's employment (or other business
relationship) by the Company and its Subsidiaries terminates for any
reason other than death, Disability, Retirement or for Cause, any
Stock Option held by such optionee may thereafter be exercised, to the
extent it was exercisable on the date of termination of employment (or
other business relationship), for three months (or such longer period
as the Committee shall specify at any time in the option, employment
or other agreement) from the date of termination of employment (or
other business relationship) or until the expiration of the stated
term of the Option, if earlier.
(x) ANNUAL LIMIT ON INCENTIVE STOCK OPTIONS. To the extent
required for "incentive stock option" treatment under Section 422 of
the Code, the aggregate Fair Market Value (determined as of the time
of grant) of the Stock with respect to which Incentive Stock Options
granted under this Plan and any other plan of the Company or its
Subsidiaries become exercisable for the first time by an optionee
during any calendar year shall not exceed $100,000.
(xi) FORM OF SETTLEMENT. Shares of Stock issued upon exercise of
a Stock Option shall be free of all restrictions under the Plan,
except as otherwise provided in this Plan.
(b) RELOAD OPTIONS. At the discretion of the Committee, Options
granted under the Plan may include a so-called "reload" feature pursuant to
which an optionee exercising an option by the delivery of a number of
shares of Stock in accordance with Section 5(a)(iv)(B) hereof would
automatically be granted an additional Option (with an exercise price equal
to the Fair Market Value of the Stock on the date the additional Option is
granted and with the same expiration date as the original Option being
exercised, and with such other terms as the Committee may provide) to
purchase that number of shares of Stock equal to the number delivered to
exercise the original Option.
(c) STOCK OPTIONS GRANTED TO NON-EMPLOYEE DIRECTORS.
<PAGE> 10
(i) AUTOMATIC GRANT OF OPTIONS.
(A) Each Non-Employee Director who is serving as a Director of the
Company on the fifth business day after the Effective Date shall
automatically be granted on such date a Non-Qualified Stock Option to
acquire 10,000 shares of Stock.
(B) Each Non-Employee Director who is serving as a Director of the
Company on the fifth business day after each annual meeting of
stockholders, beginning with the 1999 annual meeting of stockholders, shall
automatically be granted on such day a Non-Qualified Stock Option to
acquire 10,000 shares of Stock.
(C) The exercise price per share for the Stock covered by a Stock
Option granted under this Section 5(c) shall be equal to the Fair Market
Value of the Stock on the date the Stock Option is granted.
(D) The Committee, in its discretion, may grant additional
Non-Qualified Stock Options to Non-Employee Directors.
(ii) EXERCISE; TERMINATION.
(A) Except as provided in Section 16 or in the option agreement, no
Option granted under Section 5(c) may be exercised before the first
anniversary of the date upon which it was granted; provided, however, that
any Option so granted shall become exercisable upon the termination of
service of the Non-Employee Director because of Disability or death. No
Option issued under this Section 5(c) shall be exercisable after the
expiration of ten years from the date upon which such Option is granted.
(B) The rights of a Non-Employee Director in an Option granted under
Section 5(c) shall terminate on the specified expiration date; provided,
however, that if the Non-Employee Director ceases to be a Director for
Cause, the rights shall terminate immediately on the date on which he
ceases to be a Director.
(C) Any Option granted to a Non-Employee Director and outstanding on
the date of his death may be exercised by the legal representative or
legatee of the optionee for a period of six months from the date of death
or until the expiration of the stated term of the Option, if earlier.
(D) Options granted under this Section 5(c) may be exercised only by
written notice to the Company specifying the number of shares to be
purchased. Payment of the full purchase price of the shares to be purchased
may be made
<PAGE> 11
by one or more of the methods specified in Section 5(a)(iv). An optionee
shall have the rights of a shareholder only as to shares acquired upon the
exercise of a Stock Option and not as to unexercised Stock Options.
(d) NON-TRANSFERABILITY OF OPTIONS. No Stock Option shall be transferable
by the optionee otherwise than by will or by the laws of descent and
distribution and all Stock Options shall be exercisable, during the optionee's
lifetime, only by the optionee, or by the optionee's legal representative or
guardian in the event of the optionee's incapacity. Notwithstanding the
foregoing, the Committee may permit the optionee to transfer his Non-Qualified
Stock Options to members of his immediate family, or to trusts for the benefit
of such family members, or to partnerships in which such family members are the
only partners, provided that the transferee agrees in writing with the Company
to be bound by all of the terms and conditions of this Plan, the applicable
option agreement and all insider trading rules of the Company.
SECTION 6. RESTRICTED STOCK AWARDS
(a) NATURE OF RESTRICTED STOCK AWARD. The Committee may grant Restricted
Stock Awards to any participant. A Restricted Stock Award is an Award entitling
the recipient to acquire, at no cost or for a purchase price determined by the
Committee, shares of Stock subject to such restrictions and conditions as the
Committee may determine at the time of grant ("Restricted Stock"). Conditions
may be based on continuing employment (or other business relationship) and/or
achievement of pre-established performance goals and objectives. In addition, a
Restricted Stock Award may be granted to an employee by the Committee in lieu of
a cash bonus due to such employee pursuant to any other plan of the Company.
(b) AUTOMATIC GRANT OF RESTRICTED STOCK TO INDEPENDENT DIRECTORS.
(i) Each Non-Employee Director who is serving as Director of the
Company on the fifth business day after the Effective Date shall
automatically be granted on such date 3,000 shares of Restricted Stock;
provided, however, that a Non-Employee Director who has not served as a
director of the Company or Avalon Properties, Inc. prior to the Effective
Date shall automatically be granted on such date 2,000 shares of Restricted
Stock. Except as otherwise provided in the award agreement, such shares of
Restricted Stock shall vest twenty percent (20%) on the date of issuance
and twenty percent (20%) on each of the first four anniversaries of the
date of issuance.
(ii) Each Non-Employee Director who is serving as a Director of the
Company on the fifth business day after each annual meeting of
stockholders, beginning with the 1999 Annual Meeting of Stockholders, shall
automatically be granted on such day 2,000 shares of Restricted Stock.
Except as otherwise provided in the award agreement, such shares of
Restricted Stock shall vest twenty percent (20%) on the date of issuance
and twenty percent (20%) on each of the first four anniversaries of the
date of issuance.
<PAGE> 12
(iii) Each Non-Employee Director may, pursuant to the provisions of
Section 7(b), elect to receive Deferred Stock instead of Restricted Stock
provided in this Section 6(b). Any Deferred Stock granted in lieu of
Restricted Stock shall be subject to the same vesting requirements
applicable to the Restricted Stock.
(b) ACCEPTANCE OF AWARD. To the extent applicable, a participant who is
granted a Restricted Stock Award shall have no rights with respect to such Award
unless the participant shall have accepted the Award within 60 days (or such
shorter time period as the Committee may specify) following the award date by
making payment to the Company, if required, in cash, by certified or bank check
or other instrument or form of payment acceptable to the Committee in an amount
equal to the specified purchase price, if any, of the shares covered by the
Award and by executing and delivering to the Company a written instrument that
sets forth the terms and conditions of the Restricted Stock in such form as the
Committee shall determine.
(c) RIGHTS AS A SHAREHOLDER. Upon complying with Section 6(b) above, a
participant shall have all the rights of a shareholder with respect to the
Restricted Stock including voting and dividend rights, subject to
non-transferability restrictions and Company repurchase or forfeiture rights
described in this Section 6 and subject to such other conditions contained in
the written instrument evidencing the Restricted Stock Award. Unless the
Committee shall otherwise determine, certificates evidencing shares of
Restricted Stock shall remain in the possession of the Company until such shares
are vested as provided in Section 6(e) below.
(d) RESTRICTIONS. Except as provided in an individual agreement or as
otherwise determined by the Committee, shares of Restricted Stock may not be
sold, assigned, transferred, pledged or otherwise encumbered or disposed of.
Except as provided in an individual agreement or as otherwise determined by the
Committee, in the event of termination of employment (or other business
relationship) by the Company and its Subsidiaries for any reason (including
death, retirement, Disability, and for Cause), the Company shall have the right,
at the discretion of the Committee, to repurchase shares of Restricted Stock
with respect to which conditions have not lapsed at their purchase price, or to
require forfeiture of such shares to the Company if acquired at no cost, from
the participant or the participant's legal representative. The Company must
exercise such right of repurchase or forfeiture not later than the 90th day
following such termination of employment (or other business relationship),
unless otherwise specified in the written instrument evidencing the Restricted
Stock Award.
(e) VESTING OF RESTRICTED STOCK. The Committee at the time of grant shall
specify the date or dates and/or the attainment of pre-established performance
goals, objectives and other conditions on which the non-transferability of the
Restricted Stock and the Company's right of repurchase or forfeiture shall
lapse. Except as provided in Section 16, the vesting period for Restricted Stock
shall be at least three years, except that in the case of Restricted Stock that
becomes transferable and no longer subject to forfeiture upon the attainment of
such pre-established performance goals, objectives and other conditions, the
vesting period shall be at least one year. Subsequent to such date or dates
and/or the attainment of such pre-established performance goals, objectives and
other conditions, the shares on which all
<PAGE> 13
restrictions have lapsed shall no longer be Restricted Stock and shall be deemed
"vested."
(f) WAIVER, DEFERRAL AND REINVESTMENT OF DIVIDENDS. The written instrument
evidencing the Restricted Stock Award may require or permit the immediate
payment, waiver, deferral or investment of dividends paid on the Restricted
Stock.
SECTION 7. DEFERRED STOCK AWARDS
(a) NATURE OF DEFERRED STOCK AWARDS. A Deferred Stock Award is an Award of
phantom stock units to a participant, subject to restrictions and conditions as
the Committee may determine at the time of grant. Conditions may be based on
continuing employment (or other business relationship) and/or achievement of
pre-established performance goals and objectives. The grant of a Deferred Stock
Award is contingent on the participant executing the Deferred Stock Award
agreement. The terms and conditions of each such agreement shall be determined
by the Committee, and such terms and conditions may differ among individual
Awards and participants. At the end of the deferral period, the Deferred Stock
Award, to the extent vested, shall be paid to the participant in the form of
shares of Stock. (b) Election to Receive Deferred Stock Awards in Lieu of
Compensation. The Committee may, in its sole discretion, permit a participant,
including a Non-Employee Director, to elect to receive a portion of the cash
compensation or Restricted Stock Award otherwise due to such participant in the
form of a Deferred Stock Award. Any such election shall be made in writing and
shall be delivered to the Company no later than the date specified by the
Committee and in accordance with rules and procedures established by the
Committee. The Committee shall have the sole right to determine whether and
under what circumstances to permit such elections and to impose such limitations
and other terms and conditions thereon as the Committee deems appropriate.
(c) RIGHTS AS A STOCKHOLDER. During the deferral period, a participant
shall have no rights as a stockholder; provided, however, that the participant
may be credited with Dividend Equivalent Rights with respect to the phantom
stock units underlying his Deferred Stock Award, subject to such terms and
conditions as the Committee may determine.
(d) RESTRICTIONS. A Deferred Stock Award may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of during the deferral
period.
(e) TERMINATION. Except as may otherwise be provided by the Committee
either in the Award, employment or other agreement or, subject to Section 14
below, in writing after the Award agreement is issued, a participant's right in
all Deferred Stock Awards that have not vested shall automatically terminate
upon the participant's termination of employment (or cessation of business
relationship) with the Company and its Subsidiaries for any reason.
SECTION 8. UNRESTRICTED STOCK AWARDS
The Committee may, in its sole discretion, grant (or sell at a purchase
price determined by the Committee) an Unrestricted Stock Award to any
participant which will entitle such
<PAGE> 14
participant to receive shares of Stock free of any restrictions under the Plan
("Unrestricted Stock"). Unrestricted Stock Awards may be granted or sold as
described in the preceding sentence in respect of past services or other valid
consideration, or in lieu of any cash compensation due to such participant.
SECTION 9. PERFORMANCE SHARE AWARDS
(a) NATURE OF PERFORMANCE SHARES. A Performance Share Award is an award
entitling the recipient to acquire shares of Stock upon the attainment of
specified performance goals. The Committee may make Performance Share Awards
independent of or in connection with the granting of any other Award under the
Plan. Performance Share Awards may be granted under the Plan to any
participants, including those who qualify for awards under other performance
plans of the Company. The Committee in its sole discretion shall determine
whether and to whom Performance Share Awards shall be made, the performance
goals applicable under each such Award, the periods during which performance is
to be measured, and all other limitations and conditions applicable to the
awarded Performance Shares; provided, however, that the Committee may rely on
the performance goals and other standards applicable to other performance unit
plans of the Company in setting the standards for Performance Share Awards under
the Plan.
(b) RESTRICTIONS ON TRANSFER. Performance Share Awards and all rights with
respect to such Awards may not be sold, assigned, transferred, pledged or
otherwise encumbered.
(c) RIGHTS AS A SHAREHOLDER. A participant receiving a Performance Share
Award shall have the rights of a shareholder only as to shares actually received
by the participant under the Plan and not with respect to shares subject to the
Award but not actually received by the participant. A participant shall be
entitled to receive a stock certificate evidencing the acquisition of shares of
Stock under a Performance Share Award only upon satisfaction of all conditions
specified in the written instrument evidencing the Performance Share Award (or
in a performance plan adopted by the Committee).
(d) TERMINATION. Except as may otherwise be provided by the Committee in
the Award, employment or other agreement, a participant's rights in all
Performance Share Awards shall automatically terminate upon the participant's
termination of employment (or other business relationship) by the Company and
its Subsidiaries for any reason (including death, Disability and for Cause).
(e) ACCELERATION, WAIVER, ETC. At any time prior to or upon the
participant's termination of employment (or other business relationship) by the
Company and its Subsidiaries, the Committee may in its sole discretion
accelerate, waive or, subject to Section 14, amend any or all of the goals,
restrictions or conditions imposed under any Performance Share Award.
SECTION 10. QUALIFIED PERFORMANCE-BASED AWARDS TO COVERED EMPLOYEES
<PAGE> 15
Notwithstanding anything to the contrary contained herein, if any
Restricted Stock Award, Deferred Stock Award or Performance Share Award granted
to a Covered Employee is intended to qualify as "performance-based compensation"
under Section 162(m) of the Code and the regulations promulgated thereunder (a
"Performance-based Award"), such Award shall comply with the provisions set
forth below:
(a) PERFORMANCE CRITERIA. The performance criteria used in performance
goals governing Performance-based Awards granted to Covered Employees may
include any or all of the following: (i) the Company's return on equity, assets,
capital or investment, (ii) pre-tax or after-tax profit levels of the Company or
any Subsidiary, a division, an operating unit or a business segment of the
Company, or any combination of the foregoing; (iii) cash flow, funds from
operations or similar measure; (iv) total shareholder return; (v) changes in the
market price of the Stock; (vi) market share; or (vii) earnings per share.
(b) GRANT OF QUALIFIED PERFORMANCE-BASED AWARDS. With respect to each
Performance-based Award granted to a Covered Employee, the Committee shall
select, within the first 90 days of a Performance Cycle (or, if shorter, within
the maximum period allowed under Section 162(m) of the Code) the performance
criteria for such grant, and the achievement targets with respect to each
performance criterion (including a threshold level of performance below which no
amount will become payable with respect to such Award). Each Performance-based
Award will specify the amount payable, or the formula for determining the amount
payable, upon achievement of the various applicable performance targets. The
performance criteria established by the Committee may be (but need not be)
different for each Performance Cycle and different goals may be applicable to
Performance-based Awards to different Covered Employees.
(c) PAYMENT OF QUALIFIED PERFORMANCE-BASED AWARDS. Following the completion
of a Performance Cycle, the Committee shall meet to review and certify in
writing whether, and to what extent, the performance criteria for the
Performance Cycle have been achieved and, if so, to also calculate and certify
in writing the amount of the Qualified Performance-based Awards earned for the
Performance Cycle. The Committee shall then determine the actual size of each
Covered Employee's Qualified Performance-based Award, and, in doing so, may
reduce or eliminate the amount of the Qualified Performance-based Award for a
Covered Employee if, in its sole judgment, such reduction or elimination is
appropriate.
(d) MAXIMUM AWARD PAYABLE. The maximum Qualified Performance-based Award
payable to any one Covered Employee under the Plan for a Performance Cycle is
200,000 shares of Stock (subject to adjustment as provided in Section 3(b)
hereof).
SECTION 11. DIVIDEND EQUIVALENT RIGHTS
(a) DIVIDEND EQUIVALENT RIGHTS. A Dividend Equivalent Right is an Award
entitling the recipient to receive credits based on cash dividends that would
have been paid on the shares of Stock specified in the Dividend Equivalent Right
(or other award to which it
<PAGE> 16
relates) if such shares had been issued to and held by the recipient. A Dividend
Equivalent Right may be granted hereunder to any participant as a component of
another Award or as a freestanding award. The terms and conditions of Dividend
Equivalent Rights shall be specified in the grant. Dividend equivalents credited
to the holder of a Dividend Equivalent Right may be paid currently or may be
deemed to be reinvested in additional shares of Stock, which may thereafter
accrue additional equivalents. Any such reinvestment shall be at Fair Market
Value on the date of reinvestment or such other price as may then apply under a
dividend reinvestment plan sponsored by the Company, if any. Dividend Equivalent
Rights may be settled in cash or shares of Stock or a combination thereof, in a
single installment or installments. A Dividend Equivalent Right granted as a
component of another Award may provide that such Dividend Equivalent Right shall
be settled upon exercise, settlement, or payment of, or lapse of restrictions
on, such other award, and that such Dividend Equivalent Right shall expire or be
forfeited or annulled under the same conditions as such other award. A Dividend
Equivalent Right granted as a component of another Award may also contain terms
and conditions different from such other award.
(b) INTEREST EQUIVALENTS. Any Award under this Plan that is settled in
whole or in part in cash on a deferred basis may provide in the grant for
interest equivalents to be credited with respect to such cash payment. Interest
equivalents may be compounded and shall be paid upon such terms and conditions
as may be specified by the grant.
(c) TERMINATION. Except as may otherwise be provided by the Committee in
the Award, employment or other agreement, a participant's rights in all Dividend
Equivalent Rights or interest equivalents shall automatically terminate upon the
participant's termination of employment (or cessation of business relationship)
with the Company and its Subsidiaries for any reason.
SECTION 12. TAX WITHHOLDING
(a) PAYMENT BY PARTICIPANT. Each participant shall, no later than the date
as of which the value of an Award or of any Stock or other amounts received
thereunder first becomes includable in the gross income of the participant for
Federal income tax purposes, pay to the Company, or make arrangements
satisfactory to the Committee regarding payment of, any Federal, state, or local
taxes of any kind required by law to be withheld with respect to such income.
The Company and its Subsidiaries shall, to the extent permitted by law, have the
right to deduct any such taxes from any payment of any kind otherwise due to the
participant.
(b) PAYMENT IN SHARES. Subject to approval by the Committee, a participant
may elect to have such tax withholding obligation satisfied, in whole or in
part, by (i) authorizing the Company to withhold from shares of Stock to be
issued pursuant to any Award a number of shares with an aggregate Fair Market
Value (as of the date the withholding is effected) that would satisfy the
withholding amount due, (ii) transferring to the Company shares of Stock owned
by the participant with an aggregate Fair Market Value (as of the date the
withholding is effected) that would satisfy the withholding amount due, or (iii)
in a combination of (i) and (ii).
<PAGE> 17
SECTION 13. TRANSFER, LEAVE OF ABSENCE, ETC.
For purposes of the Plan, the following events shall not be deemed a
termination of employment (or other business relationship):
(a) a transfer to the employment (or other business relationship) of the
Company from a Subsidiary or from the Company to a Subsidiary, or from one
Subsidiary to another Subsidiary; or
(b) an approved leave of absence for military service or sickness, or for
any other purpose approved by the Company, if the employee's right to
re-employment (or other business relationship) is guaranteed either by a statute
or by contract or under the policy pursuant to which the leave of absence was
granted or if the Committee otherwise so provides in writing.
SECTION 14. AMENDMENTS AND TERMINATION
The Board may at any time amend or discontinue the Plan and the Committee
may at any time amend or cancel any outstanding Award for the purpose of
satisfying changes in law or for any other lawful purpose, but no such action
shall (a) adversely affect rights under any outstanding Award without the
holder's written consent or (b) without the prior approval of the Company's
stockholders, reduce the exercise price of or otherwise reprice, including
through replacement grants, any outstanding Stock Option. The Committee may also
amend any outstanding Award that is not a Stock Option to reduce the exercise or
purchase price in order to fulfill a legitimate corporate purpose (e.g., to
retain a key employee) or to maintain the value of such outstanding Award under
circumstances beyond the control of the Company's management, but in no event
shall such amendments be made to outstanding Awards representing greater than
10% of the total number of shares of Stock authorized for issuance pursuant to
the Plan. To the extent required by the Code to ensure that Options that have
been granted hereunder as Incentive Stock Options continue to qualify as
Incentive Stock Options, Plan amendments shall be subject to approval by the
Company's stockholders.
SECTION 15. STATUS OF PLAN
With respect to the portion of any Award which has not been exercised and
any payments in cash, Stock or other consideration not received by a
participant, a participant shall have no rights greater than those of a general
creditor of the Company unless the Committee shall otherwise expressly determine
in connection with any Award or Awards. In its sole discretion, the Committee
may authorize the creation of trusts or other arrangements to meet the Company's
obligations to deliver Stock or make payments with respect to Awards hereunder,
provided that the existence of such trusts or other arrangements is consistent
with the provision of the foregoing sentence.
SECTION 16. CHANGE OF CONTROL PROVISIONS
<PAGE> 18
Notwithstanding anything in this Plan to the contrary, upon the occurrence
of a Change of Control as defined in this Section 16:
(a) Each Stock Option shall automatically become fully exercisable.
(b) Restrictions and conditions on Restricted Stock Award, Deferred Stock
Awards and Performance Share Awards shall automatically be deemed waived, and
the recipients of such Awards shall become entitled to receipt of the Stock
subject to such Awards unless the Committee shall otherwise expressly provide at
the time of grant.
(c) "Change of Control" shall mean the occurrence of any one or more of the
following events:
(i) Any individual, entity or group (a "Person") within the meaning of
Sections 13(d) and 14(d) of the Act (other than the Company, any
corporation, partnership, trust or other entity controlled by the Company
(a "Subsidiary"), or any trustee, fiduciary or other person or entity
holding securities under any employee benefit plan or trust of the Company
or any of its Subsidiaries), together with all "affiliates" and
"associates" (as such terms are defined in Rule 12b-2 under the Act) of
such Person, becomes the "beneficial owner" (as such term is defined in
Rule 13d-3 under the Act) of securities of the Company representing 30% or
more of the combined voting power of the Company's then outstanding
securities having the right to vote generally in an election of the
Company's Board ("Voting Securities"), other than as a result of (A) an
acquisition of securities directly from the Company or any Subsidiary or
(B) an acquisition by any corporation pursuant to a reorganization,
consolidation or merger if, following such reorganization, consolidation or
merger the conditions described in clauses (A), (B) and (C) of subparagraph
(iii) of this Section 16(c) are satisfied; or
(ii) Individuals who, as of the Effective Date, constitute the
Company's Board (the "Incumbent Directors") cease for any reason to
constitute at least a majority of the Board, provided, however, that any
individual becoming a director of the Company subsequent to the Effective
Date (excluding, for this purpose, (A) any such individual whose initial
assumption of office is in connection with an actual or threatened election
contest relating to the election of members of the Board of Directors or
other actual or threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board, including by reason of agreement
intended to avoid or settle any such actual or threatened contest or
solicitation, and (B) any individual whose initial assumption of office is
in connection with a reorganization, merger or consolidation, involving an
unrelated entity), whose election or nomination for election by the
Company's stockholders was approved by a vote of at least a majority of the
persons then comprising Incumbent Directors shall for purposes of this Plan
be considered an Incumbent Director;
<PAGE> 19
(iii) The approval by the shareholders of a reorganization, merger or
consolidation of the Company, or, if consummation of such reorganization,
merger or consolidation is subject, at the time of such approval by
shareholders, to the consent of any government or governmental agency,
obtaining such consent (either explicitly or implicitly by consummation),
unless, following such reorganization, merger or consolidation, (A) more
than 50% of, respectively, the then outstanding shares of common stock of
the corporation resulting from such reorganization, merger or consolidation
and the combined voting power of the then outstanding voting securities of
such corporation entitled to vote generally in the election of directors
will beneficially own, directly or indirectly, by all or substantially all
of the individuals and entities who were the beneficial owners,
respectively, of the outstanding Voting Securities immediately prior to
such reorganization, merger or consolidation, (B) no Person (excluding the
Company, any employee benefit plan (or related trust) of the Company, a
Subsidiary or the corporation resulting from such reorganization, merger or
consolidation or any subsidiary thereof, and any Person beneficially
owning, immediately prior to such reorganization, merger or consolidation,
directly or indirectly, 30% or more of the outstanding Voting Securities),
will beneficially own, directly or indirectly, 30% or more of,
respectively, the then outstanding shares of common stock of the
corporation resulting from such reorganization, merger or consolidation or
the combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors, and
(C) at least a majority of the members of the board of directors of the
corporation resulting from such reorganization, merger or consolidation
will have been members of the Incumbent Board at the time of the execution
of the initial agreement providing for such reorganization, merger or
consolidation;
(iv) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company; or
(v) The approval by the shareholders of the sale, lease, exchange or
other disposition of all or substantially all of the assets of the Company,
or, if consummation of such sale, lease, exchange or other disposition is
subject, at the time of such approval by shareholders, to the consent of
any government or governmental agency, obtaining such consent (either
explicitly or implicitly by consummation), other than to a corporation,
with respect to which following such sale, lease, exchange or other
disposition (A) more than 50% of, respectively, the then outstanding shares
of common stock of such corporation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors will beneficially own, directly or
indirectly, by all or substantially all of the individuals and entities who
were the beneficial owners of the outstanding Voting Securities immediately
prior to such sale, lease, exchange or other disposition, (B) no Person
(excluding the Company and any employee benefit plan (or related trust) of
the Company or a Subsidiary or such corporation or a subsidiary thereof and
any Person beneficially owning, immediately prior to such sale, lease,
exchange or other disposition, directly or indirectly, 30% or more of the
outstanding Voting Securities),
<PAGE> 20
will beneficially own, directly or indirectly, 30% or more of,
respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election
of directors and (C) at least a majority of the members of the board of
directors of such corporation will have been members of the Incumbent Board
at the time of the execution of the initial agreement or action of the
Board providing for such sale, lease, exchange or other disposition of
assets of the Company.
Notwithstanding the foregoing, a "Change of Control" shall not be deemed to
have occurred for purposes of this Agreement solely as the result of an
acquisition of securities by the Company which, by reducing the number of shares
of Voting Securities outstanding, increases the proportionate voting power
represented by the Voting Securities beneficially owned by any Person to 30% or
more of the combined voting power of all then outstanding Voting Securities;
provided, however, that if any Person referred to in this sentence shall
thereafter become the beneficial owner of any additional shares of Stock or
other Voting Securities (other than pursuant to a stock split, stock dividend or
similar transaction), then a "Change of Control" shall be deemed to have
occurred for purposes of this Agreement.
SECTION 17. GENERAL PROVISIONS
(a) NO DISTRIBUTION; COMPLIANCE WITH LEGAL REQUIREMENTS. The Committee may
require each person acquiring shares pursuant to an Award to represent to and
agree with the Company in writing that such person is acquiring the shares
without a view to distribution thereof.
No shares of Stock shall be issued pursuant to an Award until all
applicable securities law and other legal and stock exchange requirements have
been satisfied. The Committee may require the placing of such stop-orders and
restrictive legends on certificates for Stock and Awards as it deems
appropriate.
(b) DELIVERY OF STOCK CERTIFICATES. Delivery of stock certificates to
participants under this Plan shall be deemed effected for all purposes when the
Company or a stock transfer agent of the Company shall have delivered such
certificates in the United States mail, addressed to the participant, at the
participant's last known address on file with the Company.
(c) OTHER COMPENSATION ARRANGEMENTS; NO EMPLOYMENT RIGHTS. Nothing
contained in this Plan shall prevent the Board from adopting other or additional
compensation arrangements, including trusts, subject to stockholder approval if
such approval is required; and such arrangements may be either generally
applicable or applicable only in specific cases. The adoption of the Plan and
the grant of Awards do not confer upon any employee any right to continued
employment with the Company or any Subsidiary.
SECTION 18. EFFECTIVE DATE OF PLAN
This Plan was amended and restated as of April 13, 1998 and subsequently
amended on
<PAGE> 21
July 24, 1998.
SECTION 19. GOVERNING LAW
This Plan shall be governed by Maryland law except to the extent such law
is preempted by federal law.
DATE OF APPROVAL OF INITIAL PLAN BY
SHAREHOLDERS: February 15, 1994
DATE OF APPROVAL OF FIRST AMENDED AND
RESTATED PLAN BY BOARD OF DIRECTORS: August 28, 1996
DATE OF APPROVAL OF FIRST AMENDED AND
RESTATED PLAN BY SHAREHOLDERS: April 25, 1997
DATE OF APPROVAL OF SECOND AMENDED AND
RESTATED PLAN BY BOARD OF DIRECTORS: February 26, 1998
DATE OF APPROVAL OF THIRD AMENDED AND
RESTATED PLAN BY BOARD OF DIRECTORS: April 13, 1998
DATE OF APPROVAL OF THIRD AMENDED AND
RESTATED PLAN BY SHAREHOLDERS: June 4, 1998
DATE OF APPROVAL OF AMENDMENTS TO THIRD
AMENDED AND RESTATED PLAN BY BOARD OF
DIRECTORS: July 24, 1998
<PAGE> 1
EXHIBIT 12.1
AVALONBAY COMMUNITIES, INC.
RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Nine months Year Year Year Year
Ended Ended Ended Ended March 17- January 1- Ended
September 30, December 31, December 31, December 31, December 31, March 16, December 31,
1998 1997 1996 1995 1994 1994 1993
------------- ------------ ------------ ------------ ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Operating Income $62,721 $38,941 $19,626 $11,460 $ 7,486 $ (716) $ (447)
(Less) Nonrecurring item:
Gain on sale $ (40) $ -- $ -- $(2,412) $ -- $ -- $ --
(Plus) Extraordinary item:
Unamortized loan fee
write-off $ -- $ -- $ 511 $ -- $ -- $ -- $ --
(Plus) Fixed charges:
Interest expense $35,748 $14,113 $14,276 $11,472 $ 4,782 $2,358 $10,932
Interest capitalized 11,372 6,985 2,567 3,641 2,096 -- --
Debt cost amortization 504 505 667 1,278 241 80 218
Preferred dividend 16,292 7,480 4,264 917 -- -- --
------- ------- ------- ------- ------- ------ -------
Total fixed charges (1) $63,916 $29,083 $21,774 $17,308 $ 7,119 $2,438 $11,150
(Less):
Interest capitalized $11,372 $ 6,985 $ 2,567 $ 3,641 $ 2,096 $ -- $ --
Preferred dividend 16,292 7,480 4,264 917 -- -- --
Adjusted earnings (2) $98,933 $53,559 $35,080 $21,798 $12,509 $1,722 $10,703
------- ------- ------- ------- ------- ------ -------
Ratio (2 divided by 1) 1.55 1.84 1.61 1.26 1.76 0.71 0.96
======= ======= ======= ======= ======= ====== =======
</TABLE>
<PAGE> 2
AVALONBAY COMMUNITIES, INC.
RATIOS OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Nine months Year Year Year Year
Ended Ended Ended Ended March 17- January 1- Ended
September 30, December 31, December 31, December 31, December 31, March 16, December 31,
1998 1997 1996 1995 1994 1994 1993
---------- ------------ ------------ ------------ ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Operating Income $62,721 $38,941 $19,626 $11,460 $ 7,486 $ (716) $ (447)
(Less) Nonrecurring item:
Gain on sale $ (40) $ -- $ -- $(2,412) $ -- $ -- $ --
(Plus) Extraordinary item:
Unamortized loan
fee write-off $ -- $ -- $ 511 $ -- $ -- $ -- $ --
(Plus) Fixed charges:
Interest expense $35,748 $14,113 $14,276 $11,472 $ 4,782 $2,358 $10,932
Interest capitalized 11,372 6,985 2,567 3,641 2,096 -- --
Debt cost amortization 504 505 667 1,278 241 80 218
------- ------- ------- ------- ------- ------ -------
Total fixed charges (1) $47,624 $21,603 $17,510 $16,391 $ 7,119 $2,438 $11,150
(Less):
Interest capitalized $11,372 $ 6,985 $ 2,567 $ 3,641 $ 2,096 $ -- $ --
Adjusted earnings (2) $98,933 $53,559 $35,080 $21,798 $12,509 $1,722 $10,703
------- ------- ------- ------- ------- ------ -------
Ratio (2 divided by 1) 2.08 2.48 2.00 1.33 1.76 0.71 0.96
======= ======= ======= ======= ======= ====== =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 9,458
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 68,337
<PP&E> 3,940,770
<DEPRECIATION> 120,448
<TOTAL-ASSETS> 3,958,566
<CURRENT-LIABILITIES> 143,568
<BONDS> 1,533,858
0
143
<COMMON> 637
<OTHER-SE> 2,248,211
<TOTAL-LIABILITY-AND-EQUITY> 3,958,566
<SALES> 0
<TOTAL-REVENUES> 118,064
<CGS> 0
<TOTAL-COSTS> 45,960
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,385
<INCOME-PRETAX> 31,540
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,540
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
</TABLE>
