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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, 2000
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)
(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:
67,058,099 shares outstanding as of November 1, 2000
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AVALONBAY COMMUNITIES, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
Item 1. Condensed Consolidated Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets as of September 30, 2000 (unaudited) and
December 31, 1999 (audited)................................................................ 2
Condensed Consolidated Statements of Operations (unaudited) for the three and nine
months ended September 30, 2000 and 1999................................................... 3
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months
ended September 30, 2000 and 1999.......................................................... 4-5
Notes to Condensed Consolidated Financial Statements (unaudited)........................... 6-16
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................................. 17-39
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................. 40
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................... 40
Item 2. Changes in Securities...................................................................... 40
Item 3. Defaults Upon Senior Securities............................................................ 40
Item 4. Submission of Matters to a Vote of Security Holders........................................ 40
Item 5. Other Information.......................................................................... 40
Item 6. Exhibits and Reports on Form 8-K........................................................... 40-42
Signatures............................................................................................ 43
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
9-30-00
(unaudited) 12-31-99
--------------------- --------------------
ASSETS
Real estate:
<S> <C> <C>
Land $ 758,796 $ 663,007
Buildings and improvements 3,168,903 2,942,866
Furniture, fixtures and equipment 102,576 82,467
--------------------- --------------------
4,030,275 3,688,340
Less accumulated depreciation (306,758) (206,962)
--------------------- --------------------
Net operating real estate 3,723,517 3,481,378
Construction in progress (including land) 413,595 395,187
Communities held for sale 29,847 164,758
--------------------- --------------------
Total real estate, net 4,166,959 4,041,323
Cash and cash equivalents 10,362 7,621
Cash in escrow 34,159 8,801
Resident security deposits 17,725 14,113
Investments in unconsolidated real estate joint ventures 8,450 8,101
Deferred financing costs, net 13,075 14,056
Deferred development costs 14,723 12,938
Participating mortgage notes 21,483 21,483
Prepaid expenses and other assets 43,301 26,226
--------------------- --------------------
TOTAL ASSETS $ 4,330,237 $ 4,154,662
===================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Variable rate unsecured credit facility $ 146,000 $ 178,600
Unsecured notes 1,135,000 985,000
Notes payable 408,431 430,047
Dividends payable 47,320 44,139
Payables for construction 20,643 18,874
Accrued expenses and other liabilities 53,239 40,226
Accrued interest payable 16,739 28,134
Resident security deposits 28,353 23,980
--------------------- --------------------
TOTAL LIABILITIES 1,855,725 1,749,000
--------------------- --------------------
Minority interest of unitholders in consolidated partnerships 55,294 35,377
Stockholders' equity:
Preferred stock, $.01 par value; $25 liquidation value; 50,000,000
shares authorized at both September 30, 2000 and December 31,
1999; 18,322,700 shares outstanding at both
September 30, 2000 and December 31, 1999 183 183
Common stock, $.01 par value; 140,000,000 shares
authorized at both September 30, 2000
and December 31, 1999; 66,748,339 and 65,758,009 shares
outstanding at September 30,
2000 and December 31, 1999, respectively 667 658
Additional paid-in capital 2,477,119 2,442,510
Deferred compensation (4,200) (3,559)
Dividends in excess of accumulated earnings (54,551) (69,507)
--------------------- --------------------
TOTAL STOCKHOLDERS' EQUITY 2,419,218 2,370,285
--------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,330,237 $ 4,154,662
===================== ====================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 4
AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
-------------------------- --------------------------
9-30-00 9-30-99 9-30-00 9-30-99
--------- --------- --------- ---------
Revenue:
<S> <C> <C> <C> <C>
Rental income $ 145,954 $ 130,734 $ 420,371 $ 372,114
Management fees 261 277 761 930
Other income 136 97 265 198
--------- --------- --------- ---------
Total revenue 146,351 131,108 421,397 373,242
--------- --------- --------- ---------
Expenses:
Operating expenses, excluding property taxes 36,390 35,996 104,860 102,244
Property taxes 12,158 10,718 34,717 32,058
Interest expense 21,385 19,752 61,815 54,915
Depreciation and amortization 30,599 28,144 91,227 80,798
General and administrative 3,359 2,370 9,591 7,163
Non-recurring charges -- 54 -- 16,644
--------- --------- --------- ---------
Total expenses 103,891 97,034 302,210 293,822
--------- --------- --------- ---------
Equity in income of unconsolidated joint ventures 721 860 2,117 2,266
Interest income 1,277 2,304 3,245 5,723
Minority interest in consolidated partnerships (485) (524) (1,499) (1,452)
--------- --------- --------- ---------
Income before gain on sale of communities 43,973 36,714 123,050 85,957
Gain (loss) on sale of communities 14,521 (2,434) 33,273 26,145
--------- --------- --------- ---------
Net income 58,494 34,280 156,323 112,102
Dividends attributable to preferred stock (9,944) (9,944) (29,834) (29,834)
--------- --------- --------- ---------
Net income available to common stockholders $ 48,550 $ 24,336 $ 126,489 $ 82,268
========= ========= ========= =========
Per common share:
Net income - basic $ 0.72 $ 0.37 $ 1.89 $ 1.26
========= ========= ========= =========
Net income - diluted $ 0.71 $ 0.37 $ 1.86 $ 1.25
========= ========= ========= =========
</TABLE>
See accompanying notes to 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
-----------------------------
9-30-00 9-30-99
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 156,323 $ 112,102
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 91,227 80,798
Amortization of deferred compensation 2,394 2,517
Decrease (increase) in investments in unconsolidated real estate joint ventures (100) 383
Income allocated to minority interest in consolidated partnerships 1,499 1,452
Gain on sale of communities (33,273) (26,145)
Increase in resident security deposits, accrued interest on
participating mortgage notes, prepaid expenses and
other assets (25,073) (7,016)
Increase in accrued expenses, other liabilities and accrued
interest payable 6,286 7,773
--------- ---------
Net cash provided by operating activities 199,283 171,864
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Increase (decrease) in construction payables 1,769 (20,718)
Increase in cash in escrow (25,358) (21,136)
Proceeds from sale of communities, net of selling costs 101,393 165,055
Purchase and development of real estate (299,488) (386,148)
--------- ---------
Net cash used in investing activities (221,684) (262,947)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 25,513 35,498
Dividends paid (138,186) (128,504)
Proceeds from sale of unsecured notes 150,000 275,000
Payment of deferred financing costs (1,482) (3,255)
Repayments of notes payable (2,591) (3,574)
Net repayments of unsecured facility (32,600) (82,000)
Contributions from (distributions to) minority partners 24,488 (1,929)
--------- ---------
Net cash provided by financing activities 25,142 91,236
--------- ---------
Net increase in cash 2,741 153
Cash and cash equivalents, beginning of period 7,621 8,890
--------- ---------
Cash and cash equivalents, end of period $ 10,362 $ 9,043
========= =========
Cash paid during period for interest, net of amount capitalized $ 68,158 $ 55,536
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 6
Supplemental disclosures of non-cash investing and financing activities (dollars
in thousands):
During the nine months ended September 30, 2000:
- 147,060 units of limited partnership, valued at $6,070, were presented for
redemption to the DownREIT partnership that issued such units and were
acquired by the Company for an equal number of shares of the Company's
common stock.
- 1,520 units of limited partnership in DownREIT partnerships, valued at $60
were issued in connection with an acquisition for cash and units pursuant to
a forward purchase contract agreed to in 1997 with an unaffiliated party.
- Common and preferred dividends declared but not paid totaled $47,320.
During the nine months ended September 30, 1999:
- 22,623 units of limited partnership, valued at $868, were presented for
redemption to the DownREIT partnership that issued such units and were
acquired by the Company for an equal number of shares of the Company's
common stock.
- 117,178 units of limited partnership in DownREIT partnerships, valued at
$4,614, were issued in connection with an acquisition for cash and units
pursuant to a forward purchase contract agreed to in 1997 with an
unaffiliated party.
- Common and preferred dividends declared but not paid totaled $43,829.
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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. (the "Company," which term is often used to refer to
AvalonBay Communities, Inc. together with its subsidiaries) is a Maryland
corporation that has elected to be taxed as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended. The Company
focuses on the ownership and operation of upscale apartment communities in high
barrier-to-entry markets of the United States. These markets include Northern
and Southern California and selected markets in the Mid-Atlantic, Northeast,
Midwest and Pacific Northwest regions of the country.
At September 30, 2000, the Company owned or held an interest in 126 operating
apartment communities containing 36,724 apartment homes in twelve states and the
District of Columbia, of which two communities containing 1,041 apartment homes
were under reconstruction. The Company also owned ten communities with 2,894
apartment homes under construction and rights to develop an additional 34
communities that, if developed, are expected to contain an estimated 8,825
apartment homes.
During the third quarter of 2000:
- The Company completed the development of Avalon Essex (located in the
Boston, Massachusetts area) containing 154 apartment homes and Avalon
Haven (located in the Fairfield-New Haven, Connecticut area)
containing 128 apartment homes for a total collective investment of
approximately $36,000. The Company commenced the development of three
development communities, Avalon Harbor (located in Stamford,
Connecticut), Avalon Belltown (located in downtown Seattle,
Washington) and Avalon Towers on the Peninsula (located in the San
Jose, California area). When completed, these communities are
expected to contain 634 apartment homes with a projected total
investment of approximately $145,800.
- The Company acquired two communities pursuant to the terms of a
forward purchase contract agreed to in 1997 with an unaffiliated
party. Avalon WildReed (located in the Seattle, Washington area)
containing 234 apartment homes, was acquired for approximately
$22,900. Avalon Palladia (located in the Portland, Oregon area),
containing 497 apartment homes, was acquired for approximately
$46,300.
- The Company completed four redevelopment communities, Avalon
Greenbriar (located in the Seattle, Washington area), Avalon at
Mission Bay (located in the San Diego, California area), Avalon at
Creekside (located in the San Jose, California area) and Avalon
Laguna Niguel (located in the Orange County, California area). These
communities contain 1,455 apartment homes with a total investment in
redevelopment (i.e., exclusive of acquisition costs) of $40,300.
- The Company acquired three parcels of land for an aggregate purchase
price of $21,115. The parcels are located in downtown Washington,
D.C., downtown Seattle, Washington, and the Oakland, California area.
The Company expects to develop three apartment communities, with an
aggregate of 487 apartment homes, on these parcels. As of September
30, 2000, development had commenced on one of these sites, Avalon
Belltown, as mentioned above.
As further discussed in Footnote 7, "Communities Held for Sale", the Company has
adopted a strategy of disposing of certain assets in markets that do not meet
its long-term strategic direction and redeploying the proceeds from such
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<PAGE> 8
sales to help fund the Company's development and redevelopment activities. In
connection with this strategy, the Company sold three communities containing 708
apartment homes for net proceeds of approximately $45,941 during the three
months ended September 30, 2000. The net proceeds from these dispositions will
be redeployed to develop or redevelop communities currently under construction
or reconstruction. Pending such redeployment, the proceeds from the sale of
these communities were used to reduce amounts outstanding under the Company's
variable rate unsecured credit facility.
The interim unaudited financial statements have been prepared in accordance with
accounting principles generally accepted in the United States ("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 Annual Report on Form 10-K for the year
ended December 31, 1999. The results of operations for the three and nine months
ended September 30, 2000 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.
Presentation of Historical Financial Statements for the Three and Nine Months
Ended September 30, 1999
The financial presentation of the historical financial statements for the three
and nine months ended September 30, 1999, has been changed from the presentation
that appeared in the Company's Form 10-Q for the three and nine months ended
September 30, 1999. For a discussion of the change in the presentation, see
Footnote 2 to the Consolidated Financial Statements presented in the Company's
Form 10-K for the fiscal year ended December 31, 1999.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly-owned partnerships and certain joint
venture partnerships in addition to subsidiary partnerships structured as
DownREITs. All significant intercompany balances and transactions have been
eliminated in consolidation.
In each of the partnerships structured as DownREITs, either the Company or one
of the Company's wholly-owned subsidiaries is the general partner, and there are
one or more limited partners whose interest in the partnership is represented by
units of limited partnership interest. For each DownREIT partnership, limited
partners are entitled to receive distributions before any distribution is made
to the general partner. Although the partnership agreements for each of the
DownREITs are different, generally the distributions per unit paid to the
holders of units of limited partnership interests approximate the Company's
current common stock dividend per share. Each DownREIT partnership has been
structured so that it is unlikely the limited partners will be entitled to a
distribution greater than the initial distribution provided for in the
partnership agreement. The holders of units of limited partnership interest have
the right to present each unit of limited partnership interest for redemption
for cash equal to the fair market value of a share of the Company's common stock
on the date of redemption. In lieu of a cash redemption of a limited partner's
unit, the Company may elect to acquire any unit presented for redemption for one
share of common stock.
Real Estate
Significant expenditures that improve or extend the life of an 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 their development, redevelopment and acquisition.
Expenditures for maintenance and repairs are charged to operations as incurred.
7
<PAGE> 9
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 apartment homes (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.
Depreciation is calculated on buildings and improvements using the straight-line
method over their estimated useful lives, which range from seven to thirty
years. Furniture, fixtures and equipment are generally depreciated using the
straight-line method over their estimated useful lives, which range from three
years (primarily computer related equipment) 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.
Earnings per Common Share
In accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share", basic earnings per share for the three
and nine months ended September 30, 2000 and 1999 is computed by dividing
earnings available to common shares (net income less preferred stock dividends)
by the weighted average number of shares and units of limited partnership in the
Company's DownREIT partnerships that were outstanding during the period.
Additionally, other potentially dilutive common shares are considered when
calculating earnings per share on a diluted basis in accordance with the
provisions of SFAS No. 128.
The Company's basic and diluted weighted average shares outstanding for the
three and nine months ended September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
--------------------------- ---------------------------
9-30-00 9-30-99 9-30-00 9-30-99
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding - basic 66,490,846 64,832,386 66,109,093 64,412,322
Weighted average units outstanding 851,677 984,398 901,854 915,606
---------- ---------- ---------- ----------
Weighted average common shares
and units outstanding - basic 67,342,523 65,816,784 67,010,947 65,327,928
Effect of dilutive securities 1,273,141 406,112 854,312 431,926
---------- ---------- ---------- ----------
Weighted average common shares
and units outstanding - diluted 68,615,664 66,222,896 67,865,259 65,759,854
========== ========== ========== ==========
</TABLE>
Certain options to purchase shares of common stock totaling 3,000 and 65,500
were outstanding during the three and nine months ended September 30, 2000,
respectively, and 2,390,176 and 2,401,676 were outstanding during the three and
nine months ended September 30, 1999, respectively, but were not included in the
computation of diluted earnings per share because the options' exercise prices
were greater than the average market price of the common shares.
Non-recurring Charges
In February 1999, the Company announced certain management changes including (i)
the departure of three senior officers who became entitled to severance benefits
in accordance with the terms of their employment agreements with the Company
dated as of March 9, 1998 and (ii) elimination of duplicate accounting functions
and related employee departures. The Company recorded a non-recurring charge of
$16,076 in the first quarter of 1999 related to the
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expected costs associated with this management realignment and certain related
organizational adjustments. The non-recurring charge consisted of $15,476 in
severance benefits, $250 related to costs to eliminate duplicate accounting
functions and $350 in legal fees. As of September 30, 2000 all cash payments
related to the non-recurring charge had been incurred.
The non-recurring charge also included $54 and $568 of Year 2000 remediation
costs that had been incurred for the three and nine months ended September 30,
1999, respectively.
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.
Recently Issued Accounting Standards
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 on 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. In June 1999, the Financial Accounting
Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective date of SFAS No. 133." SFAS No.
137 delays the effective date of SFAS No. 133 for one year, to fiscal years
beginning after June 15, 2000. In June 2000, the Financial Accounting Standards
Board issued SFAS No. 138, "Accounting for Certain Instruments and Certain
Hedging Activities." SFAS No. 138 addresses a limited number of issues causing
implementation difficulties for entities that apply SFAS No. 133. The Company
currently plans to adopt these pronouncements effective January 1, 2001, and
will determine both the method and impact of adoption, which is not expected to
be material to the financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements". SAB No. 101
provides guidance on applying generally accepted accounting principles to
revenue recognition issues in financial statements. The Company adopted SAB No.
101 effective with the March 31, 2000 reporting period, as required, and the
adoption did not have a material effect on the Company's condensed consolidated
financial statements.
2. Insured Fire at Development Community
On August 30, 2000, a fire occurred at Avalon River Mews, a 408 apartment home
development community located in the Northern New Jersey area. At the time, the
community was still under construction and was unoccupied. The book value of the
destroyed assets approximated $13,900. The Company has property damage and
business interruption insurance and is currently preparing its insurance claim
for the cost of replacing the destroyed assets as well as for business
interruption losses. As of September 30, 2000, the Company has reduced the
carrying value of the destroyed assets to zero, and has concurrently recorded an
insurance receivable of $10,900, equal to the book value of the destroyed assets
less an initial insurance recovery of $3,000. The Company does not anticipate
this event will have a material adverse impact on the financial condition or
results of operations of the Company.
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3. Interest Capitalized
Capitalized interest associated with communities under development or
redevelopment totaled $5,255 and $5,208 for the three months ended September 30,
2000 and 1999, respectively, and $12,912 and $18,357 for the nine months ended
September 30, 2000 and 1999, respectively.
4. Notes Payable, Unsecured Notes and Credit Facility
The Company's notes payable, unsecured notes and credit facility are summarized
as follows:
<TABLE>
<CAPTION>
9-30-00 12-31-99
---------- -----------
<S> <C> <C>
Fixed rate mortgage notes payable (conventional
and tax-exempt) $ 340,471 $ 362,087
Variable rate mortgage notes payable (tax-exempt) 67,960 67,960
Fixed rate unsecured notes 1,135,000 985,000
---------- ----------
Total notes payable and unsecured notes 1,543,431 1,415,047
Variable rate unsecured credit facility 146,000 178,600
---------- ----------
Total notes payable, unsecured notes and
credit facility $1,689,431 $1,593,647
========== ==========
</TABLE>
Mortgage notes payable are collateralized by certain apartment communities and
mature at various dates from May 2001 through December 2036. The weighted
average interest rate of the Company's variable rate notes and credit facility
was 7.3% at September 30, 2000. The weighted average interest rate of the
Company's fixed rate notes (conventional and tax-exempt) was 7.0% at September
30, 2000.
The maturity schedule for the Company's unsecured notes is as follows:
<TABLE>
<CAPTION>
Year of
Maturity Principal Interest Rate
--------------------------------------------------------------
<S> <C> <C>
2002 $ 100,000 7.375%
2003 $ 50,000 6.25%
$ 100,000 6.5%
2004 $ 125,000 6.58%
2005 $ 100,000 6.625%
$ 50,000 6.5%
2006 $ 150,000 6.8%
2007 $ 110,000 6.875%
2008 $ 50,000 6.625%
$ 150,000 8.25%
2009 $ 150,000 7.5%
</TABLE>
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The Company's unsecured 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.
The Company has a $600,000 variable rate unsecured credit facility with Morgan
Guaranty Trust Company of New York, Union Bank of Switzerland and Fleet National
Bank serving as co-agents for a syndicate of commercial banks. The credit
facility bears interest at a spread over the London Interbank Offered Rate
("LIBOR") based on rating levels achieved on the Company's unsecured notes and
on a maturity selected by the Company. The current stated pricing is LIBOR plus
0.6% per annum (7.1% at September 30, 2000). In addition, the credit facility
includes a competitive bid option (which allows banks that are part of the
lender consortium to bid to make loans to the Company at a rate that is lower
than the stated rate provided by the credit facility) for up to $400,000. The
Company is subject to certain customary covenants under the credit facility,
including, but not limited to, maintaining certain maximum leverage ratios, a
minimum fixed charges 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, as defined therein. The credit facility matures
in July 2001 and has two, one-year extension options.
5. Stockholders' Equity
The following summarizes the changes in stockholders' equity for the nine months
ended September 30, 2000:
<TABLE>
<CAPTION>
Additional
Preferred Common paid-in
stock stock capital
------------------ ----------------- -------------------
<S> <C> <C> <C>
Stockholders' equity, December 31, 1999 $ 183 $ 658 $ 2,442,510
Dividends declared to common and
preferred stockholders -- -- --
Issuance of common stock, net of
forfeitures -- 9 34,609
Amortization of deferred compensation -- -- --
Net income -- -- --
------------------ ----------------- -------------------
Stockholders' equity, September 30, 2000 $ 183 $ 667 $ 2,477,119
================== ================= ===================
</TABLE>
<TABLE>
<CAPTION>
Dividends
in excess of Total
Deferred accumulated stockholders'
compensation earnings equity
----------------- ----------------- -------------------
<S> <C> <C> <C>
Stockholders' equity, December 31, 1999 $ (3,559) $ (69,507) $ 2,370,285
Dividends declared to common and
preferred stockholders -- (141,367) (141,367)
Issuance of common stock, net of
forfeitures (3,035) -- 31,583
Amortization of deferred compensation 2,394 -- 2,394
Net income -- 156,323 156,323
----------------- ----------------- -------------------
Stockholders' equity, September 30, 2000 $ (4,200) $ (54,551) $ 2,419,218
================= ================= ===================
</TABLE>
During the nine months ended September 30, 2000, the Company issued 360,197
shares of common stock upon the exercise of stock options, 388,155 shares of
common stock through the Company's Dividend Reinvestment Plan, 147,060 shares of
common stock to acquire DownREIT limited partnership units from third parties,
10,568 shares of common stock in connection with the Company's Employee Stock
Purchase Plan and 133,456 shares of common stock in connection with restricted
stock grants to employees. A total of 49,106 shares of common stock issued in
connection with restricted stock grants were forfeited during the nine months
ended September 30, 2000.
6. Investments in Unconsolidated Real Estate Joint Ventures
The Company accounts for investments in unconsolidated entities in accordance
with Accounting Principles Board Opinion No. 18. The Company applies the equity
method of accounting to an investment in an entity if it has the ability to
significantly influence that entity. All other unconsolidated investments are
recorded under the cost method of accounting. The Company's investments in
unconsolidated real estate ventures are generally recorded under the equity
method of accounting, whereas the Company's investments in unconsolidated
non-real estate entities are recorded under the cost method of accounting. At
September 30, 2000, the Company's investments in unconsolidated real estate
joint ventures consisted of:
- a 50% general partnership interest in a partnership that owns the
Falkland Chase community;
11
<PAGE> 13
- a 49% general partnership interest in a partnership that owns the Avalon
Run community;
- a 50% limited liability company membership interest in a limited
liability company that owns the Avalon Grove community.
The following is a combined summary of the financial position of these joint
ventures as of the dates presented.
<TABLE>
<CAPTION>
9-30-00
(unaudited) 12-31-99
-------------- --------------
Assets:
<S> <C> <C>
Real estate, net $ 92,869 $ 94,644
Other assets 5,699 4,874
-------------- --------------
Total assets $ 98,568 $ 99,518
============== ==============
Liabilities and partners' equity:
Mortgage notes payable $ 25,900 $ 26,000
Other liabilities 6,502 5,915
Partners' equity 66,166 67,603
-------------- --------------
Total liabilities and partners' equity $ 98,568 $ 99,518
============== ==============
</TABLE>
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
(unaudited) (unaudited)
----------------------------- ----------------------------
9-30-00 9-30-99 9-30-00 9-30-99
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Rental income $ 5,645 $ 5,323 $ 16,434 $ 15,489
Other income 20 8 27 18
Operating and other expenses (1,597) (1,455) (4,363) (4,196)
Mortgage interest expense (274) (196) (816) (564)
Depreciation and amortization (808) (773) (2,390) (2,314)
------------- ------------ ------------ -------------
Net income $ 2,986 $ 2,907 $ 8,892 $ 8,433
============= ============ ============ =============
</TABLE>
7. Communities Held for Sale
During 1998, the Company adopted a strategy of disposing of certain assets in
markets that do not meet its long-term strategic direction. In connection with
this strategy, the Company solicits competing bids from unrelated parties for
individual assets, and considers the sales price and tax ramifications of each
proposal. In connection with this strategy, the Company sold an aggregate of 23
communities and a participating mortgage note during 1998 and 1999.
12
<PAGE> 14
The communities sold during the first nine months of 2000 and the respective
sales price and net proceeds are summarized below:
<TABLE>
<CAPTION>
Period Apartment Gross sales Net
Communities Location of sale homes Debt price proceeds
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Avalon Chase Marlton, NJ 1Q00 360 $ -- $ 29,700 $ 29,325
Avalon Pines Virginia Beach, VA 2Q00 174 5,177 11,000 5,354
Avalon Birches Chesapeake, VA 2Q00 312 -- 21,000 20,773
Glen Creek Morgan Hill, CA 3Q00 138 -- 19,050 18,780
Avalon Woods Richmond, VA 3Q00 268 -- 12,100 11,814
Governor's Square Sacramento, CA 3Q00 302 13,848 30,250 15,347
-------------- ----------------- --------------- ----------------
1,554 $ 19,025 $ 123,100 $ 101,393
============== ================= =============== ================
</TABLE>
Management intends to market additional communities for sale. However, there can
be no assurance that such assets will be sold, or that we will sell the assets
on financially advantageous terms. The assets targeted for sale include land,
buildings and improvements and furniture, fixtures and equipment, and are
recorded at the lower of cost or fair value less estimated selling costs. The
Company has not determined a need to recognize a write-down in its real estate
to arrive at net realizable value, although there can be no assurance that the
Company can sell these assets for amounts that equal or exceed its estimates of
net realizable value. At September 30, 2000, total real estate, net of
accumulated depreciation, subject to sale totaled $29,847. 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 at September 30, 2000 of $528 and $152 for the
three months ended September 30, 2000 and 1999, respectively, and $1,440 and
$487 for the nine months ended September 30, 2000 and 1999, respectively.
8. Segment Reporting
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," established standards for reporting financial and descriptive
information about operating segments in annual financial statements. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance. The Company's chief operating decision
making group consists primarily of the Company's senior officers.
The Company's reportable operating segments include Stable Communities,
Developed Communities and Redeveloped Communities:
- Stable Communities are communities that 1) have attained stabilized
occupancy levels (at least 95% occupancy) and operating costs since the
beginning of the prior calendar year (these communities are also known as
Established Communities); or 2) were acquired after the beginning of the
previous calendar year but were stabilized in terms of occupancy levels
and operating costs at the time of acquisition, and remained stabilized
throughout the period ending September 30, 2000. Stable Communities do
not include communities where planned redevelopment or development
activities have not yet commenced. The primary financial measure for this
business segment is Net Operating Income ("NOI"), which represents total
revenue less operating expenses and property taxes. With respect to
Established Communities, an additional financial measure of performance
is NOI for the current year as compared against the prior year and
against current year budgeted NOI. With respect to other Stable
Communities, performance is primarily based on reviewing growth in NOI
for the current period as compared against prior periods within the
calendar year and against current year budgeted NOI.
13
<PAGE> 15
- Developed Communities are communities which completed development during
the prior calendar year of presentation. The primary financial measure
for this business segment is Operating Yield (defined as NOI divided by
total capitalized costs). Lease-up activities immediately following the
completion of development adversely impact operating yields, as
stabilized occupancy and operating costs are not yet reached. Performance
of Developed Communities is based on comparing Operating Yields against
projected yields as determined by Management prior to undertaking the
development activity.
- Redeveloped Communities are communities that completed redevelopment
during the prior calendar year of presentation. The primary financial
measure for this business segment is Operating Yield. Lease-up activities
immediately following the completion of redevelopment adversely impact
operating yields, as stabilized occupancy and operating costs are not yet
reached. Performance for Redeveloped Communities is based on comparing
Operating Yields against projected yields as estimated by Management
prior to undertaking the redevelopment activity.
Other communities owned by the Company, which are not included in the above
segments, are communities that were under development or redevelopment at any
point in time during the applicable calendar year as well as communities held
for sale. The primary performance measure for these assets depends on the stage
of development or redevelopment of the community. While under development or
redevelopment, Management monitors actual construction costs against budgeted
costs as well as economic occupancy. The primary performance measure for
communities held for sale is NOI.
Net Operating Income for each community is generally equal to that community's
contribution to Funds from Operations ("FFO"), except that interest expense
related to indebtedness secured by an individual community and depreciation and
amortization on non-real estate assets are not included in the community's NOI
although such expenses decrease the Company's consolidated net income and FFO.
The segments are classified based on the individual community's status as of the
beginning of the given calendar year. Therefore, each year the composition of
communities within each business segment is adjusted. Accordingly, the amounts
between years are not directly comparable.
14
<PAGE> 16
<TABLE>
<CAPTION>
For the three months ended
--------------------------------------------------------------------------------
Stable Developed Redeveloped
Communities Communities Communities Other Total
--------------- --------------- -------------- -------------- ---------------
For the three and nine months
ended 9-30-00
Segment Results
<S> <C> <C> <C> <C> <C>
Total revenue $ 80,377 $ 25,794 $ 9,091 $ 30,634 $ 145,896
Net operating income $ 57,733 $ 19,508 $ 6,012 $ 21,508 $ 104,761
Gross real estate $ 2,150,725 $ 661,073 $ 292,954 $ 1,078,157 $ 4,182,909
Operating Yield 10.7% 11.8% 8.2%
Non-allocated operations
Total revenue $ -- $ -- $ -- $ 455 $ 455
Net operating income $ -- $ -- $ -- $ 286 $ 286
Gross real estate $ -- $ -- $ -- $ 292,193 $ 292,193
Total, AvalonBay
Total revenue $ 80,377 $ 25,794 $ 9,091 $ 31,089 $ 146,351
Net operating income $ 57,733 $ 19,508 $ 6,012 $ 21,794 $ 105,047
Gross real estate $ 2,150,725 $ 661,073 $ 292,954 $ 1,370,350 $ 4,475,102
</TABLE>
<TABLE>
<CAPTION>
For the three months ended
--------------------------------------------------------------------------------
Stable Developed Redeveloped
Communities Communities Communities Other Total
--------------- --------------- -------------- -------------- ---------------
For the three and nine months
ended 9-30-99
Segment Results
<S> <C> <C> <C> <C> <C>
Total revenue $ 86,982 $ 8,488 $ 7,401 $ 27,654 $ 130,525
Net operating income $ 59,870 $ 6,235 $ 5,326 $ 18,069 $ 89,500
Gross real estate $2,465,020 $ 225,469 $ 232,549 $1,065,549 $3,988,587
Operating Yield 9.7% 11.1% 9.2%
Non-allocated operations
Total revenue $ -- $ -- $ -- $ 583 $ 583
Net operating income $ -- $ -- $ -- $ 626 $ 626
Gross real estate $ -- $ -- $ -- $ 248,128 $ 248,128
Total, AvalonBay
Total revenue $ 86,982 $ 8,488 $ 7,401 $ 28,237 $ 131,108
Net operating income $ 59,870 $ 6,235 $ 5,326 $ 18,695 $ 90,126
Gross real estate $2,465,020 $ 225,469 $ 232,549 $1,313,677 $4,236,715
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended
-------------------------------------------------------------------------------------
Stable Developed Redeveloped
Communities Communities Communities Other Total
--------------- --------------- ---------------- -------------- ---------------
For the three and nine months
ended 9-30-00
Segment Results
<S> <C> <C> <C> <C> <C>
Total revenue $ 233,027 $ 74,182 $ 26,627 $ 86,287 $ 420,123
Net operating income $ 168,495 $ 55,987 $ 17,566 $ 59,252 $ 301,300
Gross real estate $2,150,725 $ 661,073 $ 292,954 $1,078,157 $4,182,909
Operating Yield 10.4% 11.3% 8.0%
Non-allocated operations
Total revenue $ -- $ -- $ -- $ 1,274 $ 1,274
Net operating income $ -- $ -- $ -- $ 942 $ 942
Gross real estate $ -- $ -- $ -- $ 292,193 $ 292,193
Total, AvalonBay
Total revenue $ 233,027 $ 74,182 $ 26,627 $ 87,561 $ 421,397
Net operating income $ 168,495 $ 55,987 $ 17,566 $ 60,194 $ 302,242
Gross real estate $2,150,725 $ 661,073 $ 292,954 $1,370,350 $4,475,102
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended
-------------------------------------------------------------------------------------
Stable Developed Redeveloped
Communities Communities Communities Other Total
--------------- --------------- ---------------- -------------- ---------------
For the three and nine months
ended 9-30-99
Segment Results
<S> <C> <C> <C> <C> <C>
Total revenue $ 261,866 $ 24,288 $ 21,726 $ 63,701 $ 371,581
Net operating income $ 181,406 $ 18,201 $ 15,362 $ 39,729 $ 254,698
Gross real estate $2,465,020 $ 225,469 $ 232,549 $1,065,549 $3,988,587
Operating Yield 9.8% 10.8% 8.8%
Non-allocated operations
Total revenue $ -- $ -- $ -- $ 1,661 $ 1,661
Net operating income $ -- $ -- $ -- $ 1,465 $ 1,465
Gross real estate $ -- $ -- $ -- $ 248,128 $ 248,128
Total, AvalonBay
Total revenue $ 261,866 $ 24,288 $ 21,726 $ 65,362 $ 373,242
Net operating income $ 181,406 $ 18,201 $ 15,362 $ 41,194 $ 256,163
Gross real estate $2,465,020 $ 225,469 $ 232,549 $1,313,677 $4,236,715
</TABLE>
In addition to reporting segments based on the above property types, Management
currently reviews its operating segments by geographic regions. Because the
various locations within each individual region have similar economic and other
characteristics, Management finds it useful to review the performance of the
Company's communities in those locations on a regional, aggregated basis.
The accounting policies applicable to the operating segments described above are
the same as those described in the summary of significant accounting policies.
Operating expenses as reflected on the Condensed Consolidated Statements of
Operations include $7,244 and $5,732 for the three months ended September 30,
2000 and 1999, respectively, and $20,422 and $17,223 for the nine months ended
September 30, 2000 and 1999, respectively, of property management overhead costs
that are not allocated to individual communities. These costs are not reflected
in NOI as shown in the above tables. The amount reflected for "Communities held
for sale" on the Condensed Consolidated Balance Sheets is net of $1,385 of
accumulated depreciation as of September 30, 2000.
9. Subsequent Events
During October 2000, the Company commenced construction of Avalon Westpark, a
218 apartment home community located in the San Jose, California area. The
expected development cost for Avalon Westpark is $49,500. Also, the Company
commenced redevelopment of Avalon at Prudential Center, located in downtown
Boston, Massachusetts. Total investment in redevelopment (i.e., exclusive of
acquisition costs) for this 781 apartment home community is expected to total
$25,000.
Subsequent to September 30, 2000, the Company made investments in BroadBand
Residential, Inc. and Viva Group Inc., companies which specialize in the
development of real estate-based software applications and ancillary services.
15
<PAGE> 17
The aggregate investment in BroadBand Residential, Inc. and Viva Group Inc.
combined with an existing investment in a separate real estate-based software
development company, totals $4,114.
16
<PAGE> 18
ITEM 2. MANAGMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
This Form 10-Q, including the footnotes to the Company's condensed consolidated
financial statements, contains "forward-looking statements" as that term is
defined under the Private Securities Litigation Reform Act of 1995. You can
identify forward-looking statements by our use of the words "believe," "expect,"
"anticipate," "intend," "estimate," "assume," and other similar expressions in
this Form 10-Q, that predict or indicate future events and trends or that do not
relate to historical matters. In addition, information concerning the following
are forward-looking statements:
- the timing and cost of completion of apartment communities under
construction, reconstruction, development or redevelopment;
- the timing of lease-up and occupancy of apartment communities;
- the pursuit of land on which we are considering future development;
- cost, yield and earnings estimates; and
- the development, implementation and use of management information
systems.
We cannot assure the future results or outcome of the matters described in
forward-looking statements; rather, these statements merely reflect our current
expectations of the approximate outcomes of the matters discussed. You should
not rely on forward-looking statements because they involve known and unknown
risks, uncertainties and other factors, some of which are beyond our control.
These risks, uncertainties and other factors may cause our actual results,
performance or achievements to differ materially from the anticipated future
results, performance or achievements expressed or implied by these
forward-looking statements. Some of the factors that could cause our actual
results, performance or achievements to differ materially from those expressed
or implied by these forward-looking statements include, but are not limited to,
the following:
- we may be unsuccessful in managing our current growth in the number of
apartment communities and the related growth of our business operations;
- our previous or possible future expansion into new geographic market
areas may not produce financial results that are consistent with our
historical performance;
- we may fail to secure development opportunities due to an inability to
reach agreements with third parties or to obtain desired zoning and other
local approvals;
- we may abandon development opportunities for a number of reasons,
including changes in local market conditions which make development less
desirable, increases in costs of development and increases in the cost of
capital;
- construction costs of a community may exceed our original estimates;
- we may not complete construction and lease-up of communities under
development or redevelopment on schedule, resulting in increased interest
expense, and construction costs and rental revenues that are lower than
originally expected;
- occupancy rates and market rents may be adversely affected by local
economic and market conditions that are beyond our control, such as
changes in employment rates or population levels;
- financing may not be available on favorable terms or at all, and our cash
flow from operations and access to cost effective capital may be
insufficient for future development activity and could limit our pursuit
of opportunities;
- our cash flow may be insufficient to meet required payments of principal
and interest, and we may be unable to refinance existing indebtedness or
the terms of such refinancing may not be as favorable as the terms of
existing indebtedness; and
17
<PAGE> 19
- software applications and ancillary services being developed by companies
in which we have invested may be unsuccessful in achieving their business
plans, which could lead to a partial or complete loss of the investment
in these companies.
You should read our unaudited condensed consolidated financial statements and
notes included in this report and the audited financial statements for the year
ended December 31, 1999 and the notes included in our annual report on Form 10-K
in conjunction with the following discussion. You should also carefully review
the section in Item 2 of this report that is captioned "Risks of Development and
Redevelopment." These forward-looking statements represent our estimates and
assumptions only as of the date of this report. We do not undertake to update
these forward-looking statements, and you should not rely upon them after the
date of this report.
Business Description and Community Information
AvalonBay is a Maryland corporation that has elected to be treated as a real
estate investment trust, or REIT, for federal income tax purposes. We focus on
the ownership and operation of upscale apartment communities (which generally
command among the highest rents in their submarkets) in high barrier-to-entry
markets of the United States. This is because we believe that the limited new
supply of upscale apartment homes in these markets helps achieve more
predictable growth in cash flows. These barriers-to-entry generally include a
difficult and lengthy entitlement process with local jurisdictions and dense
in-fill locations where zoned and entitled land is in limited supply. These
markets are located in Northern and Southern California and selected states in
the Mid-Atlantic, Northeast, Midwest and Pacific Northwest regions of the
country.
We are a fully-integrated real estate organization with in-house expertise in
the following areas:
- development and redevelopment;
- construction and reconstruction;
- leasing and management;
- acquisition and disposition;
- financing;
- marketing; and
- information technologies.
With our expertise and in-house capabilities, we believe we are well-positioned
to continue to pursue opportunities to develop and acquire upscale apartment
homes in our target markets. Our ability to pursue attractive opportunities,
however, may be constrained by capital market conditions that limit the
availability of cost effective capital to finance these activities. We have
limited our acquisition activity as compared to prior years due to these capital
constraints, and we expect to direct most of our invested capital to new
developments and redevelopments, rather than acquisitions, for the foreseeable
future. See "Liquidity and Capital Resources" and "Future Financing and Capital
Needs."
We believe 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. We intend to pursue appropriate new investments, including both new
developments and acquisitions of communities, subject to the availability of
cost-effective capital. We intend to pusue these investments in markets where
constraints to new supply exist and where new household formations have
out-paced multifamily permit activity in recent years.
18
<PAGE> 20
Our real estate investments as of November 1, 2000 consist primarily of
stabilized operating apartment communities as well as communities in various
stages of the development and redevelopment cycle and land or land options held
for development. We classify these investments into the following categories:
<TABLE>
<CAPTION>
Number of Number of
communities apartment homes
----------- ---------------
<S> <C> <C>
Current Communities 126 36,724
Stabilized Communities 124 35,683
Established Communities: 74 19,593
Northern California 24 6,275
Southern California 8 1,855
Mid-Atlantic 17 4,835
Northeast 18 4,773
Midwest 6 1,591
Pacific Northwest 1 264
Other Stabilized Communities: 50 16,090
Northern California 10 3,028
Southern California 8 2,920
Mid-Atlantic 3 1,075
Northeast 19 6,270
Midwest 2 624
Pacific Northwest 8 2,173
Lease-Up Communities -- --
Redevelopment Communities 2 1,041
Development Communities 10 2,894
Development Rights 34 8,825 (*)
</TABLE>
(*) Represents an estimate
Current Communities are apartment communities that have been completed
and have reached occupancy of at least 95%, have been complete for one
year, are in the initial lease-up process or are under redevelopment.
Current Communities consist of the following:
Stabilized Communities. Represents all Current Communities that
have completed initial lease-up by attaining physical occupancy
levels of at least 95% or have been completed for one year,
whichever occurs earlier. Stabilized Communities are categorized
as either Established Communities or Other Stabilized Communities.
- Established Communities. Represents all Stabilized
Communities owned as of January 1, 1999, with stabilized
operating costs as of January 1, 1999 such that a
comparison of 1999 operating results to 2000 operating
results is meaningful.
19
<PAGE> 21
- Other Stabilized Communities. Represents Stabilized
Communities as defined above, but which became stabilized
or were acquired after January 1, 1999.
Lease-Up Communities. Represents all communities where
construction has been complete for less than one year and where
occupancy has not reached at least 95%. As of November 1, 2000,
there were no lease-up communities.
Redevelopment Communities. Represents all communities where
substantial redevelopment has begun. Redevelopment is considered
substantial when capital expected to be invested during the
reconstruction effort exceeds the lesser of $5 million or 10% of
the community's acquisition cost.
Development Communities are communities that are under construction and
for which a final certificate of occupancy has not been received. These
communities may be partially complete and operating.
Development Rights are development opportunities in the early phase of
the development process for which we have an option to acquire land or
where we own land to develop a new community. We capitalize all related
pre-development costs incurred in pursuit of these new developments.
Of the Current Communities as of November 1, 2000, we owned:
- a fee simple, or absolute, ownership interest in 108 operating
communities, one of which is on land subject to a 149 year land lease;
- a general partnership interest in four partnerships that each own a fee
simple interest in an operating community;
- a general partnership interest in four partnerships structured as
"DownREITs," as described more fully below, that own an aggregate of 13
communities; and
- a 100% interest in a senior participating mortgage note secured by one
community, which allows us to share in part of the rental income or
resale proceeds of the community.
We also hold a fee simple ownership interest in nine of the Development
Communities and a membership interest in a limited liability company that holds
a fee simple interest in one Development Community.
In each of the four partnerships structured as DownREITs, either AvalonBay or
one of our wholly-owned subsidiaries is the general partner, and there are one
or more limited partners whose interest in the partnership is represented by
units of limited partnership interest. For each DownREIT partnership, limited
partners are entitled to receive distributions before any distribution is made
to the general partner. Although the partnership agreements for each of the
DownREITs are different, generally the distributions per unit paid to the
holders of units of limited partnership interests approximate the current
AvalonBay common stock dividend rate per share. Each DownREIT partnership has
been structured so that it is unlikely the limited partners will be entitled to
a distribution greater than the initial distribution provided for in the
partnership agreement. The holders of units of limited partnership interest have
the right to present each unit of limited partnership interest for redemption
for cash equal to the fair market value of a share of AvalonBay common stock on
the date of redemption. In lieu of cash redemption of a unit, we may elect to
acquire any unit presented for redemption for one share of our common stock. As
of September 30, 2000, there were 827,618 units outstanding. The DownREIT
partnerships are consolidated for financial reporting purposes.
At September 30, 2000, we had positioned our portfolio of Stabilized
Communities, excluding communities owned by unconsolidated joint ventures, to an
average physical occupancy level of 98.2%.
20
<PAGE> 22
Our strategy is to maximize total rental revenue through management of rental
rates and occupancy levels. Our strategy of maximizing total rental revenue
could lead to lower rental rates or occupancy levels. Given the current high
occupancy level of our portfolio, we believe that any rental revenue and net
income gains from our Stabilized Communities would be achieved primarily through
higher rental rates and the lower average operating costs per apartment home
that result from economies of scale due to national and regional growth of our
portfolio.
We elected to be taxed as a REIT for federal income tax purposes for the year
ended December 31, 1994 and we have not revoked that election. We were
incorporated under the laws of the State of California in 1978, and we were
reincorporated in the State of Maryland in July 1995. Our principal executive
offices are located at 2900 Eisenhower Avenue, Suite 300, Alexandria, Virginia,
22314, and our telephone number at that location is (703) 329-6300. We also
maintain regional offices and administrative or specialty offices in or near the
following cities:
- San Jose, California;
- Wilton, Connecticut;
- Boston, Massachusetts;
- Chicago, Illinois;
- Iselin, New Jersey;
- Los Angeles, California;
- Minneapolis, Minnesota;
- Newport Beach, California;
- New York, New York; and
- Seattle, Washington.
Recent Developments
Sales of Existing Communities. We seek to increase our geographical
concentration in selected high barrier-to-entry markets where we believe we can:
- apply sufficient market and management presence to enhance revenue
growth;
- reduce operating expenses; and
- leverage management talent.
To effect this increased concentration, we are selling assets in certain
submarkets and intend to redeploy the proceeds from those sales to develop and
redevelop communities currently under construction or reconstruction. Pending
such redeployment, we will generally use the proceeds from the sale of these
communities to reduce amounts outstanding under our variable rate unsecured
credit facility. On occasion, we will set aside the proceeds from the sale of
communities into a cash escrow account to facilitate a like-kind exchange
transaction. Accordingly, we sold three communities containing 708 apartment
homes in connection with our capital redeployment strategy during the three
months ended September 30, 2000. Net proceeds from these sales totaled
$45,941,000. We intend to dispose of additional assets as described more fully
under "Future Financing and Capital Needs."
Development, Redevelopment and Acquisition Activities. During the third quarter
of 2000:
- We completed development of Avalon Essex (located in the Boston,
Massachusetts area) containing 154 apartment homes and Avalon
Haven (located in the Fairfield-New Haven, Connecticut area)
containing 128 apartment homes for a total investment of
approximately $36,000,000.
- We commenced the development of three communities, Avalon Harbor
(located in Stamford, Connecticut), Avalon Belltown (located in
downtown Seattle, Washington) and Avalon Towers
21
<PAGE> 23
on the Peninsula (located in the San Jose, California area). When
completed, these communities are expected to contain 634 apartment
homes with a projected total investment of approximately
$145,800,000. In addition, during October 2000, we commenced
construction of Avalon Westpark, a 218 apartment home communitiy
located in the San Jose, California area. The expected development
cost for Avalon Westpark is $49,500,000.
- We acquired two communities pursuant to the terms of a forward
purchase contract agreed to in 1997 with an unaffiliated party.
Avalon WildReed (located in the Seattle, Washington area),
containing 234 apartment homes, was acquired during July 2000 for
approximately $22,900,000. Avalon Palladia (located in the
Portland, Oregon area), containing 497 apartment homes, was
acquired during September 2000 for approximately $46,300,000.
- We acquired three parcels of land, for an aggregate purchase price
of $21,115,000. The parcels are located in downtown Washington,
D.C., downtown Seattle, Washington, and the Oakland, California
area. We expect to develop three apartment communities, with an
aggregate of 487 apartment homes, on these parcels. As of
September 30, 2000, we had commenced development on one of these
sites, Avalon Belltown, as mentioned above.
- We completed four redevelopment communities, Avalon Greenbriar
(located in the Seattle, Washington area), Avalon at Mission Bay
(located in the San Diego, California area), Avalon at Creekside
(located in the San Jose, California area) and Avalon Laguna
Niguel (located in the Orange County, California area). These
communities contain 1,455 apartment homes for a total investment
in redevelopment (i.e., exclusive of acquisition costs) of
$40,300,000. In addition, during October 2000, the Company
commenced redevelopment on Avalon at Prudential Center, located in
downtown Boston, Massachusetts. Total investment in redevelopment
(i.e., exclusive of acquisition costs) for this 781 apartment home
community is expected to total $25,000,000.
The development and redevelopment of communities involve risks that the costs
will be more than expected and that the investment will fail to perform in
accordance with expectations. See "Risks of Development and Redevelopment" for
our discussion of these and other risks inherent in developing or redeveloping
communities.
Investment in Technology Initiatives. We have invested in three technology
companies in the belief that the development and application of their technology
and services will improve the operating performance of our real estate holdings.
In prior reports, we discussed the development of an onsite property management
system and leasing automation system to enable management to capture, review and
analyze data to a greater extent than is possible using existing commercial
software. The joint venture that was developing this software (consisting of
AvalonBay, United Dominion Realty Trust, Inc., and Post Properties, Inc.), was
restructured into a corporation and has been renamed Realeum, Inc. During the
third quarter, Realeum received $15 million of venture capital through the sale
of Series A Preferred stock to a group of venture capital funds. Subsequent to
September 30, 2000, we made investments in BroadBand Residential, Inc., and Viva
Group, Inc. Broadband Residential will specialize in providing broadband
communication services (such as Internet access and video) to residents of
multifamily communities. Viva provides a system for renters and property owners
to identify each other and interact and negotiate lease terms over the Internet.
Our aggregate investment in Realeum, BroadBand Residential and Viva is $4.1
million. We are not obligated to provide any more capital to any of these
entities, although we may have the opportunity to exercise preemptive rights
that would allow us to make further investments. We hold a minority interest
position in each of these entities.
Insured Fire at Development Community. On August 30, 2000, a fire occurred at
Avalon River Mews, a 408 apartment home development community located in the
Northern New Jersey area. At the time, the community was still under
construction and was unoccupied. The book value of the destroyed assets
approximated $13.9 million. We have property damage and business interruption
insurance and are
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<PAGE> 24
currently preparing our insurance claim for the cost of replacing the destroyed
assets as well as for business interruption losses. As of September 30, 2000, we
have reduced the carrying value of the destroyed assets to zero, and have
concurrently recorded an insurance receivable of $10.9 million, equal to the
book value of the destroyed assets, less an initial insurance recovery of $3.0
million. In addition to damage to the community, the fire caused substantial
damage to a number of single family and multiple dwelling homes, causing the
displacement of approximately 35 households. We expect that our liability
insurance will reimburse us for substantially all amounts that may be owed to
third parties on account of damages caused by the fire. We do not anticipate
this event will have a material adverse impact on the financial condition or
results of operations of our company.
Promotion of Chief Operating Officer to President. On September 7, 2000, we
announced that Bryce Blair, Chief Operating Officer, would assume the additional
position of President. This position was formerly held by Richard L. Michaux,
who retains the position of Chief Executive Officer and Chairman of the Board.
Results of Operations and Funds from Operations
The financial presentation of our historical financial statements for the three
and nine months ended September 30, 1999, has been changed from the presentation
that appeared in our Form 10-Q for the three and nine months ended September 30,
1999. For a discussion of the change in the presentation, see Footnote 2 to the
consolidated financial statements presented in our Form 10-K for the fiscal year
ended December 31, 1999.
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<PAGE> 25
A comparison of our operating results for the three and nine months ended
September 30, 2000 and September 30, 1999 follows.
<TABLE>
<CAPTION>
For the three months ended
---------------------------------------------------------------------
9-30-00 9-30-99 $ Change % Change
------------ ------------ ------------ -------------
Revenue:
<S> <C> <C> <C> <C>
Rental income $ 145,954 $ 130,734 $ 15,220 11.6%
Management fees 261 277 (16) (5.8%)
Other income 136 97 39 40.2%
------------ ------------ ------------ -------------
Total revenue 146,351 131,108 15,243 11.6%
------------ ------------ ------------ -------------
Expenses:
Operating expenses, excluding
property taxes 36,390 35,996 394 1.1%
Property taxes 12,158 10,718 1,440 13.4%
------------ ------------ ------------ -------------
Total operating expenses 48,548 46,714 1,834 3.9%
------------ ------------ ------------ -------------
Net Operating Income 97,803 84,394 13,409 15.9%
Other Expenses:
Interest expense 21,385 19,752 1,633 8.3%
Depreciation and amortization 30,599 28,144 2,455 8.7%
General and administrative 3,359 2,370 989 41.7%
Non-recurring charges -- 54 (54) --
------------ ------------ ------------ -------------
Total other expenses 55,343 50,320 5,023 10.0%
------------ ------------ ------------ -------------
Equity in income of unconsolidated
joint ventures 721 860 (139) (16.2%)
Interest income 1,277 2,304 (1,027) (44.6%)
Minority interest in consolidated
partnerships (485) (524) 39 7.4%
------------ ------------ ------------ -------------
Income before gain on sale
of communities 43,973 36,714 7,259 19.8%
Gain (loss) on sale of communities 14,521 (2,434) 16,955 696.6%
------------ ------------ ------------ -------------
Net income 58,494 34,280 24,214 70.6%
Dividends attributable to preferred
stock (9,944) (9,944) -- --
------------ ------------ ------------ -------------
Net income available to common
stockholders $ 48,550 $ 24,336 $ 24,214 99.5%
============ ============ ============ =============
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended
-------------------------------------------------------------------
9-30-00 9-30-99 $ Change % Change
------------ ------------ ------------ -----------
Revenue:
<S> <C> <C> <C> <C>
Rental income $ 420,371 $ 372,114 $ 48,257 13.0%
Management fees 761 930 (169) (18.2%)
Other income 265 198 67 33.8%
------------ ------------ ------------ -----------
Total revenue 421,397 373,242 48,155 12.9%
------------ ------------ ------------ -----------
Expenses:
Operating expenses, excluding
property taxes 104,860 102,244 2,616 2.6%
Property taxes 34,717 32,058 2,659 8.3%
------------ ------------ ------------ -----------
Total operating expenses 139,577 134,302 5,275 3.9%
------------ ------------ ------------ -----------
Net Operating Income 281,820 238,940 42,880 17.9%
Other Expenses:
Interest expense 61,815 54,915 6,900 12.6%
Depreciation and amortization 91,227 80,798 10,429 12.9%
General and administrative 9,591 7,163 2,428 33.9%
Non-recurring charges -- 16,644 (16,644) --
------------ ------------ ------------ -----------
Total other expenses 162,633 159,520 3,113 2.0%
------------ ------------ ------------ -----------
Equity in income of unconsolidated
joint ventures 2,117 2,266 (149) (6.6%)
Interest income 3,245 5,723 (2,478) (43.3%)
Minority interest in consolidated
partnerships (1,499) (1,452) (47) (3.2%)
------------ ------------ ------------ -----------
Income before gain on sale
of communities 123,050 85,957 37,093 43.2%
Gain (loss) on sale of communities 33,273 26,145 7,128 27.3%
------------ ------------ ------------ -----------
Net income 156,323 112,102 44,221 39.4%
Dividends attributable to preferred
stock (29,834) (29,834) -- --
------------ ------------ ------------ -----------
Net income available to common
stockholders $ 126,489 $ 82,268 $ 44,221 53.8%
============ ============ ============ ===========
</TABLE>
Net income available to common stockholders (after adjusting for non-recurring
charges and gain on sale of communities) increased by $7,205,000 for the three
months ended September 30, 2000 and $20,449,000 for the nine months ended
September 30, 2000 compared to the same periods of the preceding year. The
increase in net income, as adjusted, for the three and nine months ended
September 30, 2000 is primarily attributable to additional operating income from
newly developed or redeveloped communities as well as growth in operating income
from Established Communities.
As discussed in "Recent Developments - Sales of Existing Communities" and
"Future Financing and Capital Needs," we have funded a significant portion of
our development and redevelopment activities since 1998 through the sale of
assets in certain markets where we have a limited presence. The short term
effect of a sale of a community is that net operating income will be negatively
impacted because that community's contribution to net operating income has been
eliminated and the development or redevelopment community in which the proceeds
from the sale are being invested is not complete yet. Interest expense will also
decrease as the proceeds from the sale of communities are initially used to
repay amounts outstanding on our credit facility. The historical long term
effect of this strategy has been that net
24
<PAGE> 26
operating income attributable to newly developed and redeveloped communities is
higher than net operating income of assets identified for sale. For the period
January 1, 1999 through September 30, 2000, we have generated approximately $382
million in net proceeds from the sale of assets, which represents approximately
10% of our total real estate assets as of January 1, 1999.
The increase in net operating income of $42,880,000 for the nine months ended
September 30, 2000 as compared to the same period of the preceding year is
attributable to:
- an increase of $41,317,000 related to communities where
development activities, redevelopment activities or acquisitions
were completed subsequent to January 1, 1999;
- an increase of $15,311,000 related to Established Communities;
- a decrease of $16,835,000 related to communities sold subsequent
to January 1, 1999; and
- an increase of $3,087,000 related to all other communities.
Depreciation expense will be impacted by the timing of asset sales and the
completion of development or redevelopment activities. Gain on sale of
communities will be impacted by the number of assets sold in a given period, and
the carrying value of those assets.
Rental income increases are primarily the result of our disposition and capital
redeployment strategy discussed above and improved operating results related to
Established Communities.
Overall Portfolio - The increase in rental income (11.6% for the three
months ended and 13.0% for the nine months ended September 30, 2000) is
primarily due to an increase in the weighted average monthly rental income
per occupied apartment home offset by a decrease in the weighted average
number of occupied apartment homes. For the nine months ended September 30,
2000, the weighted average monthly revenue per occupied apartment home
increased $264 (24.0%) to $1,365 compared to $1,101 for the same period of
the preceding year. The weighted average number of occupied apartment homes
decreased from 36,628 apartment homes for the nine months ended September
30, 1999 to 33,503 apartment homes for the nine months ended September 30,
2000 due to asset sales.
Established Communities - Rental revenue increased $7,189,000 (9.8%) for
the three months ended September 30, 2000 compared to the same period of
the preceding year. Rental revenue increased $17,400,000 (8.1%) for the
nine months ended September 30, 2000 compared to the same period of the
preceding year. The increase is due to market conditions that allowed for
higher average rents and higher economic occupancy levels. For the nine
months ended September 30, 2000, weighted average monthly revenue per
occupied apartment home increased $84 (6.9%) to $1,353 compared to $1,269
for the same period of the preceding year. The average economic occupancy
increased from 96.4% for the nine months ended September 30, 1999 to 97.6%
for the nine months ended September 30, 2000.
Management fees decreases (5.8% for the three months ended and 18.2% for the
nine months ended September 30, 2000) are primarily due to a decline in the
number of third-party communities that we manage.
Operating expenses, excluding property taxes increases (1.1% for the three
months ended and 2.6% for the nine months ended September 30, 2000) are
primarily a result of our disposition and capital redeployment strategy
discussed above, and an increase in expense related to Established Communities.
Maintenance, insurance and other costs associated with Development and
Redevelopment Communities are expensed as communities move from the initial
construction and lease-up phase to the stabilized operating phase.
25
<PAGE> 27
Established Communities - Operating expenses, excluding property taxes
increased $419,000 (2.6%) to $16,049,000 for the three months ended
September 30, 2000 compared to $15,630,000 for the same period of the
preceding year. These expenses increased $1,789,000 (4.1%) to $45,741,000
for the nine months ended September 30, 2000 compared to $43,952,000 for
the same period of the preceding year. These increases are the result of
higher redecorating, maintenance, payroll, insurance and administrative
costs offset by lower utility and marketing costs.
Property taxes increases (13.4% for the three months ended and 8.3% for the nine
months ended September 30, 2000) are primarily the result of our disposition and
capital redeployment strategy discussed above and an increase in operating
expense related to Established Communities. Property taxes on Development and
Redevelopment Communities are expensed as communities move from the initial
construction and lease-up phase to the stabilized operating phase.
Established Communities - Property taxes increased $722,000 (12.3%) to
$6,595,000 for the three months ended September 30, 2000 compared to
$5,873,000 for the same period of the preceding year. Property taxes
increased $300,000 (1.6%) to $18,791,000 for the nine months ended
September 30, 2000 compared to $18,491,000 for the same period of the
preceding year. These increases are primarily the result of an adjustment
in the third quarter of 1999 to eliminate accrued but unassessed taxes
related to previously renovated communities. In addition, payments were
made during the third quarter of 2000 in resolution of a dispute over
property tax calculations from 1997 to present for one of our communities
in the Northeast region.
Interest expense increases (8.3% for the three months ended and 12.6% for the
nine months ended September 30, 2000) are primarily attributable to a decrease
in capitalized interest and secondarily to the issuance of unsecured debt
securities during 1999 and 2000. This reflects our strategy to mitigate the risk
of floating rate debt in a rising interest rate environment by repaying floating
rate debt under our credit facility (with relatively lower current interest
rates) with fixed rate unsecured debt that has a higher current interest rate
and a longer term to maturity.
General and administrative increases (41.7% for the three months ended and 33.9%
for the nine months ended September 30, 2000) are primarily attributable to
professional fees and payments required under a consulting and non-competition
arrangement with a retired executive. An increase in consulting costs as well as
compensation expense for a senior officer, whose salary was capitalized in 1999
while he served the company in a different capacity, also contributed to the
overall increase in expense. Cost savings attained from a management
reorganization in the first quarter of 1999 partially offset the increase in
expense.
Equity in income of unconsolidated joint ventures represents our share of net
income from joint ventures.
Interest income decreases (44.6% for the three months ended and 43.3% for the
nine months ended September 30, 2000) are primarily attributable to the sale of
the Fairlane Woods participating mortgage note that was sold in the fourth
quarter of 1999.
We consider Funds from Operations, or FFO, to be an appropriate measure of our
operating performance because it helps investors understand our ability to incur
and service debt and to make capital expenditures. We believe that to understand
our operating results, FFO should be examined with net income as presented in
the Condensed Consolidated Statements of Operations included elsewhere in this
report. FFO for 2000 is determined based on a definition adopted by the Board of
Governors of the National Association of Real Estate Investment Trusts(R)
(NAREIT) in October 1999, and is defined as:
- net income or loss computed in accordance with generally accepted
accounting principles (GAAP), except that excluded from net income
or loss are gains or losses
26
<PAGE> 28
on sales of property and extraordinary (as defined by GAAP) gains
or losses on debt restructuring;
- plus depreciation of real estate assets; and
- after adjustments for unconsolidated partnerships and joint
ventures.
FFO does not represent cash generated from operating activities in accordance
with GAAP. Therefore it should not be considered an alternative to net income as
an indication of our performance. FFO should also not be considered an
alternative to net cash flows from operating activities as determined by GAAP as
a measure of liquidity. Additionally, it is not necessarily indicative of cash
available to fund cash needs. Further, FFO as calculated by other REITs may not
be comparable to our calculation of FFO.
For the three months ended September 30, 2000, FFO increased to $64,498,000 from
$54,831,000 for the comparable period of the preceding year. This increase is
primarily due to the completion of new development and redevelopment communities
as well as growth in earnings from Established Communities.
FFO previously reported for the three and nine months ended September 30, 1999
excluded the effect on net income of a non-recurring restructuring charge of
$54,000 and $16,644,000, respectively in conformance with the NAREIT definition
of FFO calculations then in effect, or the original definition. NAREIT issued a
White Paper dated October 1999 that clarified the definition of FFO and the
treatment of certain non-recurring charges. The clarified definition includes
the effect on net income of non-recurring charges in the calculation of FFO.
Although we believe the comparison of FFO using the original definition
represents a better guide to investors of comparable operations and growth
between years, both FFO calculations are presented on the following page for the
three and nine months ended September 30, 2000 and 1999 (dollars in thousands):
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
------------------------------------- --------------------------------------
9-30-00 9-30-99 9-30-00 9-30-99
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net income $ 58,494 $ 34,280 $ 156,323 $ 112,102
Preferred dividends (9,944) (9,944) (29,834) (29,834)
Depreciation - real estate assets 29,830 27,349 88,877 79,595
Joint venture adjustments 200 188 590 562
Minority interest expense 439 524 1,399 1,452
(Gain) loss on sale of communities (14,521) 2,434 (33,273) (26,145)
------------------ ------------------ ------------------ ------------------
Funds from Operations - Clarified Definition (1) $ 64,498 $ 54,831 $ 184,082 $ 137,732
Non-recurring charges (2) -- 54 -- 16,644
------------------ ------------------ ------------------ ------------------
Funds from Operations - Original Definition (3) $ 64,498 $ 54,885 $ 184,082 $ 154,376
================== ================== ================== ==================
Net cash provided by operating activities $ 67,778 $ 57,989 $ 199,283 $ 171,864
================== ================== ================== ==================
Net cash used in investing activities $ (61,383) $ (107,395) $ (221,684) $ (262,947)
================== ================== ================== ==================
Net cash provided by financing activities $ 2,295 $ 43,839 $ 25,142 $ 91,236
================== ================== ================== ==================
</TABLE>
(1) Represents Funds from Operations calculated in accordance with NAREIT's
October 1999 White Paper on FFO. Our calculation of FFO in accordance
with NAREIT's clarified definition of FFO includes the effect on earnings
of non-recurring charges for certain management and other organizational
changes and Year 2000 remediation costs.
(2) Consists of $16,076 related to management and other organizational
changes announced during 1998 and $568 for Year 2000 remediation costs.
Previously, the effect on earnings of non-recurring charges for certain
management and other organizational changes and Year 2000 remediation
costs were excluded from the calculation of FFO.
(3) Funds from Operations calculated based on NAREIT's definition of FFO
prior to the issuance of the October 1999 White Paper on FFO.
27
<PAGE> 29
Capitalization of Fixed Assets and Community Improvements
Our policy with respect to capital expenditures is generally to capitalize only
non-recurring expenditures. We capitalize improvements and upgrades 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. Recurring make-ready costs
include the following:
- carpet and appliance replacements;
- floor coverings;
- interior painting; and
- other redecorating costs.
We capitalize purchases of personal property, such as computers and furniture,
only if the item is a new addition and the item exceeds $2,500. We generally
expense purchases of personal property made for replacement purposes. The
application of these policies for the nine months ended September 30, 2000
resulted in non-revenue generating capitalized expenditures for Stabilized
Communities of approximately $114 per apartment home. For the nine months ended
September 30, 2000, we charged to maintenance expense, including carpet and
appliance replacements, related to Stabilized Communities approximately $866 per
apartment home. We anticipate that capitalized costs per apartment home will
gradually increase as the average age of our communities increases.
Liquidity and Capital Resources
Liquidity. Our primary source of liquidity is cash flows from operations.
Operating cash flows have historically been determined by:
- the number of apartment homes;
- rental rates;
- occupancy levels; and
- our expenses with respect to these apartment homes.
The timing, source and amount of cash flows provided by financing activities and
used in investing activities are sensitive to the capital markets environment,
particularly to changes in interest rates that we must pay, because changes in
interest rates affect our decisions as to whether to issue debt securities,
borrow money and invest in real estate. Thus, changes in the capital markets
environment affect our plans for the undertaking of construction and development
as well as acquisition activity.
Cash and cash equivalents increased $2,741,000 to $10,362,000 for the nine
months ended September 30, 2000. Cash and cash equivalents increased $153,000 to
$9,043,000 for the comparable period during 1999.
- Net cash provided by operating activities totaled $199,283,000 for
the nine months ended September 30, 2000, an increase of
$27,419,000 over the $171,864,000 provided over the same period of
1999. The increase was primarily from additional operating cash
flow from Established Communities as well as the development and
redevelopment of new communities.
28
<PAGE> 30
- Net cash used in investing activities totaled $221,684,000 for the
nine months ended September 30, 2000, a decrease of $41,263,000
from the $262,947,000 used over the same period of 1999. The
decrease is a combination of a reduction in expenditures for the
purchase and development of real estate and a related reduction in
proceeds from the sale of communities.
- Net cash provided by financing activities totaled $25,142,000 for
the nine months ended September 30, 2000, a decrease of
$66,094,000 from the $91,236,000 provided over the same period of
1999. The decrease was primarily due to our development and
redevelopment activities increasingly being funded through the
sale of existing communities as opposed to incurring debt or
selling equity.
We regularly review our short and long-term liquidity needs and the adequacy of
Funds from Operations, as defined above, and other expected liquidity sources to
meet these needs. We believe our principal short-term liquidity needs are to
fund:
- normal recurring operating expenses;
- debt service payments;
- the distributions required with respect to our preferred stock;
- the minimum dividend payments required to maintain our REIT
qualification under the Internal Revenue Code of 1986; and
- development and redevelopment activity in which we are currently
engaged.
We anticipate that we can fully satisfy these needs from a combination of cash
flows provided by operating activities and borrowing capacity under our credit
facility. We anticipate that we can satisfy any short-term liquidity needs not
satisfied by current operating cash flows from our credit facility.
We believe our principal long-term liquidity needs are the repayment or
refinancing of medium and long-term debt, as well as the procurement of
long-term debt to refinance construction and other development related
short-term debt. We anticipate that no significant portion of the principal of
any indebtedness will be repaid prior to maturity. If we do not have funds on
hand sufficient to repay our indebtedness, it will be necessary for us to
refinance this debt. This 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. We also anticipate having
significant retained cash flow in each year so that when a debt obligation
matures, some or all of each maturity can be satisfied from this retained cash.
Although we believe we will have the capacity to meet our long-term liquidity
needs, we cannot assure you that additional debt financing or debt or equity
offerings will be available or, if available, that they will be on terms we
consider satisfactory.
Capital Resources. We intend to match the long-term nature of our real estate
assets with long-term cost effective capital to the extent permitted by
prevailing market conditions. We follow a focused strategy to help facilitate
uninterrupted access to capital. This strategy includes:
- hiring, training and retaining associates with a strong resident
service focus, which should lead to higher rents, lower turnover
and reduced operating costs;
- managing, acquiring and developing upscale communities in dense
locations where the availability of zoned and entitled land is
limited to provide consistent, sustained earnings growth;
- operating in markets with growing demand, as measured by household
formation and job growth, and high barriers-to-entry. We believe
these characteristics generally combine to provide a favorable
demand-supply balance, which we believe will create a favorable
29
<PAGE> 31
environment for future rental rate growth while protecting
existing and new communities from new supply. We expect this
strategy to result in a high level of quality to the revenue
stream;
- maintaining a conservative capital structure, largely comprised of
equity, and with modest, cost-effective leverage. We generally
avoid secured debt except in order to obtain low cost, tax-exempt
debt. We believe that such a structure should promote an
environment whereby current credit ratings levels can be
maintained;
- following accounting practices that provide a high level of
quality to reported earnings; and
- providing timely, accurate and detailed disclosures to the
investment community.
We believe these strategies provide a disciplined approach to capital access to
help position us to fund portfolio growth.
Capital markets conditions over the past several years have decreased our access
to cost effective capital. See "Future Financing and Capital Needs" for a
discussion of our response to the current capital markets environment. The
following is a discussion of specific capital transactions, arrangements and
agreements.
Variable Rate Unsecured Credit Facility
Our variable rate unsecured credit facility is furnished by a consortium of
banks and provides up to $600,000,000 in short-term credit. We pay these banks
an annual facility fee of $900,000 in equal quarterly installments. The credit
facility bears interest at varying rates tied to the London Interbank Offered
Rate (LIBOR) based on ratings levels achieved on our unsecured notes and on a
maturity selected by us. The current stated pricing is LIBOR plus 0.6% per
annum. The credit facility matures in July 2001, however we have two one-year
extension options. Therefore, subject to certain conditions, we may extend the
maturity to July 2003. A competitive bid option is available for borrowings of
up to $400,000,000. This option allows banks that are part of the lender
consortium to bid to provide us loans at a rate that is lower than the stated
pricing provided by the credit facility. The competitive bid option may result
in lower pricing if market conditions allow. Pricing under the competitive bid
option resulted in average pricing of LIBOR plus 0.42% for amounts most recently
borrowed under the competitive bid option. At November 1, 2000, $166,200,000 was
outstanding, $82,559,000 was used to provide letters of credit and $351,241,000
was available for borrowing under the credit facility. We intend to use
borrowings under the credit facility for:
- capital expenditures;
- construction, development, reconstruction, and redevelopment
costs;
- acquisitions;
- credit enhancement for tax-exempt bonds; and
- working capital purposes.
Interest Rate Protection Agreements
We are not a party to any long-term interest rate agreements, other than
interest rate protection and swap agreements on approximately $190 million of
our variable rate tax-exempt indebtedness. We intend, however, to evaluate the
need for long-term interest rate protection agreements as interest rate market
conditions dictate, and we have engaged a consultant to assist us in managing
our interest rate risks and exposure.
30
<PAGE> 32
Financing Commitments/Transactions Completed
During July 2000, we issued $150,000,000 of medium-term notes. The notes bear
interest at 8.25%, and will mature on July 15, 2008. We used the net proceeds of
approximately $149,000,000 to repay amounts outstanding under our unsecured
credit facility.
Future Financing and Capital Needs
As of September 30, 2000, we had 15 new communities under construction either by
us or by unaffiliated third parties with whom we have entered into forward
purchase contracts. As of September 30, 2000, a total estimated cost of
$250,339,000 remained to be invested in these communities. In addition, we had
two other communities under reconstruction, for which an estimated $14,636,000
remained to be invested as of September 30, 2000. Subsequent to September 30,
2000, we began additional development and redevelopment projects for which an
estimated $74,500,000 will be invested.
Substantially all of the capital expenditures necessary to complete the
communities currently under construction and reconstruction will be funded from:
- the remaining capacity under our credit facility;
- the net proceeds from sales of existing communities;
- retained operating cash; and/or
- the issuance of debt or equity securities.
We expect to continue to fund deferred development costs related to future
developments from retained operating cash and borrowings under our credit
facility. We believe these sources of capital will be adequate to take the
proposed communities to the point in the development cycle where construction
can begin.
We have observed and been impacted by a reduction in the availability of cost
effective capital since the third quarter of 1998. While the capital market
environment has improved during 2000, we cannot assure you that cost effective
capital will be available to meet future expenditures required to begin planned
reconstruction activity or the construction of the Development Rights. Before
planned reconstruction activity or the construction of a Development Right
begins, we intend to arrange adequate financing to complete these undertakings,
although we cannot assure you that we will be able to obtain such financing. In
the event that financing cannot be obtained, we may have to abandon Development
Rights, write-off associated pursuit costs and/or forego reconstruction
activity. In such instances, we will not realize the increased revenues and
earnings that we expected from such pursuits, and the related write-off of costs
will increase current period expenses and reduce cash flows from operations.
Our liquidity could be adversely impacted by expanding development activities
and/or reduced capital (as compared to prior years) available from asset sales.
To meet the balance of our liquidity needs under such conditions, we would need
to arrange additional capacity under our existing unsecured facility, sell
additional existing communities and/or issue additional debt or equity
securities. While we believe we have the financial position to expand our short
term credit capacity and support our capital markets activity, we cannot assure
you that we will be successful in completing these arrangements, offerings or
sales. The failure to complete these transactions on a cost-effective basis
could have a material adverse impact on our operating results and financial
condition, including the abandonment of deferred development costs and a
resultant charge to earnings.
To increase our concentration of communities in selected high barrier-to-entry
markets, we are selling assets in certain submarkets and redeploying the
proceeds. Under our disposition program, we solicit competing bids from
unrelated parties for these individual assets, and consider the sales price and
tax
31
<PAGE> 33
ramifications of each proposal. We have disposed of six communities since
January 1, 2000 for net proceeds of approximately $101,393,000. We intend to
actively seek buyers for the remaining communities held for sale. However, we
cannot assure you that these assets can be sold on terms that we consider
satisfactory.
The remaining assets that we have identified for disposition include land,
buildings and improvements and furniture, fixtures and equipment. Total real
estate, net of accumulated depreciation, of all communities identified for sale
at September 30, 2000 totaled $29,847,000. Certain individual assets are secured
by mortgage indebtedness which may be assumed by the purchaser or repaid from
our net sales proceeds. Our Condensed Consolidated Statements of Operations
include net income from the communities held for sale of $528,000 for the three
months ended September 30, 2000 and $1,440,000 for the nine months ended
September 30, 2000. Our Condensed Consolidated Statements of Operations include
net income from the communities held for sale of $152,000 for the three months
ended September 30, 1999 and $487,000 for the nine months ended September 30,
1999.
Because the proceeds from the sale of communities are used initially to reduce
borrowings under our credit facility, the immediate effect of a sale of a
community is to have a negative effect on Funds from Operations. This is because
the yield on a community that is sold exceeds the interest rate on the
borrowings that are repaid from such net proceeds. Therefore, changes in the
number and timing of dispositions, and the redeployment of the resulting net
proceeds, may have a material and adverse effect on our Funds from Operations.
32
<PAGE> 34
Debt Maturities
The following table details debt maturities for the next five years, excluding
the credit facility:
(Dollars in thousands)
<TABLE>
<CAPTION>
ALL-IN PRINCIPAL
INTEREST MATURITY BALANCE OUTSTANDING
COMMUNITY RATE(1) DATE 12-31-99 9-30-00
------------------------------------------------------- ---------- ---------- ----------------- ----------------
TAX-EXEMPT BONDS
Fixed Rate
<S> <C> <C> <C> <C>
Canyon Creek 6.48% Jun-2025 $ 37,535 $ 37,123
Waterford 5.88% Aug-2014 33,100 33,100
City Heights 5.80% Jun-2025 20,263 20,077
CountryBrook 7.87% Mar-2012 19,264 19,020
Villa Mariposa 5.88% Mar-2017 18,300 18,300
Sea Ridge 6.48% Jun-2025 17,026 16,839
Foxchase I 5.88% Nov-2007 16,800 16,800
Barrington Hills 6.48% Jun-2025 12,843 12,702
Foxchase II 5.88% Nov-2007 9,600 9,600
Fairway Glen 5.88% Nov-2007 9,580 9,580
Crossbrook 6.48% Jun-2025 8,273 8,186
Larkspur Canyon 5.50% Jun-2025 7,445 7,377
Avalon View 7.55% Aug-2024 18,795 18,550
Avalon at Lexington 6.56% Feb-2025 14,602 14,411
Avalon Knoll 6.95% Jun-2026 13,580 13,441
Avalon at Dulles 7.04% Jul-2024 12,360 12,360
Avalon Fields 7.57% May-2027 11,756 11,647
Avalon at Symphony Glen 7.06% Jul-2024 9,780 9,780
Avalon West 7.73% Dec-2036 8,632 8,592
Avalon Landing 6.85% Jun-2026 6,721 6,650
----------------- ----------------
306,255 304,135
Variable Rate
Avalon Devonshire Dec-2025 27,305 27,305
Avalon at Fairway Hills I Jun-2026 11,500 11,500
Laguna Brisas Mar-2009 10,400 10,400
Avalon Greenbriar May-2026 18,755 18,755
----------------- ----------------
67,960 67,960
CONVENTIONAL LOANS:
Fixed Rate
$100 Million Unsecured Notes 7.375% Sep-2002 100,000 100,000
$100 Million Unsecured Notes 6.625% Jan-2005 100,000 100,000
$110 Million Unsecured Notes 6.875% Dec-2007 110,000 110,000
$50 Million Unsecured Notes 6.25% Jan-2003 50,000 50,000
$50 Million Unsecured Notes 6.50% Jan-2005 50,000 50,000
$50 Million Unsecured Notes 6.625% Jan-2008 50,000 50,000
$100 Million Unsecured Notes 6.50% Jul-2003 100,000 100,000
$150 Million Unsecured Notes 6.80% Jul-2006 150,000 150,000
$125 Million Medium Term Notes 6.58% Feb-2004 125,000 125,000
$150 Million Medium Term Notes 7.50% Jul-2009 150,000 150,000
$150 Million Medium Term Notes 8.25% Jul-2008 -- 150,000
Govenor's Square 7.65% Aug-2004 13,923 --(2)
The Arbors 7.25% May-2004 12,870 12,870
Gallery Place 7.31% May-2001 11,272 11,102
Avalon Pines 8.00% Dec-2003 5,226 --(2)
Avalon Walk II 8.93% Nov-2004 12,541 12,364
----------------- ----------------
1,040,832 1,171,336
Variable Rate-None -- --
----------------- ----------------
TOTAL INDEBTEDNESS - EXCLUDING CREDIT FACILITY $ 1,415,047 $ 1,543,431
================= ================
(1) Includes credit enhancement fees, facility fees, and trustees fees.
(2) The remaining loan balance was repaid in connection with the disposition of the property during 2000.
</TABLE>
<TABLE>
<CAPTION>
SCHEDULED MATURITIES
COMMUNITY 2000 2001 2002 2003
------------------------------------------------------- --------------- --------------- ----------------- ---------------
TAX-EXEMPT BONDS
Fixed Rate
<S> <C> <C> <C> <C>
Canyon Creek $ 142 594 637 $ 684
Waterford -- -- -- --
City Heights 64 268 288 308
CountryBrook 86 357 386 417
Villa Mariposa -- -- -- --
Sea Ridge 64 270 289 310
Foxchase I -- -- -- --
Barrington Hills 49 203 218 234
Foxchase II -- -- -- --
Fairway Glen -- -- -- --
Crossbrook 30 126 136 146
Larkspur Canyon 23 98 105 112
Avalon View 85 350 373 397
Avalon at Lexington 64 271 288 307
Avalon Knoll 48 200 214 230
Avalon at Dulles -- -- -- --
Avalon Fields 38 157 169 180
Avalon at Symphony Glen -- -- -- --
Avalon West 13 57 61 65
Avalon Landing 24 101 108 116
--------------- --------------- ----------------- ---------------
730 3,052 3,272 3,506
Variable Rate
Avalon Devonshire -- -- -- --
Avalon at Fairway Hills I -- -- -- --
Laguna Brisas -- -- -- --
Avalon Greenbriar -- -- -- --
--------------- --------------- ----------------- ---------------
-- -- -- --
CONVENTIONAL LOANS:
Fixed Rate
$100 Million Unsecured Notes -- -- 100,000 --
$100 Million Unsecured Notes -- -- -- --
$110 Million Unsecured Notes -- -- -- --
$50 Million Unsecured Notes -- -- -- 50,000
$50 Million Unsecured Notes -- -- -- --
$50 Million Unsecured Notes -- -- -- --
$100 Million Unsecured Notes -- -- -- 100,000
$150 Million Unsecured Notes -- -- -- --
$125 Million Medium Term Notes -- -- -- --
$150 Million Medium Term Notes -- -- -- --
$150 Million Medium Term Notes -- -- -- --
Govenor's Square -- -- -- --
The Arbors -- -- -- --
Gallery Place 60 11,042 -- --
Avalon Pines -- -- --
Avalon Walk II 64 264 288 315
--------------- --------------- ----------------- ---------------
124 11,306 100,288 150,315
--------------- --------------- ----------------- ---------------
Variable Rate-None -- -- -- --
--------------- --------------- ----------------- ---------------
TOTAL INDEBTEDNESS - EXCLUDING CREDIT FACILITY $ 854 $ 14,358 $ 103,560 $ 153,821
================ =============== ================== ===============
(1) Includes credit enhancement fees, facility fees, and trustees fees.
(2) The remaining loan balance was repaid in connection with the disposition of the property during 2000.
</TABLE>
<TABLE>
<CAPTION>
COMMUNITY 2004 THEREAFTER
------------------------------------------------------- --------------- ------------------
TAX-EXEMPT BONDS
Fixed Rate
<S> <C> <C>
Canyon Creek $ 733 $ 34,333
Waterford -- 33,100
City Heights 331 18,818
CountryBrook 451 17,323
Villa Mariposa -- 18,300
Sea Ridge 332 15,574
Foxchase I -- 16,800
Barrington Hills 251 11,747
Foxchase II -- 9,600
Fairway Glen -- 9,580
Crossbrook 157 7,591
Larkspur Canyon 121 6,918
Avalon View 425 16,920
Avalon at Lexington 326 13,155
Avalon Knoll 246 12,503
Avalon at Dulles -- 12,360
Avalon Fields 193 10,910
Avalon at Symphony Glen -- 9,780
Avalon West 70 8,326
Avalon Landing 124 6,177
--------------- ------------------
3,760 289,815
Variable Rate
Avalon Devonshire -- 27,305
Avalon at Fairway Hills I -- 11,500
Laguna Brisas -- 10,400
Avalon Greenbriar -- 18,755
--------------- ------------------
-- 67,960
CONVENTIONAL LOANS:
Fixed Rate
$100 Million Unsecured Notes -- --
$100 Million Unsecured Notes -- 100,000
$110 Million Unsecured Notes -- 110,000
$50 Million Unsecured Notes -- --
$50 Million Unsecured Notes -- 50,000
$50 Million Unsecured Notes -- 50,000
$100 Million Unsecured Notes -- --
$150 Million Unsecured Notes -- 150,000
$125 Million Medium Term Notes 125,000 --
$150 Million Medium Term Notes -- 150,000
$150 Million Medium Term Notes -- 150,000
Govenor's Square -- --
The Arbors 12,870 --
Gallery Place -- --
Avalon Pines -- --
Avalon Walk II 11,433 --
--------------- ------------------
149,303 760,000
--------------- ------------------
Variable Rate-None -- --
--------------- ------------------
TOTAL INDEBTEDNESS - EXCLUDING CREDIT FACILITY $ 153,063 $ 1,117,775
================ ===================
(1) Includes credit enhancement fees, facility fees, and trustees fees.
(2) The remaining loan balance was repaid in connection with the disposition of the property during 2000.
</TABLE>
Inflation
Substantially all of the leases at the Current Communities are for a term of one
year or less. This may enable us to realize increased rents upon renewal of
existing leases or the beginning of new leases. Short-term leases generally
minimize our risk from the adverse effects of inflation, although these leases
generally permit residents to leave at the end of the lease term without
penalty. We believe that short-term leases combined with relatively consistent
demand allow rents, and therefore cash flow, from our portfolio of apartments to
provide an attractive inflation hedge.
Natural Disasters
Many of our West Coast communities are located in the general vicinity of active
earthquake faults. In July 1998, we obtained a seismic risk analysis from an
engineering firm which estimated the probable maximum loss (PML) for each of the
63 West Coast communities that we owned at that time and for each of the four
West Coast communities under development at that time. To establish a PML, the
engineers define a
33
<PAGE> 35
severe earthquake event for the applicable geographic area. The PML is the
building damage and business interruption loss that is estimated to have only a
10% probability of being exceeded in a fifty year period in the event of such an
earthquake. Because a significant number of our communities are located in the
San Francisco Bay Area, the engineers' analysis assumed an earthquake on the
Hayward Fault with a Richter Scale magnitude of 7.1. Based on this earthquake
scenario, the engineers determined the PML at that time to be $113 million for
the 63 West Coast communities that we owned at that time and the four West Coast
communities then under development. The actual aggregate PML 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 PML as a percentage of the community's replacement cost and projected
revenues. We cannot assure you that:
- an earthquake would not cause damage or losses greater than the
PML assessments indicate;
- future PML levels will not be higher than the current PML levels
described above for our communities located on the West Coast; or
- acquisitions or developments after July 1998 will not have PML
assessments indicating the possibility of greater damage or losses
than currently indicated.
In November 2000, we renewed our earthquake insurance, both for physical damage
and lost revenue, with respect to all communities we owned at that time and all
of the communities under development. For any single occurrence, we have in
place $75,000,000 of coverage with a five percent deductible for communities
located in California. The five percent deductible is subject to a minimum of
$100,000 per occurrence. Earthquake coverage outside of California is subject to
a $200,000,000 limit and a $25,000 deductible. In addition, our general
liability and property insurance program provides coverage for public liability
and fire damage. In the event an uninsured disaster or a loss in excess of
insured limits were to occur, we could lose our capital invested in the affected
community, as well as anticipated future revenue from that community. We would
also continue to be obligated to repay any mortgage indebtedness or other
obligations related to the community. Any such loss could materially and
adversely affect our business and our financial condition and results of
operations.
Development Communities
As of September 30, 2000, we had ten Development Communities under construction.
We expect these Development Communities, when completed, to add a total of 2,894
apartment homes to our portfolio for a total capitalized cost, including land
acquisition costs, of approximately $507.8 million. Statements regarding the
future development or performance of the Development Communities are
forward-looking statements. We cannot assure you that:
- we will complete the Development Communities;
- our budgeted costs or estimates of occupancy rates will be
realized;
- our schedule of leasing start dates or construction completion
dates will be achieved; or o future developments will realize
returns comparable to our past developments.
You should carefully review the discussion under "Risks of Development and
Redevelopment" below.
We hold a fee simple ownership interest in nine of the Development Communities
and a membership interest in a limited liability company that holds a fee simple
interest in one Development Community.
34
<PAGE> 36
The following table presents a summary of the Development Communities:
<TABLE>
<CAPTION>
Number of Budgeted Estimated Estimated
apartment cost (1) Construction Initial completion Stabilization
homes ($ millions) start occupancy (2) date date (3)
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. Avalon at Florham Park
Florham Park, NJ 270 $41.0 Q2 1999 Q1 2000 Q2 2001 Q4 2001
2. Avalon River Mews
Edgewater, NJ 408 $75.6 Q3 1999 Q3 2001 Q2 2002 Q4 2002
3. Avalon Bellevue
Bellevue, WA 202 $29.9 Q4 1999 Q1 2001 Q2 2001 Q3 2001
4. Avalon at Arlington Square I
Arlington, VA 510 $69.9 Q4 1999 Q4 2000 Q4 2001 Q3 2002
5. Avalon on the Sound (4)
New Rochelle, NY 412 $92.1 Q4 1999 Q3 2001 Q4 2001 Q3 2002
6. Avalon Estates
Hull, MA 162 $20.4 Q4 1999 Q3 2000 Q2 2001 Q4 2001
7. Avalon Manor
Freehold, NJ 296 $33.1 Q2 2000 Q1 2001 Q4 2001 Q2 2002
8. Avalon Harbor
Stamford, CT 323 $60.7 Q3 2000 Q1 2002 Q4 2002 Q2 2003
9. Avalon Belltown
Seattle, WA 100 $19.2 Q3 2000 Q4 2001 Q1 2002 Q3 2002
10 Avalon Towers on the Peninsula
Mountain View, CA 211 $65.9 Q3 2000 Q1 2002 Q2 2002 Q4 2002
--------------------------------
Total 2,894 $507.8
================================
</TABLE>
(1) Total 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) Future initial occupancy dates are estimates.
(3) Stabilized operations is defined as the first full quarter of 95% or
greater occupancy after completion of construction.
(4) This community is being developed under a joint venture structure with
third party financing. AvalonBay's portion of the budgeted cost is
expected to be $13.3 million.
Redevelopment Communities
As of September 30, 2000, we had two communities under redevelopment. We expect
the total budgeted cost to complete these Redevelopment Communities, including
the cost of acquisition and redevelopment, to be approximately $109.1 million,
of which approximately $29.4 million is the additional capital invested or
expected to be invested above the original purchase cost. Statements regarding
the future redevelopment or performance of the Redevelopment Communities are
forward-looking statements. We have found that the cost to redevelop an existing
apartment community is more difficult to budget than the cost to develop a new
community. Accordingly, we expect that actual costs may vary over a wider range
than for a new development community. We cannot assure you that we will meet our
schedules for redevelopment completion, or that we will meet our budgeted costs,
either individually or in the aggregate. See the discussion under "Risks of
Development and Redevelopment" below.
35
<PAGE> 37
The following presents a summary of Redevelopment Communities:
<TABLE>
<CAPTION>
($ millions) Estimated
Number of ----------------------------------
apartment Acquisition Total Reconstruction Reconstruction Restabilized
homes cost cost (1) start completion (2) Operations (3)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. Avalon at Cortez Hill
San Diego, CA 293 $24.4 $33.8 Q1 2000 Q2 2001 Q3 2001
2. Lakeside
Burbank, CA 748 $55.3 $75.3 Q1 2000 Q1 2002 Q2 2002
----------------------------------------------------
Total 1,041 $79.7 $109.1
====================================================
</TABLE>
(1) Total budgeted cost includes all capitalized costs projected to be
incurred to redevelop the respective Redevelopment Community, including
costs to acquire the community, reconstruction costs, real estate taxes,
capitalized interest and loan fees, permits, professional fees, allocated
redevelopment overhead and other regulatory fees determined in accordance
with GAAP.
(2) Reconstruction completion dates are estimates.
(3) Restabilized operations is defined as the first full quarter of 95% or
greater occupancy after completion of reconstruction.
Development Rights
As of September 30, 2000, we are considering the development of 34 new apartment
communities. These Development Rights range from land under contract or owned by
us for which design and architectural planning has just begun to land under
contract or owned by us with completed site plans and drawings where
construction can begin almost immediately. We estimate that the successful
completion of all of these communities would ultimately add 8,825 upscale
apartment homes to our portfolio. At September 30, 2000, the cumulative
capitalized costs incurred in pursuit of the 34 Development Rights, including
the cost of land acquired in connection with eight of the Development Rights,
was approximately $90.7 million, of which $57.3 million was land or deposits for
land. Substantially all of these apartment homes will offer features like those
offered by the communities we currently own.
We generally hold Development Rights through options to acquire land, although
one Development Right located in New Canaan, Connecticut is controlled through a
joint venture partnership that owns the land. The properties comprising the
Development Rights are in different stages of the due diligence and regulatory
approval process. The decisions as to which of the Development Rights to pursue,
if any, or to continue to pursue once an investment in a Development Right is
made are business judgments that we make after we perform financial, demographic
and other analysis. Although the development of any particular Development Right
cannot be assured, we believe that the Development Rights, in the aggregate,
present attractive potential opportunities for future development and growth of
FFO.
Statements regarding the future development of the Development Rights are
forward-looking statements. We cannot assure you that:
- we will succeed in obtaining zoning and other necessary
governmental approvals or the financing required to develop these
communities, or that we will decide to develop any particular
community; or
- if we undertake construction of any particular community, that we
will complete construction at the total budgeted cost assumed in
the financial projections below.
36
<PAGE> 38
The following presents a summary of the 34 Development Rights we are pursuing as
of September 30, 2000:
<TABLE>
<CAPTION>
Estimated Total budgeted
number costs
Location of homes ($ millions)
----------------------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
1. San Jose, CA (1) 218 $49
2. Long Island City, NY 372 102
3. Wimington, MA 120 17
4. Darien, CT (1) 189 37
5. SanFrancisco, CA 250 65
6. Washington, D.C. (1) 209 43
7. Weymouth, MA 304 35
8. Orange, CT (1) 168 18
9. San Diego, CA (1) 378 55
10. Lawrence, NJ 342 41
11. New Canaan, CT (1) (2) 104 26
12. Marlborough, MA 156 20
13. North Bethesda, MD 386 41
14. Arlington II, VA (1) 332 40
15. Seattle, WA 152 44
16. Westborough, MA 280 34
17. Los Angeles, CA 309 51
18. San Francisco, CA 303 82
19. Newton, MA 272 48
20. Hingham, MA 270 41
21. Andover, MA 140 21
22. Wilton, CT 113 23
23. Coram, NY 450 61
24. Oakland, CA (1) 178 36
25. North Potomac, MD 520 61
26. Danbury, CT 240 29
27. Cohasset, MA 240 34
28. Greenburgh - II, NY 500 83
29. Greenburgh - III, NY 266 44
30. Bedford, MA 144 19
31. St. James, NY 112 16
32. Stratford, CT 182 21
33. Milford, CT 370 43
34. Yonkers, NY 256 35
----------------------- -----------------------
Totals 8,825 $1,415
======================= =======================
</TABLE>
(1) AvalonBay owns land, but construction has not yet begun.
(2) The land currently is owned by a limited partnership in which
AvalonBay is a majority partner. It is currently anticipated that
the land seller will retain a minority limited partner interest.
37
<PAGE> 39
Risks of Development and Redevelopment
We intend to continue to pursue the development and redevelopment of apartment
home communities. Our development and redevelopment activities may be exposed to
the following industry risks:
- we may abandon opportunities we have already begun to explore
based on further review of, or changes in, financial, demographic,
environmental or other factors;
- we may encounter liquidity and capital constraints, including the
unavailability of financing on favorable terms for the development
or redevelopment of a community;
- we may be unable to obtain, or we may experience delays in
obtaining, all necessary zoning, land-use, building, occupancy,
and other required governmental permits and authorizations;
- we may incur construction or reconstruction costs for a community
that exceed our original estimates due to increased materials,
labor or other expenses, which could make completion or
redevelopment of the community uneconomical;
- occupancy rates and rents at a newly completed or redevelopment
community may fluctuate depending on a number of factors,
including market and general economic conditions, and may not be
sufficient to make the community profitable; and
- we may be unable to complete construction and lease-up on
schedule, resulting in increased debt service expense and
construction costs.
The occurrence of any of the events described above could adversely affect our
ability to achieve our projected yields on communities under development or
redevelopment and could affect our payment of distributions to our stockholders.
Construction costs are projected by us based on market conditions prevailing in
the community's market at the time our budgets are prepared and reflect changes
to those market conditions that we anticipated at that time. Although we attempt
to anticipate changes in market conditions, we cannot predict with certainty
what those changes will be. Construction costs have been increasing and, for
some of our Development Communities, the total construction costs have been or
are expected to be higher than the original budget. Total budgeted cost includes
all capitalized costs projected to be incurred to develop the respective
Development or Redevelopment Community, including:
- land and/or property acquisition costs;
- construction costs;
- real estate taxes;
- capitalized interest;
- loan fees;
- permits;
- professional fees;
- allocated development overhead; and
- other regulatory fees determined in accordance with generally
accepted accounting principles.
Nonetheless, because of increases in prevailing market rents we believe that, in
the aggregate, we will still achieve our targeted projected yield (i.e., return
on invested capital) for those communities experiencing costs in excess of the
original budget. We believe that we 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 our original estimates and similar increases in costs may be
experienced in the future. We cannot assure that market rents in effect at the
time new development communities or redevelopment communities complete lease-up
will be sufficient to fully offset the effects of any increased construction or
reconstruction costs.
38
<PAGE> 40
Capitalized Interest
In accordance with generally accepted accounting principles, we capitalize
interest expense during construction or reconstruction until a building obtains
a certificate of occupancy. Thereafter, the interest allocated to that completed
building within the community is expensed. Capitalized interest totaled
$5,255,000 for the three months ended September 30, 2000 and $12,912,000 for the
nine months ended September 30, 2000. Capitalized interest totaled $5,208,000
for the three months ended September 30, 1999 and $18,357,000 for the nine
months ended September 30, 1999.
39
<PAGE> 41
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in certain ordinary routine litigation
incidental to the conduct of its business. In addition, as
reported in the Company's Form 10-K for the year ended
December 31, 1999, the Company is currently involved in
litigation with York Hunter Construction, Inc., and National
Union Fire Insurance Company. While the outcome of such
litigation cannot be predicted with certainty, the Company
does not expect any current litigation, including the
litigation with York Hunter and National Union, to have a
material effect on its business or financial condition.
Item 2. Changes in Securities
During the three months ended September 30, 2000, the Company
issued 27,472 shares of common stock in exchange for units of
limited partnership held by limited partners of DownREIT
partnership subsidiaries of the Company. Specifically, the
Company issued 24,125 shares of common stock in exchange for
units in Avalon DownREIT V, L.P., and 3,347 shares of common
stock in exchange for units in Bay Countrybrook, L.P. These
shares were issued in reliance on an exemption from
registration under Section 4(2) of the Securities Act of 1933.
The Company is relying on the exemption based upon factual
representations received from the limited partner who received
these shares.
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 AvalonBay Communities (the "Company"), dated
as of June 4, 1998. (Incorporated by reference to Exhibit
3(i).1 to Form 10-Q of the Company filed August 14, 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.)
40
<PAGE> 42
<TABLE>
<CAPTION>
<S> <C>
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, dated as of
July 24, 1998. (Incorporated by reference to Exhibit 3(ii).1
to Form 10-Q of the Company filed August 14, 1998.)
3(ii).2 -- Amendment to Bylaws of the Company, dated February 10,
1999. (Incorporated by reference to Exhibit 3(ii).2 to Form
10-K of the Company filed March 31, 1999.)
3(ii).3 -- Amendment to Bylaws of the Company, dated May 5, 1999.
(Incorporated by reference to Exhibit 3(ii).3 to Form 10-Q of
the Company filed on August 16, 1999.)
4.1 -- Indenture of Avalon Properties, Inc. (hereinafter referred to as "Avalon Properties") dated as
of September 18, 1995. (Incorporated by reference to Form 8-K of Avalon Properties dated
September 18, 1995.)
4.2 -- First Supplemental Indenture of Avalon Properties dated as of September 18, 1995. (Incorporated
by reference to Avalon Properties' Current Report on Form 8-K dated September 18, 1995.)
4.3 -- Second Supplemental Indenture of Avalon Properties dated as of December 16, 1997. (Incorporated
by reference to Avalon Properties' Current Report on Form 8-K filed January 26, 1998.)
4.4 -- Third Supplemental Indenture of Avalon Properties dated as of January 22, 1998. (Incorporated
by reference to Avalon Properties' Current Report on Form 8-K filed on January 26, 1998.)
4.5 -- 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.)
4.6 -- 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.)
4.7 -- 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.)
4.8 -- Third Supplemental Indenture, dated as of December 21, 1998 between the Company and the
Trustee, including forms of Floating Rate Note and Fixed Rate Note. (Incorporated by reference
to Exhibit 4.4 to Form 8-K filed on December 21, 1998.)
4.9 -- Dividend Reinvestment and Stock Purchase Plan of the Company filed on September 14, 1999.
(Incorporated by reference to Form S-3 of the Company, File No. 333-87063.)
4.10 -- Amendment to the Company's Dividend Reinvestment and Stock Purchase Plan filed on December 17,
1999. (Incorporated by reference to the Prospectus Supplement filed pursuant to Rule 424(b)(2)
of the Securities Act of 1933 on December 17, 1999.)
</TABLE>
41
<PAGE> 43
<TABLE>
<CAPTION>
<S> <C>
4.11 -- Shareholder Rights Agreement, dated as of March 9, 1998 (the "Rights Agreement"), between the
Company and First Union National Bank (as successor to American Stock Transfer and Trust
Company) as Rights Agent (including the form of Rights Certificate as Exhibit B). (Incorporated
by reference to Exhibit 4.1 to Form 8-A of the Company filed March 11, 1998.)
4.12 -- Amendment No. 1 to the Rights Agreement, dated as of February 28, 2000, between the Company and
the Rights Agent. (Incorporated by reference to Exhibit 4.2 of Form 8-A/A of the Company filed
February 28, 2000.)
12.1 -- Statements re: Computation of Ratios.
27.1 -- Financial Data Schedule.
(b) REPORTS ON FORM 8-K
None
</TABLE>
42
<PAGE> 44
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 14, 2000 /s/ RICHARD L. MICHAUX
---------------------------------------
Richard L. Michaux
Chairman and
Chief Executive Officer,
Date: November 14, 2000 /s/ THOMAS J. SARGEANT
---------------------------------------
Thomas J. Sargeant
Executive Vice President,
Chief Financial Officer and
Treasurer
43
