Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

November 13, 1997

10-Q: Quarterly report pursuant to Section 13 or 15(d)

Published on November 13, 1997



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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, 1997
COMMISSION FILE NUMBER 1-12672

------------------------

BAY APARTMENT COMMUNITIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



MARYLAND 77-0404318
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)


4340 STEVENS CREEK BLVD., #275, SAN JOSE, CALIFORNIA 95129
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)

(408) 983-1500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, 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 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 [ ]

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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.



CLASS SHARES OUTSTANDING DATE

Common, $.01 par value 25,048,406 November 6, 1997


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BAY APARTMENT COMMUNITIES, INC.

FORM 10-Q

INDEX



PAGE
------

PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets as of September 30, 1997 and December 31,
1996........................................................................ 2
Consolidated Statements of Operations for the Quarters ended September 30,
1997 and 1996............................................................... 3
Consolidated Statements of Operations for the Nine Months ended September
30, 1997 and 1996........................................................... 4
Consolidated Statements of Cash Flows for the Nine Months ended September
30, 1997 and 1996........................................................... 5
Notes to Consolidated Financial Statements.................................. 6-14
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 15-26
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings........................................................... 27
Item 2. Changes in Securities....................................................... 27
Item 3. Defaults Upon Senior Securities............................................. 27
Item 4. Submission of Matters to a Vote of Security Holders......................... 27
Item 5. Other Information........................................................... 27
Item 6. Exhibits and Reports on Form 8-K............................................ 28
Signatures............................................................................ 29


1

PART I -- FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

BAY APARTMENT COMMUNITIES, INC.

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)



SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)

ASSETS
Real estate assets:
Land.............................................................. $ 218,849 $152,277
Buildings and improvements........................................ 692,272 511,583
Furniture, fixtures and equipment................................. 49,377 35,542
---------- --------
960,498 699,402
Less accumulated depreciation..................................... (71,208) (52,554)
---------- --------
Operating real estate assets...................................... 889,290 646,848
Construction in progress.......................................... 123,076 50,945
---------- --------
Net real estate assets......................................... 1,012,366 697,793
Cash and cash equivalents........................................... 3,829 920
Restricted cash..................................................... 1,431 960
Other assets, net................................................... 30,072 12,236
---------- --------
Total assets.............................................. $ 1,047,698 $711,909
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable....................................................... $ 336,552 $273,688
Accounts payable and accrued expenses............................... 8,737 5,450
Dividends payable................................................... 11,878 8,939
Other liabilities................................................... 8,781 4,553
---------- --------
Total liabilities.............................................. 365,948 292,630
---------- --------
Contingencies (Note 4).............................................. -- --
---------- --------
Minority interest................................................... 9,345 7,002
---------- --------
Shareholders' equity:
Preferred stock, $.01 par value; 25,000,000 shares authorized;
2,308,800 shares of Series A outstanding at both September 30,
1997 and December 31, 1996; 405,022 shares of Series B
outstanding at both September 30, 1997 and December 31, 1996;
2,300,000 shares of Series C outstanding at September 30, 1997
and no shares of Series C outstanding at December 31, 1996..... 50 27
Common stock, $.01 par value; 40,000,000 shares authorized;
24,968,136 shares outstanding at September 30, 1997; 19,007,988
shares outstanding at December 31, 1996........................ 250 190
Paid-in capital................................................... 701,717 435,723
Dividends in excess of accumulated earnings....................... (29,612) (23,663)
---------- --------
Total shareholders' equity..................................... 672,405 412,277
---------- --------
Total liabilities and shareholders' equity................ $ 1,047,698 $711,909
========== ========


The accompanying notes are an integral part of these consolidated financial
statements.

2

BAY APARTMENT COMMUNITIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)



QUARTER ENDED QUARTER ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
-------------- --------------

Revenue:
Rental......................................................... $ 31,583 $ 22,380
Other.......................................................... 1,155 670
------- -------
Total revenue............................................... 32,738 23,050
------- -------
Expenses:
Property operating............................................. 7,561 5,407
Property taxes................................................. 2,405 1,840
General and administrative..................................... 1,718 997
Abandoned project costs........................................ 140 --
Interest and financing......................................... 3,243 3,743
Depreciation and amortization.................................. 6,927 5,080
------- -------
Total expenses.............................................. 21,994 17,067
------- -------
Income before minority interest.................................. 10,744 5,983
Minority interest................................................ (91) (138)
------- -------
Net income....................................................... 10,653 5,845
Preferred dividend requirement:
Series A and B................................................. (1,174) (1,118)
Series C....................................................... (1,222) --
------- -------
Earnings available to common shares.............................. $ 8,257 $ 4,727
======= =======
Earnings per common share:
Income before minority interest................................ $ 0.36 $ 0.29
Minority interest.............................................. -- (0.01)
------- -------
Earnings available to common shares............................ 0.36 0.28
======= =======
Dividends declared per common share.............................. $ 0.42 $ 0.40
======= =======


The accompanying notes are an integral part of these consolidated financial
statements.

3

BAY APARTMENT COMMUNITIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)



NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------

Revenue:
Rental................................................... $ 85,794 $ 56,381
Other.................................................... 2,982 1,538
------- -------
Total revenue......................................... 88,776 57,919
------- -------
Expenses:
Property operating....................................... 20,306 13,253
Property taxes........................................... 6,568 4,528
General and administrative............................... 4,602 2,673
Abandoned project costs.................................. 670 50
Interest and financing................................... 10,360 10,850
Depreciation and amortization............................ 19,053 13,277
------- -------
Total expenses........................................ 61,559 44,631
------- -------
Income before minority interest and extraordinary item..... 27,217 13,288
Minority interest.......................................... (315) (165)
------- -------
Income before extraordinary item........................... 26,902 13,123
Extraordinary item......................................... -- (511)
------- -------
Net income................................................. 26,902 12,612
Preferred dividend requirement:
Series A and B........................................... (3,466) (3,117)
Series C................................................. (1,371) --
------- -------
Earnings available to common shares........................ $ 22,065 $ 9,495
======= =======
Earnings per common share:
Income before minority interest and extraordinary item... $ 1.03 $ 0.74
Minority interest........................................ (0.02) (0.01)
------- -------
Income before extraordinary item......................... 1.01 0.73
Extraordinary item....................................... -- (0.04)
------- -------
Earnings available to common shares...................... $ 1.01 $ 0.69
======= =======
Dividends declared per common share........................ $ 1.24 $ 1.20
======= =======


The accompanying notes are an integral part of these consolidated financial
statements.

4

BAY APARTMENT COMMUNITIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)



NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------

CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income............................................... $ 26,902 $ 12,612
NONCASH EXPENSES INCLUDED IN NET INCOME:
Depreciation and amortization............................ 19,053 13,277
Minority interest........................................ 315 165
Extraordinary item....................................... -- 511
CASH PROVIDED BY (USED FOR) OPERATING ASSETS AND
LIABILITIES:
Restricted cash.......................................... (471) (787)
Other assets............................................. (18,235) (1,202)
Accounts payable and accrued expenses.................... 3,287 2,633
Other liabilities........................................ 4,228 1,821
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 35,079 29,030
--------- ---------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Capital improvements..................................... (2,702) (871)
Acquisition of properties................................ (196,984) (144,043)
Construction in progress................................. (101,787) (53,467)
--------- ---------
NET CASH (USED FOR) INVESTING ACTIVITIES................... (301,473) (198,381)
--------- ---------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds from stock offerings, net of issuance costs..... 260,372 183,507
Exercise of stock options and issuances under employee
stock purchase plan................................... 827 476
Dividend reinvestment plan............................... 1,192 --
Notes payable principal payments......................... (739) (306)
Borrowings on notes payable.............................. 28,435 --
Repayments of notes payable.............................. (28,435) --
Borrowings on construction notes payable................. -- 21
Borrowings on lines of credit............................ 294,900 157,000
Repayments on lines of credit............................ (256,900) (154,700)
Partner and minority interest distributions, net of
contributions......................................... (437) (56)
Dividends paid........................................... (29,912) (17,337)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................. 269,303 168,605
--------- ---------
Increase (decrease) in cash and cash equivalents........... 2,909 (746)
Cash and cash equivalents, beginning of period............. 920 1,677
--------- ---------
Cash and cash equivalents, end of period................... $ 3,829 $ 931
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized).................. $ 9,578 $ 10,935
========= =========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Noncash transfers of construction in progress............ $ 29,656 $ 26,602
========= =========
Assumption of notes payable by the Company............... $ 25,603 $ 27,868
========= =========
Contribution of minority interest........................ $ 6,151 $ 7,270
========= =========
Conversion of Countrybrook Units......................... $ 3,916 $ --
========= =========
Dividends declared but not paid.......................... $ 11,878 $ 8,714
========= =========


The accompanying notes are an integral part of these consolidated financial
statements.

5

BAY APARTMENT COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:

Organization, Initial Public Offering and Subsequent Offerings

Bay Apartment Communities, Inc. (the "Company") and its wholly-owned
partnerships and subsidiaries were formed in 1978 to develop, lease and manage
upscale apartment communities. Before March 17, 1994, the Company was a part of
the Greenbriar Group which consisted of the Greenbriar Development Company and
certain affiliated entities. The Greenbriar Group included one land parcel held
for future development, 12 apartment communities transferred to the Company in
the reorganization transactions and the partnerships that held 11 of these
apartment communities. The Greenbriar Development Company became Bay Apartment
Communities, Inc. as a result of certain reorganization transactions in
connection with the sale of shares of common stock in an initial public
offering. Also included in this reorganization was the combination of building
and management affiliates into the Company. The Company is a self-administered
and self-managed real estate investment trust ("REIT") which acquires, builds,
owns and manages apartment communities primarily in Northern California. At
September 30, 1997, the Company owned 46 apartment communities, of which 35 are
in Northern California, ten are in Southern California, and one community is in
the Seattle area, comprising 12,194 apartment homes, including the apartment
homes delivered at Toscana -- a partially developed community. In addition to
Toscana, the Company had four communities in Northern California under
development.

On March 17, 1994, the Company completed its initial public offering of
10,889,742 shares of common stock, and received $199,998 in net proceeds (the
"Initial Offering"). The net proceeds were used to pay off mortgage debt,
purchase five apartment communities, purchase outside partners' partnership
interests, and pay debt origination costs (primarily legal fees). In October
1995, the Company issued 2,308,800 shares of Series A preferred stock receiving
net proceeds of approximately $48,269. The proceeds were used to purchase land
for future construction, pay off and close a construction loan and pay down debt
on credit lines which were subsequently drawn on to purchase apartment
communities.

In May 1996, the Company issued 1,248,191 shares of common stock in a
direct placement and 413,223 shares of common stock and 405,022 shares of Series
B preferred stock in an underwritten offering and received $49,481 in net
proceeds. The proceeds were used to purchase three communities, Parc Centre,
Parkside Commons, and Sunset Towers, and to repay borrowings on a secured credit
facility. The Company's secured credit facilities were subsequently closed,
resulting in the write-off of $511, representing unamortized loan and non-use
fees, which was recorded as an extraordinary item. On August 5, 1996, the
Company completed an underwritten public offering of 5,750,000 shares of common
stock and received $134,026 in net proceeds. The net proceeds were used to
purchase two apartment communities, Crowne Ridge (formerly Channing Heights) and
Lafayette Place (formerly Martinique Gardens), and to reduce amounts borrowed
under the Company's unsecured line of credit, including amounts borrowed to
purchase four apartment communities acquired prior to the closing of the
offering; Countrybrook, Larkspur Canyon, The Fountains, and Mill Creek.

In January 1997, the Company sold in an underwritten public offering
1,400,000 shares of common stock at a price of $37.125 per share. The net
proceeds to the Company, of approximately $49,200, were used to reduce
borrowings under the Company's unsecured line of credit, which were used to fund
the acquisition and development of additional apartment communities, including
the SummerWalk (formerly Rancho Penasquitos) acquisition.

In April 1997, the Company sold in a direct placement 1,662,000 shares of
common stock at a price of $36.125 per share. The net proceeds to the Company,
of approximately $58,600, were used to reduce borrowings under the Company's
unsecured line of credit, which were used to fund the acquisition and

6

BAY APARTMENT COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

development of additional apartment communities, including TimberWood (formerly
The Village), SunScape (formerly Banbury Cross) and Cardiff Gardens.

In June 1997, the Company sold in an underwritten public offering 2,300,000
shares of 8.5 percent, five year non-call Series C Cumulative Redeemable
Preferred Stock at a price of $25 per share. The net proceeds to the Company, of
approximately $55,500, were used to reduce borrowings under the Company's
unsecured line of credit, which were used to fund the acquisition and
development of additional apartment communities, including the Villa Serena,
Amador Oaks and Mission Woods (formerly Genesee Gardens) communities and one
land site in San Francisco, California.

In September 1997, the Company sold in an underwritten public offering
2,645,000 shares of common stock at a price of $38.6875 per share. The net
proceeds to the Company, after all anticipated issuance costs, were
approximately $97,000. The net proceeds were used to reduce borrowings under the
Company's unsecured line of credit, which were used to fund the acquisition and
development of additional apartment communities, including the Cedar Ridge
(formerly Regency), The Park and Lakeside communities and one land site in
Mountain View, California.

The interim unaudited financial statements have been prepared in accordance
with generally accepted accounting principles 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 generally accepted accounting principles 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 thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1996. The results of operations for the
quarter ended September 30, 1997 are not necessarily indicative of the operating
results for the full year. Management believes that 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.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
the Company, and its wholly-owned partnerships and subsidiaries. The
accompanying consolidated financial statements also include the accounts of Bay
Countrybrook L.P., a Delaware limited partnership (the "Countrybrook
Partnership"). The general partner of the Countrybrook Partnership is a
wholly-owned subsidiary of the Company, Bay GP, Inc., a Maryland corporation.
The accompanying consolidated financial statements also include the accounts of
Bay Rincon, LP, a California limited partnership (the "Rincon Partnership") and
Bay Pacific Northwest, L.P. (the "Northwest Partnership"). The Company is the
sole general partner of the Rincon Partnership and Northwest Partnership. All
significant intercompany balances and transactions have been eliminated in
consolidation.

Bay Countrybrook L.P.

In connection with the formation of the Countrybrook Partnership in July
1996, 298,577 units of limited partnership interests ("Countrybrook Units") were
issued to the existing partners of the contributor of the Countrybrook
community. Under the terms of the Countrybrook Partnership's Limited Partnership
Agreement, holders of Countrybrook Units have the right to require the
Countrybrook Partnership to redeem their Countrybrook Units for cash, subject to
certain conditions. The Company may, however, elect to deliver an equivalent
number of shares of the Company's common stock to the holders of Countrybrook
Units in satisfaction of the Countrybrook Partnership's obligation to redeem the
Countrybrook Units for cash.

7

BAY APARTMENT COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Countrybrook Units converted into the Company's common stock aggregated 164,617
and 3,812 as of September 30, 1997 and December 31, 1996, respectively.
Countrybrook Units redeemed for cash aggregated 762 as of September 30, 1997. No
Countrybrook Units were redeemed for cash as of December 31, 1996.

Bay Pacific Northwest, L.P.

In connection with the formation of the Northwest Partnership in September
1997, 163,338 units of limited partnership interest ("Northwest Units") were
issued to the existing partners of the contributor of the Gallery Place
community. Under the terms of the Northwest Partnership's Limited Partnership
Agreement, holders of Northwest Units have the right to require the Northwest
Partnership to redeem their Northwest Units for cash, subject to certain
conditions. The Company may, however, elect to deliver an equivalent number of
shares of the Company's common stock to the holders of Northwest Units in
satisfaction of the Northwest Partnership's obligation to redeem the Northwest
Units for cash. No Northwest Units were converted into the Company's common
stock or redeemed for cash as of September 30, 1997.

Operating Real Estate Assets

Subsequent to occupancy, significant expenditures, generally exceeding $5,
which improve or extend the life of the asset are capitalized. The operating
real estate assets are stated at cost and consist of land, buildings and
improvements, furniture, fixtures and equipment, and other costs incurred during
development and construction.

Apartment homes available for occupancy are generally leased on a one year
or less basis. Rental income and operating costs incurred during the initial
lease-up period are fully recognized as they accrue.

Capitalization of Costs During Development and Reconstruction

Cost capitalization during development of constructed 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 certificate of occupancy is issued. Cost capitalization during
reconstruction of assets (including interest and related loan fees, property
taxes and other direct and indirect costs) begins when an apartment home is
taken out of service for reconstruction and ends when the apartment home
reconstruction is completed and the apartment home is placed in service.

Depreciation

Depreciation is calculated on operating real estate assets using the
straight-line method over their estimated useful lives, which range from ten to
thirty years. Furniture, fixtures and equipment are generally depreciated using
the straight-line method over their estimated useful lives, which range from
five to seven years.

Income Taxes

The Company has elected to be taxed as a REIT under the Internal Revenue
Code of 1986, as amended, (the "Code"). A corporate REIT is a legal entity which
holds real estate interests and through certain levels of payments of dividends
to shareholders and other criteria, is permitted to reduce or avoid the payment
of federal and state income taxes at the corporate level. As a result, the
Company will not be subject to federal and state income taxation at the
corporate level if certain requirements are met. Accordingly, no provision for
federal and state income taxes has been made.

8

BAY APARTMENT COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Deferred Financing Costs

Included in other assets, net are costs associated with obtaining debt
financing and credit enhancements. Such costs are being amortized over the term
of the associated debt or credit enhancement.

Cash and Cash Equivalents

Cash and cash equivalents include all cash and liquid investments with an
original maturity of three months or less from the date acquired. Interest
income amounted to $96 and $58 for the quarters ended September 30, 1997 and
1996, respectively.

Restricted Cash

Restricted cash at September 30, 1997 and December 31, 1996 consists of
replacement reserves related to the debt on the Barrington Hills, Crossbrook,
Rivershore, Canyon Creek, Sea Ridge, Countrybrook, City Heights and Larkspur
Canyon communities.

Earnings per Common Share

Earnings per share with respect to the Company for the quarters ended
September 30, 1997 and 1996 is computed based upon the weighted average number
of common shares outstanding during the period plus (in periods where they have
a dilutive effect) the net additional number of shares which would be issuable
upon the exercise of stock options assuming that the Company used the proceeds
received to repurchase outstanding shares at market prices.

Additionally, other potentially dilutive securities, which may not qualify
as common stock equivalents, are considered when calculating earnings per share
on a primary and fully diluted basis. The assumed conversion of such securities
during the quarters ended September 30, 1997 and September 30, 1996, results in
an antidilutive effect; therefore, earnings per share presentation on a primary
and fully diluted basis is unnecessary. The weighted average number of shares
outstanding utilized in the calculations are 23,063,145 and 16,946,542 for the
quarters ended September 30, 1997 and September 30, 1996, respectively. Earnings
per share is net of the preferred stock dividend requirements for the relevant
period, which were $2,396 and $1,118 for the quarters ended September 30, 1997
and September 30, 1996, respectively.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that 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.

Concentration of Geographic Risk

The majority of the Company's apartment communities are located in Northern
California and most of these Northern California communities are located in the
San Francisco Bay Area. This geographic concentration could expose the Company
to a significant loss should one event affect the entire area such as an
earthquake or other environmental event.

9

BAY APARTMENT COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Financial Instruments

The Company enters into interest rate swap agreements (the "Swap
Agreements") with parties whose credit ratings by Standard and Poor's Ratings
Group are AAA to limit the Company's exposure should interest rates rise above
specified levels. The Swap Agreements are held for purposes other than trading.
The amortization of the cost of the Swap Agreements is included in amortization
expense. The remaining unamortized cost of the Swap Agreements is included in
"Other assets, net" on the balance sheet and is amortized over the remaining
life of the agreements.

Accounting for Stock-based Compensation

The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for its
stock-based compensation plans.

Newly Issued Accounting Standards

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share" and No.
129, "Disclosure of Information about Capital Structure." SFAS No. 128,
established standards for computing and presenting earnings per share ("EPS"),
replacing the presentation of primary EPS with a presentation of basic EPS. SFAS
No. 129 consolidates the existing disclosure requirements regarding an entity's
capital structure. SFAS No. 128 and No. 129 are effective for financial
statements issued for periods ending after December 15, 1997. Had the Company
adopted SFAS No. 128 and No. 129 for the quarter and nine months ended September
30, 1997, the impact on the Company's earnings per share and financial
statements is not expected to be material.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income" and No. 131 "Disclosure of Segment
Information." SFAS No. 130 establishes the disclosure requirements for reporting
comprehensive income in an entity's annual and interim financial statements and
becomes effective for the Company for the fiscal year ending December 31, 1998.
Comprehensive income includes unrealized gains and losses on securities
currently reported by the Company as a component of stockholders' equity which
the Company would be required to include in a financial statement and display
the accumulated balance of other comprehensive income separately in the equity
section of the consolidated balance sheet. The Company has not yet determined
what effect, if any, this pronouncement will have on the Company's results of
operations.

SFAS No. 131 establishes standards for determining an entity's operating
segments and the type and level of financial information to be disclosed. SFAS
No. 131 becomes effective for financial statements issued for periods ending
after December 15, 1997. The Company has not yet determined what effect, if any,
this pronouncement will have on the Company's consolidated financial statements.

2. INTEREST CAPITALIZED

Interest costs associated with projects under development or reconstruction
aggregating $2,009 and $894 for the quarters ended September 30, 1997 and 1996,
respectively, have been capitalized.

10

BAY APARTMENT COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

3. NOTES PAYABLE



SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------

TAX-EXEMPT VARIABLE RATE UNDER INTEREST RATE SWAPS:
Foxchase (Phase I and II) and Fairway Glen are encumbered by first
deeds of trust which collateralize three housing bond issues
maturing November 1, 2007. The Company has entered into an interest
rate swap agreement with a financial institution under which the
interest rate is fixed until March 2004 at an effective rate of
5.88%. Such bonds require monthly payments of interest only. The
bonds contain covenants which require 20% of the apartment homes to
be leased or held available for lease to low or moderate income
families........................................................... $ 35,980 $ 35,980
Waterford and Villa Mariposa are encumbered by first deeds of trust
which collateralize two housing bond issues. The Company has
entered into an interest rate swap agreement with a financial
institution under which the interest rate is fixed until March 2004
at an effective rate of 5.88%. Such bonds require monthly payments
of interest only and mature on August 1, 2014 and March 1, 2017,
respectively. The bonds contain covenants which require 20% of the
apartment homes to be leased or held available for lease to low or
moderate income families........................................... 51,400 51,400
Barrington Hills is encumbered by a first deed of trust which
collateralizes housing bond issues maturing June 15, 2025, fully
amortizing over the term. The Company has entered into an interest
rate swap agreement under which the interest rate is fixed until
June 2010 at an effective rate of 6.48%, including the amortization
of deferred financing costs. The bonds contain covenants which
require 20% of the apartment homes to be leased or held available
for lease to low or moderate income families....................... 13,224 13,338
Crossbrook is encumbered by a first deed of trust which
collateralizes housing bond issues maturing June 15, 2025, fully
amortizing over the term. The Company has entered into an interest
rate swap agreement under which the interest rate is fixed until
June 2010 at an effective rate of 6.48%, including the amortization
of deferred financing costs. The bonds contain covenants which
require 20% of the apartment homes to be leased or held available
for lease to low or moderate income families....................... 8,508 8,579
Rivershore is encumbered by a first deed of trust which
collateralizes housing bond issues maturing November 15, 2022,
fully amortizing over the term. The Company has entered into an
interest rate swap agreement under which the interest rate is fixed
until June 2010 at an effective rate of 6.48%, including the
amortization of deferred financing costs. The bonds contain
convenants which require 20% of the apartment homes to be leased or
held available for lease to low or moderate income families........ 10,344 10,445
Canyon Creek is encumbered by a first deed of trust which
collateralizes housing bond issues maturing June 15, 2025, fully
amortizing over the term. The Company has entered into an interest
rate swap agreement under which the interest rate is fixed until
June 2010 at an effective rate of 6.48%, including the amortization
of deferred financing costs. The bonds contain convenants which
require 20% of the apartment homes to be leased or held available
for lease to low income families................................... 38,649 38,800
Sea Ridge is encumbered by a first deed of trust which
collateralizes housing bond issues maturing June 15, 2025, fully
amortizing over the term. The Company has entered into an interest
rate swap agreement under which the interest rate is fixed until
June 2010 at an effective rate of 6.48%, including the amortization
of deferred financing costs. The bonds contain covenants which
require 20% of the apartment homes to be leased or held available
for lease to low income families................................... 17,532 17,600


11

BAY APARTMENT COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)



SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------

City Heights is encumbered by a first deed of trust which
collateralizes housing bond issues maturing June 1, 2025, partially
amortizing over the term. The interest rate on the bonds is fixed
until July 2007 at an effective interest rate of 5.80%, including
the amortization of deferred financing costs. The bonds contain
covenants which require 20% of the apartment homes to be leased or
held available for lease to low income families.................... 20,766 --
Larkspur Canyon is encumbered by a first deed of trust which
collateralizes housing bond issues maturing June 1, 2025, partially
amortizing over the term. The interest rate on the bonds is fixed
until September 2002 at an effective interest rate of 5.50%,
including the amortization of deferred financing costs. The bonds
contain covenants which require 20% of the apartment homes to be
leased or held available for lease to low or moderate income
families........................................................... 7,629 --
------------- ------------
Subtotal...................................................... 204,032 176,142
------------- ------------
TAX-EXEMPT FIXED RATE:
Countrybrook is encumbered by a first deed of trust which
collateralizes housing bond issues maturing March 1, 2012,
partially amortizing over the term. The interest rate on the bonds
is fixed until April 2002 at an effective interest rate of 7.87%,
including the amortization of deferred financing costs. The bonds
contain covenants which require 20% of the apartment homes to be
leased or held available for lease to low or moderate income
families........................................................... 19,917 20,111
------------- ------------
Subtotal...................................................... 19,917 20,111
------------- ------------
TAX-EXEMPT VARIABLE RATE:
City Heights was encumbered by a first deed of trust which
collateralized housing bond issues maturing March 1, 2018. Interest
only payments were required monthly at a variable rate set weekly
by the remarketing agent (6.50% at December 31, 1996, respectively,
including the amortization of deferred financing costs). The bonds
contained covenants which required 20% of the apartment homes to be
leased or held available for lease to low income families. These
bonds were refinanced in July 1997................................. -- 20,800
Larkspur Canyon was encumbered by a first deed of trust which
collateralized housing bond issues maturing March 1, 2023. Interest
only payments were required monthly at a variable rate set weekly
by the remarketing agent (5.90% at December 31, 1996, including the
amortization of deferred financing costs). The bond payments were
secured by a $7,823 irrevocable direct pay letter of credit. The
bonds contained covenants which required 20% of the apartment homes
to be leased or held available for lease to low or moderate income
families. These bonds were refinanced in August 1997............... -- 7,635
------------- ------------
Subtotal...................................................... -- 28,435
------------- ------------
FIXED RATE:
Cardiff Gardens is encumbered by a first deed of trust maturing May
1, 2004. Interest only payments are required monthly at a fixed
interest rate of 7.25%............................................. 12,870 --
Gallery Place is encumbered by a first deed of trust maturing May
15, 2001, partially amortizing over the term. The interest rate on
the loan is fixed at 7.31%......................................... 11,733 --
Note payable assumed in connection with the Cedar Ridge acquisition
maturing July 15, 1999. Interest only payments are required monthly
at a fixed interest rate of 6.50%.................................. 1,000 --
------------- ------------
Subtotal...................................................... 25,603 --
------------- ------------


12

BAY APARTMENT COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)



SEPTEMBER 30, DECEMBER 31,
1997 1996
-------- --------

CREDIT LINE:
Unsecured line of credit (the "Unsecured Line of Credit") with an
aggregate borrowing amount of up to $200,000 maturing May 2000.
This line bears interest at various LIBOR rates plus 0.90%......... 87,000 49,000
-------- --------
Subtotal...................................................... 87,000 49,000
-------- --------
Total Notes Payable...................................... $336,552 $273,688
======== ========


Principal payments on outstanding notes payable as of September 30, 1997 are due
as follows:



1997 ......................................... $ 452
1998 ......................................... 1,892
1999 ......................................... 3,033
2000 ......................................... 89,185
2001 ......................................... 13,143
Thereafter ......................................... 228,847
--------
Total ......................................... $336,552
========


4. CONTINGENCIES

The Company is subject to various legal proceedings and claims that arise
in the ordinary course of business. These matters are generally covered by
insurance. While the resolution of these matters cannot be predicted with
certainty, management believes that the final outcome of such matters will not
have a material adverse effect on the financial position or results of
operations of the Company.

On September 8, 1997, the Company agreed to purchase through the Northwest
Partnership, a 264 apartment home community currently under construction in
Redmond, Washington from Avondale Bear Creek Limited Partnership. The proposed
acquisition of Verandas at Bear Creek will not be consummated until 90 days
after construction has been completed and the community is 90 percent occupied
by residents. This proposed acquisition is expected to close during the second
quarter of 1998 and the purchase price is anticipated to be approximately $34.3
million. In connection with this proposed acquisition, the company has agreed to
pay off mortgage indebtedness secured by the community in the amount of
approximately $28 million and the Northwest Partnership will issue Northwest
Units valued at approximately $3.9 million. The total number of Northwest Units
issued in connection with this proposed acquisition will be determined based on
a price per unit equal to the average closing sale price of the Company's Common
Stock on the New York Stock Exchange for a specified number of days preceding
the closing date of the acquisition. These Northwest Units will have the same
4.5% initial annual priority return applicable to the Northwest Units issued in
connection with the Company's acquisition of the Gallery Place community. In
addition, subject to certain terms and conditions, the holders of such Northwest
Units may require the Northwest Partnership to redeem all or a portion of their
Northwest Units in exchange for cash. The Company may, however, at its election,
redeem such Northwest Units in exchange for shares of the Company's Common
Stock. All of such shares will be covered by a registration rights agreement.
Because the consummation of the acquisition of Verandas at Bear Creek is subject
to the satisfaction of certain conditions that are not within the control of the
Company, there can be no assurance that the Company will consummate the
acquisition or, if the community is acquired, that it will be purchased on the
terms currently contemplated.

13

BAY APARTMENT COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

5. SUBSEQUENT EVENTS

In October 1997, the Company engaged in the following transactions:

- Purchased the Landing West apartment community for $9,000. This community
contains 190 apartment homes and is located in Seattle, Washington.

- Acquired for $4,661 a 5.82 acre site adjacent to the Company's recently
constructed 300 apartment home community, Rosewalk, in San Jose,
California. The Company plans to build a second phase, 156 apartment home
expansion of Rosewalk on this site.

- Purchased the Creekside apartment community for $28,950. This community
contains 294 apartment homes and is located in Mountain View, California.

14

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company's actual results could
differ materially from those set forth in the forward-looking statements as a
result of, among other factors, the risk factors set forth below and in the
Company's filings with the Securities and Exchange Commission, changes in
general economic conditions and changes in the assumptions used in making such
forward-looking statements.

RESULTS OF OPERATIONS

The following discussion sets forth historical results of operations for
the Company for the quarters ended September 30, 1997 and 1996. The following
table outlines the communities acquired or leased-up during 1996 and through
September 30, 1997:



1996 ACQUISITION COMMUNITIES
- -----------------------------------------------
COMMUNITY DATE ACQUIRED
- ------------------------- ---------------------

Parc Centre(a)........... May 15, 1996
Parkside Commons......... May 15, 1996
Sunset Towers(b)......... May 22, 1996
Countrybrook(c).......... July 12, 1996
Larkspur Canyon(d)....... July 19, 1996
The Fountains(e)......... July 26, 1996
Mill Creek(f)............ July 26, 1996
Crowne Ridge(formerly
Channing Heights)(g)... August 7, 1996
Lafayette Place(formerly
Martinique
Gardens)(h)............ August 7, 1996




1996 DEVELOPMENT COMMUNITY
- -----------------------------------------------
COMMUNITY DATE STABILIZED(i)
- ------------------------- ---------------------

Rosewalk(j).............. February 1997




1997 ACQUISITION COMMUNITIES(k)
- -----------------------------------------------
COMMUNITY DATE ACQUIRED
- ------------------------- ---------------------

SummerWalk (formerly
Rancho
Penasquitos)(l)........ January 3, 1997
TimberWood (formerly The
Village)............... March 13, 1997
SunScape (formerly
Banbury Cross)......... April 1, 1997
Cardiff Gardens.......... April 18, 1997
Villa Serena............. April 25, 1997
Amador Oaks.............. April 30, 1997
Mission Woods(formerly
Genesee Gardens)....... May 16, 1997
Cedar Ridge(formerly
Regency)............... July 15, 1997
The Park................. September 4, 1997
Lakeside................. September 5, 1997
Gallery Place............ September 23, 1997


The 1996 and 1997 Acquisition and Development Communities are collectively
termed the "Acquisition Communities."
- ---------------

(a) Substantial reconstruction at Parc Centre was completed during the quarter
ended June 30, 1997. The reconstruction included the replacement of the
community's roofs, repairing and repainting exterior siding, substantially
refurbishing its landscaping, redecorating the interior of all apartment
homes, rebuilding its leasing facility and fitness center and gating the
community.

(b) Sunset Towers is undergoing substantial reconstruction including moving and
rebuilding the community's leasing facility, upgrading all of its interior
hallways and foyers, modifying its exterior siding, upgrading its
landscaping and repairing its roofs and boilers.

(c) Substantial reconstruction at Countrybrook was completed during the quarter
ended September 30, 1997. The reconstruction included the replacement of the
community's leasing facility and fitness center, repairing and repainting
its exterior siding, replacing the community's roofs, adding approximately
115 garages, substantially upgrading its landscaping and gating the
community.

(d) Substantial reconstruction at Larkspur Canyon was completed during the
quarter ended June 30, 1997. This reconstruction included repairing and
repainting the community's exterior, replacing the leasing facility and
fitness center and adding garages and a gate system.

15

(e) Reconstruction at The Fountains was completed during the quarter ended
September 30, 1997. The reconstruction included repainting the entire
exterior and other minor repairs.

(f) Substantial reconstruction at Mill Creek was completed during the quarter
ended September 30, 1997. The reconstruction included replacing the
community's roofs, decks and some exterior siding, repairing and repainting
its exterior, renovating its leasing center and fitness center, adding
garages and upgrading its laundry facilities and landscaping.

(g) Crowne Ridge, formerly known as Channing Heights, is undergoing substantial
reconstruction including the replacement of the community's roofs, raised
walkways and decks, repairing and repainting exterior siding, upgrading the
apartment interiors, replacing its leasing facility and fitness center and
substantially upgrading its landscaping.

(h) Lafayette Place, formerly known as Martinique Gardens, is undergoing
substantial reconstruction including replacing its roofs, repairing and
repainting its exterior siding, replacing all apartment home interiors,
rebuilding its leasing facility and fitness center, adding a substantial
number of new garages, replacing its roadways, the swimming pool and all of
the landscaping.

(i) Stabilized occupancy is defined as the first calendar month following
completion of construction in which the community has a physical occupancy
of at least 95%.

(j) The Rosewalk community consists of 10.8 acres of land on which 300 apartment
homes have been built. Construction of the community was completed in
January 1997, occupancy commenced in August 1996 and stabilization occurred
in February 1997.

(k) All of the 1997 Acquisition Communities are undergoing, or will undergo in
the future, substantial reconstruction and repositioning programs, with the
exception of SummerWalk, formerly Rancho Penasquitos, for which
reconstruction was completed during the quarter ended September 30, 1997.

(l) Substantial reconstruction at SummerWalk, formerly Rancho Penasquitos, was
completed during the quarter ended September 30, 1997. The reconstruction
included repairing the community's roofs, repairing, waterproofing and
repainting the stucco exteriors, rebuilding the leasing office and upgrading
the landscaping and site drainage. In addition, the Company added air
conditioning units and upgraded the bathroom lighting in all apartments,
installed new kitchen appliances in approximately one-half of the apartments
and installed washers and dryers in approximately one-third of the
apartments that did not previously have them.

Acquisitions entail risks that investments will fail to perform in
accordance with expectations and that judgments with respect to the cost of
improvements to bring an acquired community up to standards established for the
market position intended for that community will prove inaccurate, as well as
general investment risks associated with any new real estate investment.
Although the Company undertakes an evaluation of the physical condition of each
new community before it is acquired, certain defects or necessary repairs may
not be detected until after the community is acquired, which could significantly
increase the Company's total acquisition costs.

Construction costs are increasing and the cost to reposition communities
that have been acquired has, in some cases, exceeded management's original
estimates. Management believes that it may experience similar increases in the
future. There can be no assurances that the Company will be able to charge rents
upon completing the repositioning of the communities that will be sufficient to
offset the effects of increases in construction costs.

16

COMPARISON OF THE QUARTER ENDED SEPTEMBER 30, 1997 TO THE QUARTER ENDED
SEPTEMBER 30, 1996.

The Company's results of operations are summarized as follows for the
quarters ended September 30, 1997 and 1996 (Dollars in thousands):



FOR THE QUARTER
ENDED SEPTEMBER 30,
-------------------
1997 1996 $-CHANGE %-CHANGE
------- ------- -------- --------

Revenue:
Rental................................. $31,583 $22,380 $9,203 41.1%
Other.................................. 1,155 670 485 72.4%
------- ------- ------ -----
Total revenue....................... 32,738 23,050 9,688 42.0%
------- ------- ------ -----
Expenses:
Property operating..................... 7,561 5,407 2,154 39.8%
Property taxes......................... 2,405 1,840 565 30.7%
General and administrative............. 1,718 997 721 72.3%
Abandoned project costs................ 140 -- 140 --
Interest and financing................. 3,243 3,743 (500) (13.4%)
Depreciation and amortization.......... 6,927 5,080 1,847 36.4%
------- ------- ------ -----
Total expenses...................... 21,994 17,067 4,927 28.9%
------- ------- ------ -----
Income before minority interest.......... 10,744 5,983 4,761 79.6%
Minority interest........................ (91) (138) 47 (34.1%)
------- ------- ------ -----
Net income............................... $10,653 $ 5,845 $4,808 82.3%
======= ======= ====== =====


Revenue from rental property increased primarily as a result of the
addition of the Acquisition Communities. The 1996 and 1997 Acquisition
Communities contributed $1,224 and $4,980, respectively, to the increase. The
1996 Development Community, Rosewalk, was stabilized in February 1997 and
contributed $1,109 to the increase. Toscana, one of the Current Development
Communities (defined below), contributed $383 to the increase. The remainder of
the portfolio increased rental revenue by $1,507, of which $1,438 was
attributable to the Same Store communities (defined below).

Other income increased primarily as a result of the additional
miscellaneous income from the Acquisition Communities.

Property operating expenses increased primarily as a result of the addition
of the Acquisition Communities. Of the $2,154 total increase, $351 was
attributable to the 1996 Acquisition Communities, $107 was attributable to
Rosewalk, $1,340 was attributable to the 1997 Acquisition Communities and $133
was attributable to the apartment homes delivered at Toscana. The remainder of
the portfolio increased property operating expenses by $223, of which $72 was
attributable to the Same Store communities (defined below). In addition, the
Acquisition Communities contributed $591 to the increase in property taxes and
the remainder of the portfolio decreased property taxes by $26.

General and administrative costs increased primarily due to the growth in
employee-related costs and other costs needed to manage the Acquisition
Communities. The 1997 and 1996 amounts are net of $1,774 and $592, respectively,
of allocated indirect project costs capitalized to construction and
reconstruction projects, representing approximately 49% and 37% of total general
and administrative expense, including abandoned project costs, for the quarters
ended September 30, 1997 and 1996, respectively.

Interest and financing expense decreased due to higher capitalization of
interest from increased development, construction and reconstruction activity
and a lower overall cost of funds offset in part by increased borrowing for new
acquisitions.

Depreciation and amortization expense increased due to the addition of the
Acquisition Communities.

17

COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996.

The Company's results of operations are summarized as follows for the nine
months ended September 30, 1997 and 1996 (Dollars in thousands):



FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1997 1996 $-CHANGE %-CHANGE
------- ------- -------- --------

Revenue:
Rental................................. $85,794 $56,381 $29,413 52.2%
Other.................................. 2,982 1,538 1,444 93.9%
------- ------- ------ -----
Total revenue....................... 88,776 57,919 30,857 53.3%
------- ------- ------ -----
Expenses:
Property operating..................... 20,306 13,253 7,053 53.2%
Property taxes......................... 6,568 4,528 2,040 45.1%
General and administrative............. 4,602 2,673 1,929 72.2%
Abandoned project costs................ 670 50 620 1,240.0%
Interest and financing................. 10,360 10,850 (490) (4.5%)
Depreciation and amortization.......... 19,053 13,277 5,776 43.5%
------- ------- ------ -----
Total expenses...................... 61,559 44,631 16,928 37.9%
------- ------- ------ -----
Income before minority interest and
extraordinary item..................... 27,217 13,288 13,929 104.8%
Minority interest........................ (315) (165) (150) 90.9%
------- ------- ------ -----
Net income before extraordinary item..... 26,902 13,123 13,779 105.0%
Extraordinary item....................... -- (511) 511 (100.0%)
------- ------- ------ -----
Net income............................... $26,902 $12,612 $14,290 113.3%
======= ======= ====== =====


Revenue from rental property increased primarily as a result of the
addition of the Acquisition Communities. The 1996 and 1997 Acquisition
Communities contributed $11,877 and $8,710, respectively, to the increase.
Rosewalk contributed $3,428 and the apartment homes delivered at Toscana
contributed $383 to the increase. The remainder of the portfolio increased
rental revenue by $5,015, of which $4,489 was attributable to the Same Store
communities (defined below).

Other income increased primarily as a result of the addition of the
Acquisition Communities and the Same Store communities (defined below) which
contributed $854 and $437, respectively. The remaining increase of $153 was
attributable to the remainder of the portfolio.

Property operating expenses increased primarily as a result of the addition
of the Acquisition Communities. Of the $7,053 total increase, $3,196 was
attributable to the 1996 Acquisition Communities, $2,377 was attributable to the
1997 Acquisition Communities, $409 was attributable to Rosewalk, $133 was
attributable to the apartment homes delivered at Toscana, $626 was attributable
to the Same Store communities (defined below) and $312 was attributable to the
remainder of the portfolio.

Property taxes increased by $2,040 due to a $2,050 increase attributable to
the addition of the Acquisition Communities offset in part by a $10 decrease in
the remainder of the portfolio.

General and administrative costs increased primarily due to the growth in
employee-related costs and other costs necessary to manage the Acquisition
Communities. Abandoned project costs increased primarily due to a one-time write
off of $450, in the quarter ended June 30, 1997, as a result of the termination
of the Company's efforts to acquire a multifamily portfolio. The 1997 and 1996
amounts are net of $4,531 and $1,509, respectively, of allocated indirect
project costs capitalized to construction and reconstruction projects,
representing approximately 46% and 36% of total general and administrative
expense, including abandoned project costs, for the nine months ended September
30, 1997 and 1996, respectively.

18

Interest and financing expense decreased due to higher capitalization of
interest from increased development, construction and reconstruction activity
and a lower overall cost of funds offset in part by increased borrowing for new
acquisitions.

Depreciation and amortization expense increased primarily due to the
addition of the Acquisition Communities.

THE COMPANY'S RESULTS OF PROPERTY OPERATIONS (EARNINGS BEFORE INTEREST,
TAXES, DEPRECIATION AND AMORTIZATION -- "EBITDA") FOR THE "SAME STORE"
COMMUNITIES (1) IS SUMMARIZED BELOW FOR THE QUARTERS ENDED SEPTEMBER 30, 1997
AND 1996:



FOR THE QUARTER
ENDED SEPTEMBER 30,
--------------------
(DOLLARS IN THOUSANDS) 1997 1996 $-CHANGE %-CHANGE
------------------------------------- ------- -------- -------- --------

Revenue.............................. $18,946 $ 17,362 $1,584(2) 9.1%
Expenses............................. 5,324 5,265 59(3) 1.1%
------- ------- ------ ----
EBITDA............................... $13,622 $ 12,097 $1,525 12.6%
======= ======= ====== ====


- ---------------

(1) The Same Store communities consist of 24 apartment communities comprising a
total of 6,230 apartment homes. These communities include all those which
were owned for all of 1996 and during the nine months ended September 30,
1997 and to which the Company made no major renovations after January 1,
1996.

(2) Same Store revenues increased due to rental increases of $1,438, month to
month fee increases of $28, lease termination fee increases of $17 and a net
increase in other income of $101.

(3) Same Store expenses increased primarily as a result of a $75 increase in
management and administrative costs, offset in part by a $16 decrease in
other miscellaneous expenses.

CURRENT DEVELOPMENT COMMUNITIES

The Company has acquired five land sites on which it is building, or plans
to commence building in the future, the following Current Development
Communities, which will contain an aggregate of approximately 1,818 apartment
homes.

- TOSCANA, SUNNYVALE, CALIFORNIA. The Company purchased this partially
built and abandoned 17.8 acre site in May 1996 on which it is building a 710
apartment home community. The original total budgeted construction cost of this
community was $95.7 million. The site, located approximately at the intersection
of Highway 101 and Lawrence Expressway, is close to the center of Silicon
Valley. This Current Development Community will contain a large leasing
pavilion, business center, fitness center, two swimming pools, including one 75
foot lap pool, a small commercial area, secure underground parking and a
perimeter gate system. Stabilized operations are expected in the fourth quarter
of 1998, and the first apartment homes were completed and occupied in July 1997.
As of September 30, 1997 construction has been completed on 132 apartment homes.

- CENTREMARK, SAN JOSE, CALIFORNIA. The Company purchased 2.5 acres of
this 7.9 acre site in May 1996. The remainder of this site was purchased in
December 1996 after obtaining substantially all of the necessary public
approvals for development of the community. The site is located at the
intersection of Stevens Creek Boulevard and Interstate 280, in the northwest
corner of San Jose, almost immediately adjacent to the City of Cupertino. The
planned 311 apartment home community will include a large leasing facility,
business center, fitness center, 65 foot lap pool, secure underground parking
and perimeter gate system. The Company has estimated a total budgeted
construction cost for this Current Development Community of $44.1 million.
Stabilized operations are expected in the first quarter of 1999, and the first
apartment homes are expected to be completed and occupied in the second quarter
of 1998.

- PASEO ALAMEDA, SAN JOSE, CALIFORNIA. The Company purchased 7.44 acres of
this 8.87 acre site in February 1997 after it obtained substantially all of the
necessary public approvals for development of the

19

community. The remainder of this site was purchased in April 1997. The site is
located on a major street, approximately one mile from downtown San Jose. The
Company intends to build a 305 apartment home community which will include a
large leasing pavilion, business center, fitness center, 75 foot lap pool, a
small commercial area and secure underground parking. The Company has estimated
a total budgeted construction cost for this Current Development Community of
$44.4 million. Stabilized operations are expected in the second quarter of 1999,
and the first apartment homes are expected to be completed and occupied in the
third quarter of 1998.

- SAN FRANCISCO, CALIFORNIA LAND SITE. The Company acquired, through a
limited partnership in which it is the sole general partner, a portion of a city
block in the Rincon Hill area of San Francisco for approximately $7.8 million in
June 1997. The Company intends to build twin, 16-story towers above a four story
parking garage on this land site. As currently planned, the community will have
226 apartment homes, approximately 2,900 square feet of retail space and between
224 and 271 controlled access parking spaces. The land site is on Beale Street,
between Harrison and Folsom Streets, almost two blocks north of the Bay Bridge,
approximately three blocks south of Market Street and three blocks west of the
Embarcadero and San Francisco Bay. The Company has received substantially all
necessary public approvals for the project. The Company expects to begin site
work in late 1997 and actual construction of the community in early 1998, with
initial occupancy expected in mid 1999. The community will contain one, two and
three bedroom apartment homes, with resident amenities including a health club,
meeting and conference rooms, business center, leasing pavilion and parking deck
gardens.

- MOUNTAIN VIEW, CALIFORNIA LAND SITE. In September 1997 the Company
acquired a 1.917 acre land site in Mountain View, California which includes a
50% undivided interest in an existing underground parking garage adjacent to
this land site, subject to agreements which specifically allocate parking rights
between an adjacent office building and this development, including 266 spaces
reserved exclusively for residents of the community planned for this site. The
Company intends to build two 12-story towers on this land site, which will
contain a total of 266 apartment homes and approximately 10,000 square feet of
ground level space for a recreation, leasing and community center. The
acquisition of this site, purchased in two separate parcels for approximately
$8.93 million, includes substantially all necessary public approvals and
previously paid fees totaling approximately $800,000.

For new development communities, the Company's goal, on average, is to
achieve projected EBITDA as a percentage of total budgeted construction cost of
approximately 10%. Projected EBITDA as a percentage of total budgeted
construction cost represents EBITDA projected to be received in the first
calendar year after a community reaches stabilized occupancy (i.e., the first
month when the community has a weighted average physical occupancy of at least
95%), based on current market rents, less projected stabilized property
operating and maintenance expenses, before interest, income taxes, depreciation
and amortization. Total budgeted construction cost is based on current
construction costs, including interest capitalized during the construction
period. Market rents and construction costs reflect those prevailing in the
community's market at the time the Company's development budgets are prepared
taking into consideration certain changes to those market conditions anticipated
by the Company at the time. Although the Company attempts to anticipate changes
in market conditions, the Company cannot predict with certainty what those
changes will be. For example, upon the acquisition of the Toscana land site in
May 1996, the Company estimated that the total budgeted construction cost for
this Current Development Community would be $95.7 million. Since that time, the
Company has obtained bids for the construction of the first two phases of this
four-phase project. Construction costs are increasing and management believes
that when the last two phases are bid late in 1997, the total construction cost
for this development will be higher than the original budget. Nonetheless,
because of increases in prevailing market rents management believes that it will
still be able to achieve projected EBITDA as a percentage of total budgeted
construction cost of at least 10%. Management believes that it will experience
similar increases in construction costs and market rents with respect to the
CentreMark and Paseo Alameda Current Development Communities.

There are risks associated with the Company's development and construction
activities which include: development and acquisition opportunities explored by
the Company may be abandoned; construction costs of a community may exceed
original estimates due to increased materials, labor or other expenses, which
could

20

make completion of the community uneconomical; occupancy rates and rents at a
newly completed community are dependent on a number of factors, including market
and general economic conditions, and may not be sufficient to make the community
profitable; financing may not be available on favorable terms for the
development of a community; and construction and lease-up may not be completed
on schedule, resulting in increased debt service expense and construction costs.
Development activities are also subject to risks relating to the inability to
obtain, or delays in obtaining, all necessary zoning, land-use, building,
occupancy, and other required governmental permits and authorizations. The
occurrence of any of the events described above could adversely affect the
Company's ability to achieve its projected yields, or achieve stabilized
occupancy at the time originally estimated, on communities under development or
reconstruction and could prevent the Company from making expected distributions.

LIQUIDITY AND CAPITAL RESOURCES

The Company has considered its short-term liquidity needs and anticipates
that these needs will be fully funded from cash flows provided by operating
activities. The Company believes that its principal short-term liquidity needs
are to fund normal recurring expenses, debt service requirements, the
distributions required with respect to its Series C Cumulative Redeemable
Preferred Stock and the distributions required to maintain the Company's REIT
qualification under the Code.

The Company expects to fund certain committed construction, acquisition and
reconstruction projects with a combination of working capital and borrowings
under the Unsecured Line of Credit. The Company intends to use available working
capital first and available proceeds under its Unsecured Line of Credit second.

As of September 30, 1997, the proceeds from the Unsecured Line of Credit
were used primarily for the acquisition, development and construction of the
Current Development Communities and reconstruction of the 1996 and 1997
Acquisition Communities.

In July 1997, the Company assumed $1,000,000 of seller financing in
connection with the acquisition of the Cedar Ridge community.

In July 1997, the Company refinanced approximately $20,800,000 of its
tax-exempt bonds which were issued in connection with its acquisition of City
Heights in October 1995. The all-inclusive interest rate on the new variable
rate 28-year tax-exempt bonds has been fixed for ten years at a rate of
approximately 5.8%. In August 1997, the Company refinanced approximately
$7,635,000 of its tax-exempt bonds issued in connection with its acquisition of
Larkspur Canyon in July 1996. These new variable rate 28-year tax-exempt bonds
have been fixed for five years at an all-inclusive interest rate of
approximately 5.5%

In September 1997, the Company assumed $11,733,000 of financing in
connection with the acquisition of the Gallery Place community.

21

The Company's outstanding debt as of September 30, 1997 is summarized as
follows:



(DOLLARS IN THOUSANDS) BALANCE AVAILABLE MATURES RATE INTEREST RATE PROTECTION
- --------------------------- ---------- --------- --------------- ----- ------------------------

Tax-exempt variable rate $ 88,257 $ -- November 2022- 6.48%(a) Interest rate is fixed
under interest rate swap June 2025 until June 2010.
Tax-exempt variable rate 87,380 -- November 2007- 5.88%(b) Interest rate is fixed
under interest rate swap March 2017 until March 2004.
Tax-exempt variable rate 20,766 -- June 2025 5.80%(a) Interest rate is fixed
under interest rate swap until July 2007.
Tax-exempt variable rate 7,629 -- June 2025 5.50%(a) Interest rate is fixed
under interest rate swap until September 2002.
Tax-exempt fixed rate 19,917 -- March 2012 7.87%(a) Interest rate is fixed
until April 2002.
Fixed rate 12,870 -- May 2004 7.25%
Fixed rate 11,733 -- May 2001 7.31%
Fixed rate 1,000 -- July 1999 6.50%
-------- --------
Subtotal 249,552 --
$200,000 Unsecured Line of
Credit(c) 87,000 113,000 May 2000 LIBOR+0.90%
-------- --------
Total $ 336,552 $ 113,000
======== ========


- ---------------

(a) This rate represents an all-in financing cost, including amortization of
deferred financing costs.

(b) The 5.88% rate excludes the amortization of financing costs paid by the
sponsor prior to the Initial Offering; if such costs were included, the
all-inclusive effective rate would be 6.30%.

(c) Amounts drawn on the Unsecured Line of Credit were used primarily for
development, construction and reconstruction purposes.

In January 1997, the Company sold in an underwritten public offering
1,400,000 shares of common stock at a price of $37.125 per share. The net
proceeds to the Company, of approximately $49.2 million, were used to reduce
borrowings under the Unsecured Line of Credit, which were used to fund the
acquisition and development of additional apartment communities, including the
SummerWalk (formerly Rancho Penasquitos) acquisition.

In April 1997, the Company sold in a direct placement 1,662,000 shares of
common stock at a price of $36.125 per share. The net proceeds to the Company,
of approximately $58.6 million, were used to reduce borrowings under the
Unsecured Line of Credit, which were used to fund the acquisition and
development of additional apartment communities, including TimberWood (formerly
The Village), SunScape (formerly Banbury Cross) and Cardiff Gardens.

In June 1997, sold in a underwritten public offering 2,300,000 shares of
8.5 percent, five year non-call, Series C Cumulative Redeemable Preferred Stock
at a price of $25 per share. The net proceeds to the Company, of approximately
$55.5 million, were used to reduce borrowings under the Unsecured Line of
Credit, which were used to fund the acquisition and development of additional
apartment communities, including amounts borrowed to fund the acquisition of the
Villa Serena, Amador Oaks and Mission Woods (formerly Genesee Gardens)
communities and one land site in San Francisco, California.

In September 1997, the Company sold in an underwritten public offering
2,645,000 shares of common stock at a price of $38.6875 per share. The net
proceeds to the Company, after all anticipated issuance costs, were
approximately $97 million. The net proceeds were used to reduce borrowings under
the Unsecured Line of Credit, which were used to fund the acquisition and
development of additional apartment communities, including the Cedar Ridge
(formerly Regency), The Park and Lakeside communities and one land site in
Mountain View, California.

22

The Company anticipates that its cash flow and cash available from its $200
million Unsecured Line of Credit will be adequate to meet its liquidity
requirements for the foreseeable future. The Company anticipates that dividends
will be paid from Funds Available for Distribution (defined below).

Net cash provided by operations for the nine months ended September 30,
1997 increased to $35,079,000 from $29,030,000 for the nine months ended
September 30, 1996, primarily due to higher net income before noncash charges
for depreciation and amortization from the addition of the Acquisition
Communities. This increase is offset in part by increases in other assets
primarily due to deposits into escrow for two communities and one land site
acquired in October 1997 and certain increases in deferred financing costs,
property tax impound accounts and prepaid insurance.

Net cash used for investing activities was $301,473,000 and $198,381,000
for the nine months ended September 30, 1997 and 1996, respectively. This
increase reflects the expenditures for the purchases of the 1997 Acquisition
Communities, the amounts used to complete construction of the Rosewalk
community, the acquisition, development and construction of the Current
Development Communities and the costs incurred on the refurbishment and
reconstruction projects.

Net cash provided by financing activities was $269,303,000 and $168,605,000
for the nine months ended September 30, 1997 and 1996, respectively. This
increase is primarily due to the net proceeds received by the Company from the
January, April and September 1997 common stock offerings, the June 1997 offering
of the Series C Cumulative Redeemable Preferred Stock and the increase in the
Company's Unsecured Line of Credit, offset in part by the increased dividends
paid.

INFLATION

Substantially all of the leases at the Company's apartment communities are
for a term of one year or less, which may enable the Company to counter the
adverse effects of inflation by increasing rents upon renewal of existing leases
or commencement of new leases. However, these short-term leases permit a
resident to leave at the end of the lease term at minimal or no cost to the
resident.

NATURAL DISASTERS

Many of the communities are located in the general vicinity of active
earthquake faults. In June 1997, the Company obtained a seismic risk analysis
from an engineering firm which estimated the probable maximum loss ("PML") for
each of the 41 communities owned at that time and Toscana, a community currently
under construction, individually and for all of such communities combined. To
establish a PML, the engineers first define a severe earthquake event for the
applicable geographic area, which is an earthquake that has only a 10%
likelihood of occurring over a 50-year period. The PML is determined as the
structural and architectural damage and business interruption loss that has a
10% probability of being exceeded in the event of such an earthquake. Because
the communities are concentrated in the San Francisco Bay Area, the engineers'
analysis defined an earthquake on the San Andreas Fault with a Richter Scale
magnitude of 8.0 as a severe earthquake with a 10% probability of occurring
within a 50-year period, and established an aggregate PML at that time of $63.8
million for the 41 communities owned at that time and Toscana, which is a PML
level that is expected to be exceeded only 10% of the time in the event of such
a severe earthquake. This aggregate PML could be higher as a result of
variations in soil classifications and structural vulnerabilities. Two of the
communities had individual PMLs of 30%, while seven communities had PMLs of 25%,
and the remaining 33 communities owned at such time each had PMLs of 20% or
less. The Company has obtained an individual PML assessment for each of the six
communities acquired since June 1997. One community had an individual PML of
30%, one had an individual PML of 24%, two had individual PMLs of 20%, one had
an individual PML of 15% and the sixth community had an individual PML of 10%.
No assurance can be given that an earthquake would not cause damage or losses
greater than the PML assessments indicate, that future PML levels will not be
higher than the current PML levels for the communities, or that future
acquisitions or developments will not have PML assessments indicating the
possibility of greater damage or losses than currently indicated.

In July 1997, the Company renewed its earthquake insurance, both for
physical damage and lost revenues, with respect to the 41 communities then owned
and Toscana. In addition, the six communities

23

acquired subsequent to June 1997 have been included under the Company's
earthquake insurance policy. For any single occurrence, the Company self-insures
the first $25 million of loss, and has in place $35 million of coverage above
this amount, with a 5% deductible subject to a maximum of $2.43 million. In
addition, the Company's general liability and property casualty insurance
provides coverage for personal liability and fire damage. In the event that an
uninsured disaster or a loss in excess of insured limits were to occur, the
Company could lose its capital invested in the affected community, as well as
anticipated future revenues from such community, and would continue to be
obligated to repay any mortgage indebtedness or other obligations related to the
community. Any such loss could materially and adversely affect the business of
the Company and its financial condition and results of operations.

FUNDS FROM OPERATIONS AND FUNDS AVAILABLE FOR DISTRIBUTION

Many industry analysts consider Funds from Operations an appropriate
measure of performance of an equity REIT. Funds from Operations ("FFO") as
defined by the National Association of Real Estate Investment Trusts ("NAREIT")
means net income (or loss) (computed in accordance with generally accepted
accounting principles), excluding gains (or losses) from debt restructuring and
sales of property, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. This definition was revised by
NAREIT effective for periods after 1995 to exclude the add back of non-real
estate depreciation and the amortization of recurring deferred financing costs.
The Company computes FFO in accordance with the revised NAREIT definition, which
may differ from the methodology for computing FFO utilized by other equity
REITs, and, accordingly, may not be comparable to such other REITs. The Company
believes that in order to facilitate a clear understanding of the historical
operating results, FFO should be examined in conjunction with net income (loss)
as presented in the financial statements. FFO should not be considered as a
substitute for net income (loss) as a measure of results of operations or for
cash flow from operations as a measure of liquidity.

For the quarter ended September 30, 1997, FFO increased to $16,178,000 from
$10,831,000 for the quarter ended September 30, 1996. This increase is primarily
due to higher net income and real estate depreciation add back due to the
addition of the Acquisition Communities.

24

Funds from Operations and Funds Available for Distribution (defined below)
for the quarters ended September 30, 1997, June 30, 1997, March 31, 1997,
December 31, 1996 and September 30, 1996 are summarized as follows:

CALCULATION OF FUNDS FROM OPERATIONS AND FUNDS AVAILABLE FOR DISTRIBUTION



QUARTER ENDED
------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30,
PER APARTMENT HOME DATA) 1997 1997 1997 1996 1996
- --------------------------------- ---------- ---------- ---------- ---------- ----------

Net income....................... $ 10,653 $ 8,479 $ 7,771 $ 7,014 $ 5,845
Series C preferred dividend
requirement.................... (1,222) (149) -- -- --
Depreciation -- real estate
assets......................... 6,659 6,173 5,462 5,201 4,899
Non-recurring adjustments to net
income:
Amortization of non-recurring
costs, primarily legal, from
the issuance of tax-exempt
bonds(1).................... 88 88 88 87 87
---------- ---------- ---------- ---------- ----------
FFO (2).......................... 16,178 14,591 13,321 12,302 10,831
Recurring adjustments to net
income:
Amortization of reincorporation
costs....................... 7 7 7 7 7
Amortization of credit
enhancement costs (3)....... 38 38 38 38 38
Depreciation -- non real estate
assets...................... 135 120 105 79 49
Capital expenditures (4)....... (280) (471) (281) (448) (457)
Loan principal payments........ (368) (213) (157) (175) (131)
---------- ---------- ---------- ---------- ----------
Funds Available for Distribution
("FAD")........................ $ 15,710 $ 14,072 $ 13,033 $ 11,803 $ 10,337
========== ========== ========== ========== ==========
Weighted average shares
outstanding (5)................ 25,803,370 24,833,801 22,989,978 22,000,544 19,686,087
========== ========== ========== ========== ==========


- ---------------

(1) Represents the amortization of pre-1986 bond issuance costs carried forward
to the Company, under the pooling of interest method of accounting, and
costs associated with the reissuance of tax-exempt bonds incurred prior to
the Initial Offering in order to preserve the tax-exempt status of the bonds
at the Initial Offering.

(2) FFO before recurring adjustments to net income represents the definition of
FFO adopted by the NAREIT Board of Governors for periods after 1995.

(3) Represents origination fees and costs incurred at the initial setup of the
credit enhancements used for the issuance of tax-exempt bonds. Such costs
are amortized over the life of the respective credit enhancements.

25

(4) Capital improvements represent amounts expended primarily at communities
acquired or developed prior to 1996. A breakdown of the expenditures for the
quarter ended September 30, 1997 is as follows:



TOTAL PER APARTMENT HOME
QUARTER ENDED QUARTER ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
------------------ ------------------

Non-revenue generating:
Exterior painting........................ $131 $ 11
Leasing pavilion rehabilitation.......... 74 6
Landscaping.............................. 37 3
Other capital expenditures............... 38 3
---- ---
Subtotal -- capital expenditures...... 280 23
---- ---
Revenue generating:
Water submeters.......................... 268 22
Fixtures................................. 123 10
Appliances............................... 53 4
Trash compactors......................... 26 2
Other.................................... 13 1
---- ---
Subtotal.............................. 483 39
---- ---
Total capital improvements................. $763 $ 62
==== ===


The Company, as a matter of policy, expenses any apartment-related
expenditure of less than $5. These normally include any expenditure related
to the interior of an apartment. The Company typically capitalizes
non-revenue generating expenditures such as those for new security gate
systems, leasing pavilion reconstruction and redecorating, roofing repair
and replacement, exterior siding repair and repainting and parking area
resurfacing. The Company also capitalizes revenue generating expenditures
and cash flow enhancing improvements such as those expended for
construction of new garages or installation of water conservation devices
which almost immediately and permanently either earn additional revenue or
reduce expenses. Appliances represent primarily the acquisition of
washer/dryer units for apartments which generate additional rental and
other income. Capitalized expenditures as described here exclude major
reconstruction costs incurred in conjunction with the repositioning of
apartment communities. Such costs are added to the cost basis of those
communities. The per apartment home calculation for the quarter is based on
the ending number of apartment homes in the portfolio at September 30,
1997.

(5) The weighted average shares outstanding shown differs from the weighted
average shares outstanding for the purpose of calculating earnings per share
because the conversion of preferred stock is antidilutive for calculating
earnings per share, but dilutive for the purposes of calculating FFO per
share.

26

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 2. CHANGES IN SECURITIES

(c) RECENT SALES OF UNREGISTERED SECURITIES

On July 12, 1996, the Company entered into an Agreement of Limited
Partnership of Bay Countrybrook L.P., the general partner of which is Bay GP,
Inc., a wholly-owned subsidiary of the Company, for the purpose of acquiring the
Countrybrook community. In connection with the formation of the Countrybrook
Partnership, 298,577 Countrybrook Units were issued to the existing partners of
the contributor of the Countrybrook community pursuant to an exemption from
registration provided in Rule 506 of Regulation D under the Securities Act of
1933, as amended (the "Securities Act"). Under the terms of the limited
partnership agreement, holders of Countrybrook Units have the right to require
the Countrybrook Partnership to redeem their Countrybrook Units for cash,
subject to certain conditions. The Company may, however, elect to deliver an
equivalent number of shares of common stock to the holders of Countrybrook Units
in satisfaction of the Countrybrook Partnership's obligation to redeem the
Countrybrook Units for cash. During the period July 1, 1997 through September
30, 1997, 3,334 Countrybrook Units were redeemed by the Company in exchange for
shares of common stock pursuant to the exemption from registration provided in
Rule 506 of Regulation D under the Securities Act. The Company is relying on the
exemption provided in Rule 506 based upon factual representations received from
the recipients of the shares.

On September 12, 1997, the Company entered into an Agreement of Limited
Partnership of Bay Pacific Northwest, L.P., the general partner of which is the
Company, for the purpose of acquiring the Gallery Place community. In connection
with the formation of the Northwest Partnership, 163,338 Northwest Units were
issued to the existing partners of the contributor of the Gallery Place
community pursuant to an exemption from registration provided in Rule 506 of
Regulation D under the Securities Act. Under the terms of the limited
partnership agreement, holders of Northwest Units have the right to require the
Northwest Partnership's obligation to redeem the Northwest Units for cash,
subject to certain conditions. The Company may, however, elect to deliver an
equivalent number of shares of common stock to the holders of Northwest Units in
satisfaction of the Northwest Partnership's obligation to redeem the Northwest
Units for cash. During the period September 12, 1997 through September 30, 1997
no Northwest Units were redeemed by the Company in exchange for shares of common
stock.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

27

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS



EXHIBIT
NO. DESCRIPTION
------- --------------------------------------------------------------------------------

3(i).1 Articles of Incorporation of the Company. (Incorporated by reference to Exhibit
3(i) to Form 8-B of Bay Apartment Communities, Inc. dated June 8, 1995.)
3(i).2 Articles Supplementary of the Company relating to the Series A Preferred Stock
of the Company. (Incorporated by reference to Exhibit 3(i).1 to Form 8-K of Bay
Apartment Communities, Inc. dated September 25, 1995.)
3(i).3 Articles Supplementary relating to the Series B Preferred Stock of the Company.
(Incorporated by reference to Exhibit 3(i).1 to Form 8-K of Bay Apartment
Communities, Inc. dated May 6, 1996.)
3(i).4 Articles Supplementary relating to the 8.50% Series C Cumulative Redeemable
Preferred Stock of the Company. (Incorporated by reference to Exhibit 3(i).1 to
Form 8-B of Bay Apartment Communities, Inc. dated July 25, 1997.)
3(ii).1 Bylaws of the Company. (Incorporated by reference to Exhibit 3(ii) to Form 8-B
of Bay Apartment Communities, Inc. dated June 8, 1995.)
10.1 Severance Agreement and Mutual General Release dated July 31, 1997, between the
Company and Geoffrey L. Baker.
10.2 Agreement of Limited Partnership of Bay Pacific Northwest, L.P., dated as of
September 12, 1997, between the Company and certain other defined Persons.
(Incorporated by reference to Exhibit 10.1 to Form 8-K of Bay Apartment
Communities, Inc. dated September 23, 1997.)
10.3 Registration Rights Agreement, dated as of September 23, 1997, between the
Company and certain defined Holders of units of limited partnership interests in
Bay Pacific Northwest, L.P. (Incorporated by reference to Exhibit 10.2 to Form
8-K of Bay Apartment Communities, Inc. dated September 23, 1997.)
27.1 Financial Data Schedule.


(b) REPORTS ON FORM 8-K



1. Form 8-K of the Company, dated July 25, 1997, filing the Underwriting Agreement,
dated June 17, 1997, by and between the Company, PaineWebber Incorporated and
Morgan Stanley Dean Witter, relating to the sale of 2,300,000 shares of 8.50%
Series C Cumulative Redeemable Preferred Stock of the Company, and the
Definitive Articles Supplementary establishing and fixing the rights and
preferences of the 8.50% Series C Cumulative Redeemable Preferred Stock of the
Company.
2. Form 8-K of the Company, dated August 14, 1997, regarding the amendment of the
Company's Unsecured Credit Facility and the acquisition of three properties,
consisting of two apartment home communities and one land site, for an aggregate
purchase price of approximately $44.55 million. This report contains financial
statements required by Rule 3-14 of Regulation S-X and pro forma financial
statements.
3. Form 8-K of the Company, dated September 4, 1997, regarding the acquisition of
three additional properties by the Company, consisting of two apartment home
communities and one land site, for an aggregate purchase price of approximately
$80.09 million. This report contains financial statements required by Rule 3-14
of Regulation S-X and pro forma financial statements.
4. Form 8-K of the Company, dated September 10, 1997, filing the Underwriting
Agreement, dated September 10, 1997, between the Company, PaineWebber
Incorporated and A.G. Edwards & Sons, Inc., relating to the sale of 2,645,000
shares of Common Stock of the Company.


28

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.

BAY APARTMENT COMMUNITIES, INC.

Date: November 12, 1997 /s/ GILBERT M. MEYER
--------------------------------------
Gilbert M. Meyer
President and Chairman of the Board

Date: November 12, 1997 /s/ JEFFREY B. VAN HORN
--------------------------------------
Jeffrey B. Van Horn
Chief Financial Officer
(Authorized Officer of the Registrant
and Principal Financial Officer)

29

INDEX TO EXHIBITS



EXHIBIT
NUMBER DESCRIPTION
-------- ----------------------------------------------------------------------

3(i).1 Articles of Incorporation of the Company. (Incorporated by reference
to Exhibit 3(i) to Form 8-B of Bay Apartment Communities, Inc. dated
June 8, 1995.)........................................................
3(i).2 Articles Supplementary of the Company relating to the Series A
Preferred Stock of the Company. (Incorporated by reference to Exhibit
3(i).1 to Form 8-K of Bay Apartment Communities, Inc. dated September
25, 1995.)............................................................
3(i).3 Articles Supplementary relating to the Series B Preferred Stock of the
Company. (Incorporated by reference to Exhibit 3(i).1 to Form 8-K of
Bay Apartment Communities, Inc. dated May 6, 1996.)...................
3(i).4 Articles Supplementary relating to the 8.50% Series C Cumulative
Redeemable Preferred Stock of the Company. (Incorporated by reference
to Exhibit 3(i).1 to Form 8-B of Bay Apartment Communities, Inc. dated
July 25, 1997.).......................................................
3(ii).1 Bylaws of the Company. (Incorporated by reference to Exhibit 3(ii) to
Form 8-B of Bay Apartment Communities, Inc. dated June 8, 1995.)......
10.1 Severance Agreement and Mutual General Release dated July 31, 1997,
between the Company and Geoffrey L. Baker.............................
10.2 Agreement of Limited Partnership of Bay Pacific Northwest, L.P., dated
as of September 12, 1997, between the Company and certain other
defined Persons. (Incorporated by reference to Exhibit 10.1 to Form
8-K of Bay Apartment Communities, Inc. dated September 23, 1997.).....
10.3 Registration Rights Agreement, dated as of September 23, 1997, between
the Company and certain defined Holders of units of limited
partnership interests in Bay Pacific Northwest, L.P. (Incorporated by
reference to Exhibit 10.2 to Form 8-K of Bay Apartment Communities,
Inc. dated September 23, 1997.).......................................
27.1 Financial Data Schedule...............................................