10-K405: Annual report [Sections 13 and 15(d), S-K Item 405]
Published on March 29, 2001
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission file number 1-12672
AVALONBAY COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
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Maryland 77-0404318
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2900 Eisenhower Avenue, Suite 300
Alexandria, Virginia 22314
(Address of principal executive office, including zip code)
(703) 329-6300
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past ninety (90) days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the Registrant's Common Stock, par value $.01 per
share, held by nonaffiliates of the Registrant, as of March 1, 2001 was
$3,241,568,243.
The number of shares of the Registrant's Common Stock, par value $.01 per share,
outstanding as of March 1, 2001 was 67,378,263.
Documents Incorporated by Reference
Portions of AvalonBay Communities, Inc.'s Proxy Statement for the 2001 annual
meeting of stockholders, a definitive copy of which will be filed with the SEC
within 120 days after the year end of the year covered by this Form 10-K, are
incorporated by reference herein as portions of Part III of this Form 10-K.
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TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS .........................................................3
ITEM 2. COMMUNITIES.......................................................8
ITEM 3. LEGAL PROCEEDINGS................................................31
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS..................31
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................32
ITEM 6. SELECTED FINANCIAL DATA..........................................34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................37
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................53
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.................54
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT...................54
ITEM 11. EXECUTIVE COMPENSATION...........................................54
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.........................................54
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND
REPORTS ON FORM 8-K....................................55
SIGNATURES ...................................................................61
PART I
This Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Our actual results could differ materially from those set forth in each
forward-looking statement. Certain factors that might cause such a difference
are discussed in this report, including in the section entitled "Forward-Looking
Statements" on page 37 of this Form 10-K.
ITEM 1. BUSINESS
General
AvalonBay is a Maryland corporation that has elected to be treated as a real
estate investment trust, or REIT, for federal income tax purposes. We focus on
the ownership and operation of upscale apartment communities (which generally
command among the highest rents in their submarkets) in high barrier-to-entry
markets of the United States. This is because we believe that the limited new
supply of upscale apartment homes in these markets helps achieve more
predictable growth in cash flows. These barriers-to-entry generally include a
difficult and lengthy entitlement process with local jurisdictions and dense
in-fill locations where zoned and entitled land is in limited supply. Our
markets are located in Northern and Southern California and selected states in
the Mid-Atlantic, Northeast, Midwest and Pacific Northwest regions of the United
States. We believe that we have penetrated substantially all of the high
barrier-to-entry markets of the United States.
As of March 1, 2001, we owned or held a direct or indirect ownership interest in
126 operating apartment communities containing 37,256 apartment homes in twelve
states and the District of Columbia, of which four communities containing 2,211
apartment homes were under redevelopment. In addition to these operating
communities, we also owned 12 communities under construction that will contain
3,484 apartment homes and rights to develop an additional 33 communities that,
if developed as expected, will contain an estimated 9,091 apartment homes. We
generally obtain ownership in an apartment community by developing vacant land
into a new community or by acquiring and either repositioning or redeveloping an
existing community. In selecting sites for development, redevelopment or
acquisition, we favor locations that are near expanding employment centers and
convenient to recreation areas, entertainment, shopping and dining.
Our real estate investments consist of Stable Communities, Developed Communities
and Redeveloped Communities. A description of these segments and other related
information can be found in note ten of the consolidated financial statements
set forth in item 8 of this report.
Our principal operating objectives are to increase long-term stockholder value
by increasing operating cash flow and Funds from Operations (based on a
definition adopted by the Board of Governors of the National Association of Real
Estate Investment Trusts(R) in October 1999). For a description of the meaning
of Funds from Operations and its use and limitation as an operating measure, see
the discussion titled "Funds from Operations" in Item 7 of this report. Our
strategies and goals to achieve these objectives include:
o generating consistent, sustained earnings growth at each community
through increased revenue, by balancing high occupancy with premium
pricing, and increased operating margins from operating expense
management;
o investing selectively in new development, redevelopment and
acquisition communities in markets with growing demand and high
barriers-to-entry;
o selling communities in markets where we have limited market presence
or seek to adjust our market penetration; and
o maintaining a conservative capital structure to provide continuous
access to cost-effective capital.
We believe that we can generally implement these strategies best by developing,
redeveloping, acquiring and managing upscale assets in supply-constrained
markets while maintaining the financial discipline to ensure balance sheet
flexibility.
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Development Strategy. We carefully select land for development and follow
established procedures that we believe minimize both the cost and the risks of
development. As one of the largest developers of multifamily apartment
communities in high barrier-to-entry markets of the United States, we identify
development opportunities through local market presence and access to local
market information achieved through our regional offices. In addition to our
principal executive offices in Alexandria, Virginia, we also maintain regional
offices and administrative or specialty offices in or near the following cities:
o San Jose, California;
o Wilton, Connecticut;
o Boston, Massachusetts;
o Chicago, Illinois;
o Iselin, New Jersey;
o Minneapolis, Minnesota;
o Newport Beach, California;
o New York, New York; and
o Seattle, Washington.
After selecting a target site, we usually negotiate for the right to acquire the
site either through an option or a long-term conditional contract. Options and
long-term conditional contracts generally enable us to acquire the target site
shortly before the start of construction, which reduces development-related
risks as well as preserves capital. After we acquire land, we generally shift
our focus to construction. Except for certain mid-rise and high-rise apartment
communities where we elect to use third-party general contractors or
construction managers, we act as our own general contractor. We believe this
enables us to achieve higher construction quality, greater control over
construction schedules and significant cost savings. Our development and
property management teams monitor construction progress to ensure high quality
workmanship and a smooth and timely transition into the leasing and operational
phase.
Redevelopment Strategy. When we undertake the redevelopment of a community, our
goal is to generally renovate and/or rebuild an existing community so that our
total investment is significantly below replacement cost and the community is
the highest quality apartment community or best rental value for an upscale
apartment community in its local area. We have established procedures to
minimize both the cost and risks of redevelopment. Our redevelopment teams,
which include key redevelopment, construction and property management personnel,
monitor redevelopment progress. We believe we achieve significant cost savings
by acting as our own general contractor. More importantly, this helps to ensure
high quality design and workmanship and a smooth and timely transition into the
lease-up and restabilization phase.
Disposition Strategy. To increase our concentration of communities in selected
high barrier-to-entry markets, we are selling assets in certain submarkets and
intend to redeploy the proceeds from those sales to develop and redevelop
communities under construction or reconstruction. This disposition strategy acts
as a source of capital because we are able to redeploy the net proceeds from our
dispositions in lieu of raising that amount of capital externally. Under this
program, we solicit competing bids from unrelated parties for these individual
assets and consider the sales price and tax ramifications of each proposal. In
connection with this disposition program, we disposed of a total of nine
communities since January 1, 2000. The net proceeds from the sale of these
assets were approximately $139 million. However, we cannot provide assurance
that we will be able to continue our current disposition strategy or that assets
identified for sale can be sold on terms that are satisfactory to us.
Acquisition Strategy. Our core competencies in development and redevelopment
discussed above allow us to be selective in the acquisitions we target. As of
March 1, 2001 we had acquired seven communities, containing 1,960 apartment
homes, since the beginning of 2000. Six of these communities were acquired in
connection with a forward purchase contract agreed to in 1997 with an
unaffiliated party. The remaining two presale acquisitions provided for under
the 1997 agreement, and one presale commitment provided for under a separate
agreement, are expected to close during the next 24 months for an estimated
aggregate purchase price of $147.3 million. Together, these three communities
are expected to contain 968 apartment homes when completed. We will manage these
communities after acquiring ownership. This expansion is consistent with our
strategy to achieve long-term
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earnings growth by providing a high quality platform for expansion while also
providing additional economic and geographic diversity. The acquisition of these
presale communities was designed to achieve rapid penetration into markets that
are generally supply constrained and in which we had no significant presence.
Property Management Strategy. We intend to increase operating income through
innovative, proactive property management that will result in higher revenue
with controlled operating expenses from communities.
Our principle strategies to maximize revenue include:
o intense focus on resident satisfaction;
o staggering lease terms based on vacancy exposure by apartment type,
so that lease expirations are better matched to each community's
traffic patterns;
o increasing rents as market conditions permit;
o managing community occupancy for optimal rental revenue levels; and
o applying new technology to optimize revenue from each community.
Controlling operating expenses is another way in which we intend to increase
earnings growth. Growth in our portfolio and the resulting increase in revenue
allows for fixed operating costs to be spread over a larger volume of revenue,
thereby increasing operating margins. We aggressively pursue real estate tax
appeals and control operating expenses as follows:
o record invoices on-site to ensure careful monitoring of budgeted
versus actual expenses;
o purchase supplies in bulk where possible;
o bid third-party contracts on a volume basis;
o strive to retain residents through high levels of service in order
to eliminate the cost of preparing an apartment home for a new
resident and to reduce marketing and vacant apartment utility costs;
o perform turnover work in-house or hire third-parties generally
depending upon the least costly alternative; and
o undertake preventive maintenance regularly to maximize resident
satisfaction and property and equipment life.
On-site property management teams receive bonuses based largely upon the net
operating income produced at their respective communities. We are also pursuing
ancillary services which could provide additional revenue sources. On a limited
basis, we also manage properties for third parties, believing that doing so will
provide information about new markets or provide an acquisition opportunity,
thereby enhancing opportunities for growth.
Technology Strategy. We believe that an innovative management information system
infrastructure will be an important element in managing our future growth. This
is because timely and accurate collection of financial and resident profile data
will enable us to maximize revenue through careful leasing decisions and
financial management. We currently employ a company-wide intranet using a
digital network with high-speed digital lines. This network connects all of our
communities and offices to central servers in Alexandria, Virginia, providing
access to our associates and to AvalonBay's corporate information throughout the
country from all locations.
We have invested in three technology companies in the belief that the
development and application of their technology and services will improve the
operating performance of our real estate holdings. Realeum, Inc. is engaged in
the development of an on-site property management system and leasing automation
system to enable management to capture, review and analyze data to a greater
extent than is possible using existing commercial software. Broadband
Residential Inc. was formed to provide broadband communication services (such as
Internet access and video) to residents of multifamily communities. Viva Group,
Inc. provides a system for renters and property owners to identify each other
and interact and negotiate lease terms over the Internet. Except for a
commitment to lend approximately $700,000 to Broadband Residential if certain
conditions are met, we are not obligated to provide any more capital to any of
these entities, although we may have the opportunity to exercise preemptive
rights that would require us to make further investments. We hold a minority
interest position in each of
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these entities. The aggregate carrying value of these investments at December
31, 2000 was $3.6 million. To help monitor our investments, Thomas J. Sargeant,
our Executive Vice President and Chief Financial Officer, is a director of
Realeum, Inc. and Richard L. Michaux, our Executive Chairman, is a director of
Broadband Residential. In addition to the three investments described above, we
are a member of Constellation Real Technologies LLC, an entity formed by a
number of real estate investment trusts and real estate operating companies for
the purpose of investing in multi-sector real estate technology opportunities.
Our capital commitment to Constellation Real Technologies is $4.0 million,
although we have made no capital contributions to date.
Financing Strategy. We have consistently maintained, and intend to continue to
maintain, a conservative capital structure, largely comprised of common equity.
At December 31, 2000, our debt-to-total market capitalization (i.e., the
aggregate of the market value of common stock, the liquidation preference of
preferred stock and the principle amount of debt) was 30.9%, and our permanent
long-term floating rate debt, not including borrowings under the unsecured
credit facility, was only 1.2% of total market capitalization. We currently
intend to incur long-term floating rate debt only if after such incurrence
long-term floating rate debt represents less than 10% of total market
capitalization, although that policy may change from time to time.
Currently, we are impacted by a reduction in the availability of cost-effective
capital. Therefore, we cannot assure you that cost-effective capital will be
available to meet future expenditures required to begin planned construction or
reconstruction activity. Before planned construction or reconstruction activity
begins, we intend to arrange adequate capital sources to complete such
undertakings, although we cannot assure you that we will be able to obtain such
financing. During 2000, substantially all of our construction and reconstruction
activities were funded by issuance of unsecured debt securities, asset sales,
through nontaxable like-kind exchanges, and retained operating cash. In the
event that financing cannot be obtained, we may have to abandon planned
development activities, write-off associated pursuit costs and/or forego
reconstruction activity. In such instances, we will not realize the increased
revenues and earnings that we expected from such pursuits, and the related
write-off of costs will increase current period expenses.
We estimate that a portion of our short-term liquidity needs will be met from
retained operating cash and borrowings under our $600,000,000 variable rate
unsecured credit facility. At March 1, 2001, $0 was outstanding, $82,753,000 was
used to provide letters of credit and $517,247,000 was available for borrowing
under the unsecured credit facility.
If required, to meet the balance of our liquidity needs we will need to arrange
additional capacity under our existing unsecured credit facility, sell
additional existing communities and/or issue additional debt or equity
securities. While we believe we have the financial position to expand our
short-term credit capacity and access the capital markets as needed, we cannot
assure you that we will be successful in completing these arrangements, sales or
offerings. The failure to complete these transactions on a cost-effective basis
could have a material adverse impact on our operating results and financial
condition, including the abandonment of deferred development costs and a
resultant charge to earnings.
Inflation and Tax Matters
Substantially all of our leases are for a term of one year or less, which may
enable us to realize increased rents upon renewal of existing leases or the
beginning of new leases. Such short-term leases generally minimize the risk to
us of the adverse effects of inflation, although as a general rule these leases
permit residents to leave at the end of the lease term without penalty. Our
current policy is generally to permit residents to terminate leases upon an
agreed advance written notice and a lease termination payment, as provided for
in the resident's lease. Short-term leases combined with relatively consistent
demand allow rents, and therefore cash flow from the portfolio, to provide an
attractive inflation hedge.
We filed an election with our initial federal income tax return to be taxed as a
REIT under the Internal Revenue Code of 1986, as amended, and intend to maintain
our qualification as a REIT in the future. As a qualified REIT, with limited
exceptions, we will not be taxed under federal and certain state income tax laws
at the corporate level
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on our net income to the extent net income is distributed to our stockholders.
We expect to make sufficient distributions to avoid income tax at the corporate
level.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required, in many instances regardless of knowledge or responsibility, to
investigate and remediate the effects of hazardous or toxic substances or
petroleum product releases at such property. The owner or operator may be held
liable to a governmental entity or to third parties for property damage and for
investigation and remediation costs incurred by such parties in connection with
the contamination, which may be substantial. The presence of such substances, or
the failure to properly remediate the contamination, may adversely affect the
owner's ability to borrow against, sell or rent such property. In addition, some
environmental laws create a lien on the contaminated site in favor of the
government for damages and costs it incurs in connection with the contamination.
Certain federal, state and local laws, regulations and ordinances govern the
removal, encapsulation or disturbance of asbestos-containing materials, or ACMs,
when such materials are in poor condition or in the event of construction,
remodeling, renovation or demolition of a building. Such laws may impose
liability for release of ACMs and may provide for third parties to seek recovery
from owners or operators of real properties for personal injury associated with
ACMs. In connection with our ownership and operation of apartment communities,
we potentially may be liable for such costs. We are not aware that any ACMs were
used in connection with the construction of the communities developed by us.
However, we are aware that ACMs were used in connection with the construction of
certain communities acquired by us. We do not anticipate that we will incur any
material liabilities in connection with the presence of ACMs at these
communities. We currently have or intend to implement an operations and
maintenance program for ACMs at each of the communities at which ACMs have been
detected.
All of our stabilized operating communities, and all of the communities that we
are currently developing or redeveloping, have been subjected to at least a
Phase I or similar environmental assessment which generally does not involve
invasive techniques such as soil or ground water sampling. These assessments
have not revealed any environmental conditions that we believe will have a
material adverse effect on our business, assets, financial condition or results
of operations. We are not aware of any other environmental conditions which
would have such a material adverse effect.
However, we are aware that the migration of contamination from an upgradient
landowner near Avalon at Silicon Valley (formerly known as Toscana), a community
owned by us, has affected the groundwater there. The upgradient landowner is
undertaking remedial response actions and a ground water treatment system has
been installed. We expect that the upgradient landowner will take all necessary
remediation actions and ensure the ongoing operation and maintenance of the
ground water treatment system. The upgradient landowner has also provided an
indemnity that runs to current and future owners of the property and upon which
we may be able to rely if environmental liability arises from the groundwater
contamination.
We are also aware that certain communities have lead paint and we are
undertaking or intend to undertake appropriate remediation.
Additionally, prior to 1994, we had occasionally been involved in developing,
managing, leasing and operating various properties for third parties.
Consequently, we may be considered to have been an operator of such properties
and, therefore, potentially liable for removal or remediation costs or other
potential costs which could relate to hazardous or toxic substances. We are not
aware of any material environmental liabilities with respect to properties that
we managed or developed for such third parties.
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We cannot provide assurance that:
o the environmental assessments identified all potential environmental
liabilities;
o no prior owner created any material environmental condition not
known to us or the consultants who prepared the assessments;
o no environmental liabilities developed since such environmental
assessments were prepared;
o the condition of land or operations in the vicinity of our
communities, such as the presence of underground storage tanks, will
not affect the environmental condition of such communities;
o future uses or conditions, including, without limitation, changes in
applicable environmental laws and regulations, will not result in
the imposition of environmental liability; or
o no environmental liabilities will develop at communities that have
been sold pursuant to our disposition strategy for which we may have
liability.
ITEM 2. COMMUNITIES
Our real estate investments consist of current operating apartment communities,
communities in various stages of development, and land or land options held for
development. The following is a description of each category:
Current Communities are categorized as Established, Other Stabilized, Lease-Up,
or Redevelopment according to the following:
o Established Communities (also known as Same Store Communities) are
communities where a comparison of operating results from the prior
year to the current year is meaningful, as these communities were
owned and had stabilized operating costs as of the beginning of the
prior year. We determine which of our communities fall into the
Established Communities category annually on January 1 of each year
and maintain that classification throughout the year. For the year
2000, the Established Communities were communities that had
stabilized operating costs as of January 1, 1999.
o Other Stabilized Communities are all other completed communities
that have stabilized occupancy and are not undergoing or planning
redevelopment activities. We consider a community to have stabilized
occupancy at the earlier of (i) attainment of 95% occupancy or (ii)
the one-year anniversary of completion of development or
redevelopment. For the year 2000, Other Stabilized Communities
therefore include communities that were either acquired or achieved
stabilization after January 1, 1999 and that were not undergoing or
planning redevelopment activities.
o Lease-Up Communities are communities where construction has been
complete for less than one year and where occupancy has not reached
95%.
o Redevelopment Communities are communities where substantial
redevelopment is in progress or is planned to take place during the
current year. Redevelopment is considered substantial when capital
invested during the reconstruction effort exceeds the lesser of $5
million or 10% of the community's acquisition cost.
Development Communities are communities that are under construction and for
which a final certificate of occupancy has not been received. These communities
may be partially complete and operating.
Development Rights are development opportunities in the early phase of the
development process for which we have an option to acquire land, for which we
are the buyer under a long-term conditional contract to purchase land or where
we own land to develop a new community. We capitalize all related
pre-development costs incurred in pursuit of these new developments.
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As of December 31, 2000, our communities were classified as follows:
Number of Number of
communities apartment homes
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Current Communities
Established Communities:
Northern California 24 6,275
Southern California 8 1,855
Mid-Atlantic 17 4,835
Northeast 18 4,773
Midwest 6 1,591
Pacific Northwest 1 264
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Total Estabilshed 74 19,593
Other Stabilized Communities:
Northern California 9 2,840
Southern California 8 2,920
Mid-Atlantic 3 1,075
Northeast 17 5,101
Midwest 3 1,033
Pacific Northwest 8 2,374
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Total Other Stabilized 48 15,343
Lease-Up Communities -- --
Redevelopment Communities 4 2,211
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Total Current Communities 126 37,147
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Development Communities 12 3,484
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Development Rights 33 9,091
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Our holdings under each of the above categories are discussed on the following
pages.
Current Communities
The Current Communities are primarily garden-style apartment communities
consisting of two and three-story buildings in landscaped settings. The Current
Communities, as of March 1, 2001, include 103 garden-style, 15 high-rise and
eight mid-rise apartment communities. The Current Communities offer many
attractive amenities including some or all of the following:
o vaulted ceilings;
o lofts;
o fireplaces;
o patios/decks; and
o modern appliances.
Other features at various communities may include:
o swimming pools;
o fitness centers;
o tennis courts; and
o business centers.
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We also have an extensive and ongoing maintenance program to keep all
communities and apartment homes substantially free of deferred maintenance and,
where vacant, available for immediate occupancy. We believe that the aesthetic
appeal of our communities and a service oriented property management team
focused on the specific needs of residents enhances market appeal to
discriminating residents. We believe this will ultimately achieve higher rental
rates and occupancy levels while minimizing resident turnover and operating
expenses. These Current Communities are located in the following geographic
markets:
We manage and operate all of the Current Communities. During the year ended
December 31, 2000, we completed construction of 1,209 apartment homes in six
communities for a total cost of $175.2 million. The average age of the Current
Communities, on a weighted average basis according to number of apartment homes,
is 6.7 years.
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Of the Current Communities, as of March 1, 2001, we own:
o a fee simple, or absolute, ownership interest in 104 operating
communities, one of which is on land subject to a 149 year land
lease;
o a general partnership interest in four partnerships that each own a
fee simple interest in an operating community;
o a general partnership interest in four partnerships structured as
"DownREITs," as described more fully below, that own an aggregate of
16 communities;
o a 100% interest in a senior participating mortgage note secured by
one community, which allows us to share in part of the rental income
or resale proceeds of the community; and
o a membership interest in a limited liability company that holds a
fee simple interest in one Redevelopment community.
We also hold a fee simple ownership interest in eleven of the Development
Communities and a membership interest in a limited liability company that holds
a fee simple interest in one Development Community.
In each of the four partnerships structured as DownREITs, either we or one of
our wholly-owned subsidiaries is the general partner, and there are one or more
limited partners whose interest in the partnership is represented by units of
limited partnership interest. For each DownREIT partnership, limited partners
are entitled to receive distributions before any distribution is made to the
general partner. Although the partnership agreements for each of the DownREITs
are different, generally the distributions paid to the holders of units of
limited partnership interests approximate the current AvalonBay common stock
dividend amount. Each DownREIT partnership has been structured so that it is
unlikely the limited partners will be entitled to a distribution greater than
the initial distribution provided for in the partnership agreement. The holders
of units of limited partnership interest have the right to present each unit of
limited partnership interest for redemption for cash equal to the fair market
value of a share of our common stock on the date of redemption. In lieu of cash,
we may elect to acquire any unit presented for redemption for one share of our
common stock. As of December 31, 2000, there were 671,226 units outstanding. The
DownREIT partnerships are consolidated for financial reporting purposes.
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Profile of Current and Development Communities
(Dollars in thousands, except per apartment home data)
12
Profile of Current and Development Communities
(Dollars in thousands, except per apartment home data)
13
Profile of Current and Development Communities
(Dollars in thousands, except per apartment home data)
14
Profile of Current and Development Communities
(Dollars in thousands, except per apartment home data)
(1) For the purpose of this table, Current Communities include only comunities
for which we held fee simple ownership interests or which we held through
DownREIT partnerships.
(2) Represents community which was under redevelopment durring the year,
resulting in lower average ecconomic occupancy and average rental rate per
square foot for the year.
(3) Represents community that completed development or was purchased durring
the year, which could result in lower average ecconomic occupancy and
average rental rate per square foot for the year.
(4) Represents the average rental revenue per occupied apartment home.
(5) Costs are presented in accordance with generally accepted accounting
preinciples. For current Development Communities, cost represents total
costs incurred through December 31, 2000.
15
Profile of Current and Development Communities
(Dollars in thousands, except per apartment home data)
16
Features and Recreational Amenities - Current and Development Communities
17
Features and Recreational Amenities - Current and Development Communities
18
Features and Recreational Amenities - Current and Development Communities
19
Features and Recreational Amenities - Current and Development Communities
(continued)
20
Features and Recreational Amenities - Current and Development Communities
(continued)
21
Features and Recreational Amenities - Current and Development Communities
(continued)
22
Features and Recreational Amenities - Current and Development Communities
(continued)
23
Development Communities
As of March 1, 2001, we had twelve Development Communities under construction.
We expect these Development Communities, when completed, to add a total of 3,484
apartment homes to our portfolio for a total capitalized cost, including land
acquisition costs, of approximately $660.8 million. Statements regarding the
future development or performance of the Development Communities are
forward-looking statements. We cannot assure you that:
o we will complete the Development Communities;
o our budgeted costs or estimates of occupancy rates will be realized;
o our schedule of leasing start dates or construction completion dates
will be achieved; or
o future developments will realize returns comparable to our past
developments.
You should carefully review the discussion under "Risks of Development and
Redevelopment" below.
We hold a fee simple ownership interest in 11 of the Development Communities and
a membership interest in a limited liability company that holds a fee simple
interest in one Development Community. The following table presents a summary of
the Development Communities:
(1) Total budgeted cost includes all capitalized costs projected to be
incurred to develop the respective Development Community, including land
acquisition costs, construction costs, real estate taxes, capitalized
interest and loan fees, permits, professional fees, allocated development
overhead and other regulatory fees determined in accordance with generally
accepted accounting principles.
(2) Future initial occupancy dates are estimates.
(3) Stabilized operations are defined as the first full quarter of 95% or
greater occupancy after completion of construction.
(4) This community will be developed under a joint venture structure and the
joint venture entity (a limited liability company) has obtained
third-party debt financing. Our equity funding of the total budgeted
costs is expected to be $13.3 million.
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Redevelopment Communities
As of March 1, 2001, we had four communities under redevelopment. We expect the
total budgeted cost to complete these Redevelopment Communities, including the
cost of acquisition and redevelopment, to be approximately $324.6 million, of
which approximately $73.5 million is the additional capital invested or expected
to be invested above the original purchase cost. Statements regarding the future
redevelopment or performance of the Redevelopment Communities are
forward-looking statements. We have found that the cost to redevelop an existing
apartment community is more difficult to budget and estimate than the cost to
develop a new community. Accordingly, we expect that actual costs may vary from
our budget by a wider range than for a new development community. We cannot
assure you that we will meet our schedules for reconstruction completion, or
that we will meet our budgeted costs, either individually or in the aggregate.
See the discussion under "Risks of Development and Redevelopment" below.
The following presents a summary of Redevelopment Communities:
(1) Total budgeted cost includes all capitalized costs projected to be
incurred to redevelop the respective Redevelopment Community, including
costs to acquire the community, reconstruction costs, real estate taxes,
capitalized interest and loan fees, permits, professional fees, allocated
redevelopment overhead and other regulatory fees determined in accordance
with generally accepted accounting principles.
(2) Reconstruction completion dates are estimates.
(3) Restabilized operations are defined as the first full quarter of 95% or
greater occupancy after completion of reconstruction.
(4) This community will be developed under a joint venture structure and the
joint venture entity (a limited liability company) has obtained
third-party debt financing on a non-recourse basis. Our equity funding of
the total budgeted costs is expected to be $9.6 million.
Development Rights
As of March 1, 2001, we are considering the development of 33 new apartment
communities on land that is either owned by us or under contract, or for which
we hold a purchase option. These Development Rights range from those beginning
design and architectural planning to those that have completed site plans and
drawings and can begin construction almost immediately. We estimate that the
successful completion of all of these communities would ultimately add 9,091
upscale apartment homes to our portfolio. At December 31, 2000, the cumulative
capitalized costs incurred in pursuit of the 33 Development Rights was
approximately $68.9 million, of which $33.2 was the cost of land acquired in
connection with six of the Development Rights. Substantially all of these
apartment homes will offer features like those offered by the communities we
currently own.
We generally hold Development Rights through options to acquire land, although
one Development Right located in New Canaan, Connecticut is controlled through a
joint venture partnership that owns the land. The properties comprising the
Development Rights are in different stages of the due diligence and regulatory
approval process. The decisions as to which of the Development Rights to pursue,
if any, or to continue to pursue once an investment in a Development Right is
made, are business judgments that we make after we perform financial,
demographic and other analysis. Finally, we currently intend to limit the
percentage of debt used to finance new developments in
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order to maintain our general historical practice with respect to the proportion
of debt in our capital structure. Therefore, other financing alternatives may be
required to finance the development of those Development Rights scheduled to
start construction after January 1, 2001. Although the development of any
particular Development Right cannot be assured, we believe that the Development
Rights, in the aggregate, present attractive potential opportunities for future
development and growth of our long-term stockholder value.
Statements regarding the future development of the Development Rights are
forward-looking statements. We cannot assure you that:
o we will succeed in obtaining zoning and other necessary governmental
approvals or the financing required to develop these communities, or
that we will decide to develop any particular community; or
o if we undertake construction of any particular community, that we
will complete construction at the total budgeted cost assumed in the
financial projections below.
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The following presents a summary of the 33 Development Rights we are currently
pursuing:
(1) Land is owned, but construction has not yet begun.
(2) The land currently is owned by a limited partnership in which we are a
majority partner. It is currently anticipated that the land seller will
retain a minority limited partner interest.
Risks of Development and Redevelopment
We intend to continue to pursue the development and redevelopment of apartment
home communities. Our development and redevelopment activities may be exposed to
the following:
o we may abandon opportunities we have already begun to explore based
on further review of, or changes in, financial, demographic,
environmental or other factors;
o we may encounter liquidity constraints, including the unavailability
of financing on favorable terms for the development or redevelopment
of a community;
o we may be unable to obtain, or we may experience delays in
obtaining, all necessary zoning, land-use, building, occupancy, and
other required governmental permits and authorizations;
27
o we may incur construction or reconstruction costs for a community
that exceed our original estimates due to increased materials, labor
or other expenses, which could make completion or redevelopment of
the community uneconomical;
o occupancy rates and rents at a newly completed or redevelopment
community may fluctuate depending on a number of factors, including
market and general economic conditions, and may not be sufficient to
make the community profitable; and
o we may be unable to complete construction and lease-up on schedule,
resulting in increased debt service expense and construction costs.
The occurrence of any of the events described above could adversely affect our
ability to achieve our projected yields on communities under development or
redevelopment and could affect our payment of distributions to our stockholders.
Construction costs are projected by us based on market conditions prevailing in
the community's market at the time our budgets are prepared and reflect changes
to those market conditions that we anticipated at that time. Although we attempt
to anticipate changes in market conditions, we cannot predict with certainty
what those changes will be. Construction costs have been increasing and, for
some of our Development Communities, the total construction costs have been or
are expected to be higher than the original budget. Total budgeted cost includes
all capitalized costs projected to be incurred to develop the respective
Development or Redevelopment Community, including:
o land and/or property acquisition costs;
o construction or reconstruction costs;
o real estate taxes;
o capitalized interest;
o loan fees;
o permits;
o professional fees;
o allocated development or redevelopment overhead; and
o other regulatory fees determined in accordance with generally
accepted accounting principles.
We believe that, in the aggregate, we will still achieve our targeted projected
yield (i.e., return on invested capital) for those communities experiencing
costs in excess of the original budget because of increases in prevailing market
rents. We believe that we could experience similar increases in construction
costs and market rents with respect to other development communities resulting
in total construction costs that exceed original budgets. Likewise, costs to
redevelop communities that have been acquired have, in some cases, exceeded our
original estimates and similar increases in costs may be experienced in the
future. We cannot assure you that market rents in effect at the time new
development communities or redeveloped communities complete lease-up will be
sufficient to fully offset the effects of any increased construction or
reconstruction costs.
Capitalized Interest
In accordance with generally accepted accounting principles, we capitalize
interest expense during construction or reconstruction until an apartment home
obtains a certificate of occupancy. Thereafter, the interest allocated to that
completed apartment home within the community is expensed. Capitalized interest
during the years ended December 31, 2000 and 1999 totaled $18,328,000 and
$21,888,000, respectively.
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Acquisition Activities and Other Recent Developments
Acquisitions of Existing Communities. We have acquired seven communities
containing 1,960 apartment homes since January 1, 2000 for an acquisition price
of approximately $252,400,000. Six of the communities were acquired pursuant to
a forward purchase contract agreed to in 1997 with an unaffiliated party.
Sales of Existing Communities. We seek to increase our geographical
concentration in selected high barrier-to-entry markets where we believe we can:
o apply sufficient market and management presence to enhance revenue
growth;
o reduce operating expenses; and
o leverage management talent.
To achieve this increased concentration, we are selling assets in certain
submarkets and intend to redeploy the proceeds from those sales to develop and
redevelop communities currently under construction or reconstruction. Pending
such redeployment, we will generally use the proceeds from the sale of these
communities to reduce amounts outstanding under our variable rate unsecured
credit facility. On occasion, we will set aside the proceeds from the sale of
communities into a cash escrow account to facilitate a nontaxable like-kind
exchange transaction. Accordingly, we sold nine communities, totaling 2,158
apartment homes, since January 1, 2000. Net proceeds from the sales of these
assets totaled $138,924,000.
Land Acquisitions and Leases for New Developments. We carefully select land for
development and follow established procedures that we believe minimize both the
cost and the risks of development. During 2000, we acquired the following land
parcels for future development:
(1) Total budgeted cost includes all capitalized costs projected to be
incurred to develop the respective Development Community, including land
acquisition costs, construction costs, real estate taxes, capitalized
interest and loan fees, permits, professional fees allocated development
overhead and other regulatory fees determined in accordance with generally
accepted accounting principles.
(2) Future construction start and completion dates are estimates.
(3) Community will be developed on land being leased from an unrelated third
party.
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Natural Disasters
Many of our West Coast communities are located in the general vicinity of active
earthquake faults. In July 1998, we obtained a seismic risk analysis from an
engineering firm which estimated the probable maximum loss (PML) for each of the
63 West Coast communities that we owned at that time and for each of the four
West Coast communities under development at that time. To establish a PML, the
engineers define a severe earthquake event for the applicable geographic area.
The PML is the building damage and business interruption loss that is estimated
to have only a 10% probability of being exceeded in a fifty year period in the
event of such an earthquake. Because a significant number of our communities are
located in the San Francisco Bay Area, the engineers' analysis assumed an
earthquake on the Hayward Fault with a Richter Scale magnitude of 7.1. Based on
this earthquake scenario, the engineers determined the PML at that time to be
$113 million for the 60 West Coast communities that we owned at that time and
the five West Coast communities then under development. The actual aggregate PML
could be higher or lower as a result of variations in soil classifications and
structural vulnerabilities. For each community, the engineers' analysis
calculated an individual PML as a percentage of the community's replacement cost
and projected revenues. We cannot assure you that:
o an earthquake would not cause damage or losses greater than the PML
assessments indicate;
o future PML levels will not be higher than the current PML levels
described above for our communities located on the West Coast; or
o acquisitions or developments after July 1998 will not have PML
assessments indicating the possibility of greater damage or losses
than currently indicated.
In November 2000, we renewed our earthquake insurance, both for physical damage
and lost revenue, with respect to all communities we owned at that time and all
of the communities then under development. For any single occurrence, we have in
place with respect to communities located in California $75 million of coverage
with a five percent deductible. The five percent deductible is subject to a
minimum of $100,000 per occurrence. Earthquake coverage outside of California is
subject to a $200 million limit and a $25,000 deductible per occurrence. In
addition, our general liability and property insurance program provides coverage
for public liability and fire damage. In the event an uninsured disaster or a
loss in excess of insured limits were to occur, we could lose our capital
invested in the affected community, as well as anticipated future revenue from
that community. We would also continue to be obligated to repay any mortgage
indebtedness or other obligations related to the community. Any such loss could
materially and adversely affect our business and our financial condition and
results of operations.
In February 2001, an earthquake occurred in the Pacific Northwest. We believe
that no material damage occurred at any of our properties but we are continuing
to finalize our evaluation. Any damage that was sustained would be covered by
the insurance described above, subject to a $25,000 deductible.
Americans with Disabilities Act
The apartment communities we own and any apartment communities that we acquire
must comply with Title III of the Americans with Disabilities Act to the extent
that such properties are "public accommodations" and/or "commercial facilities"
as defined by the Americans with Disabilities Act. Compliance with the Americans
with Disabilities Act requirements could require removal of structural barriers
to handicapped access in certain public areas of our properties where such
removal is readily achievable. The Americans with Disabilities Act does not,
however, consider residential properties, such as apartment communities, to be
public accommodations or commercial facilities, except to the extent portions of
such facilities, such as leasing offices, are open to the public. We believe our
properties comply in all material respects with all present requirements under
the Americans with Disabilities Act and applicable state laws. Noncompliance
could result in imposition of fines or an award of damages to private litigants.
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ITEM 3. LEGAL PROCEEDINGS
AvalonBay is from time to time subject to claims and administrative proceedings
arising in the ordinary course of business. Some of these claims and proceedings
are expected to be covered by liability insurance. The following matter, for
which we believe we have meritorious defenses and are therefore vigorously
defending against, is not covered by liability insurance. However, outstanding
litigation matters, individually and in the aggregate, including the matter
described below, are not expected to have a material adverse effect on our
business or financial condition.
AvalonBay is currently involved in litigation with York Hunter Construction,
Inc. and National Union Fire Insurance Company. The action arises from our
October 1999 termination of York Hunter as construction manager under a contract
relating to construction of the Avalon Willow community in Mamaroneck, New York,
because of alleged failures and deficiencies by York Hunter and its
subcontractors in performing under the contract. York Hunter initiated the
litigation in October 1999, by filing a complaint against us and other
defendants claiming more than $15 million in damages. We have filed
counterclaims against York Hunter, seeking more than $9 million in compensatory
damages, including lost rental income and costs to complete the community, and
approximately $14 million in damages arising from a willful exaggeration of
lien. We have also filed a claim against National Union Fire Insurance, which
furnished construction and performance bonds to us on behalf of York Hunter. We
believe that we have meritorious defenses against all of York Hunter's claims
and are vigorously contesting those claims. We also intend to pursue our
counterclaims against York Hunter and National Union Fire Insurance
aggressively. During 2000, this litigation was removed from the United States
District Court for the Southern District of New York to the Supreme Court of the
State of New York, County of Westchester. A trial date has not been set.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
No matter was submitted to a vote of our security holders during the fourth
quarter of 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the New York Stock Exchange (NYSE) and the Pacific
Exchange (PCX) under the ticker symbol AVB. The following table sets forth the
quarterly high and low sales prices per share of our common stock on the NYSE
for the years 2000 and 1999, as reported by the NYSE. On March 1, 2001, there
were 864 holders of record of an aggregate of 67,378,263 shares of our
outstanding common stock.
We expect to continue our policy of paying regular quarterly cash dividends.
However, dividend distributions will be declared at the discretion of the Board
of Directors and will depend on actual cash from operations, our financial
condition, capital requirements, the annual distribution requirements under the
REIT provisions of the Internal Revenue Code and other factors as the Board of
Directors may consider relevant. The Board of Directors may modify our dividend
policy from time to time.
We have an optional Dividend Reinvestment and Stock Purchase Plan (DRIP) which
provides a simple and convenient method for stockholders to invest cash
dividends and optional cash payments in shares of our common stock. All holders
of capital stock are eligible to participate in the DRIP, including stockholders
whose shares are held in the name of a nominee or broker. These participants in
the DRIP may purchase additional shares of common stock by:
o having the cash dividends on all or part of their shares of common
stock and preferred stock automatically reinvested;
o receiving directly, as usual, their cash dividends, if and when
declared, on their shares of capital stock and investing in the DRIP
by making cash payments of not less than $100 or more than $100,000,
or such larger amount as we may approve, per quarter; and/or
o investing both their cash dividends and such optional cash payments
in shares of common stock.
Common stock acquired pursuant to the DRIP with reinvested dividends may be
purchased at a price per share equal to 97% of the closing price on the NYSE for
such shares of common stock on the applicable investment date. Common stock
purchased with optional cash payments of up to $100,000 per calendar quarter may
be purchased at a price per share equal to 100% of the last reported sale price
for a share of common stock as reported by the NYSE on the applicable investment
date. In addition, common stock purchased with optional cash payments in excess
of $100,000 per calendar quarter pursuant to a Request for Waiver may be
purchased at a price per share equal to 100% of the average of the daily high
and low sales prices of our common stock on the NYSE for the ten trading days
immediately preceding the applicable investment date. Generally, no brokerage
commissions, fees or service charges are paid by participants in connection with
purchases under the DRIP. Stockholders who do not participate in the DRIP
continue to receive cash dividends as declared.
During the three months ended December 31, 2000, the Company issued 157,542
shares of common stock in exchange for units of limited partnership held by
limited partners of DownREIT partnership subsidiaries of the Company.
Specifically, the Company issued 99,576 shares of common stock in exchange for
units in Avalon
32
DownREIT V, L.P., and 57,966 shares of common stock in exchange for units in Bay
Pacific Northwest, L.P. These shares were issued in reliance on an exemption
from registration under Section 4 (2) of the Securities Act of 1933. The Company
is relying on the exemption based upon factual representations received from the
limited partners who received these shares.
33
ITEM 6. SELECTED FINANCIAL DATA
The following table provides historical consolidated financial, operating and
other data for AvalonBay Communities, Inc. You should read the table with our
consolidated financial statements and the notes included in this report. Dollars
in thousands, except per share information.
34
Notes to Selected Financial Data
(1) Gross EBITDA represents earnings before interest, income taxes,
depreciation and amortization, non-recurring items, gain on sale of
communities and extraordinary items. Gross EBITDA is relevant to an
understanding of the economics of AvalonBay because it indicates cash flow
available from operations to service fixed obligations. Gross EBITDA
should not be considered as an alternative to operating income (as
determined in accordance with generally accepted accounting principles, or
"GAAP"), as an indicator of our operating performance, or to cash flows
from operating activities (as determined in accordance with GAAP) as a
measure of liquidity. Our calculation of gross EBITDA may not be
comparable to gross EBITDA as calculated by other companies.
(2) We generally consider Funds from Operations, or FFO, to be an appropriate
measure of our operating performance because it helps investors understand
our ability to incur and service debt and to make capital expenditures. We
believe that to gain a clear understanding of our operating results, FFO
should be examined with net income as presented in the Consolidated
Statements of Operations included elsewhere in this report. FFO is
determined based on a definition adopted by the Board of Governors of the
National Association of Real Estate Investment Trusts(R) and is defined
as:
o net income or loss computed in accordance with GAAP, except
that excluded from net income or loss are gains or losses on
sales of property and extraordinary (as defined by GAAP) gains
and losses on debt restructuring;
o plus depreciation of real estate assets; and
o after adjustments for unconsolidated partnerships and joint
ventures.
FFO does not represent cash generated from operating activities in
accordance with GAAP. Therefore it should not be considered as an
alternative to net income as an indication of performance. FFO should also
35
not be considered an alternative to net cash flows from operating
activities as determined by generally accepted accounting principles as a
measure of liquidity. Additionally, it is not necessarily indicative of
cash available to fund cash needs. Further, FFO as calculated by other
REITs may not be comparable to our calculation of FFO.
FFO previously reported for the year ended December 31, 1999 excluded the
effect on net income of a non-recurring restructuring charge of $16,076
and Year 2000 remediation costs of $706, in conformance with the NAREIT
definition of FFO calculations then in effect, or the original definition.
NAREIT issued a White Paper dated October 1999 that clarified the
definition of FFO and the treatment of certain non-recurring charges. The
clarified definition includes the effect on net income of non-recurring
charges in the calculation of FFO. Although we believe the comparison of
FFO using the original definition represents a better guide to investors
of comparable operations and growth between years, both FFO calculations
are presented below:
(3) Current Communities consist of all communities other than those which are
still under construction and have not received a final certificate of
occupancy.
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ITEM 7. MANAGMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
This Form 10-K, including the notes to the Company's consolidated financial
statements, contains "forward-looking statements" as that term is defined under
the Private Securities Litigation Reform Act of 1995. You can identify
forward-looking statements by our use of the words "believe," "expect,"
"anticipate," "intend," "estimate," "assume," "project," and other similar
expressions in this Form 10-K, that predict or indicate future events and trends
or that do not relate to historical matters. In addition, information concerning
the following are forward-looking statements:
o the timing and cost of completion of apartment communities under
construction, reconstruction, development or redevelopment;
o the timing of lease-up and occupancy of apartment communities;
o the pursuit of land on which we are considering future development;
o cost, yield and earnings estimates; and
o the development, implementation and use of management information
systems.
We cannot assure the future results or outcomes of the matters described in
these statements; rather, these statements merely reflect our current
expectations of the approximate outcomes of the matters discussed. You should
not rely on forward-looking statements since they involve known and unknown
risks, uncertainties and other factors, some of which are beyond our control.
These risks, uncertainties and other factors may cause our actual results,
performance or achievements to differ materially from the anticipated future
results, performance or achievements expressed or implied by these
forward-looking statements. Some of the factors that could cause our actual
results, performance or achievements to differ materially from those expressed
or implied by these forward-looking statements include, but are not limited to,
the following:
o we may be unsuccessful in managing our current growth in the number
of apartment communities and the related growth of our business
operations;
o our previous or possible future expansion into new geographic market
areas may not produce financial results that are consistent with our
historical performance;
o we may fail to secure development opportunities due to an inability
to reach agreements with third parties or to obtain desired zoning
and other local approvals;
o we may abandon development opportunities for a number of reasons,
including changes in local market conditions which make development
less desirable, increases in costs of development and increases in
the cost of capital;
o construction costs of a community may exceed our original estimates;
o we may not complete construction and lease-up of communities under
development or redevelopment on schedule, resulting in increased
interest expense, construction costs and reduced rental revenues;
o occupancy rates and market rents may be adversely affected by local
economic and market conditions which are beyond our control;
o financing may not be available on favorable terms and our cash flow
from operations and access to cost-effective capital may be
insufficient for the development of our pipeline and could limit our
pursuit of opportunities;
o our cash flow may be insufficient to meet required payments of
principal and interest, and we may be unable to refinance existing
indebtedness or the terms of such refinancing may not be as
favorable as the terms of existing indebtedness; and
37
o software applications and ancillary services being developed by
companies in which we have invested may be unsuccessful in achieving
their business plans or unsuccessful in obtaining additional
funding, which could lead to a partial or complete loss of the
investment in these companies.
You should read our consolidated financial statements and notes for the year
ended December 31, 2000 included in this report in conjunction with the
following discussion. You should also carefully review the section in Item 2 of
this report that is captioned "Risks of Development and Redevelopment." These
forward-looking statements represent our estimates and assumptions only as of
the date of this report. We do not undertake to update these forward-looking
statements, and you should not rely upon them after the date of this report.
Business Description and Community Information
AvalonBay is a Maryland corporation that has elected to be treated as a real
estate investment trust, or REIT, for federal income tax purposes. We focus on
the ownership and operation of upscale apartment communities (which generally
command among the highest rents in their submarkets) in high barrier-to-entry
markets of the United States. This is because we believe that the limited new
supply of upscale apartment homes in these markets helps achieve more
predictable growth in cash flows. These barriers-to-entry generally include a
difficult and lengthy entitlement process with local jurisdictions and dense
in-fill locations where zoned and entitled land is in limited supply. Our
markets are located in Northern and Southern California and selected states in
the Mid-Atlantic, Northeast, Midwest and Pacific Northwest regions of the United
States.
We are a fully-integrated real estate organization with in-house expertise in
the following areas:
o development and redevelopment;
o construction and reconstruction;
o leasing and management;
o acquisition and disposition;
o financing;
o marketing; and
o information technologies.
With our expertise and in-house capabilities, we believe we are well-positioned
to continue to pursue opportunities to develop and acquire upscale apartment
homes in our target markets. Our ability to pursue attractive opportunities,
however, may be constrained by capital market conditions that limit the
availability of cost-effective capital to finance these activities. We have
limited our acquisition activity as compared to prior years due to these capital
constraints, and we expect to direct most of our invested capital to new
developments and redevelopments, rather than acquisitions, for the foreseeable
future. See "Liquidity and Capital Resources" and "Future Financing and Capital
Needs."
We believe apartment communities present an attractive investment opportunity
compared to other real estate investments because a broad potential resident
base results in relatively stable demand during all phases of a real estate
cycle. We intend to pursue appropriate new investments, including new
developments, redevelopments and acquisitions of communities, subject to the
availability of cost-effective capital. We intend to pursue these investments in
markets where constraints to new supply exist and where new household formations
have outpaced multifamily permit activity in recent years.
38
Our real estate investments consist of current operating apartment communities,
communities in various stages of development, and land or land options held for
development. Our current operating communities are further distinguished as
Established, Other Stabilized, Lease-Up or Redevelopment. A description of these
categories and other related information is set forth above in Item 2.
At December 31, 2000, we had positioned our portfolio of Stabilized Communities
(or, all Established Communities and Other Stabilized Communities), excluding
communities owned by unconsolidated joint ventures, to an average physical
occupancy level of 97.6%. Our strategy is to maximize total rental revenue
through management of rental rates and occupancy levels. Our strategy of
maximizing total rental revenue could lead to lower occupancy levels. Given the
current high occupancy level of our portfolio, we believe that any rental
revenue and net income gains from our Established Communities would be achieved
primarily through higher rental rates and the lower average operating costs per
apartment home that result from economies of scale due to national and regional
growth of our portfolio. See "Property Management Strategy" in Item 1 of this
report for further discussion of our strategy.
Recent Developments
Sales of Existing Communities. We seek to increase our geographical
concentration in selected high barrier-to-entry markets where we believe we can:
o apply sufficient market and management presence to enhance revenue
growth;
o reduce operating expenses; and
o leverage management talent.
To effect this increased concentration, we are selling assets in certain
submarkets and intend to redeploy the proceeds from those sales to develop and
redevelop communities currently under construction or reconstruction. Pending
such redeployment, we will generally use the proceeds from the sale of these
communities to reduce amounts outstanding under our variable rate unsecured
credit facility. We sold the following communities during 1999 and 2000:
Since January 1, 2001, we have sold one additional community containing 226
apartment homes in connection with our capital redeployment strategy. The net
proceeds from the sale of this community were approximately $14,532,000. We
intend to dispose of additional assets as described more fully under "Future
Financing and Capital Needs."
Development, Redevelopment and Acquisition Activities. We began the development
of six new communities during 2000. These communities are expected to contain a
total of 1,520 apartment homes upon completion, and the total investment,
including land acquisition costs, is projected to be approximately $331,900,000.
Also, we completed the development of six new communities containing a total of
1,209 apartment homes for a total investment of $175,200,000.
We also acquired three land parcels during 2000 on which construction has not
yet commenced and entered into a land lease agreement on a fourth parcel. We
expect to develop four new communities containing a
39
total of 826 apartment homes on these parcels. The total investment in these
communities, including land acquisition costs of $19,170,000, is projected to be
approximately $195,000,000. In addition, we continue to hold three parcels of
land purchased prior to January 2000 and expect to develop three new communities
containing 604 apartment homes on these parcels.
We completed the redevelopment of four communities containing 1,455 apartment
homes during 2000 for a total investment in redevelopment (i.e. excluding
acquisition costs) of $40,300,000.
As of March 1, 2001, we had acquired seven communities, containing 1,960
apartment homes, since the beginning of 2000 for approximately $252,400,000. We
acquired six of these communities in connection with a forward purchase
agreement signed in 1997 with an unaffiliated party.
The development and redevelopment of communities involves risks that the
investment will fail to perform in accordance with expectations. See "Risks of
Development and Redevelopment" in Item 2 of this report for our discussion of
these and other risks inherent in developing or redeveloping communities.
40
Results of Operations and Funds from Operations
A comparison of our operating results for the years ended December 31, 2000 and
December 31, 1999 as well as a comparison of our operating results for the years
ended December 31, 1999 and December 31, 1998 follows:
Comparison of Year Ended December 31, 2000 to Year Ended December 31, 1999
Net income available to common stockholders increased $38,328,000 (28.9%) to
$170,825,000 for the year ended December 31, 2000 compared to $132,497,000 for
the preceding year. Excluding non-recurring charges and gain on sale of
communities, net income available to common stockholders increased by
$27,860,000 for the year ended December 31, 2000 compared to the preceding year.
The increase in net income, as adjusted, for the year ended December 31, 2000 is
primarily attributable to additional operating
41
income from newly developed and redeveloped communities as well as growth in
operating income from Established Communities.
As discussed in "Recent Developments - Sales of Existing Communities" and
"Future Financing and Capital Needs," we have funded a significant portion of
our development and redevelopment activities since 1998 through the sale of
assets in certain markets where we have a limited presence. The short-term
effect of a sale of a community is that net operating income will be negatively
impacted because that community's contribution to net operating income has been
eliminated and the development or redevelopment community in which the proceeds
from the sale are being invested is not yet complete. Interest expense will also
decrease as the proceeds from the sale of communities are initially used to
repay amounts outstanding on our unsecured credit facility. The historical
effect of this strategy has been that net operating income attributable to newly
developed and redeveloped communities is higher than net operating income of
assets identified for sale. We have generated approximately $405 million in net
proceeds from the sale of assets during 1999 and 2000, which represents
approximately 10% of our total real estate assets as of December 31, 2000.
The increase in net operating income of $56,012,000 for the year ended December
31, 2000 as compared to 1999 is attributable to:
o an increase of $50,254,000 related to communities where development
activities, redevelopment activities or acquisitions were completed
subsequent to January 1, 1999;
o an increase of $22,162,000 related to Established Communities;
o a decrease of $19,629,000 related to communities sold subsequent to
January 1, 1999; and
o an increase of $3,225,000 related to all other communities.
Depreciation expense is impacted by the timing of asset sales and the completion
of development or redevelopment activities. Gain on sale of communities is
impacted by the number of assets sold in a given period and the carrying value
of those assets.
Rental income increases are primarily the result of our disposition and capital
redeployment strategy discussed above and improved operating results related to
Established Communities.
Overall Portfolio - The increase in rental income ($67,376,000 or 13.4%)
is primarily due to an increase in the weighted average number of occupied
apartment homes as well as an increase in the weighted average monthly
rental income per occupied apartment home. The weighted average number of
occupied apartment homes increased from 33,726 apartment homes for the
year ended December 31, 1999 to 34,470 apartment homes for the year ended
December 31, 2000 primarily as a result of development, redevelopment and
acquisitions of new communities, offset by the sale of communities in 1999
and 2000. For the year ended December 31, 2000, the weighted average
monthly revenue per occupied apartment home increased $139 (11.2%) to
$1,381 compared to $1,242 for the preceding year.
Established Communities - Rental revenue increases ($25,911,000 or 8.9%)
are due to market conditions that allowed for higher average rents and
higher economic occupancy levels. For the year ended December 31, 2000,
weighted average monthly revenue per occupied apartment home increased $99
(7.8%) to $1,376 compared to $1,277 for the preceding year. The average
economic occupancy increased from 96.6% for the year ended December 31,
1999 to 97.7% for the year ended December 31, 2000. Rental income from
Established Communities in our Northern California region, which accounted
for 34.1% of all Established Community rental income in 2000, increased by
12.4% from the preceding year.
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Management fees decreases ($125,000 or 10.6%) are primarily due to a decline in
the number of communities that we manage for third-parties.
Operating expenses, excluding property taxes increases ($7,147,000 or 5.3%) are
primarily a result of our disposition and capital redeployment strategy
discussed above, and an increase in expense related to Established Communities.
Maintenance, insurance and other costs associated with Development and
Redevelopment Communities are expensed as communities move from the initial
construction and lease-up phase to the stabilized operating phase.
Established Communities - Higher operating expenses, excluding property
taxes ($2,754,000 or 4.7%) are primarily the result of higher payroll,
insurance, redecorating, and maintenance costs offset by lower utility and
marketing costs.
Property tax increases ($4,257,000 or 10.0%) are primarily the result of our
disposition and capital redeployment strategy discussed above and an increase in
operating expense related to Established Communities. Property taxes on
Development and Redevelopment Communities are expensed as communities move from
the initial construction and lease-up phase to the stabilized operating phase.
Established Communities - property tax increases ($1,005,000 or 4.1%) are
primarily a result of an adjustment in 1999 to eliminate accrued but
unassessed taxes related to previously renovated communities. In addition,
payments were made during 2000 in resolution of a dispute over property
tax calculations from 1997 to present for one of our communities in the
Northeast region.
Interest expense increases ($8,910,000 or 11.9%) are primarily attributable to
the $136 million increase in total debt from December 31, 1999 to December 31,
2000, an increase in short-term interest rates in 2000 and a decrease in
capitalized interest. Interest expense also increased from the issuance of
unsecured notes, which reflects our strategy to mitigate the risk of floating
rate debt by repaying floating rate debt under our unsecured credit facility
(with relatively lower current interest rates) with fixed rate unsecured debt
that has a higher current interest rate and a longer term to maturity.
General and administrative increases ($3,421,000 or 35.7%) are primarily
attributable to an increase in consulting costs as well as compensation expense
for a senior officer, whose salary was expensed in 2000 but capitalized in 1999
while he served the company in a different capacity. Cost savings attained from
a management reorganization in the first quarter of 1999 partially offset the
increase in expense.
Equity in income of unconsolidated joint ventures represents our share of net
income or loss from joint ventures.
Interest income decreases ($2,598,000 or 35.3%) are primarily from a decrease in
interest from participating mortgage notes, including the Fairlane Woods
participating mortgage note sold in the fourth quarter of 1999.
Gain on sale of communities decreases ($6,314,000 or 13.4%) are due to a
decrease in the number and asset value of communities sold during 2000 as
compared to 1999.
Comparison of Year Ended December 31, 1999 to Year Ended December 31, 1998
Net income available to common stockholders increased $37,094,000 (38.9%) to
$132,497,000 for the year ended December 31, 1999 compared to $95,403,000 for
the preceding year. Excluding non-recurring charges, gain on sale of communities
and extraordinary items, net income available to common stockholders increased
by $31,808,000 for the year ended December 31, 1999 compared to the preceding
year. The increase in net income, as adjusted, for the year ended December 31,
1999 is primarily
43
attributable to additional operating income from communities gained from the
merger of Avalon Properties and Bay Apartment Communities during June 1998.
Additional operating income from newly developed or redeveloped communities and
growth in operating income from Established Communities also contributed to the
increase in net income.
Rental income increases are primarily attributable to revenue from additional
communities gained from the merger and secondarily the result of our disposition
and capital redeployment strategy discussed above, and improved operating
results related to Established Communities.
Overall Portfolio - The increase in rental income ($134,622,000 or 36.4%)
is primarily due to an increase in the weighted average number of occupied
apartment homes from 28,333 apartment homes for the year ended December
31, 1998 to 33,726 apartment homes for the year ended December 31, 1999.
This increase is primarily a result of apartment homes from additional
communities gained from the merger being part of the portfolio for all of
1999 as well as the development, redevelopment and acquisition of new
communities. The increase was partially offset by the sale of communities
in 1998 and 1999. For the year ended December 31, 1999, the weighted
average monthly revenue per occupied apartment home increased $160 (14.8%)
to $1,242 compared to $1,082.
Established Communities, on a pro forma basis, assuming the merger had
occurred on January 1, 1998 - Rental revenue increased $10,114,000 (4.1%)
for the year ended December 31, 1999 compared to the preceding year. The
increase is due to market conditions that allowed for higher average rents
that were partially offset by lower economic occupancy levels. For the
year ended December 31, 1999, weighted average monthly revenue per
occupied apartment home increased $52 (4.4%) to $1,226 compared to $1,174
for the preceding year. The average economic occupancy decreased from
96.9% for the year ended December 31, 1998 to 96.6% for the year ended
December 31, 1999. Rental income increases from Established Communities in
our Northern California region, which accounted for 37.4% of all
Established Community rental income in 1999, were significantly less than
other regions. During late 1998 and much of 1999, the Northern California
sub-markets dependent on Silicon Valley employment softened. These
sub-markets experienced reduced rental rate growth and occupancy declines
as compared to other Northern California sub-markets and our other markets
as a whole.
Management fees decreases ($201,000 or 14.6%) are primarily due to a decline in
the number of communities that we manage for third parties.
Operating expense, excluding property taxes increases ($31,171,000 or 29.9%) are
primarily due to operating expenses from additional communities gained from the
merger and secondarily the result of our disposition and capital redeployment
strategy discussed above and improved operating results related to Established
communities. Maintenance, insurance and other costs associated with Development
and Redevelopment Communities are expensed as communities move from the initial
construction and lease-up phase to the stabilized operating phase.
Established Communities, on a pro forma basis, assuming the merger had
occurred on January 1, 1998 - Operating expenses, excluding property taxes
increased $1,821,000 (3.7%) to $50,912,000 for the year ended December 31,
1999 compared to $49,091,000 for the preceding year. The net changes are
the result of higher redecorating, maintenance, payroll and administrative
costs offset by lower utility, marketing, and insurance costs.
Property tax increases ($10,926,000 or 34.4%) are primarily due to expenses from
additional communities gained from the merger and secondarily the result of our
disposition and capital redeployment strategy discussed above and improved
operating results related to Established Communities. Property taxes on
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Development and Redevelopment Communities are expensed as communities move from
the initial construction and lease-up phase to the stabilized operating phase.
Established Communities, on a pro forma basis, assuming the merger had
occurred on January 1, 1998 - Property taxes decreased $30,000 (0.1%) to
$21,197,000 for the year ended December 31, 1999 compared to $21,227,000
for the preceding year. The decrease is primarily a result of revised base
year tax assessments for previously renovated communities, which resulted
in supplemental taxes that were lower than those originally projected.
Interest expense increases ($20,049,000 or 36.7%) are primarily attributable to
approximately $600 million of debt assumed in connection with the merger, offset
by an increase in capitalized interest.
Depreciation expense is impacted by the timing of asset sales and the completion
of development or redevelopment activities.
General and administrative increases ($468,000 or 5.1%) are primarily due to
additional overhead from the combination of the two companies and related
organizational structures, partially offset by a reorganization in February 1999
that reduced the management structure of the merged company.
Equity in income of unconsolidated joint ventures represents our share of net
income from joint ventures.
Interest income increases ($3,854,000 or 109.9%) are primarily from an increase
in interest from participating mortgage notes, including the Fairlane Woods
participating mortgage note acquired in the third quarter of 1998. The Fairlane
Woods promissory note was sold in the fourth quarter of 1999.
Gain on sale of communities increases ($21,823,000 or 86.4%) are due to an
increase in the number and asset value of communities sold during 1999 as
compared to 1998 as a result of the disposition strategy we implemented in the
third quarter of 1998.
Funds from Operations
We consider Funds from Operations, or FFO, to be an appropriate measure of our
operating performance because it helps investors understand our ability to incur
and service debt and to make capital expenditures. We believe that to understand
our operating results, FFO should be examined with net income as presented in
the Consolidated Statements of Operations included elsewhere in this report. FFO
for 2000 is determined based on a definition adopted by the Board of Governors
of the National Association of Real Estate Investment Trusts(R) (NAREIT) in
October 1999, and is defined as:
o net income or loss computed in accordance with generally accepted
accounting principles (GAAP), except that excluded from net income
or loss are gains or losses on sales of property and extraordinary
(as defined by GAAP) gains or losses on debt restructuring;
o plus depreciation of real estate assets; and
o after adjustments for unconsolidated partnerships and joint
ventures.
FFO does not represent cash generated from operating activities in accordance
with GAAP. Therefore it should not be considered an alternative to net income as
an indication of our performance. FFO should also not be considered an
alternative to net cash flows from operating activities as determined by GAAP as
a measure of liquidity. Additionally, it is not necessarily indicative of cash
available to fund cash needs. Further, FFO as calculated by other REITs may not
be comparable to our calculation of FFO.
45
For the year ended December 31, 2000, FFO increased to $252,013,000 from
$196,058,000 for the comparable period of the preceding year. This increase is
primarily attributable to additional operating income from newly developed and
redeveloped communities as well as growth in operating income from Established
Communities.
FFO previously reported for the year ended December 31, 1999 excluded the effect
on net income of a non-recurring restructuring charge of $16,076,000, and Year
2000 remediation costs of $706,000 in conformance with the NAREIT definition of
FFO calculations then in effect, or the original definition. NAREIT issued a
White Paper dated October 1999 that clarified the definition of FFO and the
treatment of certain non-recurring charges. The clarified definition includes
the effect on net income of non-recurring charges in the calculation of FFO.
Although we believe the comparison of FFO using the original definition
represents a better guide to investors of comparable operations and growth
between years, both FFO calculations are presented below for the years ended
December 31, 2000 and 1999 (dollars in thousands):
(1) Represents FFO calculated in accordance with NAREIT's October 1999 White
Paper on FFO. Our calculation of FFO in accordance with NAREIT's clarified
definition of FFO includes the effect on earnings of non-recurring charges
for certain management and other organizational changes and Year 2000
remediation costs.
(2) Consists of $16,076 related to management and other organizational changes
announced during durring 1998 and $706 for Year 2000 remediation costs.
Previously, the effect on earnings of non-recurring charges for certain
management and other organizational changes and Year 2000 remediation
costs were excluded from the calculation of FFO.
(3) FFO calculated based on NAREIT's definition of FFO prior to the issuance
of the October 1999 White Paper on FFO.
Capitalization of Fixed Assets and Community Improvements
Our policy with respect to capital expenditures is generally to capitalize only
non-recurring expenditures. We capitalize improvements and upgrades only if the
item:
o exceeds $15,000;
o extends the useful life of the asset; and
o is not related to making an apartment home ready for the next
resident.
46
Under this policy, virtually all capitalized costs are non-recurring, as
recurring make-ready costs are expensed as incurred. Recurring make-ready costs
include the following:
o carpet and appliance replacements;
o floor coverings;
o interior painting; and
o other redecorating costs.
We capitalize purchases of personal property, such as computers and furniture,
only if the item is a new addition and the item exceeds $2,500. We generally
expense purchases of personal property made for replacement purposes. The
application of these policies for the year ended December 31, 2000 resulted in
non-revenue generating capitalized expenditures for Stabilized Communities of
approximately $225 per apartment home. For the year ended December 31, 2000, we
charged to maintenance expense, including carpet and appliance replacements,
related to Stabilized Communities approximately $1,145 per apartment home. We
anticipate that capitalized costs per apartment home will gradually rise as the
average age of our communities increases.
Liquidity and Capital Resources
Liquidity. The primary source of liquidity is our cash flows from operations.
Operating cash flows have historically been determined by:
o the number of apartment homes;
o rental rates;
o occupancy levels; and
o our expenses with respect to these apartment homes.
The timing, source and amount of cash flows provided by financing activities and
used in investing activities are sensitive to the capital markets environment,
particularly to changes in interest rates that are charged to us as changes in
interest rates affect our decision as to whether to issue debt securities,
borrow money and invest in real estate. Thus, changes in the capital markets
environment may affect our plans for the undertaking of construction and
development as well as acquisition activity.
Cash and cash equivalents increased $49,613,000 to $57,234,000 for the year
ended December 31, 2000 compared to a decrease in cash and cash equivalents of
$1,269,000 to $7,621,000 for the year ended December 31, 1999.
o Net cash provided by operating activities totaled $294,818,000 for
the year ended December 31, 2000, an increase of $44,752,000
provided over the same period of 1999. The increase was primarily
attributable to additional operating income from newly developed and
redeveloped communities as well as growth in operating income from
Established Communities.
o Net cash used in investing activities totaled $282,584,000 for the
year ended December 31, 2000, an increase of $17,965,000 used over
the same period of 1999. The increase was primarily due to a
reduction in the proceeds from the sale of communities.
o Net cash provided by financing activities totaled $37,379,000 for
the year ended December 31, 2000, an increase of $24,095,000 over
the same period of 1999. The increase is primarily due to increased
sales of unsecured notes partially offset by additional dividends
paid and increased repayments of the unsecured credit facility.
47
Cash and cash equivalents decreased $1,269,000 to $7,621,000 for the year ended
December 31, 1999 compared to an increase of $2,168,000 to $8,890,000 for the
year ended December 31, 1998.
o Net cash provided by operating activities totaled $250,066,000 for
the year ended December 31, 1999, an increase of $56,588,000
provided over the same period of 1998. The increase was primarily
due to an increase in operating income from additional communities
gained from the merger, and additional operating income from newly
developed and redeveloped communities as well as growth in operating
income from Established Communities.
o Net cash used in investing activities totaled $264,619,000 for the
year ended December 31, 1999, a decrease of $353,066,000 used over
the same period of 1998. The decrease in expenditures reflected
increased sales of communities and decreased acquisitions, offset by
increased construction and reconstruction activity. The decrease in
acquisitions was attributable to a shift in our investment focus
away from acquisitions and towards development opportunities that
offer higher projected yields, primarily in response to the lack of
available properties that met our increased yield requirements and
the decrease in availability of cost-effective capital.
o Net cash provided by financing activities totaled $13,284,000 for
the year ended December 31, 1999, a decrease of $413,091,000 over
the same period of 1998. The decrease was primarily due to our
development activities increasingly being funded through the sale of
existing communities as opposed to incurring debt or selling equity.
This resulted in a reduction in the sale of unsecured notes as well
as a reduction of outstanding amounts under our unsecured credit
facility as proceeds from the sale of communities are initially used
to repay amounts outstanding on our unsecured credit facility. Also,
dividends paid increased as a result of additional common and
preferred shares issued in connection with the merger.
We regularly review our short and long-term liquidity needs and the adequacy of
Funds from Operations, as defined above, and other expected liquidity sources to
meet these needs. We believe our principal short-term liquidity needs are to
fund:
o normal recurring operating expenses;
o debt service payments;
o the distributions required with respect to preferred stock;
o the minimum dividend payments required to maintain our REIT
qualification under the Internal Revenue Code of 1986; and
o development and redevelopment activity in which we are currently
engaged.
We anticipate that we can fully satisfy these needs from a combination of cash
flows provided by operating activities and capacity under our unsecured credit
facility.
We believe our principle long-term liquidity needs are the repayment of medium
and long-term debt. We anticipate that no significant portion of the principal
of any indebtedness will be repaid prior to maturity. If we do not have funds on
hand sufficient to repay our indebtedness, it will be necessary for us to
refinance this debt. This refinancing may be accomplished through additional
debt financing, which may be collateralized by mortgages on individual
communities or groups of communities, by uncollateralized private or public debt
offerings or by additional equity offerings. We also anticipate having
significant retained cash flow in each year such that some or all of any debt
maturity can be satisfied from retained cash. Although we believe we will have
the capacity to meet our long-term liquidity needs, we cannot assure you that
additional debt financing or debt or equity offerings will be available or, if
available, that they will be on terms we consider satisfactory.
48
Capital Resources. We intend to match the long-term nature of our real estate
assets with long-term cost- effective capital to the extent permitted by
prevailing market conditions. We have raised approximately $625 million in
capital market offerings since January 1999:
Date Description of Offerings
------------------------ --------------------------------
January 1999 $125 million medium-term notes
July 1999 $150 million medium-term notes
July 2000 $150 million medium-term notes
December 2000 $200 million medium-term notes
We follow a focused strategy to help facilitate uninterrupted access to capital.
This strategy includes:
o hiring, training and retaining associates with a strong resident
service focus, which should lead to higher rents, lower turnover and
reduced operating costs;
o managing, acquiring and developing upscale communities in locations
where the availability of zoned and entitled land is limited to
provide consistent, sustained earnings growth;
o operating in markets with growing demand, as measured by household
formation and job growth, and high barriers-to-entry. We believe
these characteristics generally combine to provide a favorable
demand-supply balance, which we believe will create a favorable
environment for future rental rate growth while protecting existing
and new communities from new supply. We expect this strategy to
result in a high level of quality to the revenue stream;
o maintaining a conservative capital structure, largely comprised of
equity, and with modest, cost-effective leverage. We generally avoid
secured debt except in order to obtain low cost, tax-exempt debt. We
believe such a structure promotes an environment where current
credit rating levels can be maintained;
o following accounting practices that provide a high level of quality
to reported earnings; and
o providing timely, accurate and detailed disclosures to the
investment community.
We believe these strategies provide a disciplined approach to capital access to
help position us to fund portfolio growth.
Capital market conditions over the past several years have limited our access to
cost-effective capital. See "Future Financing and Capital Needs" for a
discussion of our response to the current capital markets environment. The
following is a discussion of specific capital transactions, arrangements and
agreements.
Variable Rate Unsecured Credit Facility
Our unsecured revolving credit facility is furnished by a consortium of banks
and provides $600,000,000 in short-term credit. We pay these banks an annual
facility fee of $900,000 in equal quarterly installments. The unsecured credit
facility bears interest at varying levels tied to the London Interbank Offered
Rate (LIBOR) based on ratings levels achieved on our unsecured notes and on a
maturity selected by us. The current stated pricing is LIBOR plus 0.60% per
annum. The unsecured credit facility matures in July 2001, however there are two
one-year extension options, the first at our sole discretion and the second with
the consent of the consortium of banks. Therefore, we may extend the maturity to
at least July 2002. A competitive bid option is available for borrowings of up
to $400,000,000. This option allows banks that are part of the lender consortium
to bid to provide us loans at a rate that is lower than the stated pricing
provided by the unsecured credit facility. The competitive bid option may result
in lower pricing if market conditions allow. Pricing under the competitive bid
option resulted in average pricing of LIBOR plus 0.50% for balances most
recently placed under the competitive bid option. At March 1, 2001, $0 was
outstanding, $82,753,000 was used to provide letters of credit and $517,247,000
was available for
49
borrowing under the unsecured credit facility. We intend to use borrowings under
the unsecured credit facility for:
o capital expenditures;
o construction, development, reconstruction and redevelopment costs;
o acquisitions;
o credit enhancement for tax-exempt bonds; and
o working capital purposes.
Interest Rate Protection Agreements
We are not a party to any long-term interest rate agreements, other than
interest rate protection and swap agreements on approximately $177 million of
our variable rate tax-exempt indebtedness. We intend, however, to evaluate the
need for long-term interest rate protection agreements as interest rate market
conditions dictate, and we have engaged a consultant to assist in managing our
interest rate risks and exposure.
Financing Commitments and Transactions Completed
In July 2000, we issued $150,000,000 of unsecured medium-term notes. The notes
have a coupon rate of 8.25% and will mature on July 15, 2008. We used the net
proceeds of approximately $148,989,000 to repay amounts outstanding under our
unsecured credit facility.
In December 2000, we issued $200,000,000 of unsecured medium-term notes. The
notes have a coupon rate of 7.50% and will mature on December 15, 2010. We used
the net proceeds of approximately $197,242,000 to repay amounts outstanding
under our unsecured credit facility, with the excess proceeds invested in cash
equivalents.
Future Financing and Capital Needs
As of December 31, 2000, we had 16 new communities under construction either by
us or by unaffiliated third parties with whom we have entered into forward
purchase commitments. As of December 31, 2000, a total estimated cost of
$419,914,000 remained to be invested in these communities. In addition, we had
four other communities under reconstruction, for which an estimated $33,559,000
remained to be invested as of December 31, 2000.
Substantially all of the capital expenditures necessary to complete the
communities currently under construction and reconstruction will be funded from:
o the remaining capacity under our $600,000,000 unsecured credit
facility;
o the net proceeds from sales of existing communities;
o retained operating cash; and/or
o the issuance of debt or equity securities.
We expect to continue to fund deferred development costs related to future
developments from retained operating cash and borrowings under the unsecured
credit facility. We believe these sources of capital will be adequate to take
the proposed communities to the point in the development cycle where
construction can begin.
We have observed and been impacted by a reduction in the availability of
cost-effective capital since the third quarter of 1998. While the capital market
environment has improved during 2000, we cannot assure
50
you that cost-effective capital will be available to meet future expenditures
required to begin planned reconstruction activity or the construction of the
Development Rights. Before planned reconstruction activity or the construction
of a Development Right begins, we intend to arrange adequate financing to
complete these undertakings, although we cannot assure you that we will be able
to obtain such financing. In the event that financing cannot be obtained, we may
have to abandon Development Rights, write-off associated pursuit costs and/or
forego reconstruction activity. In such instances, we will not realize the
increased revenues and earnings that we expected from such pursuits, and the
related write-off of costs will increase current period expenses.
Our liquidity could be adversely impacted by expanding development activities
and/or reduced capital (as compared to prior years) available from asset sales.
To meet the balance of our liquidity needs under such conditions, we would need
to arrange additional capacity under our existing unsecured credit facility,
sell additional existing communities and/or issue additional debt or equity
securities. While we believe we have the financial position to expand our
short-term credit capacity and support our capital markets activity, we cannot
assure you that we will be successful in completing these arrangements, sales or
offerings. The failure to complete these transactions on a cost-effective basis
could have a material adverse impact on our operating results and financial
condition, including the abandonment of deferred development costs and a
resultant charge to earnings.
To increase our concentration of communities in selected high barrier-to-entry
markets, we are selling assets in certain submarkets and redeploying the
proceeds. Under our disposition program, we solicit competing bids from
unrelated parties for these individual assets and consider the sales price and
tax ramifications of each proposal. We have disposed of nine communities since
January 1, 2000 for net proceeds of approximately $138,924,000. We intend to
actively seek buyers for the remaining communities held for sale. However, we
cannot assure you that these assets can be sold on terms that we consider
satisfactory.
The remaining assets that we have identified for disposition include land,
buildings and improvements and furniture, fixtures and equipment. Total real
estate, net of accumulated depreciation, of all communities identified for sale
at December 31, 2000 totaled $208,118,000. Certain individual assets are secured
by mortgage indebtedness which may be assumed by the purchaser or repaid from
our net sales proceeds. Our Consolidated Statements of Operations include net
income from the communities held for sale of $11,568,000 and $9,171,000 for the
years ended December 31, 2000 and 1999, respectively.
Because the proceeds from the sale of communities are used initially to reduce
borrowings under our unsecured credit facility, the immediate effect of a sale
of a community is to have a negative effect on Funds from Operations. This is
because the yield on a community that is sold exceeds the interest rate on the
borrowings that are repaid from such net proceeds. Therefore, changes in the
number and timing of dispositions, and the redeployment of the resulting net
proceeds, may have a material and adverse effect on our Funds from Operations.
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Debt Maturities
The following table details debt maturities for the next five years, excluding
the unsecured credit facility:
(1) Includes credit enhancement fees, facility fees, trustees, etc.
(2) The remaining loan balance was repaid in connection with the disposition
of the property during 2000.
Inflation
Substantially all of our leases are for a term of one year or less. This may
enable us to realize increased rents upon renewal of existing leases or the
beginning of new leases. Short-term leases generally minimize our risk from the
adverse effects of inflation, although these leases generally permit residents
to leave at the end of the lease term without penalty. We believe that
short-term leases, combined with relatively consistent demand, results in rents
and cash flow which provide an attractive inflation hedge.
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ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain financial market risks, the most predominant being
fluctuations in interest rates. Interest rate fluctuations are monitored by us
as an integral part of our overall risk management program, which recognizes the
unpredictability of financial markets and seeks to reduce the potentially
adverse effect on our results of operations. The effect of interest rate
fluctuations historically has been small relative to other factors affecting
operating results, such as rental rates and occupancy. The specific market risks
and the potential impact on our operating results are described below.
Our operating results are affected by changes in interest rates as a result of
borrowings under our variable rate unsecured credit facility as well as
outstanding bonds with variable interest rates. We had $67,960,000 and
$246,560,000 in variable rate debt (including mortgage notes payable and the
unsecured credit facility) outstanding as of December 31, 2000 and 1999,
respectively. If interest rates on the variable rate debt had been 100 basis
points higher throughout 2000 and 1999, our annual interest costs would have
increased by approximately $2,500,000 and $3,300,000, respectively, based on
balances outstanding during the applicable years.
We currently use interest rate swap agreements to reduce the impact of interest
rate fluctuations on certain variable rate indebtedness. Under swap agreements,
o we agree to pay to a counterparty the interest that would have been
incurred on a fixed principal amount at a fixed interest rate
(generally, the interest rate on a particular treasury bond on the
date the agreement is entered into, plus a fixed increment), and
o the counterparty agrees to pay to us the interest that would have
been incurred on the same principal amount at an assumed floating
interest rate tied to a particular market index.
As of December 31, 2000, the effect of swap agreements is to fix the interest
rate on approximately $177 million of our variable rate tax-exempt debt.
Furthermore, swap agreements fix the interest rate on approximately $23 million
of unconsolidated variable rate debt as of December 31, 2000. The swap
agreements were not electively entered into by us but, rather, were a
requirement of either the bond issuer or the credit enhancement provider related
to certain of our tax-exempt bond financings. Because the counterparties
providing the swap agreements are major financial institutions with AAA credit
ratings by the Standard & Poor's Ratings Group and the interest rates fixed by
the swap agreements are significantly higher than current market rates for such
agreements, we do not believe there is exposure at this time to a default by a
counterparty provider.
53
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item 8 is included as a separate section of this Annual
Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information pertaining to directors and executive officers of the registrant is
incorporated herein by reference to the registrant's Proxy Statement to be filed
with the Securities and Exchange Commission within 120 days after the end of the
year covered by this Form 10-K with respect to the Annual Meeting of
Stockholders to be held on May 8, 2001.
ITEM 11. EXECUTIVE COMPENSATION
Information pertaining to executive compensation is incorporated herein by
reference to the registrant's Proxy Statement to be filed with the Securities
and Exchange Commission within 120 days after the end of the year covered by
this Form 10-K with respect to the Annual Meeting of Stockholders to be held on
May 8, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information pertaining to security ownership of management and certain
beneficial owners of the registrant's Common Stock is incorporated herein by
reference to the registrant's Proxy Statement to be filed with the Securities
and Exchange Commission within 120 days after the end of the year covered by
this Form 10-K with respect to the Annual Meeting of Stockholders to be held on
May 8, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information pertaining to certain relationships and related transactions is
incorporated herein by reference to the registrant's Proxy Statement to be filed
with the Securities and Exchange Commission within 120 days after the end of the
year covered by this Form 10-K with respect to the Annual Meeting of
Stockholders to be held on May 8, 2001.
54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
14(a)(1) Financial Statements
Index to Financial Statements
Consolidated Financial Statements and Financial Statement Schedule:
Report of Independent Accountants F-1
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-2
Consolidated Statements of Operations for
the years ended December 31, 2000, 1999 and 1998 F-3
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for
the years ended December 31, 2000, 1999 and 1998 F-5
Notes to Consolidated Financial Statements F-6
14(a)(2) Financial Statement Schedule
Schedule III - Real Estate and Accumulated Depreciation F-28
14(a)(3) Exhibits
The exhibits listed on the accompanying Index to Exhibits are filed as a part of
this report.
14(b) Reports on Form 8-K
On October 23, 2000, the Company filed a Report on Form 8-K for the purpose of
furnishing, under Item 9 thereof, information that AvalonBay intended to present
to current and prospective stockholders and other persons and institutions.
55
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
1.1 -- Distribution Agreement, dated December 21, 1998, among the
Company and the Agents, including Administrative Procedures,
relating to the MTNs. (Incorporated by reference to Exhibit
4.4 to the Company's Current Report on Form 8-K filed on
December 21, 1998.)
1.2 -- First Amendment, dated as of June 27, 2000, to Distribution
Agreement, dated December 21, 1998, among the Company and the
Agents. (Incorporated by reference to Exhibit 1.2 to the
Company's Current Report on Form 8-K filed on July 11, 2000.)
3(i).1 -- Articles of Amendment and Restatement of Articles of
Incorporation of AvalonBay Communities, Inc. (the "Company"),
dated as of June 4, 1998. (Incorporated by reference to
Exhibit 3(i).1 to Form 10-Q of the Company filed August 14,
1998.)
3(i).2 -- Articles of Amendment, dated as of October 2, 1998.
(Incorporated by reference to Exhibit 3.1(ii) to Form 8-K of
the Company filed on October 6, 1998.)
3(i).3 -- Articles Supplementary, dated as of October 13, 1998, relating
to the 8.70% Series H Cumulative Redeemable Preferred Stock.
(Incorporated by reference to Exhibit 1 to Form 8-A of the
Company filed October 14, 1998.)
3(ii).1 -- Bylaws of the Company, as amended and restated, dated as of
July 24, 1998. (Incorporated by reference to Exhibit 3(ii).1
to Form 10-Q of the Company filed August 14, 1998.)
3(ii).2 -- Amendment to Bylaws of the Company, dated February 10, 1999.
(Incorporated by reference to Exhibit 3(ii).2 to Form 10-K of
the Company filed March 31, 1999.)
3(ii).3 -- Amendment to Bylaws of the Company, dated May 5, 1999.
(Incorporated by reference to Exhibit 3(ii).3 to Form 10-Q of
the Company filed on August 16, 1999.)
4.1 -- Indenture of Avalon Properties, Inc. (hereinafter referred to
as "Avalon Properties") dated as of September 18, 1995.
(Incorporated by reference to Form 8-K of Avalon Properties
dated September 18, 1995.)
4.2 -- First Supplemental Indenture of Avalon Properties dated as of
September 18, 1995. (Incorporated by reference to Avalon
Properties' Current Report on Form 8-K dated September 18,
1995.)
4.3 -- Second Supplemental Indenture of Avalon Properties dated as of
December 16, 1997. (Incorporated by reference to Avalon
Properties' Current Report on Form 8-K filed January 26,
1998.)
4.4 -- Third Supplemental Indenture of Avalon Properties dated as of
January 22, 1998. (Incorporated by reference to Avalon
Properties' Current Report on Form 8-K filed on January 26,
1998.)
4.5 -- Indenture, dated as of January 16, 1998, between the Company
and State Street Bank and Trust Company, as Trustee.
(Incorporated by reference to Exhibit 4.1 to Form 8-K of the
Company filed on January 21, 1998.)
56
EXHIBIT
NO. DESCRIPTION
4.6 -- First Supplemental Indenture, dated as of January 20, 1998,
between the Company and the Trustee. (Incorporated by
reference to Exhibit 4.2 to Form 8-K of the Company filed on
January 21, 1998.)
4.7 -- Second Supplemental Indenture, dated as of July 7, 1998,
between the Company and the Trustee. (Incorporated by
reference to Exhibit 4.2 to Form 8-K of the Company filed on
July 9, 1998.)
4.8 -- Third Supplemental Indenture, dated as of December 21, 1998
between the Company and the Trustee, including forms of
Floating Rate Note and Fixed Rate Note (Incorporated by
reference to Exhibit 4.4 to Form 8-K filed on December 21,
1998.)
4.9 -- Amended and Restated Third Supplemental Indenture, dated as of
July 10, 2000 between the Company and the Trustee, including
forms of Floating Rate Note and Fixed Rate Note. (Incorporated
by reference to Exhibit 4.4 to the Company's Current Report on
Form 8-K filed on July 11, 2000.)
4.10 -- Dividend Reinvestment and Stock Purchase Plan of the Company
filed September 14, 1999. (Incorporated by reference to Form
S-3 of the Company, File No. 333-87063.)
4.11 -- Amendment to the Company's Dividend Reinvestment and Stock
Purchase Plan filed on December 17, 1999. (Incorporated by
reference to the Prospectus Supplement filed pursuant to Rule
424(b)(2) of the Securities Act of 1933 on December 17, 1999.)
4.12 -- Shareholder Rights Agreement, dated March 9, 1998 (the "Rights
Agreement"), between the Company and First Union National Bank
(as successor to American Stock Transfer and Trust Company) as
Rights Agent (including the form of Rights Certificate as
Exhibit B). (Incorporated by reference to Exhibit 4.1 to Form
8-A of the Company filed March 11, 1998.)
4.13 -- Amendment No. 1 to the Rights Agreement, dated as of February
28, 2000, between the Company and the Rights Agent.
(Incorporated by reference to Exhibit 4.2 to Form 8-A/A of the
Company filed February 28, 2000.)
10.1+ -- Employment Agreement, dated as of March 9, 1998, between the
Company and Richard L. Michaux (Incorporated by reference to
Exhibit 10.1 to Form 10-Q of the Company filed August 14,
1998) and Amendment, dated as of July 30, 1999, to Employment
Agreement, dated as of March 9, 1998, between the Company and
Richard L. Michaux. (Incorporated by reference to Exhibit 10.1
to Form 10-Q of the Company filed on August 16, 1999.)
10.2+ -- Employment Agreement, dated as of March 9, 1998, between the
Company and Robert H. Slater (Incorporated by reference to
Exhibit 10.3 to Form 10-Q of the Company filed August 14,
1998) and Amendment, dated as of July 30, 1999, to Employment
Agreement, dated as of March 9, 1998, between the Company and
Robert H. Slater. (Incorporated by reference to Exhibit 10.3
to Form 10-Q of the Company filed on August 16, 1999.)
10.3+ -- Employment Agreement, dated as of March 9, 1998, between the
Company and Thomas J. Sargeant. (Incorporated by reference to
Exhibit 10.4 to Form 10-Q of the Company filed August 14,
1998.)
57
EXHIBIT
NO. DESCRIPTION
10.4+ -- Employment Agreement, dated as of March 9, 1998, between the
Company and Bryce Blair (Incorporated by reference to Exhibit
10.5 to Form 10-Q of the Company filed August 14, 1998) and
Amendment, dated as of July 30, 1999, to Employment Agreement,
dated as of March 9, 1998, between the Company and Bryce
Blair. (Incorporated by reference to Exhibit 10.2 to Form 10-Q
of the Company filed on August 16, 1999.)
10.5+ -- Employment Agreement, dated as of February 26, 2001, between
the Company and Timothy J. Naughton. (Filed herewith.)
10.6+ -- Letters of clarification, dated as of July 30, 1999, to the
Employment Agreements of Messrs. Michaux, Blair and Slater.
(Incorporated by reference to Exhibit 10.4 to Form 10-Q of the
Company filed on August 16, 1999.)
10.7+ -- Letter agreement regarding departure, dated as of August 26,
1999, by and between the Company and Debra L. Shotwell
(Incorporated by reference to Exhibit 10.41 to Form 10-K of
the Company filed on March 10, 2000) and Employment Agreement,
dated as of March 9, 1998, between the Company and Debra L.
Shotwell. (Incorporated by reference to Exhibit 10.5 to Form
10-Q of the Company filed May 15, 1998.)
10.8+ -- Letter Agreement regarding departure, dated February 26, 2001,
by and between the Company and Robert H. Slater. (Filed
herewith.)
10.9+ -- Separation Agreement, dated as of April 15, 1999, by and
between the Company and Jeffrey B. Van Horn (Incorporated by
reference to Exhibit 10.5 to Form 10-Q of the Company filed on
August 16, 1999) and Employment Agreement, dated as of March
9, 1998, between the Company and Jeffrey B. Van Horn.
(Incorporated by reference to Exhibit 10.2 to Form 10-Q of the
Company filed May 15, 1998.)
10.10+ -- Separation Agreement, dated as of May 27, 1999, by and between
the Company and Charles H. Berman (Incorporated by reference
to Exhibit 10.6 to Form 10-Q of the Company filed on August
16, 1999) and Employment Agreement, dated as of March 9, 1998,
between the Company and Charles H. Berman. (Incorporated by
reference to Exhibit 10.2 to Form 10-Q of the Company filed
August 14, 1998.)
10.11+ -- Mutual Release and Separation Agreement, dated as of March 24,
2000, between the Company and Gilbert M. Meyer. (Incorporated
by reference to Exhibit 10.1 to Form 10-Q of the Company filed
on May 15, 2000.)
10.12+ -- Retirement Agreement, dated as of March 24, 2000, between the
Company and Gilbert M. Meyer. (Incorporated by reference to
Exhibit 10.2 to Form 10-Q of the Company filed on May 15,
2000.)
10.13+ -- Consulting Agreement, dated as of March 24, 2000, between the
Company and Gilbert M. Meyer. (Incorporated by reference to
Exhibit 10.3 to Form 10-Q of the Company filed on May 15,
2000.)
10.14+ -- Avalon Properties, Inc. 1993 Stock Option and Incentive Plan.
(Filed herewith.)
10.15+ -- Avalon Properties, Inc. 1995 Equity Incentive Plan. (Filed
herewith.)
58
EXHIBIT
NO. DESCRIPTION
10.16+ -- Amendment, dated May 6, 1999, to the Avalon Properties Amended
and Restated 1995 Equity Incentive Plan. (Incorporated by
reference to Exhibit 10.7 to Form 10-Q of the Company filed on
August 16, 1999.)
10.17+ -- AvalonBay Communities, Inc. 1994 Stock Incentive Plan, as
amended and restated on April 13, 1998, and subsequently
amended on July 24, 1998 (incorporated by reference to Exhibit
10.1 to the Company's Form 10-Q filed November 16, 1998) and
amendment thereto, dated May 6, 1999 (Incorporated by
reference to Exhibit 10.8 to Form 10-Q of the Company filed on
August 16, 1999).
10.18+ -- 1996 Non-Qualified Employee Stock Purchase Plan, dated June
26, 1997, as amended and restated. (Incorporated by reference
to Exhibit 99.1 to Post-effective Amendment No. 1 to Form S-8
of the Company filed June 26, 1997, File No. 333-16837.)
10.19+ -- 1996 Non-Qualified Employee Stock Purchase Plan - Plan
Information Statement dated June 26, 1997. (Incorporated by
reference to Exhibit 99.2 to Form S-8 of the company, File No.
333-16837.)
10.20 -- 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 the
Company filed October 28, 1997.)
10.21 -- Form of Agreement of Limited Partnership of Bay Countrybrook,
L.P., by and among Bay GP, Inc., the Company and certain other
defined Persons. (Incorporated by reference to Exhibit 10.5 to
Form 8-K/A of the Company filed July 5, 1996.)
10.22 -- 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 the Company filed October 28,
1997.)
10.23+ -- Promissory Note and Pledge and Security Agreement between the
Company and Samuel B. Fuller, dated June 15, 2000. (Filed
herewith.)
10.24 -- Indemnification Agreements between the Company and the
Directors of the Company (Incorporated by reference to Exhibit
10.39 to Form 10-K of the Company filed on March 31, 1999.)
10.25+ -- The Company's Officer Severance Plan. (Incorporated by
reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K filed on July 11, 2000.)
12.1 -- Statements re: Computation of Ratios.
21.1 -- Schedule of Subsidiaries of the Company.
23.1 -- Consent of Arthur Andersen LLP.
59
- ----------------
+ Management contract or compensatory plan or arrangement required to be filed
or incorporated by reference as an exhibit to this Form 10-K pursuant to Item
14(c) of Form 10-K.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
AVALONBAY COMMUNITIES, INC.
Date: March 21, 2001 By: /s/ RICHARD L. MICHAUX
---------------------------------------
Richard L. Michaux, Executive Chairman
of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 21, 2001 By: /s/ RICHARD L. MICHAUX
---------------------------------------
Richard L. Michaux, Executive Chairman
of the Board, Director (Principal
Executive Officer)
Date: March 21, 2001 By: /s/ THOMAS J. SARGEANT
---------------------------------------
Thomas J. Sargeant, Chief Financial
Officer and Executive VP (Principal
Financial and Accounting Officer)
Date: March 21, 2001 By: /s/ BRUCE A. CHOATE
---------------------------------------
Bruce A. Choate, Director
Date: March 21, 2001 By: /s/ MICHAEL A. FUTTERMAN
---------------------------------------
Michael A. Futterman, Director
Date: March 21, 2001 By: /s/ JOHN J. HEALY, JR.
---------------------------------------
John J. Healy, Jr., Director
Date: March 21, 2001 By: /s/ GILBERT M. MEYER
---------------------------------------
Gilbert M. Meyer, Director
Date: March 21, 2001 By: /s/ BRENDA J. MIXSON
---------------------------------------
Brenda J. Mixson, Director
Date: March 21, 2001 By: /s/ LANCE R. PRIMIS
---------------------------------------
Lance R. Primis, Director
Date: March 21, 2001 By: /s/ ALLAN D. SCHUSTER
---------------------------------------
Allan D. Schuster, Director
61
Report of Independent Public Accountants
To the Board of Directors and Stockholders of
AvalonBay Communities, Inc.:
We have audited the accompanying consolidated balance sheets of AvalonBay
Communities, Inc. (a Maryland corporation, the "Company") and subsidiaries as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years
ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AvalonBay
Communities, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The Schedule of Real Estate and Accumulated
Depreciation is presented for purposes of complying with the rules of the
Securities and Exchange Commission and is not a required part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/S/ ARTHUR ANDERSEN LLP
Vienna, Virginia
January 17, 2001
F-1
AVALONBAY COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
See accompanying notes to consolidated financial statements.
F-2
AVALONBAY COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
See accompanying notes to consolidated financial statements.
F-3
AVALONBAY COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except share data)
See accompanying notes to consolidated financial statements.
F-4
AVALONBAY COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
See accompanying notes to consolidated financial statements.
F-5
Supplemental disclosures of non-cash investing and financing activities (dollars
in thousands):
During the year ended December 31, 2000:
o 1,520 units of limited partnership in DownREIT partnerships, valued
at $60, were issued in connection with an acquisition for cash and
units pursuant to a forward purchase contract agreed to in 1997 with
an unaffiliated party.
o 304,602 units of limited partnership in DownREIT partnerships,
valued at $10,926, were redeemed for an equal number of shares of
the Company's common stock.
o Real estate assets valued at $5,394 were contributed to a limited
liability company in exchange for a 25% membership interest.
o Common and preferred dividends declared but not paid totaled
$47,572.
During the year ended December 31, 1999:
o 117,178 units of limited partnership in DownREIT partnerships,
valued at $4,614, were issued in connection with an acquisition for
cash and units pursuant to a forward purchase contract agreed to in
1997 with an unaffiliated party.
o 22,623 units of limited partnership in DownREIT partnerships, valued
at $868, were redeemed for an equal number of shares of the
Company's common stock.
o Common and preferred dividends declared but not paid totaled
$44,139.
During the year ended December 31, 1998:
o Avalon Properties, Inc. ("Avalon") merged into Bay Apartment
Communities ("Bay"), whereupon Avalon ceased to exist and Bay
legally succeeded to all of the assets and liabilities of Avalon. In
these financial statements, the merger was accounted for under the
purchase method of accounting. Bay, as the surviving legal entity,
adopted the historical financial statements of Avalon, and therefore
the historical financial statements for Avalon are presented prior
to the merger. Bay's assets were recorded in the historical
financial statements of Avalon, as of the date of the merger, at an
amount equal to Bay's debt outstanding at that time plus the value
of capital stock retained by the Bay stockholders, which
approximates fair value. As a result, the financial statements
presented reflect that, in connection with the merger, the following
was assumed or acquired: debt of $604,663; net other liabilities of
$25,239; cash and cash equivalents of $1,419; and minority interest
of $9,020.
o The Company assumed $10,400 of debt and issued 104,222 units of
limited partnership in DownREIT partnerships, valued at $3,851, in
connection with acquisitions.
o 6,818 units of limited partnership in DownREIT partnerships, valued
at $173, were redeemed for an equal number of shares of the
Company's common stock.
o 950,064 shares of Series A Preferred Stock and 405,022 shares of
Series B Preferred Stock were converted into an aggregate of
1,355,086 shares of Common Stock.
o Common and preferred dividends declared but not paid totaled
$43,323.
F-6
AVALONBAY COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. Organization and Significant Accounting Policies
Organization and Recent Developments
AvalonBay Communities, Inc. (the "Company," which term is often used to refer to
AvalonBay Communities, Inc. together with its subsidiaries) is a Maryland
corporation that has elected to be taxed as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended. The Company
focuses on the ownership and operation of upscale apartment communities in high
barrier-to-entry markets of the United States. These markets include Northern
and Southern California and selected markets in the Mid-Atlantic, Northeast,
Midwest and Pacific Northwest regions of the country.
At December 31, 2000, the Company owned or held a direct or indirect ownership
interest in 126 operating apartment communities containing 37,147 apartment
homes in twelve states and the District of Columbia, of which four communities
containing 2,211 apartment homes were under reconstruction. The Company also
owned twelve communities with 3,484 apartment homes under construction and
rights to develop an additional 33 communities that, if developed as expected,
will contain an estimated 9,091 apartment homes.
During the year ended December 31, 2000:
o The Company acquired six communities containing 1,627 apartment
homes for an acquisition price of approximately $200,500. Five of
the communities were acquired pursuant to a forward purchase
contract agreed to in 1997 with an unaffiliated party.
o The Company completed development of six communities, containing
1,209 apartment homes for a total investment of approximately
$168,700.
o The Company completed redevelopment of four communities, containing
1,455 apartment homes for a total investment in redevelopment (i.e.,
excluding acquisition costs) of $40,300.
As further discussed in Note 7, "Communities Held for Sale", the Company has
adopted a strategy of funding a portion of the Company's development and
redevelopment activities with the proceeds available from the disposition of
certain assets in markets that do not meet the Company's long-term strategic
direction. In connection with this strategy, the Company sold eight communities
in 2000 containing 1,932 apartment homes for net proceeds of approximately
$124,392. During 1999, the Company sold 16 communities containing 4,464
apartment homes and a participating mortgage note secured by a community for net
proceeds of approximately $280,918.
The Company is the surviving corporation from the merger (the "Merger") of Bay
Apartment Communities, Inc. ("Bay") and Avalon Properties, Inc. ("Avalon") on
June 4, 1998, where Avalon shareholders received a 0.7683 share of common stock
of the Company for each share owned of Avalon common stock. The Merger was
accounted for under the purchase method of accounting, with the historical
financial statements for Avalon presented prior to the Merger. At that time,
Avalon ceased to legally exist, and Bay as the surviving legal entity adopted
the historical financial statements of Avalon. Consequently, Bay's assets were
recorded in the historical financial statements of Avalon at an amount equal to
Bay's debt outstanding at that time plus the value of capital stock retained by
the Bay stockholders, which approximates fair value. In connection with the
Merger, the Company changed its name from Bay Apartment Communities, Inc. to
AvalonBay Communities, Inc.
F-7
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned partnerships and certain joint venture partnerships
in addition to subsidiary partnerships structured as DownREITs. All intercompany
balances and transactions have been eliminated in consolidation.
In each of the partnerships structured as DownREITs, either the Company or one
of the Company's wholly-owned subsidiaries is the general partner, and there are
one or more limited partners whose interest in the partnership is represented by
units of limited partnership interest. For each DownREIT partnership, limited
partners are entitled to receive distributions before any distribution is made
to the general partner. Although the partnership agreements for each of the
DownREITs are different, generally the distributions per unit paid to the
holders of units of limited partnership interests approximate the Company's
current common stock dividend per share. Each DownREIT partnership has been
structured so that it is unlikely the limited partners will be entitled to a
distribution greater than the initial distribution provided for in the
partnership agreement. The holders of units of limited partnership interest have
the right to present each unit of limited partnership interest for redemption
for cash equal to the fair market value of a share of the Company's common stock
on the date of redemption. In lieu of a cash redemption of a limited partner's
unit, the Company may elect to acquire any unit presented for redemption for one
share of common stock.
The Company has minority interest investments in three technology companies.
Realeum, Inc. ("Realeum"), Broadband Residential ("Broadband"), and Viva Group,
Inc. ("Viva") are involved in the development and deployment of property
management and leasing automation systems, broadband communications services for
multifamily communities, and web based leasing software, respectively. The
Company accounts for these unconsolidated entities in accordance with Accounting
Principles Board ("APB") Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock." The Company applies the equity method of
accounting to its investments in Realeum and the cost method of accounting to
its investments in Broadband and Viva. As of December 31, 2000, the aggregate
investment in Realeum, BroadBand and Viva is $3,600.
Revenue Recognition
Rental income related to leases is recognized when due from residents. In
accordance with the Company's standard lease terms, rental payments are
generally due on a monthly basis.
Real Estate
Significant expenditures which improve or extend the life of an asset are
capitalized. The operating real estate assets are stated at cost and consist of
land, buildings and improvements, furniture, fixtures and equipment, and other
costs incurred during their development, redevelopment and acquisition.
Expenditures for maintenance and repairs are charged to operations as incurred.
The capitalization of costs during the development of assets (including interest
and related loan fees, property taxes and other direct and indirect costs)
begins when active development commences and ends when the asset is delivered
and a final certificate of occupancy is issued. Cost capitalization during
redevelopment of apartment homes (including interest and related loan fees,
property taxes and other direct and indirect costs) begins when an apartment
home is taken out-of-service for redevelopment and ends when the apartment home
redevelopment is completed and the apartment home is placed in-service. The
accompanying consolidated financial statements include a charge to expense for
unrecoverable deferred development costs related to pre-development communities
that are unlikely to be developed.
Depreciation is calculated on buildings and improvements using the straight-line
method over their estimated useful lives, which range from seven to thirty
years. Furniture, fixtures and equipment are generally depreciated using the
straight-line method over their estimated useful lives, which range from three
years (primarily computer related equipment) to seven years.
F-8
Lease terms for apartment homes are generally one year or less. Rental income
and operating costs incurred during the initial lease-up or post-redevelopment
lease-up period are fully recognized as they accrue.
If there is an event or change in circumstance that indicates an impairment in
the value of a community, the Company's policy is to assess any impairment in
value by making a comparison of the current and projected operating cash flows
of the community over its remaining useful life, on an undiscounted basis, to
the carrying amount of the community. If such carrying amounts are in excess of
the estimated projected operating cash flows of the community, the Company would
recognize an impairment loss equivalent to an amount required to adjust the
carrying amount to its estimated fair market value. The Company has not
recognized an impairment loss in 2000, 1999 or 1998 on any of its real estate.
Income Taxes
The Company elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended, for the year ended December 31, 1994 and has not revoked such
election. A corporate REIT is a legal entity which holds real estate interests
and, if certain conditions are met (including but not limited to the payment of
a minimum level of dividends to stockholders), the payment of federal and state
income taxes at the corporate level is avoided or reduced. Management believes
that all such conditions for the avoidance of taxes have been met for the
periods presented. Accordingly, no provision for federal and state income taxes
has been made.
The following summarizes the tax components of the Company's common and
preferred dividends declared for the years ended December 31, 2000, 1999 and
1998:
(1) Information presented for Bay for periods prior to June 4, 1998 is
unaudited.
F-9
Deferred Financing Costs
Deferred financing costs include fees and costs incurred to obtain debt
financing and are amortized on a straight-line basis, which approximates the
effective interest method, over the shorter of the term of the loan or the
related credit enhancement facility, if applicable. Unamortized financing costs
are written-off when debt is retired before the maturity date. Accumulated
amortization on deferred financing costs were $8,200 and $7,156 on December 31,
2000 and 1999, respectively.
Cash, Cash Equivalent and Cash in Escrow
Cash and cash equivalents include all cash and liquid investments with an
original maturity of three months or less from the date acquired. The majority
of the Company's cash, cash equivalents, and cash in escrows is held at major
commercial banks.
Earnings per Common Share
In accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share", basic earnings per share for the years
ended December 31, 2000, 1999 and 1998 is computed by dividing earnings
available to common shares (net income less preferred stock dividends) by the
weighted average number of shares outstanding during the period. Other
potentially dilutive common shares, and the related impact to earnings, are
considered when calculating earnings per share on a diluted basis. The Company's
earnings per common share for the years ended December 31, 2000, 1999 and 1998
are as follows:
Certain options to purchase shares of common stock in the amount of 7,500,
2,282,192 and 2,643,190 were outstanding during 2000, 1999 and 1998,
respectively, but were not included in the computation of diluted earnings per
share because the options' exercise prices were greater than the average market
price of the common shares.
F-10
Non-recurring Charges
In February 1999, the Company announced certain management changes including (i)
the departure of three senior officers who became entitled to severance benefits
in accordance with the terms of their employment agreements with the Company
dated as of March 9, 1998 and (ii) elimination of duplicate accounting functions
and related employee departures. The Company recorded a non-recurring charge of
$16,076 in the first quarter of 1999 related to the expected costs associated
with this management realignment and certain related organizational adjustments.
The non-recurring charge consisted of $15,476 in severance benefits, $250
related to costs to eliminate duplicate accounting functions and $350 in legal
fees. As of December 31, 1999, the Company had a remaining liability of
approximately $1,555 relating to these charges. All payments were made prior to
December 31, 2000.
The non-recurring charge also includes Year 2000 remediation costs of $706 that
were incurred for the year ended December 31, 1999.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS No. 133," and SFAS No. 138,
"Accounting for Certain Instruments and Certain Hedging Activities, an amendment
of Statement 133," is effective for the Company on January 1, 2001. SFAS No.
133, as amended, establishes accounting and reporting standards requiring that
every derivative instrument be recorded on the balance sheet as either an asset
or liability measured at its fair value. SFAS No. 133 also requires that a
change in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. For the Company's cash flow hedge
transactions, changes in the fair value of the derivative instrument will be
reported in other comprehensive income. The ineffective portion of all hedges
will be recognized in current period earnings. The Company adopted SFAS No. 133
on January 1, 2001 and recorded a cumulative effect adjustment of approximately
a $6 million gain in accumulated other comprehensive income to recognize all
derivative instruments at fair value. The Company does not expect a material
impact of adoption on its earnings.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB No.
101 provides guidance on applying generally accepted accounting principles to
revenue recognition issues in financial statements. The Company adopted SAB No.
101 effective with the March 31, 2000 reporting period, as required, and the
adoption did not have a material effect on the Company's consolidated financial
statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") requires management to make certain estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. Actual results could differ from those
estimates.
Reclassifications
Certain reclassifications have been made to amounts in prior years' financial
statements to conform with current year presentations.
2. Merger Between Bay and Avalon
As discussed in Note 1, the Company is the surviving corporation from the Merger
of Bay and Avalon on June 4, 1998. The following unaudited pro forma information
has been prepared as if the Merger and related transactions had
F-11
occurred on January 1, 1998. The pro forma financial information is presented
for informational purposes only and is not necessarily indicative of what actual
results would have been had the Merger been consummated on January 1, 1998, nor
does it purport to represent the results of operations for future periods.
Year ended
(Unaudited)
-----------
12-31-98
Pro forma total revenue $449,085
========
Pro forma net income available
to common stockholders $111,114
========
Per common share:
Pro forma net income - basic $ 1.74
========
Pro forma net income - diluted $ 1.73
========
3. Interest Capitalized
Capitalized interest associated with communities under development or
redevelopment totaled $18,328, $21,888, and $14,724 for the years ended December
31, 2000, 1999 and 1998, respectively.
4. Mortgage Notes Payable, Unsecured Notes and Unsecured Credit Facility
The Company's mortgage notes payable, unsecured notes and unsecured credit
facility are summarized as follows:
Mortgage notes payable are collateralized by certain apartment communities and
mature at various dates from May 2001 through December 2036. The weighted
average interest rate of the Company's variable rate notes and unsecured credit
facility was 5.6% at December 31, 2000. The weighted average interest rate of
the Company's fixed rate notes (conventional and tax-exempt) was 7.0% and 6.9%
at December 31, 2000 and 1999, respectively.
F-12
The maturity schedule for the Company's unsecured notes consists of the
following:
Year of
maturity Principal Interest rate
-------- --------- -------------
2002 $ 100,000 7.375%
2003 $ 50,000 6.250%
$ 100,000 6.500%
2004 $ 125,000 6.580%
2005 $ 100,000 6.625%
$ 50,000 6.500%
2006 $ 150,000 6.800%
2007 $ 110,000 6.875%
2008 $ 50,000 6.625%
$ 150,000 8.250%
2009 $ 150,000 7.500%
2010 $ 200,000 7.500%
The Company's unsecured notes contain a number of financial and other covenants
with which the Company must comply, including, but not limited to, limits on the
aggregate amount of total and secured indebtedness the Company may have on a
consolidated basis and limits on the Company's required debt service payments.
Scheduled maturities of notes payable and unsecured notes are as follows for the
years ending December 31:
Year of Scheduled
maturity maturity
-------- --------
2001 $ 14,155
2002 103,342
2003 153,587
2004 152,812
2005 153,762
Thereafter 1,152,266
-----------
Total $ 1,729,924
===========
The Company has a $600,000 variable rate unsecured credit facility (the
"unsecured credit facility") with Morgan Guaranty Trust Company of New York,
Union Bank of Switzerland and Fleet National Bank serving as co-agents for a
syndicate of commercial banks. The unsecured credit facility bears interest at a
spread over the London Interbank Offered Rate ("LIBOR") based on rating levels
achieved on the Company's unsecured notes and on a maturity selected by the
Company. The current stated pricing is LIBOR plus 0.6% per annum (7.2% at
December 31, 2000). In addition, the unsecured credit facility includes a
competitive bid option (which allows banks that are part of the lender
consortium to bid to make loans to the Company at a rate that is lower than the
stated rate provided by the unsecured credit facility) for up to $400,000. The
Company is subject to certain customary covenants under the unsecured credit
facility, including, but not limited to, maintaining certain maximum leverage
ratios, a minimum fixed charges coverage ratio, minimum unencumbered assets and
equity levels and restrictions on paying dividends in amounts that exceed 95% of
the Company's Funds from Operations, as defined therein. The unsecured credit
facility matures in July 2001 and has two, one-year extension options. The first
extension is at the Company's sole election and the second extension requires
the banks' consent.
F-13
5. Stockholders' Equity
As of both December 31, 2000 and 1999, the Company had authorized for issuance
140,000,000 and 50,000,000 of Common and Preferred Stock, respectively.
Dividends on all series of issued Preferred Stock are cumulative from the date
of original issue and are payable quarterly in arrears on or before the 15th day
of each month as stated in the table below. None of the series of Preferred
Stock are redeemable prior to the date stated in the table below, but on or
after the stated date, may be redeemed for cash at the option of the Company in
whole or in part at a redemption price of $25 per share, plus all accrued and
unpaid dividends, if any. The series of Preferred Stock have no stated maturity
and are not subject to any sinking fund or mandatory redemptions. In addition,
the series of Preferred Stock are not convertible into any other securities of
the Company and may be redeemed solely from proceeds of other capital stock of
the Company, which may include shares of other series of preferred stock.
The Company also has 1,000,000 shares of Series E Junior Participating
Cumulative Preferred Stock authorized for issuance pursuant to the Company's
Shareholder Rights Agreement. As of December 31, 2000, there were no shares of
Series E Preferred Stock outstanding.
6. Investments in Unconsolidated Real Estate Joint Ventures
The Company accounts for investments in unconsolidated real estate entities in
accordance with APB Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock." The Company applies the equity method of
accounting to an investment in an entity if it has the ability to significantly
influence that entity. All other unconsolidated real estate investments are
recorded under the cost method of accounting.
At December 31, 2000, the Company's investments in unconsolidated real estate
joint ventures consisted of:
o a 50% limited liability company membership interest in a limited
liability company that owns the Falkland Chase community;
o a 49% general partnership interest in a partnership that owns the
Avalon Run community;
o a 50% limited liability company membership interest in a limited
liability company that owns the Avalon Grove community;
o a 25% limited liability company membership interest in a limited
liability company that owns the Avalon Terrace community.
F-14
The following is a combined summary of the financial position of these joint
ventures as of the dates presented.
(Unaudited)
----------------------
12-31-00 12-31-99
-------- --------
Assets:
Real estate, net $132,832 $ 94,644
Other assets 10,400 4,874
-------- --------
Total assets $143,232 $ 99,518
======== ========
Liabilities and partners' equity:
Mortgage notes payable $ 48,400 $ 26,000
Other liabilities 8,656 5,915
Partners' equity 86,176 67,603
-------- --------
Total liabilities and partners' equity $143,232 $ 99,518
======== ========
The following is a combined summary of the operating results of these joint
ventures for the years presented:
Year ended
(Unaudited)
------------------------------------
12-31-00 12-31-99 12-31-98
-------- -------- --------
Rental income $ 22,222 $ 20,781 $ 19,799
Other income 57 26 26
Operating and other expenses (6,110) (5,657) (5,591)
Mortgage interest expense (1,107) (773) (833)
Depreciation and amortization (3,202) (3,091) (3,044)
-------- -------- --------
Net income $ 11,860 $ 11,286 $ 10,357
======== ======== ========
The Company also holds a 25% limited liability company membership interest in
Avalon on the Sound, which is presented on a consolidated basis in the financial
statements in accordance with GAAP.
7. Communities Held for Sale
The Company has adopted a strategy of funding a portion of the Company's
development and redevelopment activities with the proceeds available from the
disposition of certain assets in markets that do not meet its long-term
strategic direction. In connection with this strategy, the Company solicits
competing bids from unrelated parties for individual assets, and considers the
sales price and tax ramifications of each proposal. In 1998, the Company sold
seven communities with a total of 2,039 apartment homes in connection with this
strategy. Similarly, the Company sold sixteen communities with a total of 4,464
apartment homes and a participating mortgage note secured by a community in
1999.
F-15
The communities sold during 2000 and the respective sales price and net proceeds
are summarized below:
The following unaudited pro forma information has been prepared as if the
communities sold in connection with the disposition strategy during 2000 and
1999 had been sold as of January 1, 1999. The pro forma financial information is
presented for informational purposes only and is not necessarily indicative of
what actual results would have been had the dispositions occurred as of January
1, 1999, nor does it purport to represent the results of operations for future
periods.
Year ended Year ended
12-31-00 12-31-99
(Unaudited) (Unaudited)
----------- -----------
Pro forma revenue $ 562,894 $ 463,905
=========== ===========
Pro forma net income available
to common stockholders $ 127,347 $ 71,459
=========== ===========
Per common share:
Pro forma net income - basic $ 1.92 $ 1.10
=========== ===========
Pro forma net income - diluted $ 1.89 $ 1.08
=========== ===========
Management intends to market additional communities for sale. However, there can
be no assurance that such assets will be sold, or that such sales will prove to
be beneficial to the Company. The assets targeted for sale include land,
buildings and improvements and furniture, fixtures and equipment, and are
recorded at the lower of cost or fair value less estimated selling costs. The
Company has not determined a need to recognize a write-down in its real estate
to arrive at net realizable value, although there can be no assurance that the
Company can sell these assets for amounts that equal or exceed its estimates of
net realizable value. At December 31, 2000 and 1999, total real estate, net of
accumulated depreciation, subject to sale totaled $208,118 and $164,758,
respectively. Certain individual assets are secured by mortgage indebtedness
which may be assumed by the purchaser or repaid by the Company from the net
sales proceeds.
The Company's consolidated statements of operations include net income of the
communities held for sale at December 31, 2000 of $11,568, $9,171, and $6,417
for the years ended December 31, 2000, 1999 and 1998, respectively.
F-16
8. Commitments and Contingencies
Presale Commitments
The Company occasionally enters into forward purchase commitments with unrelated
third parties, which allows the Company to purchase communities upon completion
of construction. As of December 31, 2000, the Company has an agreement to
purchase four communities with an estimated 1,301 homes for an aggregate
purchase price of approximately $199,200. The Company expects these acquisitions
to close at different times through 2002. However, there can be no assurance
that such acquisitions will be consummated on the terms currently contemplated
or at all, or on the schedule currently contemplated. As of December 31, 2000,
the Company had provided interim construction financing of $123,400 for these
communities, leaving the remaining balance to fund under these commitments of
$75,800.
Insured Fire at Development Community
During 2000, a fire occurred at one of the Company's development communities,
which was under construction and unoccupied at the time. The book value of the
destroyed assets was reduced to zero from a balance of approximately $13,900 at
the time of the fire. The Company has property damage and business interruption
insurance and is currently preparing its insurance claim for the cost of
replacing the destroyed assets as well as for business interruption losses. At
December 31, 2000, the Company had a remaining insurance receivable balance of
$6,900 which was equal to the value of the destroyed assets less insurance
recoveries of $7,000. The Company does not anticipate this event will have a
material adverse impact on the financial condition or results of operations of
the Company.
Employment Agreements and Arrangements
The Company has employment agreements with four executive officers that it
entered into in 1998. In addition, during 2000 and 2001, four other senior
officers entered into employment agreements, which are generally similar in
structure to those entered into in 1998 but which do not provide for the same
level of severance payments. The employment agreements provide for severance
payments in the event of a termination of employment (except for a termination
by the Company with cause or a voluntary termination by the employee). The
initial term of these agreements ends on dates that vary between June 2001 and
February 2004. The employment agreements provide for one-year automatic renewals
after the initial term unless an advance notice of non-renewal is provided by
either party. Upon a change in control, the agreements provide for an automatic
extension of up to three years. The employment agreements provide for base
salary and incentive compensation in the form of cash awards, stock options and
stock grants subject to the discretion of, and attainment of performance goals
established by, the Compensation Committee of the Board of Directors.
The 1998 employment agreements also provide that base salary may be increased
during the initial term in amounts determined by the Compensation Committee, and
that during any renewal term base salary increases will be equal to the greater
of 5% of the prior year's base salary, a factor based on increases in the
consumer price index, or an amount determined at the discretion of the
Compensation Committee.
In May 2000, a senior executive of the Company retired from his management
position. Upon retirement, the former officer entered into a three year
consulting and non-compete agreement under which the company is paying him an
annual fee of approximately $1,400.
During the fourth quarter of 1999, the Company adopted an Officer Severance
Program (the "Program") for the benefit of those officers of the Company who do
not have employment agreements. Under the Program, in the event an officer who
is not otherwise covered by a severance arrangement is terminated without cause
in connection with a change in control (as defined) of the Company, such officer
will generally receive a cash lump sum payment equal to the amount of such
officer's base salary and cash bonus.
F-17
Legal 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 the final outcome of such matters will not have a material
adverse effect on the financial position or results of operations of the
Company.
9. Value of Financial Instruments
The Company has historically used interest rate swap agreements (the "Swap
Agreements") to reduce the impact of interest rate fluctuations on its variable
rate tax-exempt bonds. The Company has not entered into any interest rate hedge
agreements or treasury locks for its conventional unsecured debt. The Swap
Agreements are not held for trading or other speculative purposes. As of
December 31, 2000, the effect of these Swap Agreements is to fix $176,659 of the
Company's tax-exempt debt at an average interest rate of 6.1% with an average
maturity of six years.
The off-balance sheet risk in these contracts includes the risk of a
counterparty not performing under the terms of the contract. The counterparties
to these contracts are major financial institutions with AAA credit ratings by
the Standard & Poor's Ratings Group. The Company monitors the credit ratings of
counterparties and the amount of the Company's debt subject to swap agreements
with any one party. Therefore, the Company believes the likelihood of realizing
material losses from counterparty nonperformance is remote.
Cash and cash equivalent balances are held with various financial institutions
and may at times exceed the applicable Federal Deposit Insurance Corporation
limit. The Company monitors credit ratings of these financial institutions and
the concentration of cash and cash equivalent balances with any one financial
institution and believes the likelihood of realizing material losses from the
excess of cash and cash equivalent balances over insurance limits is remote.
The following estimated fair values of financial instruments were determined by
management using available market information and established valuation
methodologies, including discounted cash flows. Accordingly, the estimates
presented are not necessarily indicative of the amounts the Company could
realize on disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
o Cash equivalents, rents receivable, accounts payable and accrued
expenses, and other liabilities are carried at their face amounts,
which reasonably approximate their fair values.
o The Company's unsecured credit facility with an aggregate carrying
value of $0 and $178,600 at December 31, 2000 and 1999,
respectively, approximates fair value.
o Bond indebtedness and notes payable with an aggregate carrying value
of $1,729,924 and $1,415,047 had an estimated aggregate fair value
of $1,765,402 and $1,346,288 at December 31, 2000 and 1999,
respectively.
10. Segment Reporting
The Company's reportable operating segments include Stable Communities,
Developed Communities and Redeveloped Communities:
o Stable Communities are communities that have attained stabilized
occupancy levels and operating costs since the beginning of the
prior calendar year or were acquired as stabilized after the
beginning of the previous calendar year and remained stabilized
throughout the end of the current calendar year. Stable Communities
do not include
F-18
communities where planned redevelopment or development activities
have not yet commenced. The primary financial measure for this
business segment is Net Operating Income ("NOI"), which represents
total revenue less operating expenses and property taxes.
o Developed Communities are communities which completed development
and attained stabilized occupancy and expense levels during the
prior calendar year of presentation. The primary financial measure
for this business segment is Operating Yield (defined as NOI divided
by total capitalized costs).
o Redeveloped Communities are communities that completed redevelopment
and attained stabilized occupancy and expense levels during the
prior calendar year of presentation. The primary financial measure
for this business segment is Operating Yield.
Other communities owned by the Company which are not included in the above
segments are communities that were under development, redevelopment or lease-up
at any point in time during the applicable calendar year. The primary
performance measure for these assets depends on the stage of development or
redevelopment of the community. While under development or redevelopment,
Management monitors actual construction costs against budgeted costs as well as
economic occupancy. While under lease-up, the primary performance measures for
these assets are projected Operating Yield as defined above, lease-up pace
compared to budget and rent levels compared to budget.
Net Operating Income for each community is generally equal to that community's
contribution to Funds from Operations ("FFO"), except that interest expense
related to indebtedness secured by an individual community and depreciation and
amortization on non-real estate assets are not included in the community's NOI
although such expenses decrease the Company's consolidated net income and FFO.
The segments are classified based on the individual community's status as of the
beginning of the given calendar year. Therefore, each year the composition of
communities within each business segment is adjusted. Accordingly, the amounts
between years are not directly comparable.
The accounting policies applicable to the operating segments described above are
the same as those described in the summary of significant accounting policies.
F-19
(1) Operating Yield for the year ended December 31, 1998 is not
comparable to the years ended December 31, 2000 and 1999 due to the
effects of the merger of Avalon into Bay during 1998.
F-20
Operating expenses as reflected on the Consolidated Statements of Operations
include $28,111, $22,786 and $18,264 for the years ended December 31, 2000, 1999
and 1998, respectively, of property management overhead costs that are not
allocated to individual communities. These costs are not reflected in NOI as
shown in the above tables. The amount reflected for "Communities held for sale"
on the Consolidated Balance Sheets is net of $19,965 and $18,141 of accumulated
depreciation as of December 31, 2000 and 1999, respectively.
In June 1998, the Company completed the Merger. For comparative purposes, the
1998 segment information for the Company is presented below on a pro forma basis
(unaudited) assuming the Merger had occurred as of January 1, 1998.
11. Stock-Based Compensation Plans
The Company has adopted the 1994 Stock Incentive Plan, as amended and restated
(the "1994 Plan"), for the purpose of encouraging and enabling the Company's
officers, associates and directors to acquire a proprietary interest in the
Company and as a means of aligning management and stockholder interests and as a
retention incentive for key associates. Individuals who are eligible to
participate in the 1994 Plan include officers, other associates, outside
directors and other key persons of the Company and its subsidiaries who are
responsible for or contribute to the management, growth or profitability of the
Company and its subsidiaries. The 1994 Plan authorizes (i) the grant of stock
options that qualify as incentive stock options under Section 422 of the
Internal Revenue Code, (ii) the grant of stock options that do not so qualify,
(iii) grants of shares of restricted and unrestricted Common Stock, (iv) grants
of deferred stock awards, (v) performance share awards entitling the recipient
to acquire shares of Common Stock and (vi) dividend equivalent rights.
Under the 1994 Plan, a maximum of 2,500,000 shares of Common Stock, plus 9.9% of
any net increase in the total number of shares of Common Stock actually
outstanding from time to time after April 13, 1998, may be issued.
Notwithstanding the foregoing, the maximum number of shares of stock for which
Incentive Stock Options may be issued under the 1994 Plan shall not exceed
2,500,000 and no awards shall be granted under the 1994 Plan after April 13,
2008. For purposes of this limitation, shares of Common Stock which are
forfeited, canceled and reacquired by the Company, satisfied without the
issuance of Common Stock or otherwise terminated (other than by exercise) shall
be added back to the shares of Common Stock available for issuance under the
1994 Plan. Stock Options with respect to no more than 300,000 shares of stock
may be granted to any one individual participant during any one calendar year
period. Options granted to officers and employees under the 1994 Plan vest over
periods determined by the Compensation Committee of the Board of Directors and
expire ten years from the date of grant. Options granted to non-employee
directors under the 1994 Plan are subject to accelerated vesting under certain
limited circumstances and become exercisable on the first anniversary of the
date of grant and expire ten years from the date of grant. Restricted stock
granted to officers and employees under the 1994 Plan vest over periods
determined by the Compensation Committee of the Board of Directors which is
generally four years, with 20% vesting immediately on the grant date and the
remaining 80% vesting equally over the next four years from the date of grant.
Restricted stock granted to non-employee directors vests 20% on the date of
issuance and 20% on each of the first four anniversaries of the date of
issuance.
F-21
Information with respect to stock options granted under the 1994 Plan is as
follows:
Weighted
average
exercise price
Shares per share
---------- --------------
Options outstanding, December 31, 1997 (1) 1,070,374 $27.02
Exercised (164,924) 21.71
Granted 1,225,132 36.81
Forfeited (244,500) 35.25
---------- ------
Options outstanding, December 31, 1998 (1) 1,886,082 $32.74
Exercised (311,989) 25.44
Granted 993,084 32.24
Forfeited (533,903) 36.25
---------- ------
Options outstanding, December 31, 1999 2,033,274 $32.63
Exercised (172,376) 34.78
Granted 631,795 34.56
Forfeited (66,736) 33.50
---------- ------
Options outstanding, December 31, 2000 2,425,957 $32.96
========== ======
Options exercisable:
December 31, 1998 656,925 $27.26
========== ======
December 31, 1999 682,110 $30.33
========== ======
December 31, 2000 1,183,551 $32.05
========== ======
(1) Information presented for Bay for periods prior to June 4, 1998 is
unaudited.
F-22
The following table summarizes information concerning currently outstanding and
exercisable options:
Options to purchase 3,123,713, 3,637,724 and 4,488,189 shares of Common Stock
were available for grant under the 1994 Plan at December 31, 2000, 1999 and
1998, respectively.
Before the Merger, Avalon had adopted its 1995 Equity Incentive Plan (the
"Avalon 1995 Incentive Plan"). The Avalon 1995 Incentive Plan authorized the
grant of (i) stock options that qualified as incentive stock options under
Section 422 of the Internal Revenue Code, (ii) stock options that did not so
qualify, (iii) shares of restricted and unrestricted common stock, (iv) shares
of unrestricted common stock and (v) dividend equivalent rights.
Under the Avalon 1995 Incentive Plan, a maximum number of 3,315,054 shares (or
2,546,956 shares as adjusted for the Merger) of common stock were issuable, plus
any shares of common stock represented by awards under Avalon's 1993 Stock
Option and Incentive Plan (the "Avalon 1993 Plan") that were forfeited,
canceled, reacquired by Avalon, satisfied without the issuance of common stock
or otherwise terminated (other than by exercise). Options granted to officers,
non-employee directors and associates under the Avalon 1995 Incentive Plan
generally
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vested over a three-year term, expire ten years from the date of grant and are
exercisable at the market price on the date of grant.
In connection with the Merger, the exercise prices and the number of options
under the Avalon 1995 Incentive Plan and the Avalon 1993 Plan were adjusted to
reflect the equivalent Bay shares and exercise prices based on the 0.7683 share
conversion ratio used in the Merger. Officers, non-employee directors and
associates with Avalon 1995 Incentive Plan options may exercise their adjusted
number of options for the Company's Common Stock at the adjusted exercise price.
Information with respect to stock options granted under the Avalon 1995
Incentive Plan and the Avalon 1993 Plan is as follows:
Weighted
average
exercise price
Shares per share
---------- --------------
Options outstanding, December 31, 1997 1,703,348 $33.01
Exercised (49,375) 36.12
Granted 464,227 37.60
Forfeited (65,946) 38.00
---------- ------
Options outstanding, December 31, 1998 2,052,254 $34.05
Exercised (172,977) 26.97
Granted -- --
Forfeited (50,940) 37.61
---------- ------
Options outstanding, December 31, 1999 1,828,337 $34.63
Exercised (327,582) 28.65
Granted -- --
Forfeited (16,410) 35.84
---------- ------
Options outstanding, December 31, 2000 1,484,345 $35.94
========== ======
Options exercisable:
December 31, 1998 1,014,530 $30.26
========== ======
December 31, 1999 1,268,520 $33.22
========== ======
December 31, 2000 1,313,219 $35.71
========== ======
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The following table summarizes information concerning currently outstanding and
exercisable options under the Avalon 1995 Incentive Plan and the Avalon 1993
Plan:
As of June 4, 1998, the date of the Merger, options and other awards ceased to
be granted under the Avalon 1993 Plan or the Avalon 1995 Incentive Plan.
Accordingly, there were no options to purchase shares of Common Stock available
for grant under the Avalon 1995 Incentive Plan at December 31, 2000, 1999 or
1998.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its Plans.
Accordingly, no compensation expense has been recognized for the stock option
portion of the stock-based compensation plan.
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Had compensation expense for the Company's stock option plan been determined
based on the fair value at the grant date for awards under the Plan consistent
with the methodology prescribed under SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income and earnings per share would have been
reduced to the following pro forma amounts (unaudited):
The fair value of the options granted during 2000 is estimated at $3.76 per
share on the date of grant using the Black-Scholes option pricing model with the
following assumptions: dividend yield of 6.51%, volatility of 15.93%, risk-free
interest rates of 6.61%, actual number of forfeitures, and an expected life of
approximately 3 years. The fair value of the options granted during 1999 is
estimated at $3.40 per share on the date of grant using the Black-Scholes option
pricing model with the following assumptions: dividend yield of 6.10%,
volatility of 17.04%, risk free interest rates of 5.54%, actual number of
forfeitures, and an expected life of approximately 3 years. The fair value of
the options granted during 1998 is estimated at $3.72 per share on the date of
grant using the Black-Scholes option pricing model with the following
assumptions: dividend yield of 5.96%, volatility of 16.77%, risk free interest
rates of 5.55%, actual number of forfeitures, and an expected life of
approximately 3 years.
In connection with the Merger, the Company adopted the 1996 Non-Qualified
Employee Stock Purchase Plan, as amended and restated (the "1996 ESP Plan"). The
primary purpose of the 1996 ESP Plan is to encourage Common Stock ownership by
eligible directors, officers and associates (the "Participants") in the belief
that such ownership will increase each Participant's interest in the success of
the Company. Until January 1, 2000, the 1996 ESP Plan provided for two purchase
periods per year. A purchase period was a six month period beginning each
January 1 and July 1 and ending each June 30 and December 31, respectively.
Starting January 1, 2000, there is one purchase period per year, which begins
May 1 and ends October 31. Participants may contribute portions of their
compensation during a purchase period and purchase Common Stock at the end
thereof. One million shares of Common Stock are reserved for issuance under the
1996 ESP Plan. Participation in the 1996 ESP Plan entitles each Participant to
purchase Common Stock at a price which is equal to the lesser of 85% of the
closing price for a share of stock on the first day of such purchase period or
85% of the closing price on the last day of such purchase period. The Company
issued 34,055, 35,408 and 23,396 shares under the 1996 ESP Plan for 2000, 1999
and 1998, respectively.
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12. Quarterly Financial Information (Unaudited)
The following summary represents the quarterly results of operations for the
years ended December 31, 2000 and 1999:
13. Subsequent Events (Unaudited)
In January 2001, the Company became a member of Constellation Real Technologies
LLC, an entity formed by a number of real estate investment trusts and real
estate operating companies for the purpose of investing in multi-sector real
estate technology opportunities. The Company's capital commitment to
Constellation Real Technologies is $4,000.
In February 2001, the Company announced certain management changes including the
promotion of Bryce Blair to chief executive officer and the departure of another
executive. The Company expects to record a non-recurring charge in the first
quarter of 2001 relating to the departure of this executive of approximately
$2,000.
During February 2001, the Company acquired Avalon Wynhaven pursuant to the terms
of a forward purchase contract agreed to in 1997 with an unaffiliated party.
This community containing 333 apartment homes is located in the Seattle,
Washington area, and was acquired for approximately $51,909.
During February 2001, the Company sold Crossbrook, a 226 apartment home
community located in the San Francisco, California area. The net proceeds of
approximately $14,532 were invested in cash equivalents and will ultimately be
invested in development and redevelopment.
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SCHEDULE III
AVALONBAY COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2000
(Dollars in thousands)
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AVALONBAY COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2000
(Dollars in thousands)
F-29
AVALONBAY COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2000
(Dollars in thousands)
F-30
AVALONBAY COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2000
(Dollars in thousands)
F-31
AVALONBAY COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2000
(Dollars in thousands)
Depreciation of AvalonBay Communities, Inc. building, improvements, upgrades and
furniture, fixtures and equipment (FF&E) is calculated over the following useful
lives, on a straight line basis:
Building - 30 years
Improvements, upgrades and FF&E - not to exceed 7 years
The aggregate cost of total real estate for Federal income tax purposes was
approximately $4.5 billion at December 31, 2000.
The changes in total real estate for the years ended December 31, 2000, 1999 and
1998 are as follows:
The changes in accumulated depreciation for the years ended December 31, 2000,
1999 and 1998 are as follows:
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