10-K: Annual report pursuant to Section 13 and 15(d)
Published on March 1, 2010
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
Commission file number 1-12672
AVALONBAY COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
Maryland (State or other jurisdiction of incorporation or organization) |
77-0404318 (I.R.S. Employer Identification No.) |
2900 Eisenhower Avenue, Suite 300
Alexandria, Virginia 22314
(Address of principal executive office)
Alexandria, Virginia 22314
(Address of principal executive office)
(703) 329-6300
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share | New York Stock Exchange | |
(Title of each class) | (Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes o No þ
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 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes þ No o
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 registrants 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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No þ
The aggregate market value of the registrants Common Stock, par value $.01 per share, held by
nonaffiliates of the registrant, as of June 30, 2009 was $4,435,004,264.
The number of shares of the registrants Common Stock, par value $.01 per share, outstanding as of
January 31, 2010 was 81,546,465.
Documents Incorporated by Reference
Portions of AvalonBay Communities, Inc.s Proxy Statement for the 2010 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.
TABLE OF CONTENTS
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 included in this Form 10-K. You should also review Item 1a., Risk
Factors, for a discussion of various risks that could adversely affect us.
ITEM 1. | BUSINESS |
General
AvalonBay Communities, Inc. (the Company, which term, unless the context otherwise requires,
refers to AvalonBay Communities, Inc. together with its subsidiaries) is a Maryland corporation
that has elected to be treated as a real estate investment trust, (REIT), for federal income tax
purposes. We engage in the development, redevelopment, acquisition, ownership and operation of
multifamily communities in high barrier to entry markets of the United States. These barriers to
entry generally include a difficult and lengthy entitlement process with local jurisdictions and
dense urban or suburban areas where zoned and entitled land is in limited supply. Our markets are
located in New England, the New York/New Jersey metro area, the Washington DC Metro area, the
Midwest, the Pacific Northwest, and the Northern and Southern California regions of the United
States. We focus on these markets because we believe that over the long-term, a limited new supply
of apartment homes and lower housing affordability in these markets will result in higher growth in
cash flows relative to other markets.
At January 31, 2010, we owned or held a direct or indirect ownership interest in:
| 164 operating apartment communities containing 47,631 apartment homes in ten states and the District of Columbia, of which, 140 were consolidated communities containing 42,108 apartment homes, three communities containing 983 apartment homes were held by joint ventures in which we own an interest, and 21 communities containing 4,540 apartment homes were owned by the Funds (as defined below). Seven of the consolidated communities containing 2,615 apartment homes were under redevelopment, as discussed below; |
| seven communities under construction that are expected to contain an aggregate of 2,438 apartment homes when completed; and |
| rights to develop an additional 28 communities that, if developed in the manner expected, will contain an estimated 7,180 apartment homes. |
We generally obtain ownership in an apartment community by developing a new community on vacant
land or by acquiring an existing community. In selecting sites for development or acquisition, we
favor locations that are near expanding employment centers and convenient to transportation,
recreation areas, entertainment, shopping and dining.
Our consolidated real estate investments consist of the following reportable segments: Established
Communities, Other Stabilized Communities and Development/Redevelopment Communities. Established
Communities are generally operating communities that were owned and had stabilized occupancy and
operating expenses as of the beginning of the prior year such that year-over-year comparisons are
meaningful. Other Stabilized Communities are generally all other operating communities that have
stabilized occupancy and operating expenses during the current year, but that had not achieved
stabilization as of the beginning of the prior year such that year-over-year comparisons are not
meaningful as well as communities that are planned for disposition during the current year.
Development/Redevelopment Communities consist of communities that are under construction,
communities where substantial redevelopment is in progress or is planned to begin during the
current year and communities under lease-up. A more detailed description of these segments and
other related information can be found in Note 9, Segment Reporting, of the Consolidated
Financial Statements set forth in Item 8 of this report.
Our principal financial goal is to increase long-term stockholder value through the development,
acquisition, operation and, when appropriate, disposition of apartments in our markets. To help
fulfill this goal, we regularly (i) monitor our investment allocation by geographic market and
product type, (ii) develop, redevelop and acquire an interest in apartment communities in high barrier to entry markets with growing or high potential
for demand and
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high for-sale housing costs, (iii) selectively sell apartment communities that no
longer meet our long-term strategy or when opportunities are presented to realize a portion of the
value created through our investment and redeploy the proceeds from those sales, and (iv) endeavor
to maintain a capital structure that is aligned with our business risks with a view to maintaining
continuous access to cost-effective capital. Our time-tested strategy is to be leaders in customer insight, market research and capital allocation, delivering a range of multifamily offerings tailored to serve the needs of the most attractive customer segments in the best-performing US submarkets. A substantial majority of our current communities are
upscale, which generally command among the highest rents in their markets. However, we also pursue
the ownership and operation of apartment communities that target a variety of customer segments and
price points, consistent with our goal of offering a broad range of products and services.
During the three years ended December 31, 2009, excluding activity for the Funds (as defined
below), we acquired one apartment community. This communitys financial results are consolidated
for financial reporting purposes. During the same three-year period, excluding dispositions in
which we retained an ownership interest, we disposed of 19 apartment communities, disposed of one
investment in a real estate joint venture and completed the development of 30 apartment communities
and the redevelopment of 10 apartment communities.
During this period, we also realized gains from the sale of a community owned by AvalonBay Value
Added Fund, L.P. (Fund I), an institutional discretionary investment fund, which we manage and in
which we own a 15.2% interest. Fund I acquired communities with the objective of either
redeveloping or repositioning them, or taking advantage of market cycle timing and improved
operating performance. From its inception in March 2005 through the close of its investment period
in March 2008, Fund I acquired 20 communities. Fund I sold one community in 2008.
In September 2008, we formed AvalonBay Value Added Fund II, L.P. (Fund II), an additional
institutional discretionary investment fund which we manage and in which we currently own a 31.3%
interest. After adding additional equity commitments in the second quarter of 2009, a total of five
institutional investors and the Company collectively committed $400,000,000, of which our
commitment is $125,000,000. During 2009, Fund II acquired two communities. A more detailed
description of Fund I and Fund II (collectively, the Funds) and the related investment activity
can be found in the discussion under Item I., Business General Financing Strategy and Note
6, Investments in Real Estate Entities of the Consolidated Financial Statements in Item 8 of this
report.
During 2009, we sold seven real estate assets, resulting in a gain in accordance with U.S.
generally accepted accounting principles (GAAP) of $65,946,000.
A further discussion of our development, redevelopment, disposition, acquisition, property
management and related strategies follows.
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Development Strategy. We 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 rental 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 office
in Alexandria, Virginia, we also maintain regional offices, administrative offices or specialty
offices in or near the following cities:
| Boston, Massachusetts; |
| Chicago, Illinois; |
| Long Island, New York; |
| Los Angeles, California; |
| New York, New York; |
| Newport Beach, California; |
| San Francisco, California; |
| San Jose, California; |
| Seattle, Washington; |
| Shelton, Connecticut; |
| Virginia Beach, Virginia; and |
| Woodbridge, New Jersey. |
We will be moving our principal executive office to Arlington, Virginia by June 2010.
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 allow us to acquire the target site shortly before the start of construction, which
reduces development-related risks and preserves capital. However, as a result of competitive
market conditions for land suitable for development, we have sometimes acquired and held land prior
to construction for extended periods while entitlements are obtained, or acquired land zoned for
uses other than residential with the potential for rezoning. For further discussion of our
Development Rights, refer to Item 2., Communities in this report.
We generally act as our own general contractor and construction manager, except for certain
mid-rise and high-rise apartment communities where we may elect to use third-party general
contractors or construction managers. We generally perform these functions directly (although we
may use a wholly owned subsidiary) both for ourselves and for the joint ventures and partnerships
of which we are a member or a partner. We believe this enables us to achieve higher construction
quality, greater control over construction schedules and significant cost savings. Our development,
property management and construction teams monitor construction progress to ensure quality
workmanship and a smooth and timely transition into the leasing and operating phase.
During periods where competition for development land is more intense, we may acquire improved land
with existing commercial uses and rezone the site for multi-family residential use. During the
period that we hold these buildings for future development, the net revenue from these operations,
which we consider to be incidental, is accounted for as a reduction in our investment in the
development pursuit and not as net income. We have also participated, and may in the future
participate, in master planned or other large multi-use developments where we commit to build
infrastructure (such as roads) to be used by other participants or commit to act as construction
manager or general contractor in building structures or spaces for third parties (such as municipal
garages or parks). Costs we incur in connection with these activities may be accounted for as
additional invested capital in the community or we may earn fee income for providing these
services. Particularly with large scale, urban in-fill developments, we may engage in significant
environmental remediation efforts to prepare a site for construction.
Throughout this report, the term development is used to refer to the entire property development
cycle, including pursuit of zoning approvals, procurement of architectural and engineering designs
and the construction process. References to construction refer to the actual construction of the
property, which is only one element of the development cycle.
Redevelopment Strategy. When we undertake the redevelopment of a community, our goal is to
renovate and/or rebuild an existing community so that our total investment is generally below
replacement cost and the community is well positioned in the market to achieve attractive returns
on our capital. We have established a dedicated group
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of associates and procedures to control 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 quality design and workmanship and a
smooth and timely transition into the lease-up and restabilization phases.
Throughout this report, the term redevelopment is used to refer to the entire redevelopment
cycle, including planning and procurement of architectural and engineering designs, budgeting and
actual renovation work. The actual renovation work is referred to as reconstruction, which is
only one element of the redevelopment cycle.
Disposition Strategy. We sell assets that no longer meet our long-term strategy or when market
conditions are favorable, and we redeploy the proceeds from those sales to develop, redevelop and
acquire communities and to rebalance our portfolio across or within geographic regions. This also
allows us to realize a portion of the value created through our investments and provides additional
liquidity. We are then able to redeploy the net proceeds from our dispositions in lieu of raising
that amount of capital externally. When we decide to sell a community, we solicit competing bids
from unrelated parties for these individual assets and consider the sales price of each proposal.
Acquisition Strategy. Our core competencies in development and redevelopment discussed above allow
us to be selective in the acquisitions we target. Acquisitions allow us to achieve rapid
penetration into markets in which we desire an increased presence. Acquisitions (and dispositions)
also help us achieve our desired product mix or rebalance our portfolio. In September 2008, we
formed Fund II, which serves as the exclusive vehicle through which we acquire additional
investments in apartment communities until the earlier of September 2011 or until 90% of its
committed capital is invested, subject to limited exceptions. As of December 31, 2009, Fund II had
acquired two communities.
Property Management Strategy. We seek to increase operating income through innovative, proactive
property management that will result in higher revenue from communities while constraining
operating expenses. Our principal strategies to maximize revenue include:
| strong focus on resident satisfaction; |
| staggering lease terms such that lease expirations are better matched to traffic patterns; |
| balancing high occupancy with premium pricing, and increasing rents as market conditions permit; and |
| managing community occupancy for optimal rental revenue levels. |
Constraining growth in operating expenses is another way in which we seek 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
constrain growth in operating expenses in a variety of ways, which include the following, among
others:
| we use purchase order controls, acquiring goods and services from pre-approved vendors; |
| we purchase supplies in bulk where possible; |
| we bid third-party contracts on a volume basis; |
| we strive to retain residents through high levels of service in order to eliminate the cost of preparing an apartment home for a new resident and to reduce marketing and vacant apartment utility costs; |
| we perform turnover work in-house or hire third parties, generally depending upon the least costly alternative; |
| we undertake preventive maintenance regularly to maximize resident satisfaction and property and equipment life; and |
| we aggressively pursue real estate tax appeals. |
On-site property management teams receive bonuses based largely upon the net operating income
(NOI) produced at their respective communities. We use and continuously seek ways to improve
technology applications to help manage our communities, believing that the accurate collection of
financial and resident data will enable us to maximize revenue and control costs through careful
leasing decisions, maintenance decisions and financial management.
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We generally manage the operation and leasing activity of our communities directly (although we may
use a wholly owned subsidiary) both for ourselves and the joint ventures and partnerships of which
we are a member or a partner.
From time to time we also pursue or arrange ancillary services for our residents to provide
additional revenue sources or increase resident satisfaction. In general, as a REIT we cannot
directly provide services to our tenants that are not customarily provided by a landlord, nor can
we share in the income of a third party that provides such services. However, we can provide such
non-customary services to residents or share in the revenue from such services if we do so through
a taxable REIT subsidiary, which is a subsidiary that is treated as a C corporation and is
therefore subject to federal income taxes.
Financing Strategy. We maintain a capital structure that provides financial flexibility to ensure
we can select cost effective capital market options that are well matched to our business risks. We
estimate that our short-term liquidity needs will be met from cash on hand, borrowings under our
$1,000,000,000 revolving variable rate unsecured credit facility (the Credit Facility), sales of
current operating communities and/or issuance of additional debt or equity securities. A
determination to engage in an equity or debt offering depends on a variety of factors such as
general market and economic conditions, including interest rates, our short and long-term liquidity
needs, the adequacy of our expected liquidity sources, the relative costs of debt and equity
capital and growth opportunities. A summary of debt and equity activity for the last three years
is reflected on our Consolidated Statement of Cash Flows of the Consolidated Financial Statements
set forth in Item 8 of this report.
We have entered into, and may continue in the future to enter into, joint ventures (including
limited liability companies or partnerships) through which we would own an indirect economic
interest of less than 100% of the community or communities owned directly by such joint ventures.
Our decision whether to hold an apartment community in fee simple or to have an indirect interest
in the community through a joint venture is based on a variety of factors and considerations,
including: (i) the economic and tax terms required by a seller of land or of a community; (ii) our
desire to diversify our portfolio of communities by market, submarket and product type; (iii) our
desire at times to preserve our capital resources to maintain liquidity or balance sheet strength;
and (iv) our projection, in some circumstances, that we will achieve higher returns on our invested
capital or reduce our risk if a joint venture vehicle is used. Investments in joint ventures are
not limited to a specified percentage of our assets. Each joint venture agreement is individually
negotiated, and our ability to operate and/or dispose of a community in our sole discretion may be
limited to varying degrees depending on the terms of the joint venture agreement.
From its inception in 2005 until the investment period closed in March 2008, Fund I was the
exclusive vehicle through which we invested in the acquisition of apartment communities, subject to
certain exceptions. In September 2008, we formed Fund II. Fund II now serves as the exclusive
vehicle through which we invest in the acquisition of apartment communities, subject to certain
exceptions, until the earlier of September 2011 or until 90% of its committed capital is invested.
These exceptions include significant individual asset and portfolio acquisitions, properties
acquired in tax-deferred transactions and acquisitions that are inadvisable or inappropriate for
Fund II. Fund II does not restrict our development activities, and will terminate after a term of
ten years, subject to two one-year extensions. Fund II has equity commitments from five
institutional investors who, with the Company, collectively committed $400,000,000, of which our
commitment is $125,000,000. A significant portion of the investments made in the Funds by investors
have been or will be made through an entity that qualifies, or that will qualify as a REIT and in
which we also own an equity interest. As of January 31, 2010, Fund II has made two investments,
for a total of $104,330,000 invested. In February 2010, Fund II purchased its third community for a
purchase price of $31,250,000.
In addition, we may, from time to time, offer shares of our equity securities, debt securities or
options to purchase stock in exchange for property.
Other Strategies and Activities. While we emphasize equity real estate investments in rental
apartment communities, we have the ability to invest in other types of real estate, mortgages
(including participating or convertible mortgages), securities of other REITs or real estate
operating companies, or securities of technology companies that relate to our real estate
operations or of companies that provide services to us or our residents, in each case consistent
with our qualification as a REIT. In addition, we own and lease retail space at our communities
when either (i) the highest and best use of the space is for retail (e.g., street level in an urban
area) or (ii) we believe the retail space will enhance the attractiveness of the community to
residents. As of December 31, 2009, we had a
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total of 456,260 square feet of rentable retail space, excluding retail space within communities
currently under construction. Gross rental revenue provided by leased retail space in 2009 was
$8,915,000 (1.0% of total revenue). If we secure a development right and believe that its best
use, in whole or in part, is to develop the real estate with the intent to sell rather than hold
the asset, we may, through a taxable REIT subsidiary, develop real estate for sale. At present,
through a taxable REIT subsidiary that is a 50% partner in Aria at Hathorne, LLC, we have an
economic interest in the development of for-sale town homes that have a total projected capital
cost of $23,621,000. This for-sale development is on a site that is adjacent to our Avalon Danvers
community and that is zoned for for-sale development. Any investment in securities of other
entities, and any development of real estate for sale, is subject to the percentage of ownership
limitations, gross income tests, and other limitations that must be observed for REIT
qualification.
We have not engaged in trading, underwriting or agency distribution or sale of securities of other
issuers and do not intend to do so. At all times we intend to make investments in a manner so as
to qualify as a REIT unless, because of circumstances or changes to the Internal Revenue Code (or
the Treasury Regulations), our Board of Directors determines that it is no longer in our best
interest to qualify as a REIT.
Tax Matters
We filed an election with our 1994 federal income tax return to be taxed as a REIT under the
Internal Revenue Code of 1986 (the Code), 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 on our taxable net income to the
extent taxable net income is distributed to our stockholders. We expect to make sufficient
distributions to avoid income tax at the corporate level. While we believe that we are organized
and qualified as a REIT and we intend to operate in a manner that will allow us to continue to
qualify as a REIT, there can be no assurance that we will be successful in this regard.
Qualification as a REIT involves the application of highly technical and complex provisions of the
Internal Revenue Code for which there are limited judicial and administrative interpretations and
involves the determination of a variety of factual matters and circumstances not entirely within
our control.
Competition
We face competition from other real estate investors, including insurance companies, pension and
investment funds, partnerships and investment companies and other REITs, to acquire and develop
apartment communities and acquire land for future development. As an owner and operator of
apartment communities, we also face competition for prospective residents from other operators
whose communities may be perceived to offer a better location or better amenities or whose rent may
be perceived as a better value given the quality, location and amenities that the resident seeks.
We also compete against condominiums and single-family homes that are for sale or rent. Although
we often compete against large sophisticated developers and operators for development opportunities
and for prospective residents, real estate developers and operators of any size can provide
effective competition for both real estate assets and potential residents.
Environmental and Related Matters
As a current or prior owner, operator and developer of real estate, we are subject to various
federal, state and local environmental laws, regulations and ordinances and also could be liable to
third parties resulting from environmental contamination or noncompliance at our communities. For
some development communities, we undertake extensive environmental remediation to prepare the site
for construction, which could be a significant portion of our total construction cost.
Environmental remediation efforts could expose us to possible liabilities for accidents or improper
handling of contaminated materials during construction. These and other risks related to
environmental matters are described in more detail in Item 1a., Risk Factors.
We believe that more government regulation of energy use, along with a greater focus on
environmental protection may, over time, have a significant impact on urban growth patterns. If
changes in zoning to encourage greater density and proximity to mass transit do occur, such changes
could benefit multifamily housing and those companies with a competency in high-density
development. However, there can be no assurance as to whether or
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when such changes in regulations or zoning will occur or, if they do occur, whether the multifamily industry or the
Company will benefit from such changes.
Other Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC.
You may read and copy any document we file at the SECs Public Reference Room at 100 F Street,
N.E., Washington, D.C. 20549. You may call the SEC at 1-202-551-8090 for further information on
the operation of the Public Reference Room. Our SEC filings are also available to the public from
the SECs website at www.sec.gov. In addition, you may read our SEC fillings at the offices of the
New York Stock Exchange (NYSE), which is located at 11 Wall Street, New York, New York 10005.
Our SEC filings are available at the NYSE because our common stock is listed on the NYSE.
We maintain a website at www.avalonbay.com. Our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished
pursuant to the Securities Exchange Act of 1934 are available free of charge in the Investor
Relations section of our website as soon as reasonably practicable after the reports are filed
with or furnished to the SEC. In addition, the charters of our Boards Nominating and Corporate
Governance Committee, Audit Committee and Compensation Committee, as well as our Corporate
Governance Guidelines and Code of Conduct, are available free of charge in that section of our
website or by writing to AvalonBay Communities, Inc., 2900 Eisenhower Avenue, Suite 300,
Alexandria, Virginia 22314, Attention: Chief Financial Officer. To the extent required by the
rules of the SEC and the NYSE, we will disclose amendments and waivers relating to these documents
in the same place on our website.
We were incorporated under the laws of the State of California in 1978. In 1995, we reincorporated
in the State of Maryland and have been focused on the ownership and operation of apartment
communities since that time. As of January 31, 2010, we had 1,877 employees.
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ITEM 1a. RISK FACTORS
Our operations involve various risks that could have adverse consequences, including those
described below. This Item 1a. includes forward-looking statements. You should refer to our
discussion of the qualifications and limitations on forward-looking statements in this Form 10-K.
Development, redevelopment and construction risks could affect our profitability.
We intend to continue to develop and redevelop apartment home communities. These activities can
include long planning and entitlement timelines and can involve complex and costly activities,
including significant environmental remediation or construction work in high-density urban areas.
These activities may be exposed to the following risks:
| we may abandon opportunities that we have already begun to explore for a number of reasons, including changes in local market conditions or increases in construction or financing costs, and, as a result, we may fail to recover expenses already incurred in exploring those opportunities; |
| occupancy rates and rents at a community may fail to meet our original expectations for a number of reasons, including changes in market and economic conditions beyond our control and the development by competitors of competing communities; |
| we may be unable to obtain, or experience delays in obtaining, necessary zoning, occupancy, or other required governmental or third party permits and authorizations, which could result in increased costs or the delay or abandonment of opportunities; |
| we may incur costs that exceed our original estimates due to increased material, labor or other costs; |
| occupancy rates and rents at a community may fail to meet our expectations for a number of reasons, including changes in market and economic conditions beyond our control and the development by competitors of competing communities; |
| we may be unable to complete construction and lease-up of a community on schedule, resulting in increased construction and financing costs and a decrease in expected rental revenues; |
| we may be unable to obtain financing with favorable terms, or at all, for the proposed development of a community, which may cause us to delay or abandon an opportunity; |
| we may incur liabilities to third parties during the development process, for example, in connection with managing existing improvements on the site prior to tenant terminations and demolition (such as commercial space) or in connection with providing services to third parties (such as the construction of shared infrastructure or other improvements); and |
| we may incur liability if our communities are not constructed and operated in compliance with the accessibility provisions of the Americans with Disabilities Acts, the Fair Housing Act or other federal, state or local requirements. Noncompliance could result in imposition of fines, an award of damages to private litigants, and a requirement that we undertake structural modifications to remedy the noncompliance. We are currently engaged in litigation alleging noncompliance with these statutes. See Item 3., Legal Proceedings. |
We project construction costs based on market conditions at the time we prepare our budgets, and
our projections include changes that we anticipate but cannot predict with certainty.
Construction costs may increase, particularly for labor and certain materials and, for some of our
Development Communities and Development Rights (as defined below), the total construction costs
may be higher than the original budget. Total capitalized cost includes all capitalized costs
incurred and projected to be incurred to develop or redevelop a community, determined in
accordance with GAAP, including:
| land and/or property acquisition costs; |
| fees paid to secure air rights and/or tax abatements; |
| construction or reconstruction costs; |
| costs of environmental remediation; |
| real estate taxes; |
| capitalized interest; |
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| loan fees; | ||
| permits; |
| professional fees; |
| allocated development or redevelopment overhead; and |
| other regulatory fees. |
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 or redevelopment communities complete
lease-up will be sufficient to fully offset the effects of any increased construction or
reconstruction costs.
Unfavorable changes in market and economic conditions could hurt occupancy, rental rates,
operating expenses, and the overall market value of our assets, including joint ventures and
investments in the Funds.
Local conditions in our markets significantly affect occupancy, rental rates and the operating
performance of our communities. The risks that may adversely affect conditions in those markets
include the following:
| plant closings, industry slowdowns and other factors that adversely affect the local economy; |
| an oversupply of, or a reduced demand for, apartment homes; |
| a decline in household formation or employment or lack of employment growth; |
| the inability or unwillingness of residents to pay rent increases; |
| rent control or rent stabilization laws, or other laws regulating housing, that could prevent us from raising rents to offset increases in operating costs; and |
| economic conditions that could cause an increase in our operating expenses, such as increases in property taxes, utilities, compensation of on-site associates and routine maintenance. |
Changes in applicable laws, or noncompliance with applicable laws, could adversely affect our
operations or expose us to liability.
We must develop, construct and operate our communities in compliance with numerous federal, state
and local laws and regulations, some of which may conflict with one another or be subject to
limited judicial or regulatory interpretations. These laws and regulations may include zoning
laws, building codes, landlord tenant laws and other laws generally applicable to business
operations. Noncompliance with laws could expose us to liability.
Lower revenue growth or significant unanticipated expenditures may result from our need to comply
with changes in (i) laws imposing remediation requirements and the potential liability for
environmental conditions existing on properties or the restrictions on discharges or other
conditions, (ii) rent control or rent stabilization laws or other residential landlord/tenant laws,
or (iii) other governmental rules and regulations or enforcement policies affecting the
development, use and operation of our communities, including changes to building codes and fire and
life-safety codes.
Short-term leases expose us to the effects of declining market rents.
Substantially all of our apartment leases are for a term of one year or less. Because these leases
generally permit the residents to leave at the end of the lease term without penalty, our rental
revenues are impacted by declines in market rents more quickly than if our leases were for longer
terms.
Competition could limit our ability to lease apartment homes or increase or maintain rents.
Our apartment communities compete with other housing alternatives to attract residents, including
other rental apartments, condominiums and single-family homes that are available for rent, as well
as new and existing condominiums and single-family homes for sale. Competitive residential
housing in a particular area could adversely affect our ability to lease apartment homes and to
increase or maintain rental rates.
9
Attractive investment opportunities may not be available, which could adversely affect our
profitability.
We expect that other real estate investors, including insurance companies, pension funds, other
REITs and other well-capitalized investors, will compete with us to acquire existing properties
and to develop new properties. This competition could increase prices for properties of the type
we would likely pursue and adversely affect our profitability.
Capital and credit market conditions may adversely affect our access to various sources of capital
and/or the cost of capital, which could impact our business activities, dividends, earnings, and
common stock price, among other things.
In periods when the capital and credit markets experience significant volatility, the amounts,
sources and cost of capital available to us may be adversely affected. We primarily use external
financing to fund construction and to refinance indebtedness as it matures. If sufficient sources
of external financing are not available to us on cost effective terms, we could be forced to limit
our development and redevelopment activity and/or take other actions to fund our business
activities and repayment of debt, such as selling assets, reducing our cash dividend or paying out
less than 100% of our taxable income. To the extent that we are able and/or choose to access
capital at a higher cost than we have experienced in recent years (reflected in higher interest
rates for debt financing or a lower stock price for equity financing) our earnings per share and
cash flows could be adversely affected. In addition, the price of our common stock may fluctuate
significantly and/or decline in a high interest rate or volatile economic environment. We believe
that the lenders under our Credit Facility will fulfill their lending obligations thereunder, but
if economic conditions deteriorate there can be no assurance that the ability of those lenders to
fulfill their obligations would not be adversely impacted.
Insufficient cash flow could affect our debt financing and create refinancing risk.
We are subject to the risks associated with debt financing, including the risk that our cash flow
will be insufficient to meet required payments of principal and interest. In this regard, we note
that in order for us to continue to qualify as a REIT, we are required to annually distribute
dividends generally equal to at least 90% of our REIT taxable income, computed without regard to
the dividends paid deduction and our net capital gain. This requirement limits the amount of our
cash flow available to meet required principal and interest payments. The principal outstanding
balance on a portion of our debt will not be fully amortized prior to its maturity. Although we
may be able to repay our debt by using our cash flows, we cannot assure you that we will have
sufficient cash flows available to make all required principal payments. Therefore, we may need to
refinance at least a portion of our outstanding debt as it matures. There is a risk that we may
not be able to refinance existing debt or that a refinancing will not be done on as favorable
terms, either of which could have a material adverse effect on our financial condition and results
of operations.
Rising interest rates could increase interest costs and could affect the market price of our
common stock.
We currently have, and may in the future incur, contractual variable interest rate debt, as well
as effective variable interest rate debt achieved through the use of qualifying hedging
relationships. In addition, we regularly seek access to both fixed and variable rate debt
financing to repay maturing debt and to finance our development and redevelopment activity.
Accordingly, if interest rates increase, our interest costs will also rise, unless we have made
arrangements that hedge the risk of rising interest rates. In addition, an increase in market
interest rates may lead purchasers of our common stock to demand a greater annual dividend yield,
which could adversely affect the market price of our common stock.
10
Bond financing and zoning compliance requirements could limit our income, restrict the use of
communities and cause favorable financing to become unavailable.
We have financed some of our apartment communities with obligations issued by local government
agencies because the interest paid to the holders of this debt is generally exempt from federal
income taxes and, therefore, the interest rate is generally more favorable to us. These
obligations are commonly referred to as tax-exempt bonds and generally must be secured by
mortgages on our communities. As a condition to obtaining tax-exempt financing, or on occasion as
a condition to obtaining favorable zoning in some jurisdictions, we will commit to make some of
the apartments in a community available to households whose income does not exceed certain
thresholds (e.g., 50% or 80% of area median income), or who meet other qualifying tests. As of
December 31, 2009, approximately 6.8% of our apartment homes at current operating communities were
under income limitations such as these. These commitments, which may run without expiration or
may expire after a period of time (such as 15 or 20 years) may limit our ability to raise rents
and, in consequence, can also adversely affect the value of the communities subject to these
restrictions.
In addition, some of our tax-exempt bond financing documents require us to obtain a guarantee from
a financial institution of payment of the principal of, and interest on, the bonds. The guarantee
may take the form of a letter of credit, surety bond, guarantee agreement or other additional
collateral. If the financial institution defaults in its guarantee obligations, or if we are
unable to renew the applicable guarantee or otherwise post satisfactory collateral, a default will
occur under the applicable tax-exempt bonds and the community could be foreclosed upon if we do
not redeem the bonds.
Risks related to indebtedness.
We have a Credit Facility with JPMorgan Chase Bank, N.A., and Wachovia Bank, N.A., serving
together as syndication agent and as banks, Bank of America, N.A., serving as administrative
agent, swing lender, issuing bank and a bank, Morgan Stanley Bank, Wells Fargo Bank, N.A., and
Deutsche Bank Trust Company Americas, serving collectively as documentation agent and as banks,
and a syndicate of other financial institutions, serving as banks. Our organizational documents
do not limit the amount or percentage of indebtedness that may be incurred. Accordingly, subject
to compliance with outstanding debt covenants, we could incur more debt, resulting in an increased
risk of default on our obligations and an increase in debt service requirements that could
adversely affect our financial condition and results of operations.
The mortgages on those of our properties subject to secured debt, our Credit Facility and the
indenture under which a substantial portion of our debt was issued contain customary restrictions,
requirements and other limitations, as well as certain financial and operating covenants including
maintenance of certain financial ratios. Maintaining compliance with these restrictions could
limit our flexibility. A default in these requirements, if uncured, could result in a requirement
that we repay indebtedness, which could severely affect our liquidity and increase our financing
costs. Refer to Item 7., Managements Discussion and Analysis of Financial Condition and Results
of Operations, for further discussion.
Failure to generate sufficient revenue or other liquidity needs could limit cash flow available
for distributions to stockholders.
A decrease in rental revenue or other liquidity needs, including the repayment of indebtedness or
funding of our development activities, could have an adverse effect on our ability to pay
distributions to our stockholders. Significant expenditures associated with each community such as
debt service payments, if any, real estate taxes, insurance and maintenance costs are generally
not reduced when circumstances cause a reduction in income from a community.
The form, timing and/or amount of dividend distributions in future periods may vary and be
impacted by economic and other considerations.
The form, timing and/or amount of 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
11
distribution requirements under the REIT provisions of the 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 may choose to pay dividends in our own stock, in which case stockholders may be required to pay
tax in excess of the cash they receive.
We may distribute taxable dividends that are payable in part in our stock, as we did in the fourth
quarter of 2008. Taxable stockholders receiving such dividends will be required to include the
full amount of the dividend as income to the extent of our current and accumulated earnings and
profits for federal income tax purposes. As a result, a U.S. stockholder may be required to pay
tax with respect to such dividends in excess of the cash received. If a U.S. stockholder sells
the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than
the amount included in income with respect to the dividend, depending on the market price of our
stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be
required to withhold U.S. tax with respect to such dividends, including in respect of all or a
portion of such dividend that is payable in stock. In addition, the trading price of our stock
would experience downward pressure if a significant number of our stockholders sell shares of our
stock in order to pay taxes owed on dividends. .
Debt financing may not be available and equity issuances could be dilutive to our stockholders.
Our ability to execute our business strategy depends on our access to an appropriate blend of debt
and equity financing. Debt financing may not be available in sufficient amounts or on favorable
terms. If we issue additional equity securities, the interests of existing stockholders could be
diluted.
Difficulty of selling apartment communities could limit flexibility.
Federal tax laws may limit our ability to earn a gain on the sale of a community (unless we own it
through a subsidiary which will incur a taxable gain upon sale) if we are found to have held,
acquired or developed the community primarily with the intent to resell the community, and this
limitation may affect our ability to sell communities without adversely affecting returns to our
stockholders. In addition, real estate in our markets can at times be difficult to sell quickly
at prices we find acceptable. These potential difficulties in selling real estate in our markets
may limit our ability to change or reduce the apartment communities in our portfolio promptly in
response to changes in economic or other conditions.
Acquisitions may not yield anticipated results.
Subject to the requirements related to Fund II, we may in the future acquire apartment communities
on a select basis. Our acquisition activities and their success may be exposed to the following
risks:
| an acquired property may fail to perform as we expected in analyzing our investment; and |
| our estimate of the costs of repositioning or redeveloping an acquired property may prove inaccurate. |
Failure to succeed in new markets or in activities other than the development, ownership and
operation of residential rental communities may have adverse consequences.
We may from time to time commence development activity or make acquisitions outside of our
existing market areas if appropriate opportunities arise. As noted above, we also own and lease
ancillary retail space when a retail component represents the best use of the space, as is often
the case with large urban in-fill developments. Also, as noted above in Item 1., Business,
through a taxable REIT subsidiary that is a joint venture partner, we have a 50% economic interest
in a for-sale development with a total estimated capital cost at completion of $23,621,000, on a
site adjacent to one of our communities. We may engage or have an interest in for-sale activity
in the future. Our historical experience in our existing markets in developing, owning and
operating rental communities does not ensure that we will be able to operate successfully in new
markets, should we choose to enter them, or that we will be successful in other activities. We
may be exposed to a variety of risks if we choose to enter new markets, including an inability to
accurately evaluate local apartment market conditions; an inability to obtain land for development
or to identify appropriate acquisition opportunities; an inability to hire and retain key
personnel; and
12
lack of familiarity with local governmental and permitting procedures. We may be unsuccessful in
owning and leasing retail space at our communities or in developing real estate with the intent to
sell.
Land we hold with no current intent to develop may be subject to future impairment charges
We own parcels of land that we do not currently intend to develop. As discussed in Item 2.,
Communities Other Land and Real Estate Assets, in the event that the fair market value of a
parcel changes such that the we determine that the carrying basis of the parcel reflected in our
financial statements is greater than the parcels then current fair value, less costs to dispose,
we would be subject to an impairment charge, which would reduce our net income.
Risks involved in real estate activity through joint ventures.
Instead of acquiring or developing apartment communities directly, at times we invest as a partner
or a co-venturer. Joint venture investments (including investments through partnerships or limited
liability companies) involve risks, including the possibility that our partner might become
insolvent or otherwise refuse to make capital contributions when due; that we may be responsible
to our partner for indemnifiable losses; that our partner might at any time have business goals
which are inconsistent with ours; and that our partner may be in a position to take action or
withhold consent contrary to our instructions or requests. Frequently, we and our partner may
each have the right to trigger a buy-sell arrangement, which could cause us to sell our interest,
or acquire our partners interest, at a time when we otherwise would not have initiated such a
transaction.
Risks associated with an investment in and management of discretionary investment funds.
We formed Fund I which, through a wholly owned subsidiary, we manage as the general partner and in
which we have invested approximately $50,000,000 at December 31, 2009, representing our total
capital commitment, for an equity interest of approximately 15%. We have also formed Fund II
which, through a wholly owned subsidiary, we manage as the general partner and to which we have
committed $125,000,000, representing a current equity interest of approximately 31%. We have
invested approximately $17,500,000 at December 31, 2009 in Fund II. These Funds present risks,
including the following:
| investors in Fund II may fail to make their capital contributions when due and, as a result, Fund II may be unable to execute its investment objectives; |
| our subsidiaries that are the general partners of the Funds are generally liable, under partnership law, for the debts and obligations of the respective Funds, subject to certain exculpation and indemnification rights pursuant to the terms of the partnership agreement of the Funds; |
| investors in the Funds holding a majority of the partnership interests may remove us as the general partner without cause, subject to our right to receive an additional nine months of management fees after such removal and our right to acquire one of the properties then held by the Funds; |
| while we have broad discretion to manage the Funds and make investment decisions on behalf of the Funds, the investors or an advisory committee comprised of representatives of the investors must approve certain matters, and as a result we may be unable to cause the Funds to make certain investments or implement certain decisions that we consider beneficial; |
| we can develop communities but have been generally prohibited from making acquisitions of apartment communities outside of Fund II, which is our exclusive investment vehicle until September 2011 or when 90% of Fund IIs capital is invested, subject to certain exceptions; and |
| we may be liable and/or our status as a REIT may be jeopardized if either the Funds, or the REITs through which a number of investors have invested in the Funds and which we manage, fail to comply with various tax or other regulatory matters. |
Risk of earthquake damage.
As further described in Item 2., Communities Insurance and Risk of Uninsured Losses, many of
our West Coast communities are located in the general vicinity of active earthquake faults. We
cannot assure you that an earthquake would not cause damage or losses greater than insured levels.
In the event of a loss in excess of insured limits, 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.
Insurance coverage for earthquakes can be costly due to limited industry capacity. As a result,
we may experience shortages in desired coverage levels if market conditions are such that
insurance is not available or the cost of insurance makes it, in managements view, economically
impractical.
13
A significant uninsured property or liability loss could have a material adverse effect on our
financial condition and results of operations.
In addition to the earthquake insurance discussed above, we carry commercial general liability
insurance, property insurance and terrorism insurance with respect to our communities on terms we
consider commercially reasonable. There are, however, certain types of losses (such as losses
arising from acts of war) that are not insured, in full or in part, because they are either
uninsurable or the cost of insurance makes it, in managements view, economically impractical. If
an uninsured property loss or a property loss in excess of insured limits were to occur, we could
lose our capital invested in a community, as well as the anticipated future revenues from such
community. We would also continue to be obligated to repay any mortgage indebtedness or other
obligations related to the community. If an uninsured liability to a third party were to occur, we
would incur the cost of defense and settlement with, or court ordered damages to, that third
party. A significant uninsured property or liability loss could materially and adversely affect
our business and our financial condition and results of operations.
We may incur costs and increased expenses to repair property damage resulting from inclement
weather.
Particularly in New England and the Midwest, we are exposed to risks associated with inclement
winter weather, including increased costs for the removal of snow and ice as well as from delays
in construction. In addition, inclement weather could increase the need for maintenance and repair
of our communities.
We may incur costs due to environmental contamination or non-compliance.
Under various federal, state and local environmental and public health laws, regulations and
ordinances, we may be required, regardless of knowledge or responsibility, to investigate and
remediate the effects of hazardous or toxic substances or petroleum product releases at our
properties (including in some cases natural substances such as methane and radon gas) and may be
held liable under these laws or common law to a governmental entity or to third parties for
property, personal injury or natural resources damages and for investigation and remediation costs
incurred as a result of the contamination. These damages and costs may be substantial and may
exceed any insurance coverage we have for such events. The presence of such substances, or the
failure to properly remediate the contamination, may adversely affect our ability to borrow
against, sell or rent the affected property.
In addition, some environmental laws create or allow a government agency to impose a lien on the
contaminated site in favor of the government for damages and costs it incurs as a result of the
contamination.
The development, construction and operation of our communities are subject to regulations and
permitting under various federal, state and local laws, regulations and ordinances, which regulate
matters including wetlands protection, storm water runoff and wastewater discharge. Noncompliance
with such laws and regulations may subject us to fines and penalties. We do not currently
anticipate that we will incur any material liabilities as a result of noncompliance with these
laws.
Certain federal, state and local laws, regulations and ordinances govern the removal,
encapsulation or disturbance of asbestos containing materials (ACMs) when such materials are in
poor condition or in the event of renovation or demolition of a building. These laws and the
common law may impose liability for release of ACMs and may allow third parties to seek recovery
from owners or operators of real properties for personal injury associated with exposure to ACMs.
We are not aware that any ACMs were used in the construction of the communities we developed.
ACMs were, however, used in the construction of a number of the communities that we acquired. We
implement an operations and maintenance program at each of the communities at which ACMs are
detected. We do not currently anticipate that we will incur any material liabilities as a result
of the presence of ACMs at our communities.
We are aware that some of our communities have lead paint and have implemented an operations and
maintenance program at each of those communities. We do not currently anticipate that we will
incur any material liabilities as a result of the presence of lead paint at our communities.
14
All of our stabilized operating communities, and all of the communities that we are currently
developing, 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, together with subsurface assessments conducted on some properties, have not revealed,
and we are not otherwise aware of, any environmental conditions that we believe would have a
material adverse effect on our business, assets, financial condition or results of operations. In
connection with our ownership, operation and development of communities, from time to time we
undertake substantial remedial action in response to the presence of subsurface or other
contaminants, including contaminants in soil, groundwater and soil vapor beneath or affecting our
buildings. In some cases, an indemnity exists upon which we may be able to rely if environmental
liability arises from the contamination or remediation costs exceed estimates. There can be no
assurance, however, that all necessary remediation actions have been or will be undertaken at our
properties or that we will be indemnified, in full or at all, in the event that environmental
liability arises.
Mold growth may occur when excessive moisture accumulates in buildings or on building materials,
particularly if the moisture problem remains undiscovered or is not addressed over a period of
time. Although the occurrence of mold at multifamily and other structures, and the need to
remediate such mold, is not a new phenomenon, there has been increased awareness in recent years
that certain molds may in some instances lead to adverse health effects, including allergic or
other reactions. To help limit mold growth, we educate residents about the importance of adequate
ventilation and request or require that they notify us when they see mold or excessive moisture.
We have established procedures for promptly addressing and remediating mold or excessive moisture
from apartment homes when we become aware of its presence regardless of whether we or the resident
believe a health risk is presented. However, we cannot provide assurance that mold or excessive
moisture will be detected and remediated in a timely manner. If a significant mold problem arises
at one of our communities, we could be required to undertake a costly remediation program to
contain or remove the mold from the affected community and could be exposed to other liabilities
that may exceed any applicable insurance coverage. Our communities may also be affected by
potential vapor intrusion risks resulting from subsurface soil or groundwater contamination by
volatile organic compounds, which may require investigation or remediation and could subject the
Company to liability.
Additionally, we have 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 relate to the release or presence of hazardous or toxic substances. We are
not aware of any material environmental liabilities with respect to properties managed or
developed by us or our predecessors for such third parties.
We cannot assure you that:
| the environmental assessments described above have identified all potential environmental liabilities; |
| no prior owner created any material environmental condition not known to us or the consultants who prepared the assessments; |
| no environmental liabilities have developed since the environmental assessments were prepared; |
| 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 our communities; |
| future uses or conditions, including, without limitation, changes in applicable environmental laws and regulations, will not result in the imposition of environmental liability; and |
| no environmental liabilities will arise at communities that we have sold for which we may have liability. |
Failure to qualify as a REIT would cause us to be taxed as a corporation, which would
significantly reduce funds available for distribution to stockholders.
If we fail to qualify as a REIT for federal income tax purposes, we will be subject to federal
income tax on our taxable income at regular corporate rates (subject to any applicable alternative
minimum tax). In addition, unless we are entitled to relief under applicable statutory provisions,
we would be ineligible to make an election for treatment as a REIT for the four taxable years
following the year in which we lose our qualification. The additional tax liability resulting from
the failure to qualify as a REIT would significantly reduce or eliminate the amount of funds
available for distribution to our stockholders. Furthermore, we would no longer be required to
make distributions to
15
our stockholders. Thus, our failure to qualify as a REIT could also impair
our ability to expand our business and raise capital, and would adversely affect the value of our
common stock.
We believe that we are organized and qualified as a REIT, and we intend to operate in a manner
that will allow us to continue to qualify as a REIT. However, we cannot assure you that we are
qualified as a REIT, or that we will remain qualified in the future. This is because qualification
as a REIT involves the application of highly technical and complex provisions of the Internal
Revenue Code for which there are only limited judicial and administrative interpretations and
involves the determination of a variety of factual matters and circumstances not entirely within
our control. In addition, future legislation, new regulations, administrative interpretations or
court decisions may significantly change the tax laws or the application of the tax laws with
respect to qualification as a REIT for federal income tax purposes or the federal income tax
consequences of this qualification.
Even if we qualify as a REIT, we will be subject to certain federal, state and local taxes on our
income and property and on taxable income that we do not distribute to our shareholders. In
addition, we may engage in activities that are not customarily provided by a landlord through
taxable subsidiaries and will be subject to federal income tax at regular corporate rates on the
income of those subsidiaries.
The ability of our stockholders to control our policies and effect a change of control of our
company is limited by certain provisions of our charter and bylaws and by Maryland law.
There are provisions in our charter and bylaws that may discourage a third party from making a
proposal to acquire us, even if some of our stockholders might consider the proposal to be in
their best interests. These provisions include the following:
Our charter authorizes our Board of Directors to issue up to 50,000,000 shares of preferred stock
without stockholder approval and to establish the preferences and rights, including voting rights,
of any series of preferred stock issued. The Board of Directors may issue preferred stock without
stockholder approval, which could allow the Board to issue one or more classes or series of
preferred stock that could discourage or delay a tender offer or a change in control.
To maintain our qualification as a REIT for federal income tax purposes, not more than 50% in
value of our outstanding stock may be owned, directly or indirectly, by or for five or fewer
individuals at any time during the last half of any taxable year. To maintain this qualification,
and/or to address other concerns about concentrations of ownership of our stock, our charter
generally prohibits ownership (directly, indirectly by virtue of the attribution provisions of the
Code, or beneficially as defined in Section 13 of the Securities Exchange Act) by any single
stockholder of more than 9.8% of the issued and outstanding shares of any class or series of our
stock. In general, under our charter, pension plans and mutual funds may directly and beneficially
own up to 15% of the outstanding shares of any class or series of stock. Under our charter, our
Board of Directors may in its sole discretion waive or modify the ownership limit for one or more
persons, but is not required to do so even if such waiver would not affect our qualification as a
REIT. These ownership limits may prevent or delay a change in control and, as a result, could
adversely affect our stockholders ability to realize a premium for their shares of common stock.
Our bylaws provide that the affirmative vote of holders of a majority of all of the shares
entitled to be cast in the election of directors is required to elect a director. In a contested
election, if no nominee receives the vote of holders of a majority of all of the shares entitled
to be cast, the incumbent directors would remain in office. This requirement may prevent or delay
a change in control and, as a result, could adversely affect our stockholders ability to realize
a premium for their shares of common stock.
As a Maryland corporation, we are subject to the provisions of the Maryland General Corporation
Law. Maryland law imposes restrictions on some business combinations and requires compliance with
statutory procedures before some mergers and acquisitions may occur, which may delay or prevent
offers to acquire us or increase the difficulty of completing any offers, even if they are in our
stockholders best interests. In addition, other provisions of the Maryland General Corporation
Law permit the Board of Directors to make elections and to take actions without stockholder
approval (such as classifying our Board such that the entire Board is not up for reelection
annually) that, if made or taken, could have the effect of discouraging or delaying a change in
control.
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ITEM 1b. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. | COMMUNITIES |
Our real estate investments consist primarily of current operating apartment communities,
communities in various stages of development (Development Communities) and Development Rights (as
defined below). Our current operating communities are further distinguished as Established
Communities, Other Stabilized Communities, Lease-Up Communities and Redevelopment Communities. The
following is a description of each category:
Current Communities are categorized as Established, Other Stabilized,
Lease-Up, or Redevelopment according to the following attributes:
| Established Communities (also known as Same Store Communities) are consolidated 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 occupancy and operating expenses as of the beginning of the prior year. For the year ended December 31, 2009, the Established Communities are communities that are consolidated for financial reporting purposes, had stabilized occupancy and operating expenses as of January 1, 2008, are not conducting or planning to conduct substantial redevelopment activities and are not held for sale or planned for disposition within the current year. A community is considered to have stabilized occupancy at the earlier of (i) attainment of 95% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment. | ||
| Other Stabilized Communities includes all other completed communities that we own or have a direct or indirect ownership interest in, and that have stabilized occupancy, as defined above. Other Stabilized Communities do not include communities that are conducting or planning to conduct substantial redevelopment activities within the current year. | ||
| Lease-Up Communities are communities where construction has been complete for less than one year and where physical occupancy has not reached 95%. | ||
| Redevelopment Communities are communities where substantial redevelopment is in progress or is planned to begin during the current year. For communities that we wholly own, redevelopment is considered substantial when capital invested during the reconstruction effort is expected to exceed the lesser of $5,000,000 or 10% of the communitys acquisition cost. The definition of substantial redevelopment may differ for communities owned through a joint venture arrangement, or by one of the Funds. |
Development Communities are communities that are under construction and for which a certificate of occupancy has not been received for the entire community. These communities may be partially complete and operating.
Development Rights are development opportunities in the early phase of the development process for which we either have an option to acquire land or enter into a leasehold interest, 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 related pre-development costs incurred in pursuit of new developments for which we currently believe future development is probable.
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In addition, we own approximately 60,000 square feet of office space in Alexandria,
Virginia, for our corporate office, with all other regional and administrative offices
leased under operating leases. In the third quarter of 2009 we entered into a ten-year
operating lease for approximately 50,744 square feet of office space in Arlington,
Virginia, which will serve as the location for our corporate office by the end of the
second quarter 2010. We are exploring alternatives to lease or sell the office space in
Alexandria, Virginia.
As of December 31, 2009, communities that we owned or held a direct or indirect interest in were
classified as follows:
Number of | Number of | |||||||
communities | apartment homes | |||||||
Current Communities |
||||||||
Established Communities: |
||||||||
New England |
22 | 5,359 | ||||||
Metro NY/NJ |
18 | 5,895 | ||||||
Mid-Atlantic/Midwest |
15 | 6,088 | ||||||
Pacific Northwest |
8 | 1,943 | ||||||
Northern California |
15 | 4,432 | ||||||
Southern California |
12 | 3,679 | ||||||
Total Established |
90 | 27,396 | ||||||
Other Stabilized Communities: |
||||||||
New England |
12 | 3,334 | ||||||
Metro NY/NJ |
11 | 3,241 | ||||||
Mid-Atlantic/Midwest |
13 | 3,616 | ||||||
Pacific Northwest |
4 | 1,021 | ||||||
Northern California |
11 | 2,989 | ||||||
Southern California |
10 | 1,718 | ||||||
Total Other Stabilized |
61 | 15,919 | ||||||
Lease-Up Communities |
7 | 1,996 | ||||||
Redevelopment Communities |
7 | 2,615 | ||||||
Total Current Communities |
165 | 47,926 | ||||||
Development Communities |
7 | 2,438 | ||||||
Development Rights |
28 | 7,180 | ||||||
Our holdings under each of the above categories are discussed on the following pages.
Current Communities
Our Current Communities are primarily garden-style apartment communities consisting of two and
three-story buildings in landscaped settings. As of January 31, 2010, these include 113
garden-style (of which 15 are mixed communities and/or include town homes), 22 high-rise and 29
mid-rise apartment communities.
Our communities offer a variety of quality amenities and features, including:
| gourmet kitchens; |
| lofts and vaulted ceilings; |
| walk-in closets; |
| fireplaces; |
| patios/decks; and |
| modern appliances. |
Other features at various communities may include:
18
| swimming pools; |
| fitness centers; |
| tennis courts; and | ||
| wi-fi lounges. |
We also have an extensive and ongoing maintenance program to continually maintain and enhance our
communities and apartment homes. 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 our mission of Enhancing the Lives of our Residents helps us
achieve higher rental rates and occupancy levels while minimizing resident turnover and operating
expenses.
Our Current Communities are located in the following geographic markets:
Number of | Number of apartment | Percentage of total | ||||||||||||||||||||||
communities at | homes at | apartment homes at | ||||||||||||||||||||||
1-31-09 | 1-31-10 | 1-31-09 | 1-31-10 | 1-31-09 | 1-31-10 | |||||||||||||||||||
New England |
36 | 36 | 9,077 | 9,132 | 19.9 | % | 19.2 | % | ||||||||||||||||
Boston, MA |
24 | 25 | 6,460 | 6,683 | 14.2 | % | 14.0 | % | ||||||||||||||||
Fairfield County, CT |
12 | 11 | 2,617 | 2,449 | 5.7 | % | 5.2 | % | ||||||||||||||||
Metro NY/NJ |
31 | 32 | 9,353 | 10,255 | 20.4 | % | 21.5 | % | ||||||||||||||||
Long Island, NY |
7 | 6 | 1,732 | 1,732 | 3.8 | % | 3.6 | % | ||||||||||||||||
Northern New Jersey |
5 | 5 | 1,618 | 1,618 | 3.5 | % | 3.4 | % | ||||||||||||||||
Central New Jersey |
7 | 6 | 2,258 | 2,258 | 4.9 | % | 4.7 | % | ||||||||||||||||
New York, NY |
12 | 15 | 3,745 | 4,647 | 8.2 | % | 9.8 | % | ||||||||||||||||
Mid-Atlantic/Midwest |
30 | 27 | 9,213 | 9,409 | 20.2 | % | 19.8 | % | ||||||||||||||||
Washington, DC |
24 | 22 | 7,661 | 8,152 | 16.8 | % | 17.1 | % | ||||||||||||||||
Chicago, IL |
6 | 5 | 1,552 | 1,257 | 3.4 | % | 2.7 | % | ||||||||||||||||
Pacific Northwest |
11 | 12 | 2,746 | 2,964 | 6.0 | % | 6.2 | % | ||||||||||||||||
Seattle, WA |
11 | 12 | 2,746 | 2,964 | 6.0 | % | 6.2 | % | ||||||||||||||||
Northern California |
32 | 32 | 8,879 | 9,160 | 19.4 | % | 19.2 | % | ||||||||||||||||
Oakland-East Bay, CA |
8 | 9 | 2,394 | 2,833 | 5.2 | % | 5.9 | % | ||||||||||||||||
San Francisco, CA |
11 | 12 | 2,489 | 2,749 | 5.4 | % | 5.8 | % | ||||||||||||||||
San Jose, CA |
13 | 11 | 3,996 | 3,578 | 8.8 | % | 7.5 | % | ||||||||||||||||
Southern California |
24 | 25 | 6,460 | 6,711 | 14.1 | % | 14.1 | % | ||||||||||||||||
Los Angeles, CA |
12 | 12 | 3,345 | 3,345 | 7.3 | % | 7.0 | % | ||||||||||||||||
Orange County, CA |
8 | 9 | 1,896 | 2,147 | 4.1 | % | 4.5 | % | ||||||||||||||||
San Diego, CA |
4 | 4 | 1,219 | 1,219 | 2.7 | % | 2.6 | % | ||||||||||||||||
164 | 164 | 45,728 | 47,631 | 100.0 | % | 100.0 | % | |||||||||||||||||
We manage and operate substantially all of our Current Communities. During the year ended
December 31, 2009, we completed construction of 2,526 apartment homes in nine communities and sold
1,037 apartment homes in five communities. The average age of our Current Communities, on a
weighted average basis according to number of apartment homes, is 14.3 years. When adjusted to
reflect redevelopment activity, as if redevelopment were a new construction completion date, the
average age of our Current Communities is 9.2 years.
Of the Current Communities, as of January 31, 2010, we own:
| a full fee simple, or absolute, ownership interest in 124 operating communities, ten of which are on land subject to land leases expiring in October 2026, November 2028, July 2029, December 2034, July 2062, December 2073, April 2095, September 2105 and March 2142; |
| a general partnership interest in three partnerships that each own a fee simple interest in an operating community; |
| a general partnership interest and an indirect limited partnership interest in both Fund I and Fund II. Subsidiaries of Fund I own a fee simple interest in 19 operating communities, and subsidiaries of Fund II own a fee simple interest in two operating communities; |
| a general partnership interest in two partnerships structured as DownREITs, as described more fully below, that own an aggregate of nine communities; |
19
| a membership interest in six limited liability companies that each hold a fee simple interest in an operating community, two of which are on land subject to land leases expiring in September 2044, and November 2089; and | ||
| a residual profits interest (with no ownership interest) in a limited liability company to which an operating community was transferred upon completion of construction in the second quarter of 2006. |
For some communities, a land lease is used to support tax advantaged structures that ultimately
allow us to purchase the land upon lease expiration. We have options to purchase the underlying
land for the leases that expire in October 2026, November 2028, July 2029, December 2034, April
2095 and March 2142. We also hold, directly or through wholly owned subsidiaries, the full fee
simple ownership interest in the seven Development Communities, all of which are currently
consolidated for financial reporting purposes and two of which are subject to land leases expiring
in May 2105 and April 2106.
In our two partnerships structured as DownREITs, either AvalonBay or one of our wholly owned
subsidiaries is the general partner, and there are one or more limited partners whose interest in
the partnership is represented by units of limited partnership interest. For each DownREIT
partnership, limited partners are entitled to receive an initial distribution 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 have approximated our current common stock dividend amount. The
holders of units of limited partnership interest have the right to present all or some of their
units for redemption for a cash amount as determined by the applicable partnership agreement and
based on the fair value of our common stock. In lieu of a cash redemption by the partnership, we
may elect to acquire any unit presented for redemption for one share of our common stock or for
such cash amount. As of January 31, 2010, there were 15,351 DownREIT partnership units
outstanding. The DownREIT partnerships are consolidated for financial reporting purposes.
20
Profile of Current, Development and Unconsolidated Communities (1)
(Dollars in thousands, except per apartment home data)
(Dollars in thousands, except per apartment home data)
Average | ||||||||||||||||||||||||||||||||||||||||||
Approx. | Year of | Average | Physical | Average | rental rate | Financial | ||||||||||||||||||||||||||||||||||||
Number of | rentable | completion / | size | occupancy | economic occupancy | $ per | $ per | reporting | ||||||||||||||||||||||||||||||||||
City and state | homes | area (Sq. Ft.) | Acres | acquisition | (Sq. Ft.) | at 12/31/09 | 2009 | 2008 | Apt (4) | Sq. Ft. | cost (5) | |||||||||||||||||||||||||||||||
CURRENT COMMUNITIES |
||||||||||||||||||||||||||||||||||||||||||
NEW ENGLAND |
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Boston, MA |
||||||||||||||||||||||||||||||||||||||||||
Avalon at Lexington |
Lexington, MA | 198 | 237,855 | 16.1 | 1994 | 1,201 | 91.9% | 95.0 | % | 97.6 | % | 1,818 | 1.44 | 16,460 | ||||||||||||||||||||||||||||
Avalon Oaks |
Wilmington, MA | 204 | 237,167 | 22.5 | 1999 | 1,163 | 96.1% | 97.1 | % | 95.6 | % | 1,467 | 1.23 | 21,290 | ||||||||||||||||||||||||||||
Avalon Summit |
Quincy, MA | 245 | 224,974 | 8.0 | 1986/1996 | 918 | 91.4% | 96.0 | % | 97.1 | % | 1,361 | 1.42 | 17,694 | ||||||||||||||||||||||||||||
Avalon Essex |
Peabody, MA | 154 | 201,063 | 11.1 | 2000 | 1,306 | 95.5% | 96.3 | % | 96.3 | % | 1,572 | 1.16 | 22,023 | ||||||||||||||||||||||||||||
Avalon at Prudential Center |
Boston, MA | 780 | 759,130 | 1.0 | 1968/1998 | 973 | 95.1% | 93.8 | % | 97.5 | % | 3,005 | 2.90 | 157,333 | ||||||||||||||||||||||||||||
Avalon Oaks West |
Wilmington, MA | 120 | 133,376 | 27.0 | 2002 | 1,111 | 96.7% | 96.3 | % | 93.9 | % | 1,355 | 1.17 | 16,984 | ||||||||||||||||||||||||||||
Avalon Orchards |
Marlborough, MA | 156 | 179,227 | 23.0 | 2002 | 1,149 | 97.4% | 96.4 | % | 97.0 | % | 1,528 | 1.28 | 21,417 | ||||||||||||||||||||||||||||
Avalon at Newton Highlands (8) |
Newton, MA | 294 | 339,537 | 7.0 | 2003 | 1,155 | 94.9% | 96.1 | % | 96.2 | % | 2,149 | 1.79 | 57,258 | ||||||||||||||||||||||||||||
Avalon at The Pinehills I |
Plymouth, MA | 101 | 151,629 | 6.0 | 2004 | 1,501 | 95.1% | 95.0 | % | 95.9 | % | 1,909 | 1.21 | 20,008 | ||||||||||||||||||||||||||||
Avalon at Crane Brook |
Peabody, MA | 387 | 433,778 | 20.0 | 2004 | 1,121 | 95.4% | 95.6 | % | 96.4 | % | 1,383 | 1.18 | 54,961 | ||||||||||||||||||||||||||||
Essex Place |
Peabody, MA | 286 | 250,473 | 18.0 | 2004 | 876 | 94.4% | 93.9 | %(2) | 88.8 | %(2) | 1,235 | 1.32 | (2) | 35,411 | |||||||||||||||||||||||||||
Avalon at Bedford Center |
Bedford, MA | 139 | 159,704 | 38.0 | 2005 | 1,149 | 92.8% | 95.5 | % | 95.3 | % | 1,738 | 1.45 | 24,804 | ||||||||||||||||||||||||||||
Avalon Chestnut Hill |
Chestnut Hill, MA | 204 | 271,899 | 4.7 | 2007 | 1,333 | 95.1% | 96.0 | % | 93.1 | % | 2,316 | 1.67 | 60,483 | ||||||||||||||||||||||||||||
Avalon Shrewsbury |
Shrewsbury, MA | 251 | 274,780 | 25.5 | 2007 | 1,095 | 92.0% | 94.7 | % | 95.0 | % | 1,361 | 1.18 | 35,760 | ||||||||||||||||||||||||||||
Avalon Danvers |
Danvers, MA | 433 | 512,991 | 75.0 | 2006 | 1,185 | 96.1% | 95.1 | % | 86.4 | % | 1,492 | 1.20 | 82,956 | ||||||||||||||||||||||||||||
Avalon Woburn |
Woburn, MA | 446 | 486,091 | 56.0 | 2007 | 1,090 | 95.5% | 96.4 | % | 96.7 | % | 1,590 | 1.41 | 83,327 | ||||||||||||||||||||||||||||
Avalon at Lexington Hills |
Lexington, MA | 387 | 511,454 | 23.0 | 2007 | 1,322 | 95.6% | 94.8 | % | 71.1 | %(3) | 1,877 | 1.35 | 86,984 | ||||||||||||||||||||||||||||
Avalon Acton |
Acton, MA | 380 | 373,690 | 50.3 | 2007 | 983 | 94.5% | 95.0 | % | 59.2 | %(3) | 1,312 | 1.27 | 62,883 | ||||||||||||||||||||||||||||
Avalon Sharon |
Sharon, MA | 156 | 178,628 | 27.2 | 2007 | 1,145 | 98.1% | 96.5 | % | 62.3 | %(3) | 1,618 | 1.36 | 30,221 | ||||||||||||||||||||||||||||
Avalon at Center Place (11) |
Providence, RI | 225 | 233,910 | 1.2 | 1991/1997 | 1,040 | 93.3% | 95.0 | % | 94.5 | % | 1,952 | 1.78 | 29,537 | ||||||||||||||||||||||||||||
Avalon at Hingham Shipyard |
Hingham, MA | 235 | 298,981 | 12.9 | 2009 | 1,272 | 97.5% | 80.1 | %(3) | 17.1 | % | 1,735 | 1.09 | (3) | 54,221 | |||||||||||||||||||||||||||
Avalon Northborough I |
Northborough, MA | 163 | 183,000 | 14.0 | 2009 | 1,123 | 97.6% | 53.0 | %(3) | N/A | 3,626 | 1.71 | (3) | 25,030 | ||||||||||||||||||||||||||||
Avalon Blue Hills |
Randolph, MA | 276 | 307,085 | 23.1 | 2009 | 1,113 | 82.3% | 42.7 | %(3) | N/A | 7,314 | 2.80 | (3) | 45,316 | ||||||||||||||||||||||||||||
Fairfield-New Haven, CT |
||||||||||||||||||||||||||||||||||||||||||
Avalon Gates |
Trumbull, CT | 340 | 389,047 | 37.0 | 1997 | 1,144 | 95.6% | 96.9 | % | 96.5 | % | 1,618 | 1.37 | 37,712 | ||||||||||||||||||||||||||||
Avalon Glen |
Stamford, CT | 238 | 265,940 | 4.1 | 1991 | 1,117 | 95.8% | 95.2 | % | 97.1 | % | 1,892 | 1.61 | 32,566 | ||||||||||||||||||||||||||||
Avalon Springs |
Wilton, CT | 102 | 160,159 | 12.0 | 1996 | 1,570 | 95.1% | 95.2 | % | 94.2 | % | 2,825 | 1.71 | 17,299 | ||||||||||||||||||||||||||||
Avalon Valley |
Danbury, CT | 268 | 303,193 | 17.1 | 1999 | 1,131 | 98.9% | 96.4 | % | 95.7 | % | 1,616 | 1.38 | 26,443 | ||||||||||||||||||||||||||||
Avalon on Stamford Harbor |
Stamford, CT | 323 | 337,572 | 12.1 | 2003 | 1,045 | 93.8% | 94.8 | % | 96.5 | % | 2,421 | 2.19 | 62,969 | ||||||||||||||||||||||||||||
Avalon New Canaan (9) |
New Canaan, CT | 104 | 145,118 | 9.1 | 2002 | 1,395 | 97.1% | 94.2 | % | 96.1 | % | 2,648 | 1.79 | 24,469 | ||||||||||||||||||||||||||||
Avalon at Greyrock Place |
Stamford, CT | 306 | 334,381 | 3.0 | 2002 | 1,093 | 95.8% | 95.3 | % | 96.3 | % | 2,097 | 1.83 | 70,844 | ||||||||||||||||||||||||||||
Avalon Danbury |
Danbury, CT | 234 | 238,952 | 36.0 | 2005 | 1,021 | 97.4% | 95.6 | % | 96.0 | % | 1,584 | 1.48 | 35,621 | ||||||||||||||||||||||||||||
Avalon Darien |
Darien, CT | 189 | 242,533 | 32.0 | 2004 | 1,283 | 94.7% | 93.7 | % | 94.7 | % | 2,433 | 1.78 | 41,598 | ||||||||||||||||||||||||||||
Avalon Milford I |
Milford, CT | 246 | 230,246 | 22.0 | 2004 | 936 | 97.2% | 97.9 | % | 96.2 | % | 1,441 | 1.51 | 31,501 | ||||||||||||||||||||||||||||
Avalon Huntington |
Shelton, CT | 99 | 145,573 | 7.1 | 2008 | 1,470 | 91.9% | 86.8 | % | 17.0 | %(3) | 2,029 | 1.20 | 25,214 |
21
Profile of Current, Development and Unconsolidated Communities (1)
(Dollars in thousands, except per apartment home data)
(Dollars in thousands, except per apartment home data)
Average | ||||||||||||||||||||||||||||||||||||||||||
Approx. | Year of | Average | Physical | Average | rental rate | Financial | ||||||||||||||||||||||||||||||||||||
Number of | rentable | completion / | size | occupancy | economic occupancy | $ per | $ per | reporting | ||||||||||||||||||||||||||||||||||
City and state | homes | area (Sq. Ft.) | Acres | acquisition | (Sq. Ft.) | at 12/31/09 | 2009 | 2008 | Apt (4) | Sq. Ft. | cost (5) | |||||||||||||||||||||||||||||||
METRO NY/NJ |
||||||||||||||||||||||||||||||||||||||||||
Long Island, NY |
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Avalon Commons |
Smithtown, NY | 312 | 385,290 | 20.6 | 1997 | 1,235 | 96.2% | 94.5 | % | 95.0 | % | 2,060 | 1.58 | 34,105 | ||||||||||||||||||||||||||||
Avalon Towers |
Long Beach, NY | 109 | 135,036 | 1.3 | 1990/1995 | 1,239 | 94.5% | 96.0 | % | 97.4 | % | 3,551 | 2.75 | 21,594 | ||||||||||||||||||||||||||||
Avalon Court |
Melville, NY | 494 | 601,342 | 35.4 | 1997/2000 | 1,217 | 97.4% | 95.2 | % | 94.2 | % | 2,375 | 1.86 | 60,411 | ||||||||||||||||||||||||||||
Avalon at Glen Cove South (11) |
Glen Cove, NY | 256 | 262,285 | 4.0 | 2004 | 1,025 | 93.8% | 95.1 | % | 95.8 | % | 2,265 | 2.10 | 68,152 | ||||||||||||||||||||||||||||
Avalon Pines I & II |
Coram, NY | 450 | 547,981 | 74.0 | 2005/2006 | 1,218 | 96.2% | 94.7 | % | 95.8 | % | 1,958 | 1.52 | 71,712 | ||||||||||||||||||||||||||||
Avalon at Glen Cove North (11) |
Glen Cove, NY | 111 | 100,851 | 1.3 | 2007 | 909 | 97.3% | 95.3 | % | 96.8 | % | 2,076 | 2.18 | 39,944 | ||||||||||||||||||||||||||||
Northern New Jersey |
||||||||||||||||||||||||||||||||||||||||||
Avalon Cove |
Jersey City, NJ | 504 | 640,467 | 11.0 | 1997 | 1,271 | 96.4% | 96.1 | % | 96.1 | % | 2,719 | 2.06 | 93,581 | ||||||||||||||||||||||||||||
Avalon at Edgewater |
Edgewater, NJ | 408 | 438,670 | 7.6 | 2002 | 1,075 | 97.1% | 95.8 | % | 96.3 | % | 2,290 | 2.04 | 75,438 | ||||||||||||||||||||||||||||
Avalon at Florham Park |
Florham Park, NJ | 270 | 330,410 | 41.9 | 2001 | 1,224 | 95.6% | 96.3 | % | 95.8 | % | 2,576 | 2.03 | 42,115 | ||||||||||||||||||||||||||||
Avalon Lyndhurst |
Lyndhurst, NJ | 328 | 352,462 | 5.8 | 2006 | 1,075 | 93.9% | 96.1 | % | 94.9 | % | 2,023 | 1.81 | 80,984 | ||||||||||||||||||||||||||||
Central New Jersey |
||||||||||||||||||||||||||||||||||||||||||
Avalon Run
(7) & Run East (8) |
Lawrenceville, NJ | 632 | 718,101 | 36.1 | 1994/1996 | 1,136 | 95.7% | 95.7 | % | 95.1 | % | 1,484 | 1.25 | 76,725 | ||||||||||||||||||||||||||||
Avalon Watch |
West Windsor, NJ | 512 | 496,141 | 64.4 | 1988 | 969 | 93.8% | 96.0 | %(2) | 96.0 | % | 1,393 | 1.38 | (2) | 36,111 | |||||||||||||||||||||||||||
Avalon at Freehold |
Freehold, NJ | 296 | 317,416 | 40.3 | 2002 | 1,072 | 94.6% | 96.2 | % | 96.2 | % | 1,708 | 1.53 | 34,826 | ||||||||||||||||||||||||||||
Avalon Run East II |
Lawrenceville, NJ | 312 | 341,292 | 70.5 | 2003 | 1,094 | 97.1% | 95.5 | % | 96.0 | % | 1,753 | 1.53 | 52,238 | ||||||||||||||||||||||||||||
Avalon at Tinton Falls |
Tinton Falls, NJ | 216 | 240,747 | 35.0 | 2007 | 1,115 | 96.3% | 95.9 | % | 56.3 | %(3) | 1,756 | 1.51 | 41,045 | ||||||||||||||||||||||||||||
New York, NY |
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Avalon Gardens |
Nanuet, NY | 504 | 617,992 | 62.5 | 1998 | 1,226 | 96.2% | 96.9 | % | 97.0 | % | 2,082 | 1.64 | 55,579 | ||||||||||||||||||||||||||||
Avalon Green |
Elmsford, NY | 105 | 115,038 | 16.9 | 1995 | 1,096 | 96.2% | 97.3 | % | 97.4 | % | 2,327 | 2.07 | 13,951 | ||||||||||||||||||||||||||||
Avalon Willow |
Mamaroneck, NY | 227 | 240,459 | 4.0 | 2000 | 1,059 | 96.0% | 97.1 | % | 98.0 | % | 2,188 | 2.01 | 47,603 | ||||||||||||||||||||||||||||
The Avalon |
Bronxville, NY | 110 | 148,335 | 1.5 | 1999 | 1,349 | 97.3% | 96.1 | % | 97.7 | % | 3,660 | 2.61 | 31,579 | ||||||||||||||||||||||||||||
Avalon Riverview I (11) |
Long Island City, NY | 372 | 352,988 | 1.0 | 2002 | 949 | 94.9% | 96.8 | % | 96.8 | % | 3,139 | 3.20 | 95,234 | ||||||||||||||||||||||||||||
Avalon Bowery Place I |
New York, NY | 206 | 162,000 | 1.1 | 2006 | 786 | 97.0% | 95.5 | % | 96.2 | % | 4,037 | 4.90 | 92,810 | ||||||||||||||||||||||||||||
Avalon Riverview North (11) |
Long Island City, NY | 602 | 519,092 | 1.8 | 2007 | 862 | 93.9% | 96.2 | % | 92.2 | %(3) | 2,746 | 3.06 | 169,329 | ||||||||||||||||||||||||||||
Avalon on
the Sound (11) |
New Rochelle, NY | 412 | 415,369 | 2.4 | 2001 | 1,008 | 96.4% | 96.7 | % | 96.2 | % | 2,204 | 2.11 | 117,354 | ||||||||||||||||||||||||||||
Avalon on the Sound East (11) |
New Rochelle, NY | 588 | 622,999 | 1.7 | 2007 | 1,060 | 94.9% | 96.1 | % | 79.6 | %(3) | 2,270 | 2.06 | 179,654 | ||||||||||||||||||||||||||||
Avalon Bowery Place II |
New York, NY | 90 | 73,624 | 1.1 | 2007 | 818 | 96.0% | 94.1 | % | 97.1 | % | 3,554 | 4.09 | 55,766 | ||||||||||||||||||||||||||||
Avalon White Plains |
White Plains, NY | 407 | 379,555 | 0.1 | 2009 | 933 | 86.0% | 54.3 | %(3) | 14.2 | % | 2,477 | 1.44 | (3) | 150,431 | |||||||||||||||||||||||||||
Avalon Morningside Park (11) |
New York, NY | 295 | 243,157 | 0.8 | 2009 | 824 | 93.2% | 89.5 | %(3) | 25.5 | % | 2,857 | 3.10 | (3) | 109,654 | |||||||||||||||||||||||||||
Avalon Charles Pond |
Coram, NY | 200 | 176,000 | 39.0 | 2009 | 880 | 96.5% | 50.5 | %(3) | N/A | 4,382 | 2.51 | (3) | 48,078 | ||||||||||||||||||||||||||||
MID-ATLANTIC/MIDWEST |
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Baltimore, MD |
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Avalon at
Fairway Hills I, II, & III (7) |
Columbia, MD | 720 | 724,027 | 59.0 | 1987/1996 | 1,006 | 95.4% | 96.3 | % | 94.6 | % | 1,335 | 1.28 | 52,948 | ||||||||||||||||||||||||||||
Avalon Symphony Woods (SGlen) |
Columbia, MD | 176 | 179,880 | 10.0 | 1986 | 1,022 | 94.9% | 92.8 | %(2) | 88.8 | %(2) | 1,328 | 1.21 | (2) | 13,828 | |||||||||||||||||||||||||||
Avalon Symphony Woods (SGate) |
Columbia, MD | 216 | 214,670 | 12.7 | 1986/2006 | 994 | 98.2% | 92.0 | %(2) | 90.3 | %(2) | 1,257 | 1.16 | (2) | 41,752 | |||||||||||||||||||||||||||
Washington, DC |
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Avalon at Foxhall |
Washington, DC | 308 | 297,876 | 2.7 | 1982 | 967 | 92.9% | 95.3 | % | 96.3 | % | 2,307 | 2.27 | 45,086 | ||||||||||||||||||||||||||||
Avalon at Gallery Place I |
Washington, DC | 203 | 184,157 | 0.5 | 2003 | 907 | 96.1% | 96.8 | % | 96.7 | % | 2,577 | 2.75 | 49,045 | ||||||||||||||||||||||||||||
Avalon at Decoverly |
Rockville, MD | 564 | 551,292 | 34.8 | 1991/1995/2007 | 977 | 94.9% | 95.7 | % | 96.2 | % | 1,487 | 1.46 | 63,524 | ||||||||||||||||||||||||||||
Avalon Fields I |
Gaithersburg, MD | 192 | 197,280 | 5.0 | 1996 | 1,028 | 95.8% | 97.9 | % | 96.7 | % | 1,407 | 1.34 | 14,541 | ||||||||||||||||||||||||||||
Avalon Fields II |
Gaithersburg, MD | 96 | 100,268 | 5.0 | 1998 | 1,044 | 96.9% | 96.3 | % | 97.0 | % | 1,584 | 1.46 | 8,333 | ||||||||||||||||||||||||||||
Avalon Knoll |
Germantown, MD | 300 | 290,544 | 26.7 | 1985 | 968 | 96.3% | 96.0 | % | 96.5 | % | 1,236 | 1.23 | 9,003 | ||||||||||||||||||||||||||||
Avalon at Rock Spring (9) (11) |
North Bethesda, MD | 386 | 387,884 | 10.2 | 2003 | 1,005 | 96.9% | 97.5 | % | 96.8 | % | 1,779 | 1.73 | 82,586 |
22
Profile of Current, Development and Unconsolidated Communities (1)
(Dollars in thousands, except per apartment home data)
(Dollars in thousands, except per apartment home data)
Average | ||||||||||||||||||||||||||||||||||||||||||
Approx. | Year of | Average | Physical | Average | rental rate | Financial | ||||||||||||||||||||||||||||||||||||
Number of | rentable | completion / | size | occupancy | economic occupancy | $ per | $ per | reporting | ||||||||||||||||||||||||||||||||||
City and state | homes | area (Sq. Ft.) | Acres | acquisition | (Sq. Ft.) | at 12/31/09 | 2009 | 2008 | Apt (4) | Sq. Ft. | cost (5) | |||||||||||||||||||||||||||||||
Avalon at Grosvenor Station |
North Bethesda, MD | 497 | 472,001 | 10.0 | 2004 | 950 | 94.8% | 96.9 | % | 97.0 | % | 1,798 | 1.84 | 82,452 | ||||||||||||||||||||||||||||
Avalon at Traville (8) |
North Potomac, MD | 520 | 575,529 | 47.9 | 2004 | 1,107 | 95.6% | 96.5 | % | 97.0 | % | 1,777 | 1.55 | 70,102 | ||||||||||||||||||||||||||||
Avalon Fair Lakes |
Fairfax, VA | 420 | 354,945 | 24.3 | 1989/1996 | 845 | 95.5% | 95.7 | % | 93.3% | (2) | 1,382 | 1.57 | 37,886 | ||||||||||||||||||||||||||||
Avalon at Ballston Washington
Towers |
Arlington, VA | 344 | 294,954 | 4.1 | 1990 | 857 | 95.1% | 95.8 | % | 96.2 | % | 1,809 | 2.02 | 39,215 | ||||||||||||||||||||||||||||
Avalon at Cameron Court |
Alexandria, VA | 460 | 478,068 | 16.0 | 1998 | 1,039 | 96.1% | 96.4 | % | 96.2 | % | 1,878 | 1.74 | 44,582 | ||||||||||||||||||||||||||||
Avalon at Providence Park |
Fairfax, VA | 141 | 148,282 | 9.3 | 1988/1997 | 1,052 | 97.9% | 96.3 | % | 96.7 | % | 1,558 | 1.43 | 11,942 | ||||||||||||||||||||||||||||
Avalon Crescent |
McLean, VA | 558 | 613,426 | 19.1 | 1996 | 1,099 | 97.0% | 97.0 | % | 96.5 | % | 1,850 | 1.63 | 57,921 | ||||||||||||||||||||||||||||
Avalon at Arlington Square |
Arlington, VA | 842 | 628,433 | 20.1 | 2001 | 746 | 95.1% | 96.6 | % | 96.8 | % | 1,876 | 2.43 | 113,679 | ||||||||||||||||||||||||||||
Chicago, IL |
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Avalon at
Danada Farms (8) |
Wheaton, IL | 295 | 351,206 | 19.2 | 1997 | 1,191 | 95.3% | 96.5 | % | 96.2 | % | 1,417 | 1.15 | 40,030 | ||||||||||||||||||||||||||||
Avalon at Stratford Green (8) |
Bloomingdale, IL | 192 | 237,124 | 12.7 | 1997 | 1,235 | 95.3% | 96.0 | % | 96.7 | % | 1,425 | 1.11 | 22,253 | ||||||||||||||||||||||||||||
Avalon Arlington Heights |
Arlington Heights, IL | 409 | 352,236 | 2.8 | 1987/2000 | 861 | 93.6% | 95.7 | % | 96.2 | % | 1,495 | 1.66 | 56,986 | ||||||||||||||||||||||||||||
PACIFIC NORTHWEST |
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Seattle, WA |
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Avalon Redmond Place |
Redmond, WA | 222 | 219,075 | 8.4 | 1991/1997 | 987 | 94.1% | 92.0 | % | 86.4 | %(2) | 1,358 | 1.27 | 31,922 | ||||||||||||||||||||||||||||
Avalon at Bear Creek |
Redmond, WA | 264 | 296,530 | 22.2 | 1998 | 1,123 | 91.7% | 94.4 | % | 96.6 | % | 1,380 | 1.16 | 36,283 | ||||||||||||||||||||||||||||
Avalon Bellevue |
Bellevue, WA | 200 | 170,965 | 1.7 | 2001 | 855 | 94.0% | 93.3 | % | 94.8 | % | 1,555 | 1.70 | 31,093 | ||||||||||||||||||||||||||||
Avalon RockMeadow (8) |
Bothell, WA | 206 | 246,683 | 11.2 | 2000 | 1,197 | 91.8% | 94.4 | % | 95.2 | % | 1,260 | 0.99 | 25,032 | ||||||||||||||||||||||||||||
Avalon WildReed (8) |
Everett, WA | 234 | 266,580 | 23.0 | 2000 | 1,139 | 95.7% | 95.3 | % | 95.8 | % | 1,100 | 0.92 | 23,132 | ||||||||||||||||||||||||||||
Avalon HighGrove (8) |
Everett, WA | 391 | 428,962 | 19.0 | 2000 | 1,097 | 94.6% | 93.9 | % | 94.8 | % | 1,108 | 0.95 | 39,942 | ||||||||||||||||||||||||||||
Avalon ParcSquare (8) |
Redmond, WA | 124 | 131,706 | 2.0 | 2000 | 1,062 | 94.4% | 93.0 | % | 96.9 | % | 1,611 | 1.41 | 19,542 | ||||||||||||||||||||||||||||
Avalon Brandemoor (8) |
Lynwood, WA | 424 | 465,257 | 27.0 | 2001 | 1,097 | 95.1% | 95.1 | % | 95.1 | % | 1,162 | 1.01 | 45,691 | ||||||||||||||||||||||||||||
Avalon Belltown |
Seattle, WA | 100 | 95,201 | 0.7 | 2001 | 952 | 95.0% | 93.1 | % | 95.3 | % | 1,757 | 1.72 | 18,499 | ||||||||||||||||||||||||||||
Avalon Meydenbauer |
Bellevue, WA | 368 | 333,502 | 3.6 | 2008 | 906 | 96.2% | 92.2 | % | 48.1 | %(3) | 1,616 | 1.65 | 89,365 | ||||||||||||||||||||||||||||
NORTHERN CALIFORNIA |
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Oakland-East Bay, CA |
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Avalon Fremont |
Fremont, CA | 308 | 386,277 | 14.3 | 1994 | 1,254 | 96.8% | 97.1 | % | 96.3 | % | 1,677 | 1.30 | 57,311 | ||||||||||||||||||||||||||||
Avalon Dublin |
Dublin, CA | 204 | 179,004 | 13.0 | 1989/1997 | 877 | 95.1% | 96.7 | % | 96.7 | % | 1,473 | 1.62 | 28,694 | ||||||||||||||||||||||||||||
Avalon Pleasanton |
Pleasanton, CA | 456 | 366,062 | 14.7 | 1988/1994 | 803 | 94.5% | 95.3 | %(2) | 96.8 | % | 1,371 | 1.63 | (2) | 66,026 | |||||||||||||||||||||||||||
Avalon at Union Square |
Union City, CA | 208 | 150,320 | 8.5 | 1973/1996 | 723 | 92.8% | 95.9 | % | 96.7 | % | 1,243 | 1.65 | 22,924 | ||||||||||||||||||||||||||||
Waterford |
Hayward, CA | 544 | 452,043 | 11.1 | 1985/1986 | 831 | 90.8% | 91.8 | % | 93.9 | % | 1,250 | 1.38 | 62,190 | ||||||||||||||||||||||||||||
Avalon at Willow Creek |
Fremont, CA | 235 | 191,935 | 13.5 | 1985/1994 | 817 | 96.2% | 96.8 | %(2) | 97.0 | % | 1,457 | 1.73 | (2) | 36,493 | |||||||||||||||||||||||||||
Avalon at Dublin Station |
Dublin, CA | 305 | 300,760 | 4.7 | 2006 | 986 | 92.8% | 94.1 | % | 67.6 | %(3) | 1,691 | 1.61 | 84,380 | ||||||||||||||||||||||||||||
Avalon Union City |
Union City, CA | 439 | 428,730 | 6.0 | 2009 | 977 | 85.7% | 42.5 | %(3) | N/A | 2,120 | 0.92 | (3) | 118,740 | ||||||||||||||||||||||||||||
San Francisco, CA |
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Avalon at Cedar Ridge |
Daly City, CA | 195 | 141,411 | 7.0 | 1972/1997 | 725 | 90.3% | 95.5 | %(2) | 97.0 | % | 1,621 | 2.13 | (2) | 29,141 | |||||||||||||||||||||||||||
Avalon at Nob Hill |
San Francisco, CA | 185 | 108,712 | 1.4 | 1990/1995 | 588 | 97.8% | 96.0 | % | 96.8 | % | 1,921 | 3.14 | 28,192 | ||||||||||||||||||||||||||||
Crowne Ridge |
San Rafael, CA | 254 | 222,685 | 21.9 | 1973/1996 | 877 | 96.9% | 95.6 | % | 96.8 | % | 1,479 | 1.61 | 33,100 | ||||||||||||||||||||||||||||
Avalon Foster City |
Foster City, CA | 288 | 222,364 | 11.0 | 1973/1994 | 772 | 94.1% | 95.0 | % | 97.1 | % | 1,585 | 1.95 | 44,191 | ||||||||||||||||||||||||||||
Avalon Towers by the Bay |
San Francisco, CA | 227 | 285,881 | 1.0 | 1999 | 1,259 | 94.3% | 96.1 | % | 97.5 | % | 3,025 | 2.31 | 67,055 | ||||||||||||||||||||||||||||
Avalon Pacifica |
Pacifica, CA | 220 | 186,800 | 21.9 | 1971/1995 | 849 | 94.1% | 95.1 | % | 97.0 | % | 1,650 | 1.85 | 32,481 | ||||||||||||||||||||||||||||
Avalon Sunset Towers |
San Francisco, CA | 243 | 171,854 | 16.0 | 1961/1996 | 707 | 94.2% | 94.2 | % | 96.3 | % | 1,975 | 2.63 | 28,890 | ||||||||||||||||||||||||||||
Avalon at Diamond Heights |
San Francisco, CA | 154 | 123,566 | 3.0 | 1972/1994 | 802 | 90.3% | 93.2 | % (2) | 95.9 | % (2) | 1,901 | 2.21 | (2) | 28,933 | |||||||||||||||||||||||||||
Avalon at Mission Bay North |
San Francisco, CA | 250 | 240,368 | 1.4 | 2003 | 961 | 93.6% | 96.3 | % | 96.0 | % | 3,122 | 3.13 | 93,148 | ||||||||||||||||||||||||||||
Avalon at Mission Bay III |
San Francisco, CA | 260 | 261,361 | 1.5 | 2009 | 1,005 | 85.0% | 46.3 | %(3) | N/A | 3,078 | 1.42 | (3) | 146,913 |
23
Profile of Current, Development and Unconsolidated Communities (1)
(Dollars in thousands, except per apartment home data)
(Dollars in thousands, except per apartment home data)
Average | ||||||||||||||||||||||||||||||||||||||||||
Approx. | Year of | Average | Physical | Average | rental rate | Financial | ||||||||||||||||||||||||||||||||||||
Number of | rentable | completion / | size | occupancy | economic occupancy | $ per | reporting | |||||||||||||||||||||||||||||||||||
City and state | homes | area (Sq. Ft.) | Acres | acquisition | (Sq. Ft.) | at 12/31/09 | 2009 | 2008 | Apt (4) | $ per Sq. Ft. | cost (5) | |||||||||||||||||||||||||||||||
San Jose, CA |
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Avalon Campbell |
Campbell, CA | 348 | 329,816 | 10.8 | 1995 | 948 | 94.5% | 94.5 | % | 96.9 | % | 1,686 | 1.68 | 60,672 | ||||||||||||||||||||||||||||
CountryBrook |
San Jose, CA | 360 | 322,992 | 14.0 | 1985/1996 | 897 | 96.9% | 94.9 | % | 95.9 | % | 1,489 | 1.58 | 52,874 | ||||||||||||||||||||||||||||
Avalon on the Alameda |
San Jose, CA | 305 | 320,464 | 8.9 | 1999 | 1,051 | 94.1% | 96.7 | % | 97.3 | % | 2,037 | 1.87 | 56,939 | ||||||||||||||||||||||||||||
Avalon Rosewalk |
San Jose, CA | 456 | 459,162 | 16.6 | 1997/1999 | 1,007 | 94.5% | 95.8 | % | 96.4 | % | 1,699 | 1.62 | 79,972 | ||||||||||||||||||||||||||||
Avalon Silicon Valley |
Sunnyvale, CA | 710 | 659,729 | 13.6 | 1997 | 929 | 95.4% | 96.8 | % | 96.1 | % | 1,955 | 2.04 | 123,527 | ||||||||||||||||||||||||||||
Avalon Mountain View (9) |
Mountain View, CA | 248 | 211,552 | 10.5 | 1986 | 853 | 94.8% | 90.6 | %(2) | 88.0 | %(2) | 1,859 | 1.97 | (2) | 58,883 | |||||||||||||||||||||||||||
Avalon at Creekside |
Mountain View, CA | 294 | 215,680 | 13.0 | 1962/1997 | 734 | 96.3% | 97.0 | % | 97.6 | % | 1,515 | 2.00 | 43,657 | ||||||||||||||||||||||||||||
Avalon at Cahill Park |
San Jose, CA | 218 | 221,933 | 3.8 | 2002 | 1,018 | 95.4% | 96.7 | % | 97.6 | % | 2,020 | 1.92 | 52,747 | ||||||||||||||||||||||||||||
Avalon Towers on the Peninsula |
Mountain View, CA | 211 | 218,392 | 1.9 | 2002 | 1,035 | 95.7% | 97.0 | % | 97.3 | % | 2,639 | 2.47 | 65,811 | ||||||||||||||||||||||||||||
Countrybrook II |
San Jose, CA | 80 | 64,554 | 3.6 | 2007 | 807 | 100.0% | 95.2 | % | 96.8 | % | 1,442 | 1.70 | 18,005 | ||||||||||||||||||||||||||||
SOUTHERN CALIFORNIA |
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Orange County, CA |
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Avalon Newport |
Costa Mesa, CA | 145 | 122,415 | 6.6 | 1956/1996 | 844 | 95.9% | 95.3 | % | 96.3 | % | 1,644 | 1.86 | 10,441 | ||||||||||||||||||||||||||||
Avalon Mission Viejo |
Mission Viejo, CA | 166 | 124,770 | 7.8 | 1984/1996 | 752 | 95.2% | 93.5 | % | 95.4 | % | 1,270 | 1.58 | 14,120 | ||||||||||||||||||||||||||||
Avalon at South Coast |
Costa Mesa, CA | 258 | 210,922 | 8.0 | 1973/1996 | 818 | 96.9% | 94.0 | % | 94.4 | % | 1,377 | 1.58 | 26,027 | ||||||||||||||||||||||||||||
Avalon Santa Margarita |
Rancho Santa Margarita, CA | 301 | 229,593 | 20.0 | 1990/1997 | 763 | 95.4% | 93.1 | % | 96.7 | % | 1,333 | 1.63 | 24,527 | ||||||||||||||||||||||||||||
Avalon at Pacific Bay |
Huntington Beach, CA | 304 | 268,720 | 9.7 | 1971/1997 | 884 | 94.4% | 94.2 | % | 96.1 | % | 1,512 | 1.61 | 33,233 | ||||||||||||||||||||||||||||
Avalon Warner Place |
Canoga Park, CA | 210 | 186,402 | 3.3 | 2007 | 888 | 93.3% | 94.1 | % | 57.2 | %(3) | 1,583 | 1.68 | 52,742 | ||||||||||||||||||||||||||||
Avalon Anaheim Stadium |
Anaheim, CA | 251 | 302,480 | 3.5 | 2009 | 1,205 | 95.6% | 49.2 | %(3) | 4.8 | % | 2,267 | 0.93 | (3) | 97,813 | |||||||||||||||||||||||||||
San Diego, CA |
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Avalon at Mission Bay |
San Diego, CA | 564 | 402,320 | 12.9 | 1969/1997 | 713 | 95.2% | 94.6 | % | 95.0 | % | 1,433 | 1.90 | 66,886 | ||||||||||||||||||||||||||||
Avalon at Mission Ridge |
San Diego, CA | 200 | 208,125 | 4.0 | 1960/1997 | 1,041 | 95.0% | 92.3 | % | 94.9 | % | 1,652 | 1.46 | 22,666 | ||||||||||||||||||||||||||||
Avalon at Cortez Hill |
San Diego, CA | 294 | 227,373 | 1.4 | 1973/1998 | 773 | 94.9% | 93.4 | % | 96.4 | % | 1,506 | 1.82 | 34,745 | ||||||||||||||||||||||||||||
Avalon Fashion Valley |
San Diego, CA | 161 | 186,766 | 10.0 | 2008 | 1,160 | 92.6% | 68.4 | % | 15.3 | %(3) | 2,380 | 1.24 | 64,540 | ||||||||||||||||||||||||||||
Los Angeles, CA |
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Avalon at Media Center |
Burbank, CA | 748 | 532,264 | 14.1 | 1961/1997 | 712 | 95.2% | 94.5 | % | 95.6 | % | 1,440 | 1.91 | 77,725 | ||||||||||||||||||||||||||||
Avalon Woodland Hills |
Woodland Hills, CA | 663 | 597,871 | 18.2 | 1989/1997 | 902 | 89.6% | 83.9 | %(2) | 76.9 | %(2) | 1,500 | 1.40 | (2) | 107,901 | |||||||||||||||||||||||||||
Avalon at Warner Center |
Woodland Hills, CA | 227 | 195,224 | 7.0 | 1979/1998 | 860 | 96.5% | 94.2 | % | 94.7 | % | 1,554 | 1.70 | 27,564 | ||||||||||||||||||||||||||||
Avalon Glendale (11) |
Burbank, CA | 223 | 241,714 | 5.1 | 2003 | 1,084 | 96.4% | 94.5 | % | 94.2 | % | 2,271 | 1.98 | 41,567 | ||||||||||||||||||||||||||||
Avalon Burbank |
Burbank, CA | 400 | 360,587 | 6.9 | 1988/2002 | 901 | 88.0% | 88.1 | %(2) | 96.7 | %(2) | 1,878 | 1.84 | (2) | 91,653 | |||||||||||||||||||||||||||
Avalon Camarillo |
Camarillo, CA | 249 | 233,267 | 10.0 | 2006 | 937 | 95.2% | 93.6 | % | 94.5 | % | 1,513 | 1.51 | 48,738 | ||||||||||||||||||||||||||||
Avalon Wilshire |
Los Angeles, CA | 123 | 125,193 | 1.6 | 2007 | 1,018 | 94.3% | 94.1 | % | 94.7 | % | 2,582 | 2.39 | 46,876 | ||||||||||||||||||||||||||||
Avalon Encino |
Los Angeles, CA | 131 | 131,220 | 2.0 | 2008 | 1,002 | 96.2% | 76.9 | % | 15.7 | %(3) | 2,475 | 1.79 | 61,815 |
24
Profile of Current, Development and Unconsolidated Communities (1)
(Dollars in thousands, except per apartment home data)
(Dollars in thousands, except per apartment home data)
Average | ||||||||||||||||||||||||||||||||||||||||||
Approx. | Year of | Average | Physical | Average | rental rate | Financial | ||||||||||||||||||||||||||||||||||||
Number of | rentable | completion / | size | occupancy | economic occupancy | $ per | reporting | |||||||||||||||||||||||||||||||||||
City and state | homes | area (Sq. Ft.) | Acres | acquisition | (Sq. Ft.) | at 12/31/09 | 2009 | 2008 | Apt (4) | $ per Sq. Ft. | cost (5) | |||||||||||||||||||||||||||||||
DEVELOPMENT COMMUNITIES |
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Avalon Irvine |
Irvine, CA | 279 | 243,157 | 4.5 | N/A | 872 | N/A | N/A | N/A | N/A | N/A | 76,104 | ||||||||||||||||||||||||||||||
Avalon Walnut Creek (9) (11) |
Walnut Creek, CA | 422 | 448,384 | 5.3 | N/A | 1,063 | N/A | N/A | N/A | N/A | N/A | 98,820 | ||||||||||||||||||||||||||||||
Avalon Norwalk |
Norwalk, CT | 311 | 312,018 | 4.5 | N/A | 1,003 | N/A | N/A | N/A | N/A | N/A | 50,771 | ||||||||||||||||||||||||||||||
Avalon Fort Greene |
Brooklyn, NY | 631 | 498,632 | 1.0 | N/A | 790 | N/A | N/A | N/A | N/A | N/A | 259,672 | ||||||||||||||||||||||||||||||
Avalon Towers Bellevue (11) |
Bellevue, WA | 396 | 330,194 | 1.5 | N/A | 834 | N/A | N/A | N/A | N/A | N/A | 73,799 | ||||||||||||||||||||||||||||||
Avalon Northborough II |
Northborough, MA | 219 | 271,150 | 17.7 | N/A | 1,238 | N/A | N/A | N/A | N/A | N/A | 18,901 | ||||||||||||||||||||||||||||||
Avalon at West Long Branch |
West Long Branch, NJ | 180 | 192,357 | 10.4 | N/A | 1,069 | N/A | N/A | N/A | N/A | N/A | 2,219 | ||||||||||||||||||||||||||||||
UNCONSOLIDATED COMMUNITIES |
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Avalon at Mission Bay North II (9) |
San Francisco, CA | 313 | 291,556 | 1.5 | 2006 | 931 | 92.3% | 95.2 | % | 95.0 | % | 2,986 | 3.05 | N/A | ||||||||||||||||||||||||||||
Avalon Del Rey (9) |
Los Angeles, CA | 309 | 284,387 | 5.0 | 2006 | 920 | 94.2% | 94.3 | % | 92.7 | % | 1,972 | 2.02 | N/A | ||||||||||||||||||||||||||||
Avalon Chrystie Place I (9)(11) |
New York, NY | 361 | 266,940 | 1.5 | 2005 | 739 | 99.0% | 95.5 | % | 96.9 | % | 4,138 | 5.34 | N/A | ||||||||||||||||||||||||||||
Avalon Juanita Village (10) |
Kirkland, WA | 211 | 209,335 | 2.9 | 2005 | 992 | 91.5% | 91.6 | % | 95.3 | % | 1,661 | 1.53 | N/A | ||||||||||||||||||||||||||||
Avalon at Redondo Beach (6) |
Redondo Beach, CA | 105 | 86,075 | 1.2 | 1971/2004 | 820 | 97.1% | 93.3 | % | 94.3 | % | 1,906 | 2.17 | N/A | ||||||||||||||||||||||||||||
Avalon Sunset (6) |
Los Angeles, CA | 82 | 71,037 | 0.8 | 1987/2005 | 866 | 97.6% | 93.4 | % | 96.5 | % | 1,863 | 2.01 | N/A | ||||||||||||||||||||||||||||
Civic Center (6) |
Norwalk, CA | 192 | 174,378 | 8.7 | 1987/2005 | 908 | 96.9% | 92.5 | % | 93.6 | % | 1,584 | 1.61 | N/A | ||||||||||||||||||||||||||||
Avalon Paseo Place (6) |
Fremont, CA | 134 | 106,249 | 7.0 | 1987/2005 | 793 | 96.3% | 96.9 | % | 94.8 | % (2) | 1,453 | 1.77 | N/A | ||||||||||||||||||||||||||||
Avalon Yerba Buena (6) |
San Francisco, CA | 160 | 159,604 | 0.9 | 2000/2006 | 998 | 93.1% | 95.7 | % | 97.1 | % | 2,784 | 2.67 | N/A | ||||||||||||||||||||||||||||
The Springs (6) |
Corona, CA | 320 | 241,440 | 13.3 | 1987/2006 | 755 | 95.3% | 86.0 | % | 87.7 | % | 1,017 | 1.16 | N/A | ||||||||||||||||||||||||||||
Avalon Skyway (6) |
San Jose,CA | 348 | 287,918 | 18.4 | 1994/2007 | 827 | 98.6% | 96.7 | % | 97.7 | % | 1,460 | 1.71 | N/A | ||||||||||||||||||||||||||||
South Hills Apartments (6) |
West Covina, CA | 85 | 107,150 | 5.3 | 1966/2007 | 1,261 | 94.1% | 94.6 | % | 88.0 | % (2) | 1,636 | 1.23 | N/A | ||||||||||||||||||||||||||||
Avalon Lakeside (6) |
Wheaton, IL | 204 | 162,821 | 12.4 | 2004 | 798 | 93.1% | 96.0 | % | 96.2 | % | 985 | 1.18 | N/A | ||||||||||||||||||||||||||||
Avalon at Poplar Creek (6) |
Schaumburg, IL | 196 | 178,490 | 12.8 | 1986/2005 | 911 | 95.9% | 95.8 | % | 91.3 | % | 1,159 | 1.22 | N/A | ||||||||||||||||||||||||||||
Avalon Lombard (6) |
Schaumburg, IL | 256 | 201,924 | 13.2 | 1988/2006 | 789 | 95.7% | 97.2 | % | 96.2 | % (2) | 1,069 | 1.32 | N/A | ||||||||||||||||||||||||||||
Middlesex Crossing (6) |
Billerica, MA | 252 | 188,915 | 13.0 | 2007 | 750 | 95.6% | 96.8 | % | 96.0 | % | 1,250 | 1.61 | N/A | ||||||||||||||||||||||||||||
Weymouth Place (6) |
Weymouth, MA | 211 | 154,957 | 7.7 | 1971/2007 | 734 | 99.1% | 92.6 | % | 95.8 | % (2) | 1,124 | 1.42 | N/A | ||||||||||||||||||||||||||||
Avalon Columbia (6) |
Columbia, MD | 170 | 180,452 | 11.3 | 1989/2004 | 1,061 | 96.5% | 96.8 | % | 96.3 | % | 1,479 | 1.35 | N/A | ||||||||||||||||||||||||||||
Avalon Cedar Place (6) |
Columbia, MD | 156 | 152,923 | 11.4 | 1972/2006 | 980 | 94.2% | 97.0 | % | 86.8 | % (2) | 1,211 | 1.20 | N/A | ||||||||||||||||||||||||||||
Avalon Centerpoint (6) |
Baltimore,MD | 392 | 312,356 | 6.9 | 2005/2007 | 797 | 91.9% | 93.8 | % | 90.5 | % | 1,439 | 1.70 | N/A | ||||||||||||||||||||||||||||
Avalon at Aberdeen Station (6) |
Aberdeen, NJ | 290 | 414,585 | 16.8 | 2002/2006 | 1,430 | 94.5% | 96.4 | % | 96.5 | % | 1,759 | 1.19 | N/A | ||||||||||||||||||||||||||||
Avalon at Rutherford Station (6) |
East Rutherford, NJ | 108 | 131,937 | 1.5 | 2005/2007 | 1,222 | 100.0% | 96.6 | % | 95.2 | % | 2,222 | 1.76 | N/A | ||||||||||||||||||||||||||||
Avalon Crystal Hill (6) |
Pomona, NY | 168 | 215,203 | 12.1 | 2001/2007 | 1,281 | 96.5% | 96.6 | % | 95.2 | % | 1,982 | 1.49 | N/A | ||||||||||||||||||||||||||||
The Hermitage (12) |
Fairfax, VA | 491 | 165,948 | 13.5 | 2009 | 338 | 95.3% | 94.2 | % (3) | N/A | 1,355 | 3.78 | (3) | N/A | ||||||||||||||||||||||||||||
Avalon Bellevue Park (12) |
Bellevue, WA | 220 | 373,843 | 1.8 | 2009 | 1,699 | 85.0% | 88.9 | % (3) | N/A | 1,339 | 0.70 | (3) | N/A |
25
(1) | We own a fee simple interest in the communities listed, excepted as noted below. | |
(2) | Represents a community that was under redevelopment during the year, which could result in lower average economic occupancy and average rental rate per square foot for the year. | |
(3) | Represents a community that completed development or was purchased during the year, which could result in lower average economic 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 GAAP. For current Development Communities, cost represents total costs incurred through December 31, 2009. Financial reporting costs are excluded for unconsolidated communities, see Note 6, Investments in Real Estate Entities. | |
(6) | We own a 15.2% combined general partnership and indirect limited partner equity interest in this community. | |
(7) | We own a general partnership interest in a partnership that owns a fee simple interest in this community. | |
(8) | We own a general partnership interest in a partnership structured as a DownREIT that owns this community. | |
(9) | We own a membership interest in a limited liability company that holds a fee simple interest in this community. | |
(10) | This community was transferred to a joint venture entity upon completion of development. We do not hold an equity interest in the entity, but retain a promoted residual interest in the profits of the entity. We receive a property management fee for this community. | |
(11) | Community is located on land subject to a land lease. | |
(12) | We own a 31.3% combined general partnership and indirect limited partner equity interest in this community. |
26
Development Communities
As of December 31, 2009, we had seven Development Communities under construction. We expect these
Development Communities, when completed, to add a total of 2,438 apartment homes to our portfolio
for a total capitalized cost, including land acquisition costs, of approximately $813,300,000. You
should carefully review Item 1a., Risk Factors, for a discussion of the risks associated with
development activity and our discussion under Item 7., Managements Discussion and Analysis of
Financial Condition and Results of Operations, for further discussion of our 2010 outlook for
development activity.
The following table presents a summary of the Development Communities. We hold a direct or
indirect fee simple ownership interest in these communities except where noted.
Total | ||||||||||||||||||||||||
Number of | capitalized | |||||||||||||||||||||||
apartment | cost (1) | Construction | Initial | Estimated | Estimated | |||||||||||||||||||
homes | ($ millions) | start | occupancy (2) | completion | stabilization (3) | |||||||||||||||||||
1. Avalon Irvine |
279 | $ | 77.4 | Q4 2007 | Q2 2009 | Q1 2010 | Q3 2010 | |||||||||||||||||
Irvine, CA |
||||||||||||||||||||||||
2. Avalon Fort Greene |
631 | 306.8 | Q4 2007 | Q4 2009 | Q1 2011 | Q3 2011 | ||||||||||||||||||
New York, NY |
||||||||||||||||||||||||
3. Avalon Walnut Creek (4) |
422 | 151.7 | Q3 2008 | Q2 2010 | Q1 2011 | Q3 2011 | ||||||||||||||||||
Walnut Creek, CA |
||||||||||||||||||||||||
4. Avalon Norwalk |
311 | 86.4 | Q3 2008 | Q2 2010 | Q2 2011 | Q4 2011 | ||||||||||||||||||
Norwalk, CT |
||||||||||||||||||||||||
5. Avalon Towers Bellevue |
396 | 126.1 | Q4 2008 | Q2 2010 | Q2 2011 | Q4 2011 | ||||||||||||||||||
Bellevue, WA |
||||||||||||||||||||||||
6. Avalon Northborough II |
219 | 36.3 | Q4 2009 | Q2 2010 | Q1 2011 | Q3 2011 | ||||||||||||||||||
Northborough, MA |
||||||||||||||||||||||||
7. Avalon at West Long Branch |
180 | 28.6 | Q4 2009 | Q3 2010 | Q1 2011 | Q3 2011 | ||||||||||||||||||
West Long Branch, NJ |
||||||||||||||||||||||||
Total |
2,438 | $ | 813.3 | |||||||||||||||||||||
(1) | Total capitalized cost includes all capitalized costs projected to be or actually incurred to develop the respective Development Community, determined in accordance with GAAP, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees. Total capitalized cost for communities identified as having joint venture ownership, either during construction or upon construction completion, represents the total projected joint venture contribution amount. | |
(2) | Future initial occupancy dates are estimates. There can be no assurance that we will pursue to completion any or all of these proposed developments. | |
(3) | Stabilized operations is defined as the earlier of (i) attainment of 95% or greater physical occupancy or (ii) the one-year anniversary of completion of development. | |
(4) | This community is being financed in part by third party, tax-exempt debt. |
Redevelopment Communities
As of December 31, 2009, we had seven consolidated communities under redevelopment. We expect the
total capitalized cost to redevelop these communities to be $118,400,000, excluding costs prior to
redevelopment. We have found that the cost to redevelop an existing apartment community is more
difficult to budget and estimate than the cost to develop a new community. Accordingly, we expect
that actual costs may vary from our budget by a wider range than for a new development community.
We cannot assure you that we will meet our schedule for reconstruction completion or restabilized
operations, or that we will meet our budgeted costs, either individually or in the aggregate. We
anticipate increasing our redevelopment activity related to communities owned by the Funds, as well
as communities in our current operating portfolio. You should carefully review Item 1a., Risk
Factors, for a discussion of the risks associated with redevelopment activity.
27
The following presents a summary of these Redevelopment Communities:
Total cost | ||||||||||||||||||||||||
Number of | ($ millions) | Estimated | Estimated | |||||||||||||||||||||
apartment | Pre-redevelopment | Total capitalized | Reconstruction | reconstruction | restabilized | |||||||||||||||||||
homes | cost | cost (1) | start | completion | operations (2) | |||||||||||||||||||
1. Avalon Woodland Hills |
663 | $ | 72.1 | $ | 110.6 | Q4 2007 | Q2 2010 | Q4 2010 | ||||||||||||||||
Woodland Hills, CA |
||||||||||||||||||||||||
2. Avalon at Diamond Heights |
154 | 25.3 | 30.6 | Q4 2007 | Q4 2010 | Q2 2011 | ||||||||||||||||||
San Francisco, CA |
||||||||||||||||||||||||
3. Avalon Burbank |
400 | 71.0 | 94.4 | Q3 2008 | Q3 2010 | Q1 2011 | ||||||||||||||||||
Burbank, CA |
||||||||||||||||||||||||
4. Avalon Pleasanton |
456 | 63.0 | 80.9 | Q2 2009 | Q4 2011 | Q2 2012 | ||||||||||||||||||
Pleasanton, CA |
||||||||||||||||||||||||
5. Avalon Watch |
512 | 30.2 | 49.9 | Q2 2009 | Q1 2012 | Q3 2012 | ||||||||||||||||||
West Windsor, NJ |
||||||||||||||||||||||||
6. Avalon at Cedar Ridge |
195 | 27.7 | 33.8 | Q3 2009 | Q1 2011 | Q3 2011 | ||||||||||||||||||
Daly City, CA |
||||||||||||||||||||||||
7. Avalon at Willow creek |
235 | 36.5 | 44.0 | Q4 2009 | Q1 2011 | Q3 2011 | ||||||||||||||||||
Fremont, CA |
||||||||||||||||||||||||
Total |
2,615 | $ | 325.8 | $ | 444.2 | |||||||||||||||||||
(1) | Total capitalized cost includes all capitalized costs projected to be or actually incurred to redevelop the respective Redevelopment Community, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees, all as determined in accordance with GAAP. | |
(2) | Restabilized operations is defined as the earlier of (i) attainment of 95% or greater physical occupancy or (ii) the one-year anniversary of completion of redevelopment. |
Development Rights
As of December 31, 2009, we are evaluating the future development of 28 new apartment communities
on land that is either owned by us, under contract, subject to a leasehold interest or for which we
hold either a purchase or lease option. We generally prefer to hold Development Rights through
options to acquire land, although for 14 of the Development Rights we currently own the land on
which a community would be built if we proceeded with development. The 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 7,180 apartment homes to our portfolio.
Substantially all of these apartment homes will offer features like those offered by the
communities we currently own. At December 31, 2009, there were cumulative capitalized costs
(including legal fees, design fees and related overhead costs, but excluding land costs) of
$87,763,000 relating to Development Rights. In addition, land costs related to the pursuit of
Development Rights (consisting of original land and additional carrying costs) of
$237,095,000 are reflected as land held for development as of December 31, 2009 on the Consolidated
Balance Sheet of the Consolidated Financial Statements set forth in Item 8 of this report. In
addition, we control certain land that is held for development under a 99-year land lease
agreement, with future minimum obligations of approximately $6,500,000 per year.
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 invest in, 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 analyses. In the event
that we do not proceed with a Development Right, we generally would not recover capitalized costs
incurred in the pursuit of those communities, unless we were to recover amounts in connection with
the sale of land; however, we cannot guarantee a recovery. Initial development costs incurred for
pursuits for which future development is not yet considered probable are expensed as incurred. In
addition, if the status of a Development Right changes, making future development no longer
probable, any capitalized pre-development costs are charged to expense. During 2009, we incurred a
charge of approximately $5,842,000 of pre-development cost for development rights that were not yet
probable of future development at the
28
time incurred, or for pursuits that we determined would not
likely be developed. We also incurred a charge of $21,152,000 on three land parcels that were held
for development that we do not currently intend to develop.
You should carefully review Section 1a., Risk Factors, for a discussion of the risks associated
with Development Rights.
The table below presents a summary of these Development Rights:
Total | ||||||||||||
Estimated | capitalized | |||||||||||
number | cost | |||||||||||
Location | of homes | ($ millions) (1) | ||||||||||
1. | Rockville Centre, NY Phase I |
210 | $ | 78 | ||||||||
2. | Greenburgh, NY Phase II |
288 | 77 | |||||||||
3. | Seattle, WA |
204 | 58 | |||||||||
4. | Lynnwood, WA Phase II |
82 | 18 | |||||||||
5. | Plymouth, MA Phase II |
92 | 20 | |||||||||
6. | Wilton, CT |
100 | 30 | |||||||||
7. | Wood-Ridge, NJ Phase I |
266 | 60 | |||||||||
8. | San Francisco, CA |
173 | 65 | |||||||||
9. | New York, NY |
691 | 307 | |||||||||
10. | Boston, MA |
180 | 97 | |||||||||
11. | Rockville Centre, NY Phase II |
139 | 51 | |||||||||
12. | Shelton, CT |
251 | 66 | |||||||||
13. | Roselle Park, NJ |
249 | 54 | |||||||||
14. | Garden City, NY |
160 | 51 | |||||||||
15. | Wood-Ridge, NJ Phase II |
140 | 32 | |||||||||
16. | Brooklyn, NY |
861 | 443 | |||||||||
17. | Rockville, MD |
239 | 57 | |||||||||
18. | Andover, MA |
115 | 26 | |||||||||
19. | Huntington Station, NY |
424 | 100 | |||||||||
20. | North Bergen, NJ |
164 | 47 | |||||||||
21. | Dublin, CA Phase II |
487 | 145 | |||||||||
22. | Seattle, WA II |
272 | 81 | |||||||||
23. | Cohasset, MA |
200 | 38 | |||||||||
24. | Stratford, CT |
130 | 22 | |||||||||
25. | Tysons Corner, VA |
338 | 87 | |||||||||
26. | Greenburgh, NY Phase III |
156 | 43 | |||||||||
27. | Yaphank, NY |
343 | 57 | |||||||||
28. | Hackensack, NJ |
226 | 48 | |||||||||
Total |
7,180 | $ | 2,258 | |||||||||
(1) | Total capitalized cost includes all capitalized costs incurred to date (if any) and projected to be incurred to develop the respective community, determined in accordance with GAAP, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees. |
29
Land Acquisitions
We select land for development and follow established procedures that we believe minimize both the
cost and the risks of development. During 2009, we acquired the following two land parcels for
development for an aggregate purchase price of approximately $11,951,000:
Estimated | Total | |||||||||||||||
number | capitalized | |||||||||||||||
Gross | of apartment | cost (1) | Date | |||||||||||||
acres | homes | ($ millions) | acquired | |||||||||||||
1. Avalon Northborough II |
8.3 | 219 | $ | 36 | February 2009 | |||||||||||
Northborough, MA |
||||||||||||||||
2. Avalon Willoughby West (2) |
4.2 | 861 | 443 | September 2009 | ||||||||||||
New York, NY |
||||||||||||||||
Total |
12.5 | 1,080 | $ | 479 | ||||||||||||
(1) | Total capitalized cost includes all capitalized costs incurred to date (if any) and projected to be incurred to develop the respective community, determined in accordance with GAAP, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees. | |
(2) | This represents a portion of the aggregate land purchase that we will transact under a non-cancelable commitment related to this expected development, as discussed in Note 8, Commitments and Contingencies, of the Consolidated Financial Statements set forth in Item 8 of this report. |
Other Land and Real Estate Assets
At December 31, 2009 we own land that we do not currently intend to develop with an aggregate
carrying basis under GAAP of $96,356,000. We believe that the current carrying basis of these
assets is such that there is no charge for impairment, or further charge in the case of assets
previously impaired. However we may be subject to the recognition of further impairment charges in
the event that there are indicators of such impairment, and we determine that the carrying basis of
the assets is greater than the current fair value, less costs to dispose.
Recent Disposition Activity
We (i) sell assets that do not meet our long-term investment strategy or when capital and real
estate markets allow us to realize a portion of the value created over the past business cycle and
(ii) redeploy the proceeds from those sales to develop, redevelop and acquire communities. Pending
such redeployment, we will generally use the proceeds from the sale of these communities to reduce
amounts outstanding under our Credit Facility. On occasion, we will set aside the proceeds from
the sale of communities into a cash escrow account to facilitate a non-taxable, like-kind exchange
transaction. From January 1, 2009 to January 31, 2010, we sold our interest in six wholly owned
communities, containing 1,332 apartment homes. The aggregate gross sales price for these assets
was $225,125,000.
Insurance and Risk of Uninsured Losses
We carry commercial general liability insurance and property insurance with respect to all of our
communities. These policies, and other insurance policies we carry, have policy specifications,
insured limits and deductibles that we consider commercially reasonable. There are, however,
certain types of losses (such as losses arising from acts
of war) that are not insured, in full or in part, because they are either uninsurable or the cost
of insurance makes it, in managements view, economically impractical. You should carefully review
the discussion under Item 1a., Risk Factors, of this Form 10-K for a discussion of risks
associated with an uninsured property or liability loss.
Many of our West Coast communities are located in the general vicinity of active earthquake faults.
Many of our communities are near, and thus susceptible to, the major fault lines in California,
including the San Andreas Fault and the Hayward Fault. We cannot assure you that an earthquake
would not cause damage or losses greater than
30
insured levels. We have in place with respect to
communities located in California and Washington, for any single occurrence and in the aggregate,
$75,000,000 of coverage. Earthquake coverage outside of California and Washington is subject to a
$100,000,000 limit each occurrence and in the aggregate. In California the deductible each
occurrence is five percent of the insured value of each damaged building. Our earthquake insurance
outside of California provides for a $100,000 deductible per occurrence except that the next
$350,000 of loss per occurrence outside California will be treated as an additional self-insured
retention until the total incurred self-insured retention exceeds $1,400,000.
On December 31, 2009, we elected to cancel and rewrite our property insurance policy for a 16 month
term in order to take advantage of updated earthquake loss projections and declining insurance
premium rates. As a result, our property insurance premium decreased by approximately 24% with no
material changes in coverage. We expect to renew this policy when it expires on May 1, 2011.
In August 2009, we renewed our general liability policy and workers compensation coverage for a
one year term, and experienced a decrease in the premium on these policies of approximately 25%,
with no material changes in the coverage. These policies are in effect until August 1, 2010.
Just as with office buildings, transportation systems and government buildings, there have been
reports that apartment communities could become targets of terrorism. In December 2007, Congress
passed the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) which is designed to
make terrorism insurance available through a federal back-stop program until 2014. In connection
with this legislation, we have purchased insurance for property damage due to terrorism up to
$250,000,000. Additionally, we have purchased insurance for certain terrorist acts, not covered
under TRIPRA, such as domestic-based terrorism. This insurance, often referred to as
non-certified terrorism insurance, is subject to deductibles, limits and exclusions. Our general
liability policy provides TRIPRA coverage (subject to deductibles and insured limits) for liability
to third parties that result from terrorist acts at our communities.
An additional consideration for insurance coverage and potential uninsured losses is mold growth.
Mold growth may occur when excessive moisture accumulates in buildings or on building materials,
particularly if the moisture problem remains undiscovered or is not addressed over a period of
time. If a significant mold problem arises at one of our communities, we could be required to
undertake a costly remediation program to contain or remove the mold from the affected community
and could be exposed to other liabilities. For further discussion of the risks and the Companys
related prevention and remediation activities, please refer to the discussion under Item 1a., Risk
Factors We may incur costs due to environmental contamination or non-compliance, elsewhere in
this report. We cannot provide assurance that we will have coverage under our existing policies
for property damage or liability to third parties arising as a result of exposure to mold or a
claim of exposure to mold at one of our communities.
We also carry crime policies (also commonly referred to as a fidelity policy or employee dishonesty
policy) that protect the Company, up to $5,000,000 per occurrence, from employee theft of money,
securities or property.
ITEM 3. LEGAL PROCEEDINGS
As previously reported, we are involved in litigation alleging that communities constructed by us
violate the accessibility requirements of the Fair Housing Act (FHA) and the Americans with
Disabilities Act. The Equal Rights Center (ERC) filed a complaint against us on September 23,
2005 in the U.S. District Court, District of Maryland with respect to 100 properties. In November
2009, we settled this litigation by entering into a court approved consent decree. Under the
consent decree we will inspect and, if necessary, remediate up to 8,250
apartment units and related public and common areas at our communities. We expect that the
remediation resulting from the inspections, which should occur over approximately a four year
period, will enhance and/or extend the useful life of the applicable communities and will therefore
be capitalized. Although we will not be able to determine the exact remediation or associated costs
until inspections are completed, we do not believe that the remediation costs will be material to
the Company.
31
On August 13, 2008 the U.S. Attorneys Office for the Southern District of New York filed a civil
lawsuit against the Company and the joint venture (CVP I, LLC) in which it has an interest that
owns Avalon Chrystie Place. The lawsuit alleges that Avalon Chrystie Place was not designed and
constructed in accordance with the accessibility requirements of the FHA. The Company designed and
constructed Avalon Chrystie Place with a view to compliance with New York Citys Local Law 58,
which for more than 20 years has been New York Citys code regulating the accessible design and
construction of apartments. After the filing of its answer and affirmative defenses, during the
fourth quarter of 2009 the plaintiff served the Company with discovery requests relating to
communities owned by the Company nationwide. The Company objected to these discovery requests as
being overly broad, as the plaintiffs complaint made factual allegations with regard to Avalon
Chrystie Place only. A magistrate judge agreed with the Company and limited discovery to Avalon
Chrystie Place. The plaintiff is appealing the magistrate judges ruling. Due to the preliminary
nature of the Department of Justice matter, including whether the scope of their suit will be
extended to other properties, we cannot predict or determine the outcome of that matter, nor is it
reasonably possible to estimate the amount of loss, if any, that would be associated with an
adverse decision or settlement.
On August 1, 2008, we filed a lawsuit in the Superior Court of the State of Washington in the
County of King (Avalon DownREIT V, L.P. v. Grand-Glacier, LLC et al) relating to our assertion that
the homeowners association in which our former Avalon Wynhaven community is a part systematically
overcharged us for various shared costs. We sold this property in 2008 and agreed to indemnify the
buyer for annual association fees to the extent they exceed an amount that we each agreed was
reasonable. The defendants have filed a cross-claim against Avalon DownREIT V, L.P. seeking
foreclosure of the property and satisfaction of all amounts alleged to be due. We intend to
vigorously pursue our claim and defend against the counter claim. We are negotiating a settlement
of this litigation on terms that are not material to the Companys operations or financial
condition, but we cannot predict if or when we will settle this litigation, or the terms of a final
judgment or settlement.
In addition to the matters described above, we are involved in various other claims and/or
administrative proceedings that arise in the ordinary course of our business. While no assurances
can be given, we do not believe that any of these other outstanding litigation matters,
individually or in the aggregate, will have a material adverse effect on our operations.
ITEM
4. [RESERVED]
32
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the NYSE under the ticker symbol AVB. The following table sets forth
the quarterly high and low sales prices per share of our common stock for the years 2009 and 2008,
as reported by the NYSE. On January 31, 2010 there were 648 holders of record of an aggregate of
81,546,465 shares of our outstanding common stock. The number of holders does not include
individuals or entities who beneficially own shares but whose shares are held of record by a broker
or clearing agency, but does include each such broker or clearing agency as one record holder.
2009 | 2008 | |||||||||||||||||||||||
Sales Price | Dividends | Sales Price | Dividends | |||||||||||||||||||||
High | Low | declared | High | Low | declared | |||||||||||||||||||
Quarter ended March 31 |
$ | 61.87 | $ | 35.38 | $ | 0.8925 | $ | 105.98 | $ | 79.78 | $ | 0.8925 | ||||||||||||
Quarter ended June 30 |
$ | 66.71 | $ | 45.48 | $ | 0.8925 | $ | 107.37 | $ | 87.65 | $ | 0.8925 | ||||||||||||
Quarter ended September 30 |
$ | 78.75 | $ | 49.98 | $ | 0.8925 | $ | 109.45 | $ | 82.97 | $ | 0.8925 | ||||||||||||
Quarter ended December 31 |
$ | 87.79 | $ | 66.91 | $ | 0.8925 | $ | 96.68 | $ | 41.43 | $ | 2.7000 |
At present, we expect to continue our policy of paying regular quarterly cash dividends.
However, the form, timing and/or amount of 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.
Dividends declared for the quarter ended December 31, 2008 included a special dividend, declared in
December 2008, of $1.8075 per share (the Special Dividend) in conjunction with the fourth quarter
2008 regular dividend of $0.8925 per share. These dividends were paid in cash and common shares.
The Special Dividend was declared to distribute a portion of the excess income attributable to
gains on asset sales from the Companys disposition activities during 2008. The Special Dividend
was declared to qualify for the dividends paid deduction for tax purposes and minimize corporate
level income taxes for 2008 and reduce federal excise taxes.
In February 2010, we announced that our Board of Directors declared a dividend on our common stock
for the first quarter of 2010 of $0.8925 per share. The dividend will be payable on April 15, 2010
to all common stockholders as of March 31, 2010.
33
Issuer Purchases of Equity Securities
(c) | (d) | |||||||||||||||
Total Number of | Maximum Dollar Amount | |||||||||||||||
Shares Purchased | that May Yet be Purchased | |||||||||||||||
(a) | (b) | as Part of Publicly | Under the Plans or | |||||||||||||
Total Number of | Average Price Paid | Announced Plans or | Programs | |||||||||||||
Shares Purchased | per Share | Programs | (in thousands) | |||||||||||||
Period | (1) | (1) | (2) | (2) | ||||||||||||
Month Ended October 31, 2009 |
| $ | | | $ | 200,000 | ||||||||||
Month Ended November 30, 2009 |
| $ | | | $ | 200,000 | ||||||||||
Month Ended December 31, 2009 |
180 | $ | 86.59 | | $ | 200,000 |
(1) | Includes shares surrendered to the Company in connection with employee stock option exercises or vesting of restricted stock as payment of exercise price or as payment of taxes. | |
(2) | As disclosed in our Form 10-Q for the quarter ended March 31, 2008, represents amounts outstanding under the Companys $500,000,000 Stock Repurchase Program. There is no scheduled expiration date to this program. |
Information regarding securities authorized for issuance under equity compensation plans is
included in the section entitled Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters in this Form 10-K.
34
ITEM 6. SELECTED FINANCIAL DATA
The following table provides historical consolidated financial, operating and other data for the
Company. You should read the table with our Consolidated Financial Statements and the Notes
included in this report (dollars in thousands, except per share information).
For the year ended | ||||||||||||||||||||
12-31-09 | 12-31-08 | 12-31-07 | 12-31-06 | 12-31-05 | ||||||||||||||||
Revenue: |
||||||||||||||||||||
Rental and other income |
$ | 844,254 | $ | 807,656 | $ | 721,644 | $ | 633,674 | $ | 578,444 | ||||||||||
Management, development and other fees |
7,328 | 6,568 | 6,142 | 6,259 | 4,304 | |||||||||||||||
Total revenue |
851,582 | 814,224 | 727,786 | 639,933 | 582,748 | |||||||||||||||
Expenses: |
||||||||||||||||||||
Operating expenses, excluding property taxes |
261,752 | 248,862 | 222,332 | 196,349 | 178,819 | |||||||||||||||
Property taxes |
83,809 | 73,937 | 67,240 | 59,500 | 57,819 | |||||||||||||||
Interest expense, net |
150,323 | 114,910 | 92,175 | 103,910 | 120,670 | |||||||||||||||
(Gain) loss on extinguishment of debt, net |
25,910 | (1,839 | ) | | | | ||||||||||||||
Depreciation expense |
209,746 | 183,748 | 157,895 | 139,075 | 136,409 | |||||||||||||||
General and administrative expense |
28,748 | 42,781 | 28,494 | 24,767 | 25,761 | |||||||||||||||
Impairment loss land holdings |
21,152 | 57,899 | | | | |||||||||||||||
Total expenses |
781,440 | 720,298 | 568,136 | 523,601 | 519,478 | |||||||||||||||
Equity in income of unconsolidated entities |
1,441 | 4,566 | 59,169 | 7,455 | 7,198 | |||||||||||||||
Gain on sale of land |
4,830 | | 545 | 13,519 | 4,479 | |||||||||||||||
Income from continuing operations |
76,413 | 98,492 | 219,364 | 137,306 | 74,947 | |||||||||||||||
Discontinued operations: |
||||||||||||||||||||
Income from discontinued operations |
13,974 | 27,353 | 33,894 | 32,402 | 41,715 | |||||||||||||||
Gain on sale of communities |
63,887 | 284,901 | 106,487 | 97,411 | 195,287 | |||||||||||||||
Total discontinued operations |
77,861 | 312,254 | 140,381 | 129,813 | 237,002 | |||||||||||||||
Net income |
154,274 | 410,746 | 359,745 | 267,119 | 311,949 | |||||||||||||||
Net (income) loss attributable to redeemable noncontrolling interests |
1,373 | 741 | (1,585 | ) | (573 | ) | (1,481 | ) | ||||||||||||
Net income attributable to the Company |
155,647 | 411,487 | 358,160 | 266,546 | 310,468 | |||||||||||||||
Dividends attributable to preferred stock |
| (10,454 | ) | (8,700 | ) | (8,700 | ) | (8,700 | ) | |||||||||||
Net income attributable to common stockholders |
$ | 155,647 | $ | 401,033 | $ | 349,460 | $ | 257,846 | $ | 301,768 | ||||||||||
Per Common Share and Share Information: |
||||||||||||||||||||
Earnings per common share basic: |
||||||||||||||||||||
Income from continuing operations attributable to common
stockholders (net of dividends attributable to preferred stock) |
$ | 0.97 | $ | 1.15 | $ | 2.65 | $ | 1.73 | $ | 0.88 | ||||||||||
Discontinued operations attributable to common stockholders |
0.97 | 4.06 | 1.78 | 1.74 | 3.24 | |||||||||||||||
Net income attributable to common stockholders |
$ | 1.94 | $ | 5.21 | $ | 4.43 | $ | 3.47 | $ | 4.12 | ||||||||||
Weighted average shares outstanding basic
(1)
|
79,951,348 | 76,783,515 | 78,680,043 | 74,125,795 | 72,952,492 | |||||||||||||||
Earnings per common share diluted: |
||||||||||||||||||||
Income from continuing operations attributable to common stockholders (net of dividends attributable to preferred stock) |
$ | 0.96 | $ | 1.15 | $ | 2.62 | $ | 1.69 | $ | 0.87 | ||||||||||
Discontinued operations attributable to common stockholders |
0.97 | 4.02 | 1.76 | 1.73 | 3.18 | |||||||||||||||
Net income
attributable to common stockholders |
$ | 1.93 | $ | 5.17 | $ | 4.38 | $ | 3.42 | $ | 4.05 | ||||||||||
Weighted
average shares outstanding diluted (2)
|
80,599,657 | 77,578,852 | 79,856,927 | 75,586,898 | 74,759,318 | |||||||||||||||
Cash dividends declared
(3)
|
$ | 3.57 | $ | 3.57 | $ | 3.40 | $ | 3.12 | $ | 2.84 |
(1) | Amounts include unvested restricted shares. Please refer to Note 1, Organization and Basis of Presentation - Earnings per Common Share of the Consolidated Financial Statements set forth in Item 8 of this report for a discussion of the calculation of Earnings per Share. | |
(2) | Weighted average common shares outstanding diluted for 2008 includes the impact of approximately 2.6 million common shares issued under the special dividend declared on December 17, 2008. | |
(3) | Does not include the special dividend of $1.8075 per share, which was declared on December 17, 2008, and paid in the form of shares of the Companys common stock. |
35
For the year ended | ||||||||||||||||||||
12-31-09 | 12-31-08 | 12-31-07 | 12-31-06 | 12-31-05 | ||||||||||||||||
Other Information: |
||||||||||||||||||||
Net income attributable to the Company |
$ | 155,647 | $ | 411,487 | $ | 358,160 | $ | 266,546 | $ | 310,468 | ||||||||||
Depreciation continuing operations |
209,746 | 183,748 | 157,895 | 139,075 | 136,409 | |||||||||||||||
Depreciation discontinued operations |
8,540 | 15,704 | 23,830 | 25,054 | 26,888 | |||||||||||||||
Interest expense, net continuing operations (1) |
176,233 | 113,071 | 92,175 | 103,910 | 120,670 | |||||||||||||||
Interest expense, net discontinued operations |
681 | 3,297 | 6,057 | 7,136 | 6,428 | |||||||||||||||
EBITDA (2) |
$ | 550,847 | $ | 727,307 | $ | 638,117 | $ | 541,721 | $ | 600,863 | ||||||||||
Funds from Operations (3) |
$ | 313,241 | $ | 315,947 | $ | 368,057 | $ | 320,199 | $ | 271,096 | ||||||||||
Number of Current Communities (4) |
165 | 164 | 163 | 150 | 143 | |||||||||||||||
Number of apartment homes |
47,926 | 45,728 | 45,932 | 43,141 | 41,412 | |||||||||||||||
Balance Sheet Information: |
||||||||||||||||||||
Real estate, before accumulated depreciation |
$ | 8,360,091 | $ | 8,002,487 | $ | 7,556,740 | $ | 6,615,593 | $ | 5,940,146 | ||||||||||
Total assets |
$ | 7,457,605 | $ | 7,174,353 | $ | 6,736,484 | $ | 5,848,507 | $ | 5,198,598 | ||||||||||
Notes payable and unsecured credit facilities |
$ | 3,974,872 | $ | 3,674,457 | $ | 3,208,202 | $ | 2,866,433 | $ | 2,334,017 | ||||||||||
Cash Flow Information: |
||||||||||||||||||||
Net cash flows provided by operating activities |
$ | 378,600 | $ | 386,855 | $ | 454,874 | $ | 351,660 | $ | 306,248 | ||||||||||
Net cash flows used in investing activities |
$ | (333,559 | ) | $ | (266,309 | ) | $ | (809,247 | ) | $ | (511,371 | ) | $ | (19,761 | ) | |||||
Net cash flows (used in) provided by financing activities |
$ | (4,285 | ) | $ | (75,111 | ) | $ | 366,360 | $ | 162,280 | $ | (282,293 | ) |
Notes to Selected Financial Data
(1) | Interest expense, net includes any loss or gain incurred from the extinguishment of debt. | |
(2) | EBITDA is defined as net income before interest income and expense, income taxes, depreciation and amortization from both continuing and discontinued operations. Under this definition, EBITDA includes gains on sale of assets and gain on sale of partnership interests. Management generally considers EBITDA to be an appropriate supplemental measure to net income of our operating performance because it helps investors to understand our ability to incur and service debt and to make capital expenditures. EBITDA should not be considered as an alternative to net income (as determined in accordance with GAAP), as an indicator of our operating performance, or to cash flows from operating activities (as determined in accordance with GAAP) as a measure of liquidity. Our calculation of EBITDA may not be comparable to EBITDA as calculated by other companies. | |
(3) | We generally consider Funds from Operations, or FFO, as defined below, to be an appropriate supplemental measure of our operating and financial performance because, by excluding gains or losses related to dispositions of previously depreciated property and excluding real estate depreciation, which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates, FFO can help one compare the operating performance of a real estate company between periods or as compared to different companies. We believe that in order to understand our operating results, FFO should be examined with net income as presented in the Consolidated Statements of Operations and Other Comprehensive Income included elsewhere in this report. | |
Consistent with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trustsâ (NAREIT), we calculate FFO as net income or loss computed in accordance with GAAP, adjusted for: |
| gains or losses on sales of previously depreciated operating communities; | ||
| extraordinary gains or losses (as defined by GAAP); | ||
| cumulative effect of change in accounting principle; | ||
| depreciation of real estate assets; and | ||
| adjustments for unconsolidated partnerships and joint ventures. |
FFO does not represent net income in accordance with GAAP, and therefore it should not be considered an alternative to net income, which remains the primary measure, as an indication of our performance. In addition, FFO as calculated by other REITs may not be comparable to our calculation of FFO. |
36
FFO also does not represent cash generated from operating activities in accordance with GAAP, and therefore should 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. A presentation of GAAP based cash flow metrics is provided in Cash Flow Information in the table on the previous page. | ||
The following is a reconciliation of net income to FFO (dollars in thousands, except per share data): |
For the year ended | ||||||||||||||||||||
12-31-09 | 12-31-08 | 12-31-07 | 12-31-06 | 12-31-05 | ||||||||||||||||
Net income attributable to the Company |
$ | 155,647 | $ | 411,487 | $ | 358,160 | $ | 266,546 | $ | 310,468 | ||||||||||
Dividends attributable to preferred stock |
| (10,454 | ) | (8,700 | ) | (8,700 | ) | (8,700 | ) | |||||||||||
Depreciation real estate assets,
including discontinued operations and
joint venture adjustments |
221,415 | 203,082 | 184,731 | 165,982 | 163,252 | |||||||||||||||
Distributions to noncontrolling interests,
including discontinued operations |
66 | 216 | 280 | 391 | 1,363 | |||||||||||||||
Gain on sale of unconsolidated entities
holding previously depreciated real
estate assets |
| (3,483 | ) | (59,927 | ) | (6,609 | ) | | ||||||||||||
Gain on sale of previously depreciated
real estate assets |
(63,887 | ) | (284,901 | ) | (106,487 | ) | (97,411 | ) | (195,287 | ) | ||||||||||
Funds from Operations
attributable to common stockholders |
$ | 313,241 | $ | 315,947 | $ | 368,057 | $ | 320,199 | $ | 271,096 | ||||||||||
Weighted average shares outstanding diluted |
80,599,657 | 77,578,852 | 79,856,927 | 75,586,898 | 74,759,318 | |||||||||||||||
FFO per common share diluted |
$ | 3.89 | $ | 4.07 | $ | 4.61 | $ | 4.24 | $ | 3.63 |
(4) | Current Communities consist of all communities other than those which are still under construction and have not received a certificate of occupancy. |
37
ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is
intended to help provide an understanding of our business and results of operations. This MD&A
should be read in conjunction with our Consolidated Financial Statements and the accompanying Notes
to Consolidated Financial Statements included elsewhere in this report. This report, including the
following MD&A, contains forward-looking statements regarding future events or trends that should
be read in conjunction with the factors described under Forward-Looking Statements included in
this report. In addition, our actual results or developments could differ materially from those
projected in such forward-looking statements as a result of the factors discussed under
Forward-Looking Statements as well as the risk factors described in Item 1a, Risk Factors, of
this report.
Executive Overview
Business Description
We are primarily engaged in developing, acquiring, owning and operating apartment communities in
high barrier to entry markets of the United States. We believe that apartment communities are an
attractive long-term investment opportunity compared to other real estate investments, because a
broad potential resident base should help reduce demand volatility over a real estate cycle.
However, throughout the real estate cycle, apartment market fundamentals, and therefore operating
cash flows, are affected by overall economic conditions. We seek to create long-term shareholder
value by accessing capital on cost effective terms; deploying that capital to develop, redevelop
and acquire apartment communities in high barrier to entry markets; operating apartment
communities; and selling communities when they no longer meet our long-term investment strategy or
when pricing is attractive. Barriers to entry in our markets generally include a difficult and
lengthy entitlement process with local jurisdictions and dense urban or suburban areas where zoned
and entitled land is in limited supply.
We regularly evaluate the allocation of our investments by the amount of invested capital and by
product type within our individual markets, which are located in New England, the New York/New
Jersey metro area, the Mid-Atlantic, the Midwest, the Pacific Northwest, and the Northern and
Southern California regions of the United States. Our time-tested strategy is to be leaders in customer insight, market research and capital
allocation, delivering a range of multifamily offerings tailored to serve the needs of the most
attractive customer segments in the best-performing US submarkets. Our communities are
predominately upscale, which generally command among the highest rents in their markets. However,
we also pursue the ownership and operation of apartment communities that target a variety of
customer segments and price points, consistent with our goal of offering a broad range of products
and services.
Financial Highlights and Outlook
For the year ended December 31, 2009, net income available to common stockholders was $155,647,000
compared to $401,033,000 for 2008, a decrease of 61.2%. The decrease is primarily due to the
reduced number of communities sold and amount of gains related to these sales in 2009 as compared
to the prior year, coupled with the loss recognized on the tender offer completed in October 2009,
offset somewhat by a decrease in charges for land impairments and abandoned pursuit costs. Detail
of the impacts for the land impairments, abandoned pursuits as well as the charge for the tender
offer and certain other non-routine items is provided in the following table.
38
Non-Routine Items
Decrease (Increase) in Net Income and FFO
(dollars in thousands)
Decrease (Increase) in Net Income and FFO
(dollars in thousands)
Full Year | Full Year | |||||||
2008 | 2009 | |||||||
Land impairments |
$ | 57,899 | $ | 21,152 | ||||
Abandoned pursuits (1) |
6,611 | 1,139 | ||||||
Severance and related costs |
3,400 | 4,500 | ||||||
Federal excise tax |
3,200 | 515 | ||||||
(Gain) loss on unsecured notes repurchase |
(1,839 | ) | 25,910 | |||||
Gain on sale of land |
| (4,830 | ) | |||||
Joint venture income adjustment (2) |
| (1,294 | ) | |||||
Legal settlement proceeds, net |
| (1,175 | ) | |||||
Preferred stock deferred offering
expenses |
3,566 | | ||||||
Fund II organizational costs |
1,209 | | ||||||
Total non-routine items |
$ | 74,046 | $ | 45,917 | ||||
Weighted
Average Dilutive Shares Outstanding |
77,578,852 | 80,599,657 |
(1) | For purposes of non-routine classification, abandoned pursuits includes costs we expensed for individual pursuits in excess of $1,000 in a given quarter. | |
(2) | Includes our promoted interest of $3,894 in joint venture, and our pro rata portion of an impairment charge on a community in an unconsolidated joint venture of $2,600. |
Apartment fundamentals continued to be challenged during 2009. Job losses exceeded our expectations
during the year, resulting in more than expected downward pressure on rental revenue. Our
Established Community portfolio experienced a decline in year-over-year rental revenue of 3.7%,
comprised of a decrease in rental rates of 3.1% and in economic occupancy of 0.6%. This decrease in
revenues and an increase in operating expenses resulted in a decline in our Established Community
portfolio NOI of 7.1% in 2009 from the prior year.
We expect Earnings per share diluted (EPS) will decrease to $1.73 for 2010 from $1.93 in 2009,
driven primarily by a decline in revenue and NOI from our Established Communities in 2010 as
compared to the prior year. The recession, coupled with the short term nature of apartment leases,
continues to adversely impact current operating fundamentals. The expected decline in our 2010 NOI
is attributable largely to the effect of job losses experienced during the past two years.
Employment is a leading demand driver, and we expect continued weak employment conditions to
contribute to revenue declines in 2010. The impact of job losses on our results for 2010 may be
somewhat offset by (i) the expected continued weakness in the for-sale housing market during 2010,
(ii) growth in those age groups that have historically demonstrated a higher propensity to rent and
(iii) constrained levels of new supply. Our current financial outlook for 2010 provides for a
decline in rental revenue of between 3.0% and 4.5% in our Established Community portfolio resulting
in a projected NOI decline for our Established Communities of 5.0% to 7.0%.
We were again active in the capital markets in 2009, raising in excess of $1,700,000,000 through
the issuance of secured and unsecured debt, assets sales, sales of common equity in the public
markets, and capital commitments for Fund II. We have used the proceeds received to fund our
development and redevelopment activities, to acquire an indirect interest in assets through Fund
II, to repay higher cost secured and unsecured debt, and to repay floating rate debt, while
retaining substantial cash balances for general corporate purposes. Our focus on raising capital
includes consideration for managing the maturity risk associated with our secured and unsecured
debt obligations. Our 2009 activity includes the issuance of over $800,000,000 of secured
financing and $500,000,000 of unsecured notes in September 2009 in two $250,000,000 tranches, one
maturing in 2017 and the second maturing in 2020. A portion of the proceeds was used to repurchase
$310,100,000 principal amount of some or all of the amounts outstanding on unsecured notes maturing
over the next three years, effectively extending the duration of debt maturities while reducing
interest costs. We believe that our relatively modest level of secured and unsecured debt will
continue to provide financial flexibility to access capital on attractive terms.
39
The funds raised from dispositions consist of the proceeds from the sale of five communities for a gross sales
price of $179,675,000. We anticipate our level of disposition activity will be consistent in 2010,
within the range of gross sales of $180,000,000 to $200,000,000, occurring primarily during the
first half of the year
During 2009 we completed the development of nine communities for an aggregate total capitalized
cost of $810,700,000. We started the development of two communities, which are expected to be
completed for an estimated total capitalized cost of $64,900,000.
We expect an increase in investor demand for quality multifamily assets, due in part to the
increased liquidity in the capital markets and constrained supply resulting from the decline in
development activity in all markets. While we reduced our level of development during 2009 in
response to the general deterioration in real estate and capital market conditions, we believe that
our development activity will continue to create long-term value. During 2010, we expect to use
our core competency in development to deliver new assets into the market for a recovery in
apartment fundamentals that we expect in 2011 and 2012. We anticipate new development starts in
2010 with a total projected capitalized cost of $380,000,000. Consistent with this view, we also
expect to increase redevelopment activity for our wholly owned communities in 2010, during which we
expect to start redevelopment of seven wholly owned communities.
During 2010, we expect to disburse approximately $500,000,000 related to the seven communities
under development at December 31, 2009, the new development starts, and anticipated acquisitions of
land for future development. We expect approximately $50,000,000 of the projected 2010
disbursements will be funded from cash in escrow related to previously sourced tax-exempt debt. We
believe that our current level of indebtedness, our current ability to service interest and other
fixed charges and our current limited use of financial encumbrances (such as secured financing)
will provide adequate access to the capital necessary to fund our development and redevelopment
activities during 2010. We expect to meet our liquidity needs from the issuance of corporate
securities (which could include unsecured debt and/or common and preferred equity) and secured
debt, as well as from disposition proceeds, joint ventures or from retained cash. We believe that
the current market provides for an opportunity to perform certain scheduled maintenance and
repositioning activities at attractive costs due to a continued decline in costs for construction
materials and labor.
We increase our direct and indirect interests in communities through development and acquisitions.
While we grow principally through our demonstrated core competency of developing wholly owned
assets from capital sources, we also acquire interests in additional assets, primarily through our
investment in Fund II.
Fund I is a discretionary investment fund with nine institutional investors, including us. One of
our wholly owned subsidiaries is the general partner of Fund I and has invested approximately
$50,000,000 in Fund I, representing a 15.2% combined general partner and limited partner equity
interest. Fund I was our principal vehicle for acquiring apartment communities through the close of
its investment period in March 2008. Subsidiaries of Fund I have 21 loans secured by individual
assets with amounts outstanding in the aggregate of $436,410,000 with varying maturity dates (or
dates after which the loans can be prepaid without penalty), ranging from October 2011 to September
2016. These mortgage loans are secured by the underlying real estate.
Fund II is a second discretionary investment fund with six institutional investors, including us.
One of our wholly owned subsidiaries is the general partner of Fund II. Fund II was formed in
August 2008 and, in the second quarter of 2009, we added equity commitments for Fund II, resulting
in total equity commitments from five institutional investors and us of $400,000,000, of which our
commitment is $125,000,000. Total equity commitments to Fund II in the second
quarter of 2009 increased by $67,000,000 as a result of the following:
| a new institutional investor made an equity commitment of $75,000,000; | ||
| an existing institutional investor increased its commitment by $17,000,000, based on terms of its existing commitment; and | ||
| we decreased our commitment by $25,000,000 to $125,000,000, based on terms of our existing commitment, decreasing our equity interest to approximately 31%. |
40
Fund II can employ leverage of up to 65%, allowing for a total investment capacity of approximately
$1,100,000,000, and has a term that expires in August 2018, plus two one-year extension options.
Fund II now serves as the exclusive vehicle through which we will acquire investment interests in
apartment communities until August 2011 or, if earlier, until 90% of the committed capital of Fund
II is invested, subject to limited exceptions. Fund II will not include or involve our development
activities. We will receive, in addition to any returns on invested equity, asset management fees, property management fees and redevelopment fees. We will
also receive a promoted interest if certain return thresholds are met.
In 2009, Fund II acquired two communities, Avalon Bellevue Park, a 220 apartment-home community
located in Bellevue, Washington and The Hermitage, a 491 apartment-home community located in
Fairfax, Virginia. Fund II has invested $104,330,000 as of December 31, 2009. Fund II has one loan
secured by an asset in the amount of $21,515,000 with a maturity of June 2019. This loan is payable
by Fund II. As of December 31, 2009, Fund II also has $30,200,000 outstanding under a credit
facility that matures in December 2010.
In February 2010, Fund II acquired its third community, a 203 apartment-home community located in
Gaithersburg, Maryland.
Communities Overview
Our real estate investments consist primarily of current operating apartment communities,
Development Communities, and Development Rights. Our current operating communities are further
distinguished as Established Communities, Other Stabilized Communities, Lease-Up Communities and
Redevelopment Communities. Established Communities are generally operating communities that are
consolidated for financial reporting purposes and were owned and had stabilized occupancy and
operating expenses as of the beginning of the prior year, which allows the performance of these
communities and the markets in which they are located to be compared and monitored between years.
Other Stabilized Communities are generally all other consolidated operating communities that have
stabilized occupancy and operating expenses during the current year, but had not achieved
stabilization as of the beginning of the prior year. Lease-Up Communities consist of communities
where construction is complete but stabilization has not been achieved. Redevelopment Communities
consist of communities where substantial redevelopment is in progress or is planned to begin during
the current year. A more detailed description of our reportable segments and other related
operating information can be found in Note 9, Segment Reporting, of our Consolidated Financial
Statements.
Although each of these categories is important to our business, we generally evaluate overall
operating, industry and market trends based on the operating results of Established Communities,
for which a detailed discussion can be found in Results of Operations as part of our discussion
of overall operating results. We evaluate our current and future cash needs and future operating
potential based on acquisition, disposition, development, redevelopment and financing activities
within Other Stabilized, Redevelopment and Development Communities. Discussions related to these
segments of our business can be found in Liquidity and Capital Resources.
NOI of our current operating communities is one of the financial measures that we use to evaluate
community performance. NOI is affected by the demand and supply dynamics within our markets, our
rental rates and occupancy levels and our ability to control operating costs. Our overall
financial performance is also impacted by the general availability and cost of capital and the
performance of newly developed and acquired apartment communities.
As of December 31, 2009, we owned or held a direct or indirect ownership interest in 172 apartment
communities containing 50,364 apartment homes in ten states and the District of Columbia, of which
seven communities were under construction and seven communities were under reconstruction. Of
these communities, 24 were owned by entities that were not consolidated for financial reporting
purposes, including 19 owned by subsidiaries of Fund I and two owned by subsidiaries of Fund II.
In addition, we owned a direct or indirect ownership interest in Development Rights to develop an
additional 28 wholly owned communities that, if developed in the manner expected, will contain an
estimated 7,180 apartment homes.
Results of Operations
41
Our year-over-year operating performance is primarily affected by both overall and individual
geographic market conditions and apartment fundamentals and reflected in changes in NOI of our
Established Communities; NOI derived from acquisitions and development completions; the loss of NOI
related to disposed communities; and capital market and financing activity. A comparison of our
operating results for 2009, 2008 and 2007 follows (dollars in thousands):
2009 | 2008 | $ Change | % Change | 2008 | 2007 | $ Change | % Change | |||||||||||||||||||||||||
Revenue: |
||||||||||||||||||||||||||||||||
Rental and other income |
$ | 844,254 | $ | 807,656 | $ | 36,598 | 4.5 | % | $ | 807,656 | $ | 721,644 | $ | 86,012 | 11.9 | % | ||||||||||||||||
Management, development and other fees |
7,328 | 6,568 | 760 | 11.6 | % | 6,568 | 6,142 | 426 | 6.9 | % | ||||||||||||||||||||||
Total revenue |
851,582 | 814,224 | 37,358 | 4.6 | % | 814,224 | 727,786 | 86,438 | 11.9 | % | ||||||||||||||||||||||
Expenses: |
||||||||||||||||||||||||||||||||
Direct property operating expenses,
excluding property taxes |
214,507 | 191,690 | 22,817 | 11.9 | % | 191,690 | 171,968 | 19,722 | 11.5 | % | ||||||||||||||||||||||
Property taxes |
83,809 | 73,937 | 9,872 | 13.4 | % | 73,937 | 67,240 | 6,697 | 10.0 | % | ||||||||||||||||||||||
Total community operating expenses |
298,316 | 265,627 | 32,689 | 12.3 | % | 265,627 | 239,208 | 26,419 | 11.0 | % | ||||||||||||||||||||||
Corporate-level property management
and other indirect operating expenses |
37,559 | 39,874 | (2,315 | ) | (5.8 | %) | 39,874 | 38,627 | 1,247 | 3.2 | % | |||||||||||||||||||||
Investments and investment management expense |
3,844 | 4,787 | (943 | ) | (19.7 | %) | 4,787 | 4,763 | 24 | 0.5 | % | |||||||||||||||||||||
Expensed development and other pursuit costs |
5,842 | 12,511 | (6,669 | ) | (53.3 | %) | 12,511 | 6,974 | 5,537 | 79.4 | % | |||||||||||||||||||||
Interest expense, net |
150,323 | 114,910 | 35,413 | 30.8 | % | 114,910 | 92,175 | 22,735 | 24.7 | % | ||||||||||||||||||||||
(Gain) loss on extinguishment of debt, net |
25,910 | (1,839 | ) | 27,749 | (1,508.9 | %) | (1,839 | ) | | (1,839 | ) | N/A | ||||||||||||||||||||
Depreciation expense |
209,746 | 183,748 | 25,998 | 14.1 | % | 183,748 | 157,895 | 25,853 | 16.4 | % | ||||||||||||||||||||||
General and administrative expense |
28,748 | 42,781 | (14,033 | ) | (32.8 | %) | 42,781 | 28,494 | 14,287 | 50.1 | % | |||||||||||||||||||||
Impairment loss |
21,152 | 57,899 | (36,747 | ) | (63.5 | %) | 57,899 | | 57,899 | N/A | ||||||||||||||||||||||
Gain on sale of land |
(4,830 | ) | | (4,830 | ) | N/A | | (545 | ) | 545 | (100.0 | %) | ||||||||||||||||||||
Total other expenses |
478,294 | 454,671 | 23,623 | 5.2 | % | 454,671 | 328,383 | 126,288 | 38.5 | % | ||||||||||||||||||||||
Equity in income of unconsolidated entities |
1,441 | 4,566 | (3,125 | ) | (68.4 | %) | 4,566 | 59,169 | (54,603 | ) | (92.3 | %) | ||||||||||||||||||||
Income from continuing operations |
76,413 | 98,492 | (22,079 | ) | (22.4 | %) | 98,492 | 219,364 | (120,872 | ) | (55.1 | %) | ||||||||||||||||||||
Discontinued operations: |
||||||||||||||||||||||||||||||||
Income from discontinued operations |
13,974 | 27,353 | (13,379 | ) | (48.9 | %) | 27,353 | 33,894 | (6,541 | ) | (19.3 | %) | ||||||||||||||||||||
Gain on sale of communities |
63,887 | 284,901 | (221,014 | ) | (77.6 | %) | 284,901 | 106,487 | 178,414 | 167.5 | % | |||||||||||||||||||||
Total discontinued operations |
77,861 | 312,254 | (234,393 | ) | (75.1 | %) | 312,254 | 140,381 | 171,873 | 122.4 | % | |||||||||||||||||||||
Net income |
154,274 | 410,746 | (256,472 | ) | (62.4 | %) | 410,746 | 359,745 | 51,001 | 14.2 | % | |||||||||||||||||||||
Net (income) loss attributable to redeemable
noncontrolling interests |
1,373 | 741 | 632 | 85.3 | % | 741 | (1,585 | ) | 2,326 | (146.8 | %) | |||||||||||||||||||||
Net income attributable to the Company |
155,647 | 411,487 | (255,840 | ) | (62.2 | %) | 411,487 | 358,160 | 53,327 | 14.9 | % | |||||||||||||||||||||
Dividends attributable to preferred stock |
| (10,454 | ) | 10,454 | (100.0 | %) | (10,454 | ) | (8,700 | ) | (1,754 | ) | 20.2 | % | ||||||||||||||||||
Net income attributable to common stockholders |
$ | 155,647 | $ | 401,033 | $ | (245,386 | ) | (61.2 | %) | $ | 401,033 | $ | 349,460 | $ | 51,573 | 14.8 | % | |||||||||||||||
Net income attributable to common stockholders decreased $245,386,000 or 61.2%, to $155,647,000 in
2009
primarily due to the reduced number of communities sold and amount of gains related to these sales
in 2009 as compared to the prior year and the loss recognized on the early repurchase of debt
completed in October 2009. The overall decline in net income was mitigated by a reduction in
charges for land impairments and abandoned pursuit costs between years. Net income attributable to
common stockholders increased $51,573,000 or 14.8% in 2008 over the prior year period due primarily
to gains from the sale of communities and year-over-year increases in community operating
performance, partially offset by charges associated with land impairments and abandoned pursuits as
well as increased costs for interest and depreciation.
NOI is considered by management to be an important and appropriate supplemental performance measure
to net income because it helps both investors and management to understand the core operations of a
community or communities prior to the allocation of any corporate-level or financing-related costs.
NOI reflects the operating performance of a community and allows for an easy comparison of the
operating performance of individual assets or groups of assets. In addition, because prospective
buyers of real estate have different financing and overhead structures, with varying marginal
impacts to overhead by acquiring real estate, NOI is considered by many in the real estate industry
to be a useful measure for determining the value of a real estate asset or group of assets. We
define NOI as total property revenue less direct property operating expenses, including property
taxes.
NOI does not represent cash generated from operating activities in accordance with GAAP.
Therefore, NOI should not be considered an alternative to net income as an indication of our
performance. NOI should also not be considered an alternative to net cash flow from operating
activities, as determined by GAAP, as a measure of liquidity, nor is NOI necessarily indicative of
cash available to fund cash needs. Reconciliations of NOI for the years ended December 31, 2009,
2008 and 2007 to net income for each year, are as follows (dollars in thousands):
42
For the year ended | ||||||||||||
12-31-09 | 12-31-08 | 12-31-07 | ||||||||||
Net income |
$ | 154,274 | $ | 410,746 | $ | 359,745 | ||||||
Indirect operating expenses, net of
corporate income |
30,315 | 33,010 | 31,285 | |||||||||
Investments and investment management expense |
3,844 | 4,787 | 4,763 | |||||||||
Expensed development and other pursuit costs |
5,842 | 12,511 | 6,974 | |||||||||
Interest expense, net |
150,323 | 114,910 | 92,175 | |||||||||
(Gain) loss on extinguishment of debt, net |
25,910 | (1,839 | ) | | ||||||||
General and administrative expense |
28,748 | 42,781 | 28,494 | |||||||||
Equity in income of unconsolidated entities |
(1,441 | ) | (4,566 | ) | (59,169 | ) | ||||||
Depreciation expense |
209,746 | 183,748 | 157,895 | |||||||||
Impairment loss land holdings |
21,152 | 57,899 | | |||||||||
Gain on sale of real estate assets |
(68,717 | ) | (284,901 | ) | (107,032 | ) | ||||||
Income from discontinued operations |
(13,974 | ) | (27,353 | ) | (33,894 | ) | ||||||
Net operating income |
$ | 546,022 | $ | 541,733 | $ | 481,236 | ||||||
The NOI increases for both 2009 and 2008, as compared to the prior year period, consist of changes
in the following categories (dollars in thousands):
Full Year | Full Year | |||||||
2009 | 2008 | |||||||
Established Communities |
$ | (29,707 | ) | $ | 19,160 | |||
Other Stabilized Communities |
14,228 | 44,722 | ||||||
Development and Redevelopment Communities |
19,768 | (3,385 | ) | |||||
Total |
$ | 4,289 | $ | 60,497 | ||||
The NOI decrease in Established Communities in 2009 is due to the rental revenue declines as a
result of the job losses experienced in 2008 and 2009, coupled with increases in community
operating expenses. During 2009, we focused on minimizing rental rate declines, while maintaining
occupancy of at least 94% in all regions.
We anticipate that rental rates and occupancy levels will decline in 2010 such that overall rental
revenue will decline between 3.0% and 4.5%. The projected revenue decline is due to our
expectation of continued job losses at least through the second quarter of 2010. Expense growth
also impacts growth in NOI and we continue to monitor and manage operating expenses to constrain
expense growth. We expect operating expenses to be flat in 2010 from prior year levels. As a
result, we expect NOI for our Established Communities to decline between 5.0% and 7.0%. These
projections are based on our outlook for employment conditions and apartment market fundamentals in
2010, both nationally and in the markets where we operate, as well as the individual demand/supply
characteristics of each submarket in which we operate. There can be no assurance that our outlook
for economic conditions and/or their impact on our operating results will be accurate, and actual
results could differ materially. Please see Risk Factors, Forward-Looking Statements and other
discussions in this report on Form 10-K for a discussion of factors which could affect our results
of operations.
Rental and other income increased in 2009 as compared to the prior year due to additional rental
income generated from newly developed communities, offset somewhat by decreased rental rates and
occupancy for our Established Communities. Rental and other income increased in 2008 as compared to
the prior year due to increased rental rates and occupancy for our Established Communities, coupled
with additional rental income generated from newly developed communities.
Overall Portfolio The weighted average number of occupied apartment homes increased to 38,233 apartment homes for 2009 as compared to 37,886 homes for 2008 and 38,436 homes for 2007. The increase in 2009 over 2008 is due to homes available from newly developed communities, offset partially by communities sold during 2009, as well as declining occupancy levels due to the economic slow down. |
43
The weighted average monthly revenue per occupied apartment home decreased to $1,910 for 2009 as compared to $1,921 in 2008 and $1,767 in 2007. | ||
Established Communities Rental revenue decreased $22,370,000, or 3.7%, for 2009 and increased $18,221,000, or 3.1%, for 2008. The decrease in 2009 from 2008 is due primarily to lower rental rates. For 2009, the weighted average monthly revenue per occupied apartment home decreased 3.1% to $1,869 compared to $1,929 in 2008. There was a slight change in year-over-year average economic occupancy for 2009 down 0.6% to 95.6% compared to 96.2% in 2008. The increase in rental revenue in 2008 over the prior year is due entirely to increased average rental rates. Economic occupancy takes into account the fact that apartment homes of different sizes and locations within a community have different economic impacts on a communitys gross revenue. Economic occupancy is defined as gross potential revenue less vacancy loss, as a percentage of gross potential revenue. Gross potential revenue is determined by valuing occupied homes at leased rates and vacant homes at market rents. |
We experienced decreases in Established Communities rental revenue in all six of our regions for
2009 as compared to the prior year period as discussed in more detail below.
The Metro New York/New Jersey region, which accounted for approximately 26% of Established Community rental revenue for 2009, experienced a decrease in rental revenue of 4.3% for 2009 as compared to 2008. Average rental rates decreased 4.1% to $2,288, and economic occupancy decreased 0.2% to 95.9% for 2009 as compared to 2008. During 2009, the trend of weakening rental market conditions in both New York City and surrounding suburban markets resulting from the recession is reflected in the declining rental rates in the second half of 2009. The challenges facing the financial services industry drive the regions current expectation for job growth, which is expected to lag the U.S. average and our other markets. | ||
The Mid-Atlantic/Midwest region, which represented approximately 21% of Established Community rental revenue during 2009, experienced a decrease in rental revenue of 0.6% as compared to 2008. Average rental rates decreased by 0.7% to $1,729, while economic occupancy increased by 0.1% from 96.4% to 96.5% for 2009 as compared to 2008. This region continues to benefit from the impact of government and government services employment, which has served to stabilize the economy relative to other regions. | ||
The New England region accounted for approximately 21% of the Established Community rental revenue for 2009 and experienced a rental revenue decrease of 4.0% over the prior year. Average rental rates decreased 2.9% to $1,984 and economic occupancy decreased 1.1% to 95.2% for 2009, as compared to 2008. Given the significance of the financial services industry in the Boston metro area, as well as the impact of New York trends on Fairfield-New Haven, we expect the job recovery to be slow. | ||
Northern California accounted for approximately 17% of the Established Community rental revenue for 2009 and experienced a rental revenue decrease of 4.7% over the prior year. Average rental rates decreased 4.1% to $1,923 and economic occupancy decreased by 0.6% to 96.2% for 2009 as compared to 2008. The regions employment base, with its above-average exposure to high-technology industries, can result in greater volatility in rental revenue changes relative to other regions. | ||
Southern California accounted for approximately 11% of the Established Community rental revenue for 2009 and experienced a rental revenue decrease of 5.0% over the prior year. Average rental rates decreased 3.8% to $1,509, and economic occupancy decreased by 1.2% to 94.1% for 2009 as compared to 2008. | ||
The Pacific Northwest region accounted for approximately 5% of the Established Community rental revenue for 2009 and experienced a rental revenue decrease of 5.0% over the prior year. Average rental rates decreased 3.7% to $1,282 and economic occupancy decreased by 1.3% to 94.2% for 2009 as compared to 2008. The Pacific Northwest also has a large presence of technology based employment, a contributing factor to the greater degree of volatility in rental rates. We believe a recovery in apartment fundamentals in the Pacific Northwest is likely to lag other AvalonBay regions given an increased level of housing supply in many submarkets. |
44
In accordance with GAAP, cash concessions are amortized as an offset to rental revenue over the
approximate lease term, which is generally one year. As a supplemental measure, we also present
rental revenue with concessions stated on a cash basis to help investors evaluate the impact of
both current and historical concessions on GAAP based rental revenue and to more readily enable
comparisons to revenue as reported by other companies. Rental revenue with concessions stated on a
cash basis also allows investors to understand historical trends in cash concessions, as well as
current rental market conditions.
The following table reconciles total rental revenue in conformity with GAAP to total rental revenue
adjusted to state concessions on a cash basis for our Established Communities for the years 2009
and 2008 (dollars in thousands). Information for the year ended December 31, 2007 is not
presented, as Established Community classification is not comparable prior to January 1, 2008. See
Note 9, Segment Reporting, of our Consolidated Financial Statements.
For the year ended | ||||||||
12-31-09 | 12-31-08 | |||||||
Rental revenue (GAAP basis) |
$ | 587,752 | $ | 610,122 | ||||
Concessions amortized |
8,000 | 6,771 | ||||||
Concessions granted |
(6,361 | ) | (8,004 | ) | ||||
Rental revenue adjusted to state
concessions on a cash basis |
$ | 589,391 | $ | 608,889 | ||||
Year-over-year % change GAAP revenue |
(3.7 | %) | n/a | |||||
Year-over-year % change cash concession based revenue |
(3.2 | %) | n/a |
Management, development and other fees increased $760,000, or 11.6%, in 2009 and increased
$426,000, or 6.9% in 2008. The increase in 2009 was due primarily to increased asset and property
management fees from Fund II. The increase in 2008 was due primarily to increased redevelopment
fees and property management fees as additional communities were acquired by subsidiaries of Fund
I.
Direct property operating expenses, excluding property taxes increased $22,817,000, or 11.9% in
2009 and increased $19,722,000, or 11.5% for 2008 as compared to the prior year periods, primarily
due to the addition of recently developed apartment homes coupled with increased administrative
expense due primarily to increases in bad debt expense due to the recession.
For Established Communities, direct property operating expenses, excluding property taxes,
increased $6,411,000, or 4.8% to $139,955,000 for 2009 and $328,000, or 0.2% to $133,544,000 for
2008, due primarily to increased administrative and community maintenance related costs, offset
partially by a decrease in insurance and utility related expenses. The increases in administrative
expense are primarily due to increased bad debt.
Property taxes increased $9,872,000, or 13.4% and $6,697,000, or 10.0% in 2009 and 2008,
respectively, due to the addition of newly developed and redeveloped apartment homes and overall
higher assessments. Property tax increases are also impacted by the size and timing of successful
tax appeals.
For Established Communities, property taxes increased by $1,242,000, or 2.1% and $3,515,000, or
6.2% for 2009 and 2008, respectively over the prior year, due to both higher assessments throughout
all regions and reductions in property taxes realized in 2008 that did not occur in 2009. The
impact of the current economic environment has not been reflected in current assessments, as there
is typically a time lag between a change in the economy affecting property valuations and updated
real estate tax assessments. We expect property taxes in 2010 to increase over 2009 due primarily
to higher tax rates, without the benefit of lower assessed values. For communities in California,
property tax changes are determined by the change in the California Consumer Price Index, with
increases limited by law (Proposition 13). We evaluate property tax increases internally, and also
engage third-party consultants to assist in our evaluations. We appeal property tax increases when
appropriate.
45
Corporate-level property management and other indirect operating expenses decreased by $2,315,000,
or 5.8% in 2009 and increased $1,247,000, or 3.2% in 2008 over the prior year periods. The
decrease in 2009 over 2008 is due primarily to decreases in compensation costs, coupled with a
reduction in costs associated with the initial start up of our Customer Care Center, discussed
below. The increase in 2008 over the prior year is due primarily to increased compensation and
employee separation costs, as well as costs relating to the initial start up of the Customer Care
Center and other corporate initiatives focused on increasing efficiency and enhancing controls at
our operating communities. The Customer Care Center in Virginia Beach, Virginia opened in 2007 and
expanded in 2008 to centralize certain community-related accounting, administrative and customer
service functions.
Investments and investment management reflects the costs incurred for investment acquisitions and
investment management. Investments and investment management costs decreased in 2009 by $943,000 or
19.7% from the prior year due primarily to lower compensation and travel-related costs.
Expensed development and other pursuit costs primarily reflect the costs incurred for abandoned
pursuit costs, which include costs incurred for development pursuits not yet considered probable
for development, as well as the abandonment of Development Rights and disposition pursuits.
Expensed development and other pursuit costs increased in 2008 as compared to 2007 and 2009 due to
increases in abandoned development pursuits in response to
the economic decline and deteriorating market conditions in 2008. These costs can be volatile,
particularly in periods of economic downturn or when there is limited access to capital, and the
costs may vary significantly from period to period.
Interest expense, net increased $35,413,000, or 30.8% and $22,735,000, or 24.7% in 2009 and 2008,
respectively over the prior years. This category includes interest expense offset by interest
capitalized, and interest income. The increase in 2009 is due primarily to a decrease in the
amount of interest capitalized in 2009 as compared to the prior year, coupled with increased
interest expense in 2009 compared to 2008 from additional secured and unsecured debt issued to fund
development activity. The decrease in interest capitalized is due to the reduction in development
activity in 2009 as compared to 2008. The increase in 2008 over the prior year is due primarily to
a decrease in interest income in 2008 as compared to the prior year period, coupled with increased
interest expense in 2008 compared to 2007. The higher level of interest income in 2007 is due to
higher invested cash balances from our January 2007 equity offering. The increased interest
expense in 2008 is due primarily to increased amounts of debt outstanding in 2008 compared to the
prior year.
(Gain) loss on the extinguishment of debt, net reflects the impact of our debt repurchase activity
for payments above or below the carrying basis. The net loss in 2009 is due to the $310,100,000 in
unsecured notes that we purchased prior to their scheduled maturity at a premium, offset by the
gain recognized from our January 2009 tender offer.
Depreciation expense increased in 2009 and 2008 primarily due to the net increase in assets from
the completion of development and redevelopment activities, offset by assets sold during the year.
General and administrative expense (G&A) decreased $14,033,000, or 32.8% in 2009 and increased
$14,287,000, or 50.1% in 2008 as compared to the prior years. The increase in 2008 as compared to
2007 and 2009 is due primarily to higher severance and related costs in 2008 associated with the
decrease in our planned development activity, higher federal excise tax expense in 2008 resulting
from gains on disposition activity and organization costs for the formation of Fund II incurred in
2008.
Impairment loss for 2009 is due to the write down of three land parcels which we do not currently
plan on developing. Impairment loss in 2008 is due primarily to the write down of eight land
parcels which we did not plan on developing at the time. We did not recognize an impairment loss in
2007.
Gain on sale of land for 2009 increased primarily due to the sale of two land parcels in 2009,
without comparable activity in the prior year.
Equity in income of unconsolidated entities for 2009 decreased from the prior year period due
primarily to the recognition of our proportionate amount of an impairment loss that one of our
unconsolidated investments recognized on one of its operating communities in 2009. In addition,
gains from both the sale of a community by an
46
unconsolidated joint venture as well as from an
investment in a joint venture formed to develop for sale homes occurred in 2008 that were not
present in 2009. These amounts were partially offset by the recognition of our promoted interest in
the joint venture that owns Avalon Chrystie Place in 2009. The decrease in 2008 from the prior
year is due primarily to the gain on the sale of two partnership interests in 2007 and the related
loss of partnership income, partially offset by our portion of the gain from the sale of a
community by a joint venture partner, income from joint ventures where the underlying communities
have achieved stabilized operations and gains from our investment in a joint venture formed to
develop for-sale homes.
Income from discontinued operations represents the net income generated by communities sold or
qualifying as discontinued operations during the period from January 1, 2007 through December 31,
2009. This income decreased for 2009 and 2008 due to an increased number of communities sold in
each year as compared to the prior year period. See Note 7, Real Estate Disposition Activities,
of our Consolidated Financial Statements.
Gain on sale of communities decreased in 2009 and increased in 2008 as compared to the prior year
periods as a result of changes in the sales volume and associated gains in each respective year.
The amount of gain realized upon disposition of a community depends on many factors, including the
number of communities sold, the size and carrying value of those communities and the market
conditions in the local area.
Net (income) loss attributable to redeemable noncontrolling interests for 2009 resulted in income
of $1,373,000 compared to income of $741,000 in 2008 due primarily to recognition of income for our
joint venture partners portion of expenses incurred by Fund II, as well as the conversion and
redemption of limited partnership units in 2008 and 2009, thereby reducing outside ownership
interests and the allocation of net income to outside ownership interests.
FFO
FFO is considered by management to be an appropriate supplemental measure of our operating and
financial performance. In calculating FFO, we exclude gains or losses related to dispositions of
previously depreciated property and exclude real estate depreciation, which can vary among owners
of identical assets in similar condition based on historical cost accounting and useful life
estimates. FFO can help one compare the operating performance of a real estate company between
periods or as compared to different companies. We believe that in order to understand our
operating results, FFO should be examined with net income as presented in our Consolidated
Financial Statements included elsewhere in this report. For a more detailed discussion and
presentation of FFO, see Selected Financial Data, included in Item 6 of this report.
Liquidity and Capital Resources
We believe our principal short-term liquidity needs are to fund:
| development and redevelopment activity in which we are currently engaged; | ||
| the minimum dividend payments on our common stock required to maintain our REIT qualification under the Internal Revenue Code of 1986; | ||
| debt service and principal payments either at maturity or opportunistic payments; | ||
| normal recurring operating expenses; | ||
| DownREIT partnership unit distributions; and | ||
| capital calls for Fund II, as required. |
Factors affecting our liquidity and capital resources are our cash flows from operations, financing
activities and investing activities (including dispositions) as well as general economic and market
conditions. Operating cash flow has historically been determined by: (i) the number of apartment
homes currently owned, (ii) rental rates, (iii) occupancy levels and (iv) operating expenses with
respect to apartment homes. The timing and type of capital markets activity in which we engage, as
well as our plans for development, redevelopment, acquisition and disposition activity, are
affected by changes in the capital markets environment, such as changes in interest rates or the
availability of cost-effective capital. We regularly review our liquidity needs, the adequacy of
cash flows from operations and other expected liquidity sources to meet these needs.
47
During 2009 we saw access to liquidity improve as credit and equity markets recovered. During 2009,
we raised in excess of $1,700,000,000 in the form of secured debt, unsecured debt and public and
private equity. In 2010, we expect to meet all of our liquidity needs from a variety of internal
and external sources, including cash balances on hand, borrowing capacity under our Credit Facility
(as defined below), secured financings and other public or private sources of liquidity as
discussed below, as well as our operating activities. To the extent that currently available
internal and external resources do not satisfy our needs, we may seek additional external
financing. Additional external financing could come from a variety of sources, such as public
sales of debt or equity securities or unsecured or secured loans from financial institutions or
other private or governmental lenders, among others. Private equity through joint ventures may also
be used. Our ability to obtain additional financing will depend on a variety of factors such as
market conditions, the general availability of credit, the overall availability of credit to the
real estate industry, our credit ratings and credit capacity, as well as the perception of lenders
regarding our long or short-term financial prospects. At December 31, 2009, we have unrestricted
cash, cash equivalents and cash in escrow of $316,367,000 available for both current liquidity
needs as well as development activities, of which $93,440,000 relates to a Development Right for
which we have not begun construction.
Unrestricted cash and cash equivalents totaled $105,691,000 at December 31, 2009, an increase of
$40,756,000 from $64,935,000 at December 31, 2008. The following discussion relates to changes in
cash due to operating, investing and financing activities, which are presented in our Consolidated
Statements of Cash Flows included elsewhere in this report.
Operating Activities Net cash provided by operating activities decreased to $378,600,000 in 2009 from $386,084,000 in 2008. The decrease was driven primarily by the timing of general corporate payables and the payment of interest amounts in 2009 as compared to 2008. | ||
Investing Activities Net cash used in investing activities of $333,559,000 in 2009 related to investments in assets through development and redevelopment. In total, we invested $572,103,000 during 2009 in the following areas: |
| We invested approximately $560,155,000 in the development of communities. | ||
| We had capital expenditures of $11,948,000 for real estate and non-real estate assets. |
These amounts are partially offset by the proceeds from the disposition of real estate of $189,417,000. |
Financing Activities Net cash used in financing activities totaled $4,285,000 in 2009. The net cash used is due primarily to the repayment of unsecured notes at maturity and repayment of amounts tendered of $868,564,000, the payment of cash dividends in the amount of $283,710,000, the repayment of amounts outstanding on the Credit Facility, defined below, of $124,000,000, and the repayment of secured notes of $65,229,000. These amounts were partially offset by the pooled secured financing executed in April 2009 for $741,140,000, the issuance of $500,000,000 aggregate principal amount of unsecured notes in September and $108,860,000 received from the issuance of common stock, primarily through the Continuous Equity Program (the CEP) we initiated in August 2009. |
Variable Rate Unsecured Credit Facility
We currently have a $1,000,000,000 revolving variable rate Credit Facility with a syndicate of
commercial banks that expires in November 2011 (assuming our exercise of a one-year renewal
option). We pay an annual facility fee of approximately $1,250,000. The Credit Facility bears
interest at varying levels based on the London Interbank Offered Rate (LIBOR), our credit rating
and on a maturity schedule selected by us. The current stated pricing is LIBOR plus 0.40% per
annum (0.63% on January 31, 2010). The spread over LIBOR can vary from LIBOR plus 0.325% to LIBOR
plus 1.00% based on our credit rating. In addition, a competitive bid option is available for
borrowings of up to $650,000,000. This option allows banks that are part of the lender consortium
to bid to provide us loans at a rate that is lower than the stated pricing provided by the Credit
Facility. The competitive bid option may result in lower pricing if market conditions allow. We
had no outstanding balance under this competitive bid option at January 31, 2010. At January 31,
2010, there were no amounts outstanding on the Credit Facility,
48
$45,355,000 was used to provide
letters of credit, and $954,645,000 was available for borrowing under the Credit Facility.
We expect to refinance the Credit Facility prior to maturity. While credit market conditions
continue to improve from the difficult environment seen in 2008 and 2009, we expect facility
pricing to be higher, and we may not be able to achieve the same borrowing capacity as exists under
the current Credit Facility.
We are subject to financial and other covenants contained in the Credit Facility and the indenture
under which our unsecured notes were issued. The financial covenants include the following:
| limitations on the amount of total and secured debt in relation to our overall capital structure; | ||
| limitation on the amount of our unsecured debt relative to the undepreciated basis of real estate assets that are not encumbered by property-specific financing; and | ||
| minimum levels of debt service coverage. |
We were in compliance with these covenants at December 31, 2009.
In addition, our secured borrowings may include yield maintenance, defeasance, or prepayment
penalty provisions, which would result in us incurring an additional charge in the event of a full
or partial prepayment of outstanding principal before the scheduled maturity. These provisions in
our secured borrowings are generally consistent with other similar types of debt instruments issued
during the same time period in which our borrowings were secured.
Continuous Equity Offering Program
In August 2009, we commenced the CEP, under which we may sell up to $400,000,000 of our common
stock. This program is available until the $400,000,000 is sold or August 2012, whichever occurs
first. We may sell the shares in amounts and at times to be determined by us. Actual sales will
depend on a variety of factors to be determined by us, including market conditions, the trading
price of our common stock and determinations of the appropriate sources of funding. In conjunction
with the CEP, we engaged sales agents who received compensation of 1.5% of the gross sales price
for shares sold. During the three months ended December 31, 2009 we sold 37,900 shares under this
program at an average sales price of $74.34 per share, for net proceeds of $2,775,000. During the
year ended December 31, 2009, we sold 1,504,901 shares under this program at an average sales price
of approximately $69.56 per share, resulting in net proceeds of approximately $103,109,000.
Future Financing and Capital Needs Debt Maturities
One of our principal long-term liquidity needs is the repayment of long-term debt at the time that
such debt matures. For unsecured notes, a portion of the principal of these notes may be repaid
prior to maturity. Early retirement of our unsecured notes could result in gains or losses on
extinguishment similar to those recognized in 2008 and 2009. If we do not have funds on hand
sufficient to repay our indebtedness as it becomes due, it will be necessary for us to refinance
the debt. This refinancing may be accomplished by uncollateralized private or public debt
offerings, additional debt financing that is secured by mortgages on individual communities or
groups of communities, draws on our Credit Facility or by equity offerings. Although we believe we
will have the capacity to meet our currently anticipated 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.
The following financing activity occurred during 2009:
| we obtained secured financing for $741,140,000 pursuant to fourteen separate ten-year mortgage loans, each secured by one of our current communities at an interest rate of 5.86%; | ||
| we obtained $93,440,000 in variable rate tax-exempt bond financing related to a Development Right, the proceeds of which will be held in escrow until requisitioned for construction funding; | ||
| we repaid $4,143,000 in 8.08% fixed rate debt secured by a real estate asset formerly classified as a Development Right in Alexandria, Virginia in April 2009 pursuant to its scheduled maturity; |
49
| we redeemed $37,438,000 principal amount of our $150,000,000, 7.5% unsecured notes that mature in August 2009 for par and cancelled the notes upon purchase; | ||
| we redeemed $64,423,000 principal amount of our $200,000,000, 7.5% unsecured notes that mature in December 2010 for $63,135,000 with the discount below par recorded as a gain reflected in (gain) loss on extinguishment of debt, net on the Consolidated Statement of Operations and Other Comprehensive Income of the Consolidated Financial Statements in Item 8 of this Form 10-K and cancelled the notes upon purchase; | ||
| we repaid $105,600,000 in unsecured debt, representing the first tranche of our $330,000,000 unsecured variable rate term loan pursuant to its scheduled maturity; | ||
| we repaid $19,470,000 in variable rate debt secured by Avalon at Flanders Hill, located in Westborough, Massachusetts pursuant to its scheduled maturity; | ||
| we repaid $102,562,000 of previously issued 7.5% unsecured notes, along with any unpaid interest, pursuant to their scheduled maturity; | ||
| we repaid $112,200,000 in unsecured debt, representing the second tranche of our term loan prior to its scheduled maturity of January 2010; | ||
| we issued a total of $500,000,000 of unsecured notes under our existing shelf registration statement. The offering consisted of two separate $250,000,000 tranches with effective interest rates of 5.80% and 6.19%, maturing in March 2017 and March 2020, respectively; | ||
| we settled a cash tender offer, purchasing the following unsecured notes: |
| $46,001,000 principal amount of our $200,000,000 7.5% unsecured notes due December 2010 at a weighted average price of 107.50% of par; | ||
| $150,000,000 principal amount of our $300,000,000 6.625% unsecured notes due September 2011 at a weighted average price of 109.00% of par; | ||
| $55,600,000 principal amount of our $250,000,000 5.5% unsecured notes due January 2012 at a weighted average price of 106.25% of par; and | ||
| $48,399,000 principal amount of our $250,000,000 6.125% unsecured notes due November 2012 at a weighted average price of 108.75% of par; |
| we repurchased $10,100,000 principal amount of our 6.625% unsecured notes due September 2011 at a weighted average price of 107.0% of par; | ||
| we recorded a charge for the purchase premium as well as certain deferred issuance costs related to the $300,000,000 cash tender offer and additional $10,100,000 unsecured notes repurchase activity above of approximately $26,000,000 in (gain) loss on extinguishment of debt, net on the Consolidated Statement of Operations and Other Comprehensive Income of the Consolidated Financial Statements in Item 8 of this form 10-K; | ||
| we repaid the final $112,200,000 of our term loan outstanding prior to its scheduled maturity of January 2011; | ||
| we repaid $33,615,000 in variable rate debt secured by Avalon at Newton Highlands, located in Newton, Massachusetts pursuant to its scheduled maturity; and | ||
| through the execution of interest rate swaps, we effectively converted $300,000,000 principal of our fixed rate unsecured notes, with a weighted average maturity of approximately two years, to floating rate debt at a weighted average interest rate of three month LIBOR plus 5.42%. |
50
The following table details debt maturities for the next five years, excluding our Credit
Facility and amounts outstanding related to communities classified as held for sale, for debt
outstanding at December 31, 2009 (dollars in thousands).
All-In | Principal | |||||||||||||||||||||||||||||||||||||||||||
interest | maturity | Balance outstanding | Scheduled maturities | |||||||||||||||||||||||||||||||||||||||||
Community | rate (1) | date | 12-31-08 | 12-31-09 | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | ||||||||||||||||||||||||||||||||||
Tax-exempt bonds |
||||||||||||||||||||||||||||||||||||||||||||
Fixed rate |
||||||||||||||||||||||||||||||||||||||||||||
CountryBrook |
6.47 | % | Mar-2012 | $ | 14,680 | $ | 13,961 | $ | 766 | $ | 816 | $ | 12,379 | $ | | $ | | $ | | |||||||||||||||||||||||||
Avalon at Symphony Glen |
5.17 | % | Jul-2024 | 9,780 | 9,780 | | | | | | 9,780 | |||||||||||||||||||||||||||||||||
Avalon at Lexington |
6.95 | % | Feb-2025 | 11,665 | 11,226 | 466 | 495 | 526 | 559 | 594 | 8,586 | |||||||||||||||||||||||||||||||||
Avalon Campbell |
6.50 | % | Jun-2025 | 30,914 | 29,881 | (2 | ) | | | | | | 29,881 | |||||||||||||||||||||||||||||||
Avalon Pacifica |
6.51 | % | Jun-2025 | 14,023 | 13,554 | (2 | ) | | | | | | 13,554 | |||||||||||||||||||||||||||||||
Avalon Fields |
7.79 | % | May-2027 | 9,988 | 9,714 | 295 | 316 | 339 | 364 | 390 | 8,010 | |||||||||||||||||||||||||||||||||
Avalon Oaks |
7.49 | % | Feb-2041 | 16,940 | 16,794 | 157 | 168 | 180 | 193 | 207 | 15,889 | |||||||||||||||||||||||||||||||||
Avalon Oaks West |
7.54 | % | Apr-2043 | 16,795 | 16,661 | 142 | 152 | 162 | 173 | 185 | 15,847 | |||||||||||||||||||||||||||||||||
Avalon at Chestnut Hill |
6.15 | % | Oct-2047 | 41,834 | 41,501 | 349 | 368 | 388 | 409 | 432 | 39,555 | |||||||||||||||||||||||||||||||||
166,619 | 163,072 | 2,175 | 2,315 | 13,974 | 1,698 | 1,808 | 141,102 | |||||||||||||||||||||||||||||||||||||
Variable rate (3)
|
||||||||||||||||||||||||||||||||||||||||||||
Avalon Burbank |
1.99 | % | Oct-2010 | 30,142 | 29,387 | 29,387 | | | | | | |||||||||||||||||||||||||||||||||
Waterford |
1.09 | % | Jul-2014 | 33,100 | 33,100 | (4 | ) | | | | | 33,100 | | |||||||||||||||||||||||||||||||
Avalon at Mountain View |
1.14 | % | Feb-2017 | 18,300 | 18,300 | (4 | ) | | | | | | 18,300 | |||||||||||||||||||||||||||||||
Avalon at Mission Viejo |
1.44 | % | Jun-2025 | 7,635 | 7,635 | (4 | ) | | | | | | 7,635 | |||||||||||||||||||||||||||||||
Avalon at Nob Hill |
1.31 | % | Jun-2025 | 20,800 | 20,800 | (4 | ) | | | | | | 20,800 | |||||||||||||||||||||||||||||||
Avalon Campbell |
2.10 | % | Jun-2025 | 7,886 | 8,919 | (2 | ) | | | | | | 8,919 | |||||||||||||||||||||||||||||||
Avalon Pacifica |
2.12 | % | Jun-2025 | 3,577 | 4,046 | (2 | ) | | | | | | 4,046 | |||||||||||||||||||||||||||||||
Avalon Bowery Place I |
1.35 | % | Nov-2037 | 93,800 | 93,800 | | | | | | 93,800 | |||||||||||||||||||||||||||||||||
Avalon Bowery Place II |
1.57 | % | Nov-2039 | 48,500 | 48,500 | (5 | ) | | | | | | 48,500 | |||||||||||||||||||||||||||||||
Avalon Acton |
1.67 | % | Jul-2040 | 45,000 | 45,000 | (5 | ) | | | | | | 45,000 | |||||||||||||||||||||||||||||||
Avalon Morningside Park |
3.00 | % | Nov-2040 | 100,000 | 100,000 | (5 | ) | | | | | | 100,000 | |||||||||||||||||||||||||||||||
West Chelsea |
0.18 | % | May-2012 | | 93,440 | (5 | ) | | | 93,440 | | | | |||||||||||||||||||||||||||||||
Avalon Walnut Creek |
2.95 | % | Mar-2046 | 116,000 | 116,000 | (5 | ) | | | | | | 116,000 | |||||||||||||||||||||||||||||||
Avalon Walnut Creek |
2.89 | % | Mar-2046 | 10,000 | 10,000 | (5 | ) | | | | | | 10,000 | |||||||||||||||||||||||||||||||
534,740 | 628,927 | 29,387 | | 93,440 | | 33,100 | 473,000 | |||||||||||||||||||||||||||||||||||||
Conventional loans (6) |
||||||||||||||||||||||||||||||||||||||||||||
Fixed rate |
||||||||||||||||||||||||||||||||||||||||||||
$150 million unsecured notes |
| Aug-2009 | 140,000 | | | | | | | | ||||||||||||||||||||||||||||||||||
$200 million unsecured notes |
7.67 | % | Dec-2010 | 200,000 | 14,576 | (7 | ) (12) | 14,576 | | | | | | |||||||||||||||||||||||||||||||
$300 million unsecured notes |
6.79 | % | Sep-2011 | 300,000 | 39,900 | (8 | ) (12) | | 39,900 | | | | | |||||||||||||||||||||||||||||||
$50 million unsecured notes |
6.31 | % | Sep-2011 | 50,000 | | (12 | ) | | | | | | | |||||||||||||||||||||||||||||||
$250 million unsecured notes |
5.74 | % | Jan-2012 | 235,000 | 104,400 | (9 | ) (12) | | | 104,400 | | | | |||||||||||||||||||||||||||||||
$250 million unsecured notes |
6.26 | % | Nov-2012 | 250,000 | 201,601 | (10 | ) | | | 201,601 | | | | |||||||||||||||||||||||||||||||
$100 million unsecured notes |
5.11 | % | Mar-2013 | 100,000 | 100,000 | | | | 100,000 | | | |||||||||||||||||||||||||||||||||
$150 million unsecured notes |
5.52 | % | Apr-2014 | 150,000 | 150,000 | | | | | 150,000 | | |||||||||||||||||||||||||||||||||
$250 million unsecured notes |
5.89 | % | Sep-2016 | 250,000 | 250,000 | | | | | | 250,000 | |||||||||||||||||||||||||||||||||
$250 million unsecured notes |
5.82 | % | Mar-2017 | | 250,000 | | | | | | 250,000 | |||||||||||||||||||||||||||||||||
$250 million unsecured notes |
6.19 | % | Mar-2020 | | 250,000 | | | | | | 250,000 | |||||||||||||||||||||||||||||||||
Avalon at Twinbrook |
7.25 | % | Oct-2011 | 7,801 | 7,578 | 239 | 7,339 | | | | | |||||||||||||||||||||||||||||||||
Avalon at Tysons West |
5.55 | % | Jul-2028 | 6,218 | 6,045 | 183 | 193 | 204 | 216 | 229 | 5,020 | |||||||||||||||||||||||||||||||||
4600 Eisenhower Avenue |
| Apr-2009 | 4,175 | | | | | | | | ||||||||||||||||||||||||||||||||||
Avalon Orchards |
7.77 | % | Jul-2033 | 19,322 | 19,011 | 333 | 357 | 382 | 409 | 438 | 17,092 | |||||||||||||||||||||||||||||||||
Avalon at Arlington Square |
4.81 | % | Apr-2013 | 170,125 | 170,125 | | | | 170,125 | | | |||||||||||||||||||||||||||||||||
Avalon at Cameron Court |
5.07 | % | Apr-2013 | 94,572 | 94,572 | | | | 94,572 | | | |||||||||||||||||||||||||||||||||
Avalon Crescent |
5.59 | % | May-2015 | 110,600 | 110,600 | | | | | | 110,600 | |||||||||||||||||||||||||||||||||
Avalon Silicon Valley |
5.74 | % | Jul-2015 | 150,000 | 150,000 | | | | | | 150,000 | |||||||||||||||||||||||||||||||||
Avalon Darien |
6.22 | % | Nov-2015 | 51,749 | 51,172 | 660 | 702 | 746 | 793 | 843 | 47,428 | |||||||||||||||||||||||||||||||||
Avalon Greyrock Place |
6.13 | % | Nov-2015 | 62,400 | 61,690 | 811 | 861 | 914 | 971 | 1,031 | 57,102 | |||||||||||||||||||||||||||||||||
Avalon Commons |
6.09 | % | Jan-2019 | 55,100 | 55,100 | | 693 | 734 | 779 | 826 | 52,068 | |||||||||||||||||||||||||||||||||
Avalon Walnut Creek |
4.00 | % | Jul-2066 | 2,500 | 2,500 | | | | | | 2,500 | |||||||||||||||||||||||||||||||||
Avalon Shrewsbury |
5.92 | % | May-2019 | | 21,130 | | 183 | 285 | 301 | 319 | 20,042 | |||||||||||||||||||||||||||||||||
Avalon Gates |
5.93 | % | May-2019 | | 41,321 | | 357 | 557 | 589 | 624 | 39,194 | |||||||||||||||||||||||||||||||||
Avalon at Stamford Harbor |
5.92 | % | May-2019 | | 65,695 | | 568 | 885 | 937 | 992 | 62,313 | |||||||||||||||||||||||||||||||||
Avalon Freehold |
5.94 | % | May-2019 | | 36,630 | | 317 | 493 | 522 | 553 | 34,745 | |||||||||||||||||||||||||||||||||
Avalon Run East II |
5.94 | % | May-2019 | | 39,250 | | 339 | 529 | 560 | 592 | 37,230 | |||||||||||||||||||||||||||||||||
Avalon Gardens |
6.06 | % | May-2019 | | 66,237 | | 572 | 892 | 945 | 1,000 | 62,828 | |||||||||||||||||||||||||||||||||
Avalon Edgewater |
6.10 | % | May-2019 | | 78,565 | | 679 | 1,058 | 1,120 | 1,186 | 74,522 | |||||||||||||||||||||||||||||||||
Avalon Foxhall |
6.05 | % | May-2019 | | 59,010 | | 510 | 795 | 841 | 891 | 55,973 | |||||||||||||||||||||||||||||||||
Avalon Gallery Place I |
6.05 | % | May-2019 | | 45,850 | | 396 | 618 | 654 | 692 | 43,490 | |||||||||||||||||||||||||||||||||
Avalon Traville |
5.91 | % | May-2019 | | 77,700 | | 672 | 1,047 | 1,108 | 1,173 | 73,700 | |||||||||||||||||||||||||||||||||
Avalon Bellevue |
5.91 | % | May-2019 | | 26,698 | | 231 | 360 | 381 | 403 | 25,323 | |||||||||||||||||||||||||||||||||
Avalon on the Alameda |
5.91 | % | May-2019 | | 53,980 | | 467 | 727 | 770 | 815 | 51,201 | |||||||||||||||||||||||||||||||||
Avalon Mission Bay North |
5.90 | % | May-2019 | | 73,269 | | 633 | 987 | 1,045 | 1,106 | 69,498 | |||||||||||||||||||||||||||||||||
Avalon Woburn |
5.91 | % | May-2019 | | 55,805 | | 482 | 752 | 796 | 842 | 52,933 | |||||||||||||||||||||||||||||||||
2,409,562 | 2,830,010 | 16,802 | 56,451 | 318,966 | 378,434 | 164,555 | 1,894,802 | |||||||||||||||||||||||||||||||||||||
Variable rate (3)
|
||||||||||||||||||||||||||||||||||||||||||||
Avalon at Flanders Hill |
| May-2009 | 19,735 | | | | | | | | ||||||||||||||||||||||||||||||||||
Avalon at Newton Highlands |
| Dec-2009 | 34,945 | | | | | | | | ||||||||||||||||||||||||||||||||||
Avalon at Crane Brook |
2.11 | % | Mar-2011 | 31,530 | 30,440 | (4 | ) | 1,169 | 29,271 | | | | | |||||||||||||||||||||||||||||||
Avalon at Bedford Center |
1.74 | % | May-2012 | 16,361 | 15,871 | (4 | ) | 527 | 560 | 14,784 | | | | |||||||||||||||||||||||||||||||
Avalon Walnut Creek |
3.03 | % | Mar-2046 | 9,000 | 9,000 | (5 | ) | | | | | | 9,000 | |||||||||||||||||||||||||||||||
$105.6 million unsecured notes |
| May-2009 | 105,600 | | | | | | | | ||||||||||||||||||||||||||||||||||
$112.2 million unsecured notes |
| Jan-2010 | 112,200 | | (11 | ) | | | | | | | ||||||||||||||||||||||||||||||||
$112.2 million unsecured notes |
| Jan-2011 | 112,200 | | (11 | ) | | | | | | | ||||||||||||||||||||||||||||||||
$200 Million unsecured notes |
7.034 | % | Dec-2010 | | 75,000 | (12 | ) | 75,000 | | | | | | |||||||||||||||||||||||||||||||
$300 Million unsecured notes |
5.663 | % | Sep-2011 | | 100,000 | (12 | ) | | 100,000 | | | | | |||||||||||||||||||||||||||||||
$50 Million unsecured notes |
5.663 | % | Sep-2011 | | 50,000 | (12 | ) | | 50,000 | | | | | |||||||||||||||||||||||||||||||
$250 Million unsecured notes |
4.352 | % | Jan-2012 | | 75,000 | (12 | ) | | | 75,000 | | | | |||||||||||||||||||||||||||||||
441,571 | 355,311 | 76,696 | 179,831 | 89,784 | | | 9,000 | |||||||||||||||||||||||||||||||||||||
Total indebtedness excluding unsecured credit facility | $ | 3,552,492 | $ | 3,977,320 | $ | 125,060 | $ | 238,597 | $ | 516,164 | $ | 380,132 | $ | 199,463 | $ | 2,517,904 | ||||||||||||||||||||||||||||
(1) | Includes credit enhancement fees, facility fees, trustees fees and other fees. |
51
(2) | Financed by variable rate, tax-exempt debt, but the interest rate on a portion of this debt is effectively fixed at December 31, 2009 and December 31, 2008 through an interest rate swap agreement. The portion of the debt fixed through the interest rate swap agreement decreases (and therefore the variable portion of the debt increases) monthly as payments are made to a principal reserve fund. | |
(3) | Variable rates are given as of December 31, 2009. | |
(4) | Financed by variable rate debt, but interest rate is capped through an interest rate protection agreement. | |
(5) | Represents full amount of the debt as of December 31, 2009. Actual amounts drawn on the debt as of December 31, 2009 are $46,216 for Bowery Place II, $44,678 for Avalon Acton, $88,823 for Morningside Park, $64,080 for Walnut Creek, and $0 for West Chelsea. | |
(6) | Balances outstanding represent total amounts due at maturity, and are not net of $2,448 of debt discount and basis adjustments associated with the hedged unsecured notes as of December 31, 2009 and $2,035 of debt discount as of December 31, 2008, as reflected in unsecured notes on our Consolidated Balance Sheets included elsewhere in this report. | |
(7) | In October 2009, we redeemed $46,001 principal amount of our $200,000 7.5% unsecured notes due December 2010. | |
(8) | In October 2009, we redeemed $160,100 principal amount of our $300,000 6.625% unsecured notes due September 2011. | |
(9) | In October 2009, we redeemed $55,600 principal amount of our $250,000 5.5% unsecured notes due January 2012. | |
(10) | In October 2009, we redeemed $48,399 principal amount of our $250,000 6.125% unsecured notes due November 2012. | |
(11) | In August and October 2009, we repaid $224,400 in unsecured debt, representing the second and third tranches of our term loan, prior to its scheduled maturities in January 2010 and 2011, respectively. | |
(12) | In October 2009, we executed $300,000 of interest rate swaps allowing us to effectively convert $300,000 principal of our fixed rate unsecured notes to floating rate debt. |
Future Financing and Capital Needs Portfolio and Other Activity
As of December 31, 2009, we had seven new wholly owned communities under construction, for
which a total estimated cost of $245,046,000 remained to be invested. We also had seven wholly
owned communities under reconstruction, for which a total estimated cost of $49,527,000 remained to
be invested. In addition, we may be required to contribute our proportionate share of capital to
Fund II, if or to the extent that Fund II makes capital calls in conjunction with additional
community acquisitions during 2010. Substantially all of the capital expenditures necessary to
complete the communities currently under construction and reconstruction, development costs related
to pursuing Development Rights, as well as for equity contributions to Fund II, will be funded
from:
| cash currently on hand, including cash in construction escrows, invested in highly liquid overnight money market funds and repurchase agreements, and short-term investment vehicles; | ||
| the remaining capacity under our $1,000,000,000 Credit Facility; | ||
| retained operating cash; | ||
| the net proceeds from sales of existing communities; | ||
| the issuance of debt or equity securities; and/or | ||
| private equity funding, including joint venture activity. |
Before planned reconstruction activity, including reconstruction activity related to communities
acquired by the Funds, 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 pre-development costs that were capitalized and/or
forego reconstruction activity. In such instances, we will not realize the increased revenues and
earnings that we expected from such Development Rights or reconstruction activity and significant
losses could be incurred.
From time to time we use joint ventures to hold or develop individual real estate assets. We
generally employ joint ventures primarily to mitigate asset concentration or market risk and
secondarily as a source of liquidity. We may also use joint ventures related to mixed-use land
development opportunities where our partners bring development and operational expertise to the
venture. Each joint venture or partnership agreement has been individually negotiated, and our
ability to operate and/or dispose of a community in our sole discretion may be limited to varying
52
degrees depending on the terms of the joint venture or partnership agreement. We cannot assure you
that we will achieve our objectives through joint ventures.
In evaluating our allocation of capital within our markets, we sell assets that do not meet our
long-term investment criteria or when capital and real estate markets allow us to realize a portion
of the value created over the past business cycle and redeploy the proceeds from those sales to
develop and redevelop communities. Because the proceeds from the sale of communities may not be
immediately redeployed into revenue generating assets, the immediate effect of a sale of a community for a gain is to increase net
income, but reduce future total revenues, total expenses and NOI. However, we believe that the
absence of future cash flows from communities sold will have a minimal impact on our ability to
fund future liquidity and capital resource needs.
Off-Balance Sheet Arrangements
In addition to our investment interests in consolidated and unconsolidated real estate
entities, we have certain off-balance sheet arrangements with the entities in which we invest.
Additional discussion of these entities can be found in Note 6, Investments in Real Estate
Entities, of our Consolidated Financial Statements located elsewhere in this report.
| CVP I, LLC has outstanding tax-exempt, variable rate bonds maturing in November 2036 in the amount of $117,000,000, which have permanent credit enhancement. We have agreed to guarantee, under limited circumstances, the repayment to the credit enhancer of any advances it may make in fulfillment of CVP I, LLCs repayment obligations under the bonds. We have also guaranteed to the credit enhancer that CVP I, LLC will obtain a final certificate of occupancy for the project (Chrystie Place in New York City), which is expected in 2010. Our 80% partner in this venture has agreed that it will reimburse us its pro rata share of any amounts paid relative to these guaranteed obligations. The estimated fair value of and our obligation under these guarantees, both at inception and as of December 31, 2009, were not significant. As a result we have not recorded any obligation associated with these guarantees at December 31, 2009. | ||
| Subsidiaries of Fund I have 21 loans secured by individual assets with amounts outstanding in the aggregate of $436,410,000, with varying maturity dates (or dates after which the loans can be prepaid), ranging from October 2011 to September 2016. These mortgage loans are secured by the underlying real estate. The mortgage loans are payable by the subsidiaries of Fund I with operating cash flow or disposition proceeds from the underlying real estate. We have not guaranteed the debt of Fund I, nor do we have any obligation to fund this debt should Fund I be unable to do so. | ||
In addition, as part of the formation of Fund I, we have provided to one of the limited partners a guarantee. The guarantee provides that if, upon final liquidation of Fund I, the total amount of all distributions to that partner during the life of Fund I (whether from operating cash flow or property sales) does not equal a minimum of the total capital contributions made by that partner, then we will pay the partner an amount equal to the shortfall, but in no event more than 10% of the total capital contributions made by the partner (maximum of approximately $7,500,000 as of December 31, 2009). As of December 31, 2009, the expected realizable value of the real estate assets owned by Fund I is considered adequate to cover such potential payment to that partner under the expected Fund I liquidation scenario. The estimated fair value of, and our obligation under this guarantee, both at inception and as of December 31, 2009 was not significant and therefore we have not recorded any obligation for this guarantee as of December 31, 2009. | |||
| A subsidiary of Fund II has one loan secured by an asset in the amount of $21,515,000 with a maturity of June 2019. This loan is payable by the subsidiary of Fund II. As of December 31, 2009, Fund II also has $30,200,000 outstanding under a credit facility that matures in December 2010. The mortgage loan is payable by the subsidiary of Fund II with operating cash flow or disposition proceeds from the underlying real estate, and the credit facility is payable by Fund II and is secured by capital commitments. We have not guaranteed, beyond our proportionate share of capital commitments supporting the credit facility of Fund II, the debt of Fund II, nor do we have any obligation to fund this debt should Fund II be unable to do so. |
53
In addition, as part of the formation of Fund II, we have provided to one of the limited partners a guarantee. The guarantee provides that if, upon final liquidation of Fund II, the total amount of all distributions to that partner during the life of Fund II (whether from operating cash flow or property sales) does not equal a minimum of the total capital contributions made by that partner, then we will pay the partner an amount equal to the shortfall, but in no event more than 10% of the total capital contributions made by the partner (maximum of approximately $1,470,000 as of December 31, 2009). As of December 31, 2009, the expected realizable value of the real estate assets owned by Fund II is considered adequate to cover such potential payment to that partner under the expected Fund II liquidation scenario. The estimated fair value of, and our obligation under this guarantee, both at inception and as of December 31, 2009 was not significant and therefore we have not recorded any obligation for this guarantee as of December 31, 2009. | |||
| MVP I, LLC, the entity that owns Avalon at Mission Bay North II, has a loan secured by the underlying real estate assets of the community for $105,000,000. The loan is a fixed rate, interest-only note bearing interest at 6.02%, maturing in December 2015. We have not guaranteed the debt of MVP I, LLC, nor do we have any obligation to fund this debt should MVP I, LLC be unable to do so. | ||
| Avalon Del Rey Apartments, LLC has a loan secured by the underlying real estate assets of the community for $45,943,000 maturing in April 2016. The variable rate loan had an interest rate of 3.69% at December 31, 2009. We have not guaranteed the debt of Avalon Del Rey Apartments, LLC, nor do we have any obligation to fund this debt should Avalon Del Rey Apartments, LLC be unable to do so. | ||
| Aria at Hathorne Hill, LLC is a joint venture in which we have a non-managing member interest. The LLC is developing for-sale town homes in Danvers, Massachusetts. The LLC has three separate variable rate loans with aggregate borrowings of $2,432,000 and a weighted average interest rate of 4.19% at December 31, 2009. We have not guaranteed the debt of Aria at Hathorne, nor do we have any obligation to fund this debt should Aria at Hathorne be unable to do so. | ||
| PHVP I, LLC, a consolidated joint venture in which we hold a 99.0% controlling interest, constructed a public garage adjacent to our Walnut Creek development. As part of the construction management services we provided to PHVP I, LLC for the construction of the public garage, we provided a construction completion guarantee to the related lender in order to fulfill their standard financing requirements related to the garage construction financing, which occurred in the third quarter of 2009. Our obligations under this guarantee therefore, have terminated and we have no further obligation under this agreement. | ||
| In 2007 we entered into a non-cancelable commitment (the Commitment) to acquire parcels of land in Brooklyn, New York for an aggregate purchase price of approximately $111,000,000. Under the terms of the Commitment, we are closing on the various parcels over a period determined by the sellers ability to execute unrelated purchase transactions and achieve deferral of gains for the land sold under this Commitment. However, under no circumstances will the Commitment extend beyond 2011, at which time either we or the seller can compel execution of the remaining transactions. At December 31, 2009, we have an outstanding commitment to purchase the remaining land for approximately $51,500,000. |
There are no other lines of credit, side agreements, financial guarantees or any other derivative
financial instruments related to or between our unconsolidated real estate entities and us. In
evaluating our capital structure and overall leverage, management takes into consideration our
proportionate share of this unconsolidated debt.
Contractual Obligations
In 2009, we entered into a lease agreement for office space in Arlington, Virginia. The office
space will serve as our corporate headquarters, with relocation scheduled to occur in the first
half of 2010. The lease has a ten year lease term, with extension rights, with rent of
approximately $1,900,000 annually. We are marketing for lease or sale the building that serves as
our current headquarters in Alexandria, Virginia. Aside from this lease, there have not been any
other material changes outside of the ordinary course of business to our contractual obligations
during 2009.
54
Scheduled contractual obligations required for the next five years and thereafter are as
follows as of December 31, 2009 (dollars in thousands):
Payments due by period | ||||||||||||||||||||
Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | ||||||||||||||||
Debt Obligations |
$ | 3,977,320 | $ | 125,060 | $ | 754,761 | $ | 579,595 | $ | 2,517,904 | ||||||||||
Operating Lease Obligations (1) |
3,412,947 | 20,732 | 50,815 | 53,850 | 3,287,550 | |||||||||||||||
Total |
$ | 7,390,267 | $ | 145,792 | $ | 805,576 | $ | 633,445 | $ | 5,805,454 | ||||||||||
(1) | Includes land leases expiring between October 2026 and March 2142. Amounts do not include any adjustment for purchase options available under the land leases. |
Inflation and Deflation
Substantially all of our apartment leases are for a term of one year or less. In an inflationary
environment, this may allow 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
and therefore expose us to the effect of a decline in market rents. In a deflationary rent
environment, we may be exposed to declining rents more quickly under these shorter-term leases.
Forward-Looking Statements
This Form 10-K 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, plan,
may, shall, will and other similar expressions in this Form 10-K, that predict or indicate
future events and trends and that do not report historical matters. These statements include,
among other things, statements regarding our intent, belief or expectations with respect to:
| our potential development, redevelopment, acquisition or disposition of communities; | ||
| the timing and cost of completion of apartment communities under construction, reconstruction, development or redevelopment; | ||
| the timing of lease-up, occupancy and stabilization of apartment communities; | ||
| the pursuit of land on which we are considering future development; | ||
| the anticipated operating performance of our communities; | ||
| cost, yield, revenue, NOI and earnings estimates; | ||
| our declaration or payment of distributions; | ||
| our joint venture and discretionary fund activities; | ||
| our policies regarding investments, indebtedness, acquisitions, dispositions, financings and other matters; | ||
| our qualification as a REIT under the Internal Revenue Code; | ||
| the real estate markets in Northern and Southern California and markets in selected states in the Mid-Atlantic, Midwest, New England, Metro New York/New Jersey and Pacific Northwest regions of the United States and in general; | ||
| the availability of debt and equity financing; | ||
| interest rates; | ||
| general economic conditions including the recent economic downturn; and | ||
| trends affecting our financial condition or results of operations. |
We cannot assure the future results or outcome of the matters described in these statements;
rather, these statements merely reflect our current expectations of the approximate outcomes of the
matters discussed. In addition, these
55
forward-looking statements represent our estimates and
assumptions only as of the date of this report. We do not undertake a duty to update these
forward-looking statements, and therefore they may not represent our estimates and assumptions
after the date of this report. You should not rely on forward-looking statements because they
involve known and unknown risks, uncertainties and other factors, some of which are beyond our
control. These risks, uncertainties and other factors may cause our actual results, performance or
achievements to differ materially from the anticipated future results, performance or achievements
expressed or implied by these forward-looking statements. In addition to the factors referred to
below, you should carefully review the discussion under Item 1a., Risk Factors, in this document
for a discussion of additional risks associated with our business and these forward-looking
statements.
Some of the factors that could cause our actual results, performance or achievements to differ
materially from those expressed or implied by these forward-looking statements include, but are not
limited to, the following:
| we may fail to secure development opportunities due to an inability to reach agreements with third parties to obtain land at attractive prices or to obtain desired zoning and other local approvals; | ||
| we may abandon or defer development opportunities for a number of reasons, including changes in local market conditions which make development less desirable, increases in costs of development, increases in the cost of capital or lack of capital availability, resulting in losses; | ||
| construction costs of a community may exceed our original estimates; | ||
| we may not complete construction and lease-up of communities under development or redevelopment on schedule, resulting in increased interest costs and construction costs and a decrease in our expected rental revenues; | ||
| occupancy rates and market rents may be adversely affected by competition and local economic and market conditions which are beyond our control; | ||
| financing may not be available on favorable terms or at all, and our cash flows from operations and access to cost effective capital may be insufficient for the development of our pipeline which could limit our pursuit of opportunities; | ||
| our cash flows 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; | ||
| we may be unsuccessful in our management of Fund I, Fund II or the REIT vehicles that are used with each respective Fund; and | ||
| we may be unsuccessful in managing changes in our portfolio composition. |
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to use judgment
in the application of accounting policies, including making estimates and assumptions. If our
judgment or interpretation of the facts and circumstances relating to various transactions had been
different, or different assumptions were made, it is possible that different accounting policies
would have been applied, resulting in different financial results or a different presentation of
our financial statements. Below is a discussion of the accounting policies that we consider
critical to an understanding of our financial condition and operating results that may require
complex or significant judgment in their application or require estimates about matters which are
inherently uncertain. A discussion of our significant accounting policies, including further
discussion of the accounting policies described below, can be found in Note 1, Organization and
Basis of Presentation of our Consolidated Financial Statements.
Principles of Consolidation
We may enter into various joint venture agreements with unrelated third parties to hold or develop
real estate assets. We must determine for each of these ventures whether to consolidate the entity
or account for our investment under the equity or cost basis of accounting.
We determine whether to consolidate certain entities based on our rights and obligations under the
joint venture agreements, applying the applicable accounting guidance. For investment interests
that we do not consolidate, we
56
evaluate the guidance to determine the accounting framework to
apply. The application of the rules in evaluating the accounting treatment for each joint venture
is complex and requires substantial management judgment. Therefore, we believe the decision to
choose an appropriate accounting framework is a critical accounting estimate.
If we were to consolidate the joint ventures that we accounted for using the equity method at
December 31, 2009, our assets would have increased by $1,030,260,000 and our liabilities would have
increased by $778,156,000. We would be required to consolidate those joint ventures currently not
consolidated for financial reporting purposes if the facts and circumstances changed, including but
not limited to the following reasons, none of which are currently expected to occur:
| For entities not considered to be variable interest entities, the nature of the entity changed such that it would be considered a variable interest entity and if we were considered the primary beneficiary. | ||
| For entities in which we do not hold a controlling voting and/or variable interest, the contractual arrangement changed resulting in our investment interest being either a controlling voting and/or variable interest. |
We evaluate our accounting for investments on a quarterly basis or when a significant change in the
design of an entity occurs.
Cost Capitalization
We capitalize costs during the development of assets beginning when we determine that development
of a future asset is probable until the asset, or a portion of the asset, is delivered and is ready
for its intended use. For redevelopment efforts, we capitalize costs either (i) in advance of
taking homes out of service when significant renovation of the common area has begun until the
redevelopment is completed, or (ii) when an apartment home is taken out of service for
redevelopment until the redevelopment is completed and the apartment home is available for a new
resident. Rental income and operating expenses incurred during the initial lease-up or
post-redevelopment lease-up period are fully recognized as they accrue.
During the development and redevelopment efforts we capitalize all direct costs and indirect costs
which have been incurred as a result of the development and redevelopment activities. These costs
include interest and related loan fees, property taxes as well as other direct and indirect costs.
Interest is capitalized for any project specific financing, as well as for general corporate
financing to the extent of our aggregate investment in the projects. Indirect project costs,
which include personnel and office and administrative costs that are clearly associated with our
development and redevelopment efforts, are also capitalized. The estimation of the direct and
indirect costs to capitalize as part of our development and redevelopment activities requires
judgment and, as such, we believe cost capitalization to be a critical accounting estimate.
There may be a change in our operating expenses in the event that there are changes in accounting
guidance governing capitalization or changes to our levels of development or redevelopment
activity. If changes in the accounting guidance limit our ability to capitalize costs or if we
reduce our development and redevelopment activities without a corresponding decrease in indirect
project costs, there may be an increase in our operating expenses. For example, if in 2009 our
development activities decreased by 10%, and there were no corresponding decrease in our indirect
project costs, our operating expenses would have increased by $2,493,200.
We capitalize pre-development costs incurred in pursuit of Development Rights. These costs include
legal fees, design fees and related overhead costs. Future development of these pursuits is
dependent upon various factors, including zoning and regulatory approval, rental market conditions,
construction costs and availability of capital. Pre-development costs incurred for pursuits for
which future development is not yet considered probable are
expensed as incurred. In addition, if the status of a Development Right changes, making future
development no longer probable, any capitalized pre-development costs are written off with a charge
to expense.
Due to the subjectivity in determining whether a pursuit will result in the development of an
apartment community, and therefore should be capitalized, the accounting for pursuit costs is a
critical accounting estimate. If we had
57
determined that 10% of our capitalized pursuit costs were
associated with Development Rights that were no longer probable of occurring, net income for the
year ended December 31, 2009 would have decreased by $8,776,300.
Abandoned Pursuit Costs & Asset Impairment
We capitalize pre-development costs incurred in pursuit of new development opportunities for which
we currently believe future development is probable. Future development of these Development Rights
is dependent upon various factors, including zoning and regulatory approval, rental market
conditions, construction costs and the availability of capital. Pre-development costs incurred for
pursuits for which future development is not yet considered probable are expensed as incurred. In
addition, if the status of a Development Right changes, making future development by us no longer
probable, any capitalized pre-development costs are written off with a charge to expense. We
expensed costs related to abandoned pursuits, which includes the abandonment of Development Rights
and disposition pursuits, in the amounts of $5,842,000 in 2009 and $12,511,000 in 2008. These costs
are included in operating expenses, excluding property taxes on the accompanying Consolidated
Statements of Operations and Other Comprehensive Income. Abandoned pursuit costs can vary greatly,
and the costs incurred in any given period may be significantly different in future years.
During 2009, we concluded that the continued economic downturn and the related decline in
employment levels did not support the development and construction of certain new apartment
communities that were previously in planning. This resulted in the recognition of an impairment
charge of $20,302,000 related to the impairment of two land parcels which we currently do not
intend to develop. We looked to third-party pricing estimates to determine the fair values of the
land parcels considered to be impaired. Given the heterogeneous nature of multifamily real estate,
the third party values incorporated significant other unobservable inputs and are therefore
considered to be Level 3 prices in the fair value hierarchy. In addition, in 2009 we recognized a
further impairment charge of $850,000 on a land parcel for which an earlier impairment had been
recognized in the fourth quarter of 2008. The additional impairment charge reduces our carrying
basis to its current estimated selling price less costs to dispose.
Our focus on value creation through real estate development presents an impairment risk in the
event of a future deterioration of the real estate and/or capital markets or a decision by us to
reduce or cease development. We cannot predict the occurrence of future events that may cause an
impairment assessment to be performed, or the likelihood of any future impairment charges, if any.
You should also review Item 1a., Risk Factors of this Form 10-K.
REIT Status
We are a Maryland corporation that has elected to be treated, for federal income tax purposes, as a
REIT. We elected to be taxed as a REIT under the Code for the year ended December 31, 1994 and
have not revoked such election. A corporate REIT is a legal entity which holds real estate
interests and must meet a number of organizational and operational requirements, including a
requirement that it currently distribute at least 90% of its adjusted taxable income to
stockholders. As a REIT, we generally will not be subject to corporate level federal income tax on
taxable income if we distribute 100% of taxable income to our stockholders over time periods
allowed under the Code. If we fail to qualify as a REIT in any taxable year, we will be subject to
federal and state income taxes at regular corporate rates (subject to any applicable alternative
minimum tax) and may not be able to elect to qualify as a REIT for four subsequent taxable years.
For example, if we failed to qualify as a REIT in 2009, our net income would have decreased by
approximately $62,000,000.
Our qualification as a REIT requires management to exercise significant judgment and consideration
with respect to operational matters and accounting treatment. Therefore, we believe our REIT
status is a critical accounting estimate.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks from our financial instruments primarily from changes in market
interest rates. We do not have exposure to any other significant market risk. We monitor interest
rate risk as an integral part of our overall risk management, which recognizes the unpredictability
of financial markets and seek to reduce the
58
potentially adverse effect on our results of
operations. Our operating results are affected by changes in interest rates, primarily, in
short-term LIBOR and the SIFMA index as a result of borrowings under our Credit Facility and
outstanding bonds with variable interest rates. In addition the fair value of our fixed rate
unsecured and secured notes are impacted by changes in market interest rates. The effect of
interest rate fluctuations on our results of operations historically has been small relative to
other factors affecting operating results, such as rental rates and occupancy.
We currently use interest rate protection agreements (consisting of interest rate swap and interest
rate cap agreements) for our risk management objectives, as well as for compliance with the
requirements of certain lenders, and not for trading or speculative purposes. In the fourth quarter
of 2009, we entered into interest rate swap agreements to convert fixed rate borrowings to
effective floating rate notes. In addition, we have interest rate caps and interest rate swaps that
serve to either convert floating rate borrowings to fixed rate borrowings, or effectively limit the
amount of interest rate expense we would incur on a floating rate borrowing. Further discussion of
the financial instruments impacted and our exposure is presented below.
We had $1,271,273,000 and $1,088,848,000 in variable rate debt outstanding (excluding variable rate
debt effectively fixed through swap agreements and including fixed rate debt effectively swapped to
variable rates through swap agreements) as of December 31, 2009 and 2008, respectively. If
interest rates on the variable rate debt had been 100 basis points higher throughout 2009 and 2008,
our annual interest costs would have increased by approximately $9,079,000 and $11,490,000,
respectively, based on balances outstanding during the applicable years.
As of December 31, 2009, we had executed interest rate swap agreements to hedge cash flow
variability for approximately $43,435,000 of our variable rate, tax-exempt debt and executed
interest rate swap agreements to hedge fair value exposure for approximately $300,000,000 of our
fixed rate unsecured notes. Had these interest rate swap agreements not been in place during 2009
and 2008, our annual interest costs would have been approximately $1,492,000 higher and $1,451,000
lower, respectively, based on balances outstanding and reported interest rates during the
applicable years. Additionally, if the variable interest rates on hedged floating rate debt had
been 100 basis points higher throughout 2009 and 2008 and these swap agreements had not been in
place, our annual interest costs would have been approximately $2,054,000 higher and $887,000
lower, respectively.
Because the counterparties providing the interest rate cap and swap agreements are major financial
institutions which have an A+ or better credit rating by the Standard & Poors Ratings Group and
the current valuation of the position is a net liability for us, we do not believe there is
exposure at this time to a default by a counterparty provider.
In addition, changes in interest rates affect the fair value of our fixed rate debt, computed using
a discounted cash flow model considering our current market yields, which impacts the fair value of
our aggregate indebtedness. Debt securities and notes payable (excluding amounts outstanding under
our Credit Facility) with an aggregate carrying value of $3,977,320,000 at December 31, 2009 had an
estimated aggregate fair value of $4,052,817,000 at December 31, 2009. Contractual fixed rate debt
represented $3,249,647,000 of the carrying value and $3,352,312,000 of the fair value at December
31, 2009. If interest rates had been 100 basis points higher as of December 31, 2009, the fair
value of this fixed rate debt would have decreased by $159,030,000.
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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.
ITEM 9a. CONTROLS AND PROCEDURES
(a) | Evaluation of Disclosure Controls and Procedures. As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms. We continue to review and document our disclosure controls and procedures, including our internal control over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business. | ||
(b) | Managements Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2009 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2009. |
Our internal control over financial reporting as of December 31, 2009 has been audited by Ernst
& Young LLP, an independent registered public accounting firm, as stated in their report which
is included elsewhere herein.
(c) | Changes in Internal Control Over Financial Reporting. There was no change in our internal control over financial reporting that occurred during the fourth quarter of the period covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. |
ITEM 9b. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 pertaining to directors and executive officers of the Company
and the Companys Code of Conduct is incorporated herein by reference to the Companys 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 scheduled to
be held on May 19, 2010.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 pertaining to executive compensation is incorporated herein by
reference to the Companys 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 scheduled to be held on May 19, 2010.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required by Item 12 pertaining to security ownership of management and certain
beneficial owners of the Companys common stock is incorporated herein by reference to the
Companys 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 scheduled to be held on May 19, 2010, to the extent not set forth below.
The Company maintains the 2009 Stock Option and Incentive Plan (the 2009 Plan) and the 1996
Non-Qualified Employee Stock Purchase Plan (the ESPP), pursuant to which common stock or other
equity awards may be issued or granted to eligible persons.
The following table gives information about equity awards under the 2009 Plan, the Companys prior
1994 Stock Incentive Plan (the 1994 Plan) under which awards were previously made, and the ESPP
as of December 31, 2009:
(b) | (c) | |||||||||||
Weighted- | Number of securities | |||||||||||
(a) | average | remaining available for | ||||||||||
Number of securities | exercise price | future issuance under | ||||||||||
to be issued upon | of outstanding | equity compensation | ||||||||||
exercise of | options, | plans (excluding | ||||||||||
outstanding options, | warrants and | securities reflected in | ||||||||||
Plan category | warrants and rights | rights | column (a)) | |||||||||
Equity compensation plans approved by security holders (1)
|
2,964,394 | (2) | $ | 80.76 | (3) | 4,164,064 | ||||||
Equity compensation plans not approved by security holders (4)
|
| n/a | 755,484 | |||||||||
Total |
2,964,394 | $ | 80.76 | (3) | 4,919,548 | |||||||
(1) | Consists of the 2009 Plan and the 1994 Plan. | |
(2) | Includes 128,141 deferred units granted under the 2009 Plan and the 1994 Plan, which, subject to vesting requirements, will convert in the future to common stock on a one-for-one basis, but does not include 244,640 shares of restricted stock that are outstanding and that are already reflected in the Companys outstanding shares. |
61
(3) | Excludes deferred units granted under the 2009 Plan and the 1994 Plan, which, subject to vesting requirements, will convert in the future to common stock on a one-for-one basis. | |
(4) | Consists of the ESPP. |
The ESPP, which was adopted by the Board of Directors on October 29, 1996, has not been approved by
our shareholders. A further description of the ESPP appears in Note 10, Stock-Based Compensation
Plans, of our Consolidated Financial Statements included in this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 pertaining to certain relationships and related transactions is
incorporated herein by reference to the Companys 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 19, 2010.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 pertaining to the fees paid to and services provided by the
Companys principal accountant is incorporated herein by reference to the Companys 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 19,
2010.
62
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE
15(a)(1) Financial Statements
Index to Financial Statements
Consolidated Financial Statements and Financial Statement Schedule:
F-1 | ||
F-3 | ||
F-4 | ||
F-5 | ||
F-6 | ||
F-8 |
15(a)(2) Financial Statement Schedule
All other schedules for which provision is made in the applicable accounting regulation of the
Securities and Exchange Commission are not required under the related instructions or are
inapplicable and therefore have been omitted.
15(a)(3) Exhibits
The exhibits listed on the accompanying Index to Exhibits are filed as a part of this report.
63
INDEX TO EXHIBITS
3(i).1
|
| Articles of Amendment and Restatement of Articles of Incorporation of the Company, dated as of June 4, 1998. (Incorporated by reference to Exhibit 3(i).1 to Form 10-K of the Company filed March 1, 2007.) | ||
3(i).2
|
| Articles of Amendment, dated as of October 2, 1998. (Incorporated by reference to Exhibit 3(i).2 to Form 10-K of the Company filed March 1, 2007.) | ||
3(ii). |