UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-12672

AVALONBAY COMMUNITIES, INC.

(Exact name of registrant as specified in its charter)

Maryland		77-0404318
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

Ballston Tower
671 N. Glebe Rd, Suite 800
Arlington, Virginia 22203
(Address of principal executive offices, including zip code)

(703) 329-6300
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days.

Yes þ      No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) 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 whether the Exchange 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

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

82,984,697 shares of common stock, par value $0.01 per share, were outstanding as of April 30, 2010

 

 

AVALONBAY COMMUNITIES, INC.
FORM 10-Q
INDEX

		Page
PART I — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2010 (unaudited) and December 31, 2009			1
Condensed Consolidated Statements of Operations and Other Comprehensive Income (unaudited) for the three months ended March 31, 2010 and 2009			2
Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2010 and 2009			3-4
Notes to Condensed Consolidated Financial Statements (unaudited)			5-18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation			19-40
Item 3. Quantitative and Qualitative Disclosures About Market Risk			41
Item 4. Controls and Procedures			41
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			41-42
Item 1a. Risk Factors			42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			42-43
Item 3. Defaults Upon Senior Securities			43
Item 4. (Removed and Reserved)			43
Item 5. Other Information			43
Item 6. Exhibits			43-45
Signatures			46

AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

		3-31-10				12-31-09
		(unaudited)
ASSETS
Real estate:
Land		$	1,273,615			$	1,250,679
Buildings and improvements			6,066,355				5,988,330
Furniture, fixtures and equipment			189,490				186,301
			7,529,460				7,425,310
Less accumulated depreciation			(1,533,579	)			(1,477,772	)
Net operating real estate			5,995,881				5,947,538
Construction in progress, including land			580,814				531,299
Land held for development			206,713				237,095
Operating real estate assets held for sale, net			86,610				117,555
Total real estate, net			6,870,018				6,833,487
Cash and cash equivalents			123,297				105,691
Cash in escrow			207,336				210,676
Resident security deposits			22,456				23,646
Investments in unconsolidated real estate entities			72,999				74,570
Deferred financing costs, net			32,375				34,531
Deferred development costs			85,302				87,763
Prepaid expenses and other assets			94,351				87,241
Total assets		$	7,508,134			$	7,457,605
LIABILITIES AND STOCKHOLDERS’ EQUITY
Unsecured notes, net		$	1,659,529			$	1,658,029
Mortgage notes payable			2,290,378				2,316,843
Dividends payable			73,804				72,773
Payables for construction			48,368				49,623
Accrued expenses and other liabilities			235,951				233,029
Accrued interest payable			22,520				35,069
Resident security deposits			33,532				33,646
Liabilities related to real estate assets held for sale			1,679				2,669
Total liabilities			4,365,761				4,401,681
Redeemable noncontrolling interests			6,724				5,797
Stockholders’ equity:
Preferred stock, $0.01 par value; $25 liquidation preference; 50,000,000 shares authorized at both March 31, 2010 and December 31, 2009; zero shares issued and outstanding at March 31, 2010 and December 31, 2009			—				—
Common stock, $0.01 par value; 140,000,000 shares authorized at both March 31, 2010 and December 31, 2009; 82,693,377 and 81,528,957 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively			827				815
Additional paid-in capital			3,287,671				3,200,367
Accumulated earnings less dividends			(152,324	)			(149,988	)
Accumulated other comprehensive loss			(525	)			(1,067	)
Total stockholders’ equity			3,135,649				3,050,127
Total liabilities and stockholders’ equity		$	7,508,134			$	7,457,605

See accompanying notes to Condensed Consolidated Financial Statements.

AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME

(unaudited)
(Dollars in thousands, except per share data)

		For the three months ended
		3-31-10				3-31-09
Revenue:
Rental and other income		$	213,738			$	208,265
Management, development and other fees			1,849				1,468
Total revenue			215,587				209,733
Expenses:
Operating expenses, excluding property taxes			65,031				62,780
Property taxes			23,172				20,886
Interest expense, net			42,541				30,130
Gain on extinguishment of debt, net			—				(1,062	)
Depreciation expense			56,095				50,073
General and administrative expense			8,895				7,247
Total expenses			195,734				170,054
Equity in income of unconsolidated entities			227				3,457
Income from continuing operations			20,080				43,136
Discontinued operations:
Income from discontinued operations			1,995				3,965
Gain on sale of communities			50,291				—
Total discontinued operations			52,286				3,965
Net income			72,366				47,101
Net loss attributable to redeemable noncontrolling interests			157				324
Net income attributable to common stockholders		$	72,523			$	47,425
Other comprehensive income:
Unrealized gain on cash flow hedges			542				376
Comprehensive income		$	73,065			$	47,801
Earnings per common share — basic:
Income from continuing operations attributable to common stockholders		$	0.25			$	0.55
Discontinued operations attributable to common stockholders			0.64				0.05
Net income attributable to common stockholders		$	0.89			$	0.60
Earnings per common share — diluted:
Income from continuing operations attributable to common stockholders		$	0.25			$	0.54
Discontinued operations attributable to common stockholders			0.63				0.05
Net income attributable to common stockholders		$	0.88			$	0.59
Dividends per common share:		$	0.8925			$	0.8925

See accompanying notes to Condensed Consolidated Financial Statements.

AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)
(Dollars in thousands)

		For the three months ended
		3-31-10				3-31-09
Cash flows from operating activities:
Net income		$	72,366			$	47,101
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation expense			56,095				50,073
Depreciation expense from discontinued operations			—				2,567
Amortization of deferred financing costs and debt premium/discount			2,246				2,223
Amortization of stock-based compensation			2,226				2,368
Equity in loss (income) of unconsolidated entities, net of eliminations			226				(4,281	)
Gain on sale of real estate assets			(50,291	)			—
Gain on extinguishment of debt, net			—				(1,062	)
Decrease (increase) in cash in operating escrows			269				(166	)
Increase in resident security deposits, prepaid expenses and other assets			(4,813	)			(2,669	)
Decrease in accrued expenses, other liabilities and accrued interest payable			(9,441	)			(5,333	)
Net cash provided by operating activities			68,883				90,821
Cash flows from investing activities:
Development/redevelopment of real estate assets including land acquisitions and deferred development costs			(118,604	)			(148,333	)
Capital expenditures — existing real estate assets			(1,475	)			(839	)
Capital expenditures — non-real estate assets			(359	)			(294	)
Proceeds from sale of real estate, net of selling costs			81,335				—
Decrease in payables for construction			(1,255	)			(7,128	)
Decrease in cash in construction escrows			3,071				23,884
Decrease in investments in unconsolidated real estate entities			1,244				3,029
Net cash used in investing activities			(36,043	)			(129,681	)
Cash flows from financing activities:
Issuance of common stock			83,896				35
Dividends paid			(72,603	)			(68,841	)
Net borrowings under unsecured credit facility			—				235,000
Repayments of mortgage notes payable			(26,465	)			(2,107	)
Repayment of unsecured notes			—				(100,573	)
Distributions to DownREIT partnership unitholders			(14	)			(25	)
Distributions to joint venture and profit-sharing partners			(48	)			—
Net cash (used in) provided by financing activities			(15,234	)			63,489
Net increase in cash and cash equivalents			17,606				24,629
Cash and cash equivalents, beginning of period			105,691				65,706
Cash and cash equivalents, end of period		$	123,297			$	90,335
Cash paid during the period for interest, net of amount capitalized		$	49,552			$	33,717

See accompanying notes to Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Supplemental disclosures of non-cash investing and financing activities (dollars in thousands):

During the three months ended March 31, 2010:

	•		96,394 shares of common stock valued at $7,152 were issued in connection with stock grants, 1,998 shares valued at $159 were issued through the Company’s dividend reinvestment plan, 38,960 shares valued at $3,167 were withheld to satisfy employees’ tax withholding and other liabilities, 1,300 shares valued at $38 were forfeited, and 3,283 shares valued at $161 were issued to members of the board of directors in fulfillment of deferred stock awards, for a net value of $4,267. In addition, the Company granted 126,484 options for common stock at a value of $2,460.
	•		The Company recorded a decrease to other liabilities and a corresponding increase to other comprehensive income of $542 and recorded an increase to prepaid expenses and other assets of $1,410, with a corresponding offset to the basis of unsecured notes, net to record the impact of the Company’s hedge accounting activity (as described in Note 5, “Derivative Instruments and Hedging Activities”).
	•		Common dividends declared but not paid totaled $73,804.
	•		The Company recorded an increase of $1,145 in redeemable noncontrolling interests with a corresponding decrease to accumulated earnings less dividends to adjust the redemption value associated with the put options held by joint venture partners and DownREIT partnership units. For further discussion of the nature and valuation of these items, see Note 11, “Fair Value.”

During the three months ended March 31, 2009:

	•		2,624,641 shares of common stock valued at $139,058 were issued as part of the special dividend declared in the fourth quarter of 2008, 161,719 shares of common stock valued at $7,860 were issued in connection with stock grants, 2,257 shares valued at $120 were issued through the Company’s dividend reinvestment plan, 29,243 shares valued at $1,265 were withheld to satisfy employees’ tax withholding and other liabilities and 1,031 shares valued at $101 were forfeited, for a net value of $145,672. In addition, the Company granted 344,801 options for common stock at a value of $2,252.
	•		The Company recorded a decrease to other liabilities and a corresponding increase to other comprehensive income of $376 to record the impact of the Company’s hedge accounting activity.
	•		Common dividends declared but not paid totaled $71,330.
	•		The Company recorded a decrease of $3,953 in redeemable noncontrolling interests with a corresponding increase to accumulated earnings less dividends to adjust the redemption value associated with the put options held by joint venture partners and DownREIT partnership units.

AVALONBAY COMMUNITIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollars in thousands, except per share data)

1. Organization, Basis of Presentation and Significant Accounting Policies

Organization and Basis of Presentation

AvalonBay Communities, Inc. (the “Company,” which term, unless the context otherwise requires, refers to AvalonBay Communities, Inc. together with its consolidated subsidiaries), is a Maryland corporation that elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986 (“the Code”). The Company focuses on the development, acquisition, ownership and operation of apartment communities in high barrier to entry markets of the United States. These markets are located in the New England, Metro New York/New Jersey, Mid-Atlantic, Midwest, Pacific Northwest, and Northern and Southern California regions of the country.

At March 31, 2010, the Company owned or held a direct or indirect ownership interest in 165 operating apartment communities containing 47,813 apartment homes in ten states and the District of Columbia, of which seven communities containing 2,615 apartment homes were under reconstruction. In addition, the Company owned or held a direct or indirect ownership interest in seven communities under construction that are expected to contain an aggregate of 2,509 apartment homes when completed. The Company also owned or held a direct or indirect ownership interest in rights to develop an additional 29 communities that, if developed as expected, will contain an estimated 7,361 apartment homes.

The interim unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements required by GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited financial statements should be read in conjunction with the financial statements and notes included in the Company’s 2009 Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2010 are not necessarily indicative of the operating results for the full year. Management believes the disclosures are adequate to ensure the information presented is not misleading. In the opinion of management, all adjustments and eliminations, consisting only of normal, recurring adjustments necessary for a fair presentation of the financial statements for the interim periods, have been included.

All capitalized terms have the meaning as provided elsewhere in this Form 10-Q.

Earnings per Common Share

Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted average number of shares outstanding during the period. All outstanding unvested restricted share awards contain rights to non-forfeitable dividends and participate in undistributed earnings with common shareholders and, accordingly, are considered participating securities that are included in the two-class method of computing basic earnings per share (“EPS”). Both the unvested restricted shares and other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis. The Company’s earnings per common share are determined as follows:

		For the three months ended
		3-31-10				3-31-09
Basic and diluted shares outstanding
Weighted average common shares — basic			81,637,686				78,752,744
Weighted average DownREIT units outstanding			15,351				19,427
Effect of dilutive securities			657,633				1,020,110
Weighted average common shares — diluted			82,310,670				79,792,281
Calculation of Earnings per Share — basic
Net income attributable to common stockholders		$	72,523			$	47,425
Net income allocated to unvested restricted shares			(230	)			(152	)
Net income attributable to common stockholders, adjusted		$	72,293			$	47,273
Weighted average common shares — basic			81,637,686				78,752,744
Earnings per common share — basic		$	0.89			$	0.60
Calculation of Earnings per Share — diluted
Net income attributable to common stockholders		$	72,523			$	47,425
Add: noncontrolling interests of DownREIT unitholders in consolidated partnerships, including discontinued operations			14				25
Adjusted net income available to common stockholders		$	72,537			$	47,450
Weighted average common shares — diluted			82,310,670				79,792,281
Earnings per common share — diluted		$	0.88			$	0.59

Certain options to purchase shares of common stock in the amounts of 1,641,986 and 2,379,353 were outstanding at March 31, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per share because such options were anti-dilutive.

The Company is required to estimate the forfeiture of stock options and recognize compensation cost net of the estimated forfeitures. The estimated forfeitures included in compensation cost are adjusted to reflect actual forfeitures at the end of the vesting period. The forfeiture rate at March 31, 2010 is based on the average forfeiture activity over a period equal to the estimated life of the stock options, and was 1.4%. The application of estimated forfeitures did not materially impact compensation expense for the three months ended March 31, 2010 or 2009.

Abandoned Pursuit Costs and Impairment of Long-Lived Assets

The Company capitalizes pre-development costs incurred in pursuit of new development opportunities for which the Company currently believes future development is probable (“Development Rights”). 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. Initial 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 the Company no longer probable, any capitalized pre-development costs are written off with a charge to expense. The Company expensed costs related to abandoned pursuits, which includes the abandonment of Development Rights as well as costs incurred in pursuing the disposition of assets, in the amounts of $505 and $1,093 for the three months ended March 31, 2010 and 2009. These costs are included in operating expenses, excluding property taxes on the accompanying Condensed 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.

The Company evaluates its real estate and other long-lived assets for impairment when potential indicators of impairment exist. Such assets are stated at cost, less accumulated depreciation and amortization, unless the carrying amount of the asset is not recoverable. If events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, the Company assesses its recoverability by comparing the carrying amount of the long-lived asset to its estimated undiscounted future cash flows. If the carrying amount exceeds the aggregate undiscounted future cash flows, the Company recognizes an impairment loss to the extent the carrying amount

exceeds the estimated fair value of the long-lived asset. Based on periodic tests of recoverability of long-lived assets, for the three months ended March 31, 2010 and 2009, the Company did not record any impairment losses.

Legal and Other Contingencies

As previously reported, on August 13, 2008 the U.S. Attorney’s Office for the Southern District of New York filed a civil lawsuit against the Company and the joint venture 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 Fair Housing Act (“FHA”). The Company designed and constructed Avalon Chrystie Place with a view to compliance with New York City’s Local Law 58, which for more than 20 years has been New York City’s 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 plaintiff’s 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 judge’s ruling. Due to the preliminary nature of this matter, including whether the scope of the suit will be extended to other properties, the Company cannot predict or determine the outcome of this matter, nor is it reasonably possible to estimate the amount of loss, if any, that would be associated with an adverse decision or settlement.

In addition to the outstanding litigation described above, the Company is involved in various other claims and/or administrative proceedings that arise in the ordinary course of our business. While no assurances can be given, the Company does not believe that any of these other outstanding litigation matters, individually or in the aggregate, will have a material adverse effect on the Company’s operations.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

Reclassifications

Certain reclassifications have been made to amounts in prior period financial statements to conform to current period presentations.

Recently Adopted Accounting Standards

In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance on accounting for distributions to shareholders with components of stock and cash. This guidance clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate, is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend. The Company already follows the practices required by this guidance, so required adoption of this guidance did not impact the Company’s financial position or results of operations.

In January 2010, the FASB issued guidance on fair value measurements and disclosures. This guidance specifies that a reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. In addition, a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number) related to Level 3 fair value measurements as part of a reconciliation of the beginning and ending balances. It also clarifies the disclosure requirements related to the level of disaggregation, significant inputs and valuation techniques. The adoption of this guidance did not impact the Company’s financial position or results of operations.

In February 2010, the FASB issued guidance on subsequent events. This guidance provides a definition for SEC filer and eliminates the requirement to disclose the date through which subsequent events have been evaluated. The adoption of this guidance did not impact the Company’s financial position or results of operations.

In June 2009, the FASB issued guidance to significantly amend the consolidation guidance applicable to variable interest entities (“VIEs”). The consolidation model was modified to one based on control and economics, and replaces the current quantitative primary beneficiary analysis with a qualitative analysis. The primary beneficiary of a VIE will be the entity that has (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses or receive benefits that could potentially be significant to the VIE. If multiple unrelated parties share such power, as defined, no party will be required to consolidate the VIE. Further, the guidance requires continual reconsideration of the primary beneficiary of a VIE and adds an additional reconsideration event for determination of whether an entity is a VIE. The amendments also require expanded disclosures related to VIEs which are largely consistent with the disclosure framework currently applied by the Company. The new guidance was effective January 1, 2010 for the Company. The adoption of this guidance did not impact the Company’s financial position or results of operations.

2. Interest Capitalized

The Company capitalizes interest during the development and redevelopment of real estate assets. Capitalized interest associated with the Company’s development or redevelopment activities totaled $9,836 and $12,368 for the three months ended March, 31, 2010 and 2009, respectively.

3. Notes Payable, Unsecured Notes and Credit Facility

The Company’s mortgage notes payable, unsecured notes and Credit Facility, as defined below, as of March 31, 2010 and December 31, 2009, are summarized below. The following amounts and discussion do not include the mortgage notes related to the communities classified as held for sale, if any, as of March 31, 2010 and December 31, 2009, as shown in the Condensed Consolidated Balance Sheets (see Note 7, “Real Estate Disposition Activities”).

		3-31-10				12-31-09
Fixed rate unsecured notes (1)		$	1,358,347			$	1,358,257
Variable rate unsecured notes (2)			301,182				299,772
Fixed rate mortgage notes payable — conventional and tax-exempt			1,606,254				1,632,605
Variable rate mortgage notes payable — conventional and tax-exempt			684,124				684,238
Total notes payable and unsecured notes			3,949,907				3,974,872
Variable rate unsecured credit facility			—				—
Total mortgage notes payable, unsecured notes and Credit Facility		$	3,949,907			$	3,974,872

The following debt activity occurred during the three months ended March 31, 2010:

	•		In February 2010, the Company repaid a 6.47% fixed rate secured mortgage note in the amount of $13,961 in advance of its March 2012 scheduled maturity date.
	•		In March 2010, the Company repaid a 6.95% fixed rate secured mortgage note in the amount of $11,226 in advance of its February 2025 scheduled maturity date.

In the aggregate, secured notes payable mature at various dates from October 2010 through July 2066, and are secured by certain apartment communities and improved land parcels (with a net carrying value of $1,829,247 as of March 31, 2010). As of March 31, 2010, the Company has guaranteed approximately $437,729 of mortgage notes payable held by wholly owned subsidiaries; all such mortgage notes payable are consolidated for financial reporting purposes. The weighted average interest rate of the Company’s fixed rate mortgage notes payable (conventional and tax-exempt) was 5.1% at March 31, 2010 and December 31, 2009. The weighted average interest rate of the Company’s variable rate mortgage notes payable and its Credit Facility, including the effect of certain financing related fees, was 3.4% at March 31, 2010 and 2.9% at December 31, 2009.

Scheduled payments and maturities of mortgage notes payable and unsecured notes outstanding at March 31, 2010 are as follows:

														Stated
										Unsecured				interest rate
		Secured notes				Secured notes				notes				of unsecured
Year		payments (1)				maturities				maturities				notes
2010		$	3,589			$	29,387			$	14,576				7.500	%
											75,000				7.038	%(2)
2011			10,776				36,610				39,900				6.625	%
											150,000				5.667	%(2)
2012			14,034				108,224				201,601				6.125	%
											104,400				5.500	%
											75,000				4.325	%(2)
2013			14,876				264,697				100,000				4.950	%
2014			15,769				33,100				150,000				5.375	%
2015			14,725				365,130				—				—
2016			15,600				—				250,000				5.750	%
2017			16,533				18,300				250,000				5.700	%
2018			17,522				—				—				—
2019			2,588				699,529				—				—
Thereafter			110,705				498,684				250,000				6.100	%
		$	236,717			$	2,053,661			$	1,660,477

The Company has a variable rate unsecured credit facility (the “Credit Facility”) in the amount of $1,000,000 with a syndicate of commercial banks, to whom the Company pays an annual facility fee of approximately $1,250. The Company did not have any amounts outstanding under the Credit Facility and had $46,055 outstanding in letters of credit as of March 31, 2010. At December 31, 2009, there were no amounts outstanding under the Credit Facility and $44,105 outstanding in letters of credit. The Credit Facility bears interest at varying levels based on the London Interbank Offered Rate (“LIBOR”), rating levels achieved on the Company’s unsecured notes and on a maturity schedule selected by the Company. The current stated pricing is LIBOR plus 0.40% per annum (0.67% at March 31, 2010). The stated spread over LIBOR can vary from LIBOR plus 0.325% to LIBOR plus 1.00% based on the Company’s credit ratings. In addition, the Credit Facility includes a competitive bid option, which allows banks that are part of the lender consortium to bid to make loans to the Company at a rate that is lower than the stated rate provided by the Credit Facility for up to $650,000. The competitive bid option may result in lower pricing than the stated rate if market conditions allow. The Company did not have any amounts outstanding under this competitive bid option as of March 31, 2010. The Credit Facility matures in November 2011, assuming exercise of a one-year renewal option by the Company.

The Company was in compliance at March 31, 2010 with certain customary financial and other covenants under the Credit Facility and the Company’s unsecured notes.

4. Stockholders’ Equity

The following summarizes the changes in stockholders’ equity for the three months ended March 31, 2010:

										Accumulated				Accumulated
						Additional				earnings				other				Total
		Common				paid-in				less				comprehensive				stockholders’
		stock				capital				dividends				loss				equity
Balance at December 31, 2009		$	815			$	3,200,367			$	(149,988	)		$	(1,067	)		$	3,050,127
Net income attributable to common stockholders			—				—				72,523				—				72,523
Unrealized gain on cash flow hedges			—				—				—				542				542
Change in redemption value of redeemable noncontrolling interest			—				—				(1,145	)			—				(1,145	)
Dividends declared to common stockholders			—				—				(73,804	)			—				(73,804	)
Issuance of common stock			12				80,909				90				—				81,011
Amortization of deferred compensation			—				6,395				—				—				6,395
Balance at March 31, 2010		$	827			$	3,287,671			$	(152,324	)		$	(525	)		$	3,135,649

During the three months ended March 31, 2010, the Company:

	(i)		issued 891,685 shares of common stock through public offerings;
	(ii)		issued 211,320 shares of common stock in connection with stock options exercised;
	(iii)		issued 1,998 common shares through the Company’s dividend reinvestment plan;
	(iv)		issued 96,394 common shares in connection with stock grants;
	(v)		issued 3,283 shares to members of the Board of Directors in fulfillment of deferred stock awards;
	(vi)		withheld 38,960 common shares to satisfy employees’ tax withholding and other liabilities; and
	(vii)		had 1,300 shares of restricted common stock forfeited.

In addition, the Company granted 126,484 options for common stock to employees. Any deferred compensation related to the Company’s stock option and restricted stock grants during the three months ended March 31, 2010 is not reflected on the Company’s Condensed Consolidated Balance Sheet as of March 31, 2010, and will not be reflected until earned as compensation cost.

In August 2009, the Company commenced a continuous equity program (the “CEP”), under which the Company may sell up to $400,000 of its common stock until August 2012. During the three months ended March 31, 2010, the Company sold 891,685 shares under this program at an average sales price of $84.10 per share, for net proceeds of $73,870.

5. Derivative Instruments and Hedging Activities

The Company enters into interest rate swap and interest rate cap agreements (collectively, the “Hedging Derivatives”) for interest rate risk management purposes and in conjunction with certain variable rate secured debt to satisfy lender requirements. The Company does not enter into derivative transactions for trading or other speculative purposes. The following table summarizes the consolidated Hedging Derivatives at March 31, 2010, excluding derivatives executed to hedge debt on communities classified as held for sale (dollars in thousands):

		Non-designated												Fair Value
		Hedges				Cash Flow Hedges								Hedges
		Interest				Interest				Interest				Interest
		Rate Caps				Rate Caps				Rate Swaps				Rate Swaps
Notional balance		$	109,847			$	15,615			$	43,044			$	300,000
Weighted average interest rate (1)			1.5	%			1.7	%			6.5	%			5.7	%
Weighted average capped interest rate			6.9	%			6.0	%			n/a				n/a
Earliest maturity date		Apr-11				Jun-12				Jun-10				Dec-10
Latest maturity date		Mar-14				Jun-12				Jun-10				Jan-12
Estimated fair value, asset/(liability)		$	33			$	6			$	(365	)		$	1,182

Excluding derivatives executed to hedge debt on communities classified as held for sale, the Company had three derivatives designated as cash flow hedges, five derivatives designated as fair value hedges and five derivatives not designated as hedges at March 31, 2010. Fair value changes for derivatives that are not in qualifying hedge relationships are reported as a component of general and administrative expenses on the accompanying Condensed Consolidated Statements of Operations and Other Comprehensive Income. Fair value changes for derivatives not in qualifying hedge relationships for the three months ended March 31, 2010, were not material. For the derivative positions that the Company has determined qualify as effective cash flow hedges, the Company has recorded the effective portion of cumulative changes in the fair value of the Hedging Derivatives in other comprehensive income. Amounts recorded in other comprehensive income will be reclassified into earnings in the periods in which earnings are affected by the hedged cash flow. To adjust the Hedging Derivatives in qualifying cash flow hedges to their fair value and recognize the impact of hedge accounting, the Company recorded an increase in other comprehensive income of $542 and $376 during the three months ended March 31, 2010 and 2009, respectively. The amount reclassified into earnings for the three months ended March 31, 2010, as well as the estimated amount included in accumulated other comprehensive income as of March 31, 2010, expected to be reclassified into earnings within the next twelve months to offset the variability of cash flows of the hedged items during this period are not material. For the derivative positions that the Company has determined qualify as effective fair value hedges, the Company has recorded an increase in the fair value of $1,410 with the derivatives fair value reported as a component of prepaid expenses and other assets, with the associated gain as an adjustment to the carrying amount of the corresponding debt being hedged on the accompanying Condensed Consolidated Balance Sheets as of March 31, 2010.

The Company assesses, both at inception and on an on-going basis, the effectiveness of qualifying cash flow and fair value hedges. Hedge ineffectiveness, reported as a component of general and administrative expenses, did not have a material impact on earnings of the Company for any prior period, and the Company does not anticipate that it will have a material effect in the future. The fair values of the Hedging Derivatives and non-designated derivatives that are in an asset position are recorded in prepaid expenses and other assets. The fair value of derivatives that are in a liability position are included in accrued expenses and other liabilities on the accompanying Condensed Consolidated Balance Sheets.

Derivative financial instruments expose the Company to credit risk in the event of nonperformance by the counterparties under the terms of the Hedging Derivatives. The Company minimizes its credit risk on these transactions by dealing with major, creditworthy financial institutions which have an A+ or better credit rating by the Standard & Poor’s Ratings Group. As part of its on-going control procedures, the Company monitors the credit ratings of counterparties and the exposure of the Company to any single entity, thus minimizing credit risk concentration. The Company believes the likelihood of realizing losses from counterparty non-performance is remote. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements of its derivative financial instruments. Refer to Note 11, “Fair Value,” for further discussion.

6. Investments in Real Estate Entities

As of March 31, 2010, the Company had investments in six unconsolidated real estate entities with ownership interest percentages ranging from 15.2% to 50%. There were no changes in the Company’s ownership interest in, or

presentation of, its investments in unconsolidated real estate entities during the three months ended March 31,  2010. Detail of the real estate and associated funding underlying the Company’s unconsolidated investments is presented in the following table (unaudited).

 

		Company				# of				Total				Debt
		Ownership				Apartment				Capitalized										Interest				Maturity
Unconsolidated Real Estate Investments		Percentage				Homes				Cost (1)				Amount				Type		Rate (2)				Date
Fund I
1. Avalon at Redondo Beach — Los Angeles, CA							105			$	24,622			$	21,033			Fixed			4.87	%		Oct 2011
2. Avalon Lakeside — Chicago, IL							204				18,231				12,056			Fixed			5.74	%		Mar 2012
3. Avalon Columbia — Baltimore, MD							170				29,346				22,275			Fixed			5.48	%		Apr 2012
4. Avalon Sunset — Los Angeles, CA							82				20,903				12,750			Fixed			5.41	%		Mar 2014
5. Avalon at Poplar Creek — Chicago, IL							196				28,014				16,500			Fixed			4.83	%		Oct 2012
6. Avalon at Civic Center — Norwalk, CA							192				42,756				27,001			Fixed			5.38	%		Aug 2013
7. Avalon Paseo Place — Fremont, CA							134				24,825				11,800			Fixed			5.74	%		Nov 2013
8. Avalon at Yerba Buena — San Francisco, CA							160				66,791				41,500			Fixed			5.88	%		Mar 2014
9. Avalon at Aberdeen Station — Aberdeen, NJ							290				58,219				39,842			Fixed			5.64	%		Sep 2013
10. The Springs — Corona, CA							320				48,392				26,000			Fixed			6.06	%		Oct 2014
11. Avalon Lombard — Lombard, IL							256				35,319				17,243			Fixed			5.43	%		Jan 2014
12. Avalon Cedar Place — Columbia, MD							156				24,399				12,000			Fixed			5.68	%		Feb 2014
13. Avalon Centerpoint — Baltimore, MD							392				79,557				45,000			Fixed			5.74	%		Dec 2013
14. Middlesex Crossing — Billerica, MA							252				38,043				24,100			Fixed			5.49	%		Dec 2013
15. Avalon Crystal Hill — Ponoma, NY							168				38,603				24,500			Fixed			5.43	%		Dec 2013
16. Avalon Skyway — San Jose, CA							348				78,218				37,500			Fixed			6.11	%		Mar 2014
17. Avalon Rutherford Station — East Rutherford, NJ							108				36,771				20,019			Fixed			6.13	%		Sep 2016
18. South Hills Apartments — West Covina, CA							85				24,756				11,761			Fixed			5.92	%		Oct 2013
19. Weymouth Place — Weymouth, MA							211				25,298				13,455			Fixed			5.12	%		Mar 2015
Total Fund I			15.2	%			3,829			$	743,063			$	436,335						5.6	%
Fund II
1. Avalon Bellevue Park — Bellevue, WA							220			$	33,581			$	21,515			Fixed			5.52	%		Jun 2019
2. The Hermitage — Fairfax, VA							491				71,084				—			N/A			—			N/A
3. Avalon Rothbury — Gaithersburg, MD							203				31,250				—			N/A			—			N/A
Fund II corporate debt							N/A				N/A				61,500			Variable			2.74	%		2010(3)
Total Fund II			31.3	%			914			$	135,915			$	83,015						3.5	%
Other Operating Joint Ventures
1. Avalon Chrystie Place I — New York, NY (4)			20.0	%			361			$	135,270			$	117,000			Variable			0.92	%		Nov 2036
2. Avalon at Mission Bay North II — San Francisco, CA (5)			25.0	%			313				124,009				105,000			Fixed			6.02	%		Dec 2015
3. Avalon Del Rey — Los Angeles, CA			30.0	%			309				70,037				45,720			Variable			3.57	%		Apr 2016
Other Development Joint Ventures
1. Aria at Hathorne — Danvers, MA (5) (6)			50.0	%			64				N/A				2,420			Variable			4.19	%		Jun 2010
Total Other Joint Ventures							1,047			$	329,316			$	270,140						3.4	%
Total Unconsolidated Investments							5,790			$	1,208,294			$	789,490						4.6	%

The following is a combined summary of the financial position of the entities accounted for using the equity method, as of the dates presented:

		3-31-10				12-31-09
		(unaudited)				(unaudited)
Assets:
Real estate, net		$	1,105,589			$	1,065,328
Other assets			44,279				39,502
Total assets		$	1,149,868			$	1,104,830
Liabilities and partners’ capital:
Mortgage notes payable and credit facility		$	789,490			$	758,487
Other liabilities			24,266				19,669
Partners’ capital			336,112				326,674
Total liabilities and partners’ capital		$	1,149,868			$	1,104,830

The following is a combined summary of the operating results of the entities accounted for using the equity method, for the periods presented:

		For the three months ended
		(unaudited)
		3-31-10				3-31-09
Rental and other income		$	27,033			$	25,156
Operating and other expenses			(13,428	)			(11,021	)
Interest expense, net			(9,489	)			(8,778	)
Depreciation expense			(8,981	)			(7,806	)
Net loss		$	(4,865	)		$	(2,449	)

In conjunction with the acquisition and development of investments in unconsolidated entities, the Company incurred costs in excess of its equity in the underlying net assets of the respective investments. These costs represent $10,946 at March 31, 2010 and $11,047 at December 31, 2009 of the respective investment balances.

As part of the formation of the AvalonBay Value Added Fund, LP (“Fund I”) and the AvalonBay Value Added Fund II, LP (“Fund II”), the Company provided separate and distinct guarantees to one of the limited partners in each of the ventures. These guarantees are specific to the respective fund and any impacts or obligation of the Company to perform under one of the guarantees has no impact on the Company’s obligations with respect to the other guarantee. The guarantees provide that, if, upon final liquidation of Fund I or Fund II, the total amount of all distributions to the guaranteed partner during the life of the respective fund (whether from operating cash flow or property sales) does not equal the total capital contributions made by that partner, then the Company will pay the guaranteed partner an amount equal to the shortfall, but in no event more than 10% of the total capital contributions made by the guaranteed partner (maximum of approximately $7,500 for Fund I and approximately $1,470 for Fund II as of March 31, 2010). As of March 31, 2010, the expected realizable values of the real estate assets owned by Fund I and Fund II are considered adequate to cover such potential payments under a liquidation scenario. The estimated fair value of and the Company’s obligation under these guarantees, both at inception and as of March 31, 2010, was not significant and therefore the Company has not recorded any obligation for either of these guarantees as of March 31, 2010.

In February 2010, Fund II purchased its third community, located in Gaithersburg, Maryland. The garden-style community, renamed Avalon Rothbury, contains 203 homes and was acquired for a purchase price of $31,250 or approximately $154 per apartment home.

7. Real Estate Disposition Activities

During the three months ended March 31, 2010, the Company sold two wholly owned communities, Avalon at Danada Farms, located in Wheaton, Illinois and Avalon Knoll, located in Germantown, Maryland. In the aggregate, these two communities contain 595 apartment homes and were sold for a gross sales price of $82,950. These dispositions resulted

in a gain in accordance with GAAP of approximately $50,291. As of March 31, 2010, the Company had one community that qualified as discontinued operations and held for sale.

The operations for any real estate assets sold from January 1, 2009 through March 31, 2010 and the real estate assets that qualified as discontinued operations and held for sale as of March 31, 2010 have been presented as such in the accompanying Condensed Consolidated Financial Statements. Accordingly, certain reclassifications have been made to prior years to reflect discontinued operations consistent with current year presentation.

The following is a summary of income from discontinued operations for the periods presented:

		For the three months ended
		3-31-10				3-31-09
Rental income		$	3,202			$	9,946
Operating and other expenses			(1,207	)			(3,237	)
Interest expense, net			—				(177	)
Depreciation expense			—				(2,567	)
Income from discontinued operations		$	1,995			$	3,965

8. Segment Reporting

The Company’s reportable operating segments include Established Communities, Other Stabilized Communities, and Development/Redevelopment Communities. Annually as of January 1^st, the Company determines which of its communities fall into each of these categories and maintains that classification, unless disposition plans regarding a community change, throughout the year for the purpose of reporting segment operations.

In addition, the Company owns land for future development and has other corporate assets that are not allocated to an operating segment.

The Company’s segment disclosures present the measure(s) used by the chief operating decision maker for purposes of assessing such segments’ performance. The Company’s chief operating decision maker is comprised of several members of its executive management team who use net operating income (“NOI”) as the primary financial measure for Established Communities and Other Stabilized Communities. NOI is defined by the Company as total revenue less direct property operating expenses. Although the Company considers NOI a useful measure of a community’s or communities’ operating performance, NOI should not be considered an alternative to net income or net cash flow from operating activities, as determined in accordance with GAAP. NOI excludes a number of income and expense categories as detailed in the reconciliation of NOI to net income.

A reconciliation of NOI to net income for three months ended March 31, 2010 and 2009 is as follows:

		For the three months ended
		3-31-10				3-31-09
Net income		$	72,366			$	47,101
Indirect operating expenses, net of corporate income			7,232				8,575
Investments and investment management expense			1,039				916
Expensed development and other pursuit costs			505				1,093
Interest expense, net			42,541				30,130
Gain on extinguishment of debt, net			—				(1,062	)
General and administrative expense			8,895				7,247
Equity in income of unconsolidated entities			(227	)			(3,457	)
Depreciation expense			56,095				50,073
Gain on sale of real estate assets			(50,291	)			—
Income from discontinued operations			(1,995	)			(3,965	)
Net operating income		$	136,160			$	136,651

The primary performance measure for communities under development or redevelopment depends on the stage of completion. While under development, management monitors actual construction costs against budgeted costs as well as lease-up pace and rent levels compared to budget.

The following table provides details of the Company’s segment information as of the dates specified. The segments are classified based on the individual community’s status as of the beginning of the given calendar year. Therefore, each year the composition of communities within each business segment is adjusted. Accordingly, the amounts between years are not directly comparable. Segment information for the three months ended March 31, 2010 and 2009 have been adjusted for the communities that were sold from January 1, 2009 through March 31, 2010, or otherwise qualify as discontinued operations as of March 31, 2010, as described in Note 7, “Real Estate Disposition Activities.”

		For the three months ended
		Total								% NOI change				Gross
		revenue				NOI				from prior year				real estate (1)
For the period ended March 31, 2010
Established
New England		$	35,193			$	21,643				(4.6	%)		$	1,086,197
Metro NY/NJ			44,390				29,507				(3.5	%)			1,385,405
Mid-Atlantic/Midwest			29,391				17,546				(5.6	%)			750,566
Pacific Northwest			6,617				4,426				(15.0	%)			239,683
Northern California			29,416				20,158				(14.5	%)			1,108,224
Southern California			14,773				9,707				(9.9	%)			467,275
Total Established			159,780				102,987				(7.6	%)			5,037,350
Other Stabilized			28,917				16,869				n/a				1,556,920
Development / Redevelopment			25,041				16,304				n/a				1,429,601
Land Held for Future Development			n/a				n/a				n/a				206,713
Non-allocated (2)			1,849				n/a				n/a				86,403
Total		$	215,587			$	136,160				(0.4	%)		$	8,316,987
For the period ended March 31, 2009
Established
New England		$	30,641			$	19,262				(3.0	%)		$	857,240
Metro NY/NJ			39,540				26,280				(3.9	%)			1,047,109
Mid-Atlantic/Midwest			30,529				19,155				(1.2	%)			773,828
Pacific Northwest			7,381				5,214				0.4	%			238,474
Northern California			25,857				19,429				1.5	%			855,263
Southern California			16,116				11,346				(5.6	%)			426,467
Total Established			150,064				100,686				(2.2	%)			4,198,381
Other Stabilized			30,995				19,811				n/a				1,420,710
Development / Redevelopment			27,206				16,154				n/a				1,892,565
Land Held for Future Development			n/a				n/a				n/a				248,998
Non-allocated (2)			1,468				n/a				n/a				57,880
Total		$	209,733			$	136,651				6.0	%		$	7,818,534

(1)		Does not include gross real estate assets held for sale of $117,443 and $325,170 as of March 31, 2010 and 2009, respectively.
(2)		Revenue represents third-party management, accounting and developer fees and miscellaneous income which are not allocated to a reportable segment.

9. Stock-Based Compensation Plans

Information with respect to stock options granted under the Company’s 1994 Stock Option and Incentive Plan (the “1994 Plan”) and under the AvalonBay Communities, Inc. 2009 Stock Option and Incentive Plan (the “2009 Plan”) are as follows:

						Weighted								Weighted
						average								average
		2009 Plan				exercise price				1994 Plan				exercise price
		shares				per share				shares				per share
Options Outstanding, December 31, 2009			—			$	—				2,836,254			$	80.76
Exercised			—				—				(211,320	)			48.41
Granted			126,484				74.20				—				—
Forfeited			—				—				(11,571	)			90.74
Options Outstanding, March 31, 2010			126,484			$	74.20				2,613,363			$	83.34
Options Exercisable March 31, 2010			—				N/A				2,256,938			$	86.58

The weighted average fair value of the options granted under the 2009 Plan during the three months ended March 31, 2010 is estimated at $19.45 per share on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield of 5.5% over the expected life of the option, volatility of 43.00%, risk-free interest rate of 3.15% and an expected life of approximately seven years.

At March 31, 2010, the Company had 234,611 outstanding unvested shares granted under restricted stock awards. The Company issued 96,394 shares of restricted stock valued at $7,152 as part of its stock-based compensation plan during the three months ended March 31, 2010. Restricted stock vesting during the three months ended March 31, 2010 totaled 106,423 shares and had fair values at the grant date ranging from $48.60 to $147.75 per share. The total fair value of shares vested was $8,913 and $9,794 for the three months ended March 31, 2010 and 2009, respectively.

Total employee stock-based compensation cost recognized in income was $3,485, and $3,536 for the three months ended March 31, 2010 and 2009, respectively, and total capitalized stock-based compensation cost was $1,329 and $1,546 for the three months ended March 31, 2010 and 2009, respectively. At March 31, 2010, there was a total of $2,999 and $9,088 in unrecognized compensation cost for unvested stock options and unvested restricted stock, respectively, which does not include estimated forfeitures. The unrecognized compensation cost for unvested stock options and restricted stock is expected to be recognized over a weighted average period of 2.10 years and 2.70 years, respectively.

Deferred Stock Performance Plan

The total cost recognized in earnings in connection with the multi-year performance plan implemented by the Company in 2008 was $427 and $437 for the three months ended March 31, 2010 and 2009, respectively, and total capitalized stock-based compensation cost was $233 and $249 for the three months ended March 31, 2010 and 2009, respectively.

10. Related Party Arrangements

Unconsolidated Entities

The Company manages unconsolidated real estate entities for which it receives asset management, property management, development and redevelopment fee revenue. From these entities, the Company received fees of $1,849 and $1,468 in the three months ended March 31, 2010 and 2009, respectively. These fees are included in management, development and other fees on the accompanying Condensed Consolidated Statements of Operations and Other Comprehensive Income. In addition, the Company has outstanding receivables associated with its management role of $3,803 and $2,125 as of March 31, 2010 and 2009, respectively.

Director Compensation

The Company recorded non-employee director compensation expense relating to the restricted stock grants and deferred stock awards in the amount of $219 for three months ended March 31, 2010 as a component of general and administrative expense. Deferred compensation relating to these restricted stock grants and deferred stock awards was $146 and $365 on March 31, 2010 and December 31, 2009, respectively.

11. Fair Value

Financial Instruments Carried at Fair Value

Derivative Financial Instruments

Currently, the Company uses interest rate swap and interest rate cap agreements to manage its interest rate risk. These instruments are carried at fair value in the Company’s financial statements. See Note 5, “Derivative Instruments and Hedging Activities,” for derivative values at March 31, 2010 and a description of where these amounts are recorded in the financial statements. In adjusting the fair value of its derivative contracts for the effect of counterparty nonperformance risk, the Company has considered the impact of its net position with a given counterparty, as well as any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives use Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. As of March 31, 2010, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined it is not significant. As a result, the Company has determined that its derivative valuations are classified in Level 2 of the fair value hierarchy.

Redeemable Noncontrolling Interests

•

Puts – The Company provided redemption options (the “Puts”) that allow two of the Company’s joint venture partners to require the Company to purchase their interests in the investments at the future fair market value. One Put is payable in cash or, at the Company’s option, common stock of the Company, and the second is payable in cash. The Company determines the fair value of the Puts based on unobservable inputs considering the assumptions that market participants would make in pricing the obligations. The Company applies discount factors to the estimated future cash flows of the asset underlying the associated joint venture, which in the case of the Puts is the NOI from an apartment community, as well as potential disposition proceeds utilizing market capitalization rates, to derive the fair value of the position. Given the significance of the unobservable inputs, the valuations are classified in Level 3 of the fair value hierarchy. At December 31, 2009, the Puts’ aggregate fair value was $4,101. At March 31, 2010, the aggregate fair value of the Puts was $4,963.

•

DownREIT units – The Company issued units of limited partnership interest in DownREITs which provide the DownREIT limited partners the ability to present all or some of their units for redemption for a cash amount as determined by the applicable partnership agreement. Under the DownREIT agreements, for each limited partnership unit, the limited partner is entitled to receive cash in the amount equal to the fair value of the Company’s common stock on or about the date of redemption. In lieu of cash redemption, the Company may elect to exchange such units for an equal number of shares in the Company’s common stock. The limited partnership units in DownREITs are valued using the market price of the Company’s common stock, a Level 1 price under the fair value hierarchy. At December 31, 2009, the fair value of the DownREIT units was $1,260. At March 31, 2010, the fair value of the DownREIT units was $1,326.

Financial Instruments Not Carried at Fair Value

Cash and Cash Equivalents

Cash and cash equivalent balances are held with various financial institutions within principal protected accounts. The Company monitors credit ratings of these financial institutions and the concentration of cash and cash equivalent balances with any one financial institution and believes the likelihood of realizing material losses related to cash and cash equivalent balances is remote. Cash and cash equivalents are carried at their face amounts, which reasonably approximate their fair values.

Other Financial Instruments

Rents receivable, accounts and construction payable and accrued expenses and other liabilities are carried at their face amounts, which reasonably approximate their fair values.

The Company values its bond indebtedness, notes payable and outstanding amounts under the Credit Facility using a discounted cash flow analysis on the expected cash flows of each instrument. This analysis reflects the contractual terms of the instrument, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The process also considers credit valuation adjustments to appropriately reflect the Company’s nonperformance risk. The Company has concluded that the value of its bond indebtedness and notes payable are Level 2 prices as the majority of the inputs used to value its positions fall within Level 2 of the fair value hierarchy. Bond indebtedness, notes payable and outstanding amounts under the Credit Facility (as applicable) with an aggregate outstanding par amount of approximately $3,950,855 and $3,977,320 had an estimated aggregate fair value of $4,039,536 and $4,052,817 at March 31, 2010 and December 31, 2009, respectively.

12. Subsequent Events

The Company has evaluated subsequent events through the date on which this Form 10-Q was filed, the date on which these financial statements were issued, and identified the items below for discussion.

In April 2010, the Company sold one community, Avalon on the Sound, located in New Rochelle, New York. Avalon on the Sound contains 412 apartment homes and was sold for $107,500. The Company estimates that it will record a GAAP gain of approximately $19,500 related to this disposition.

In April 2010, the Company settled a lawsuit relating to the Company’s former Avalon Wynhaven community, which was sold in 2008. In conjunction with the settlement the Company made a payment to the homeowners association and an indemnification payment to the buyer of Avalon Wynhaven, of approximately $1,350. The Company previously had deferred recognition of $3,272 from the gain in disposition related to these costs, and will recognize the remainder of the deferred gain in the second quarter of 2010.

In April 2010, the Company sold an additional 271,700 shares under its CEP at an average sales price of $92.00 per share, for net proceeds of $24,620.

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

Management’s 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 Condensed Consolidated Financial Statements and the accompanying Notes to Condensed Consolidated Financial Statements included elsewhere in this report. This report, including the following MD&A, contains forward-looking statements regarding future events or trends as described more fully under “Forward-Looking Statements” included in this report. Actual results or developments could differ materially from those projected in such statements as a result of the factors described under “Forward-Looking Statements” below and the risk factors described in Item 1a, “Risk Factors,” of our Form 10-K for the year ended December 31, 2009 (our “Form 10-K”).

All capitalized terms have the meaning as provided elsewhere in this Form 10-Q.

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 strategy is to be leaders in 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 submarkets of the United States. 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.

First Quarter 2010 Highlights

	•		Net income attributable to common stockholders for the quarter ended March 31, 2010 was $72,523,000, as compared to $47,425,000 for the quarter ended March 31, 2009, an increase of 52.9%. The increase is attributable to gains on asset sales in the first quarter 2010 with no comparable activity in 2009.
	•		Our Established Community portfolio experienced a 7.6% decrease in NOI over the comparable period of 2009, comprised of a 4.2% decrease in rental revenue and an increase in operating expenses of 2.8%. Sequential rental revenue declined by 0.3% as compared to the fourth quarter 2009.

Financial Outlook

While both year over year and sequential revenue declined, the decline was at a lesser rate than anticipated in our financial outlook provided in February 2010. Our results reflect the improving economic conditions, primarily in the form of higher occupancy levels and lower turnover, supporting our current expectations of moderate sequential rental rate growth beginning in the second quarter of 2010.

Capital activity during the first quarter of 2010 consisted of early debt retirement and the issuance of equity. We repaid two fixed rate secured notes with an aggregate principal balance of $25,187,000 and a weighted average coupon of 6.7% in advance of their scheduled maturities in 2012 and 2025. We accessed the capital markets by issuing equity under our CEP, from which we raised $98,490,000 year to date through April 30, 2010. In addition, through April 30, 2010 we have sold three communities for an aggregate gross sales price of $190,450,000. We used the proceeds received to fund our development and redevelopment activities, to acquire an indirect interest in assets through Fund II, and to repay higher cost secured debt, while retaining substantial cash balances for general corporate purposes. We believe that our capital structure will continue to provide financial flexibility to access capital on attractive terms.

We currently have seven communities under construction with a total projected capitalized cost of approximately $843,500,000. As of March 31, 2010, approximately $614,880,000 of the capital for this development has been invested, with $228,620,000 remaining to be invested. We have obtained $59,400,000 of this required funding through financing from third-party tax-exempt and taxable debt. Our combined development under way and in planning remained largely consistent with year end 2009 amounts, and was $3,100,500,000 at March 31, 2010. During the first quarter of 2010 we completed the development of one community for a total capitalized cost of $77,400,000 and commenced the development of one community, which we expect to be completed for a total capitalized cost of $110,700,000. Relative to 2009, we expect to increase our current level of development activity in 2010 and expect to deliver assets into the market in 2011 and 2012 when a composite of third-party economic forecasts expect apartment fundamentals to be more favorable.

At March 31, 2010, there were seven communities under redevelopment, with an expected investment of approximately $118,400,000, excluding costs incurred prior to the start of redevelopment, with $36,873,000 remaining to be invested. We also expect to increase our current level of redevelopment activity through the end of 2010, taking the opportunity to reinvest and reposition our assets to meet the needs of our residents and ensure that our assets are positioned to outperform when the economy fully recovers.

During the remainder of 2010, we expect to disburse approximately $167,322,000 related to the seven communities currently under development. We expect approximately $42,400,000 of the projected 2010 disbursements will be funded from cash in escrow related to previously sourced tax-exempt and taxable debt. 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 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 for the balance of 2010. See the discussion under Liquidity and Capital Resources.

While we continue to grow principally through our demonstrated core competency of developing wholly owned assets, we also acquire interests in additional assets, primarily through our investment in two private discretionary investment funds.

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 $436,335,000 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 with total equity commitments of $125,000,000. 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 our 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 February 2010, Fund II purchased its third community, located in Gaithersburg, Maryland. The garden-style community, renamed Avalon Rothbury, contains 203 homes and was acquired for a purchase price of $31,250,000 or approximately $154,000 per apartment home.

Communities Overview

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 period ended March 31, 2010, the Established Communities are communities that are consolidated for financial reporting purposes, had stabilized occupancy and operating expenses as of January 1, 2009, 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 are 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. Redevelopment is considered substantial when capital invested during the reconstruction effort is expected to exceed either $5,000,000 or 10% of the community’s pre-redevelopment basis.

			Development Communities are communities that are under construction and for which a certificate of occupancy has not been received. These communities may be partially complete and operating.
			Development Rights are development opportunities in the early phase of the development process for which we 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.

In the first quarter of 2010, we moved our corporate headquarters to Arlington, Virginia. The new office space is leased under a ten-year operating lease for approximately 50,744 square feet of office space. In addition, we currently own approximately 60,000 square feet of office space in Alexandria, Virginia, which formerly served as our corporate office. We are exploring alternatives to lease or sell the office space in Alexandria, Virginia. All other regional and administrative offices are leased under operating leases.

As of March 31, 2010, 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			25				6,442
Metro NY/NJ			21				6,908
Mid-Atlantic/Midwest			15				5,944
Pacific Northwest			8				1,943
Northern California			20				5,975
Southern California			12				3,460
Total Established			101				30,672
Other Stabilized Communities:
New England			10				2,414
Metro NY/NJ			9				2,428
Mid-Atlantic/Midwest			12				3,368
Pacific Northwest			4				1,021
Northern California			8				2,145
Southern California			11				2,188
Total Other Stabilized			54				13,564
Lease-Up Communities			3				962
Redevelopment Communities			7				2,615
Total Current Communities			165				47,813
Development Communities			7				2,509
Development Rights			29				7,361