10-K405: Annual report [Sections 13 and 15(d), S-K Item 405]
Published on March 10, 2000
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission file number 1-12672
AVALONBAY COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
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Maryland 77-0404318
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2900 Eisenhower Avenue, Suite 300
Alexandria, Virginia 22314
(Address of principal executive office, including zip code)
(703) 329-6300
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
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 [Y] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, as of March 1, 2000 was $2,256,084,969.
The number of shares of the Registrant's Common Stock, par value $.01 per share,
outstanding as of March 1, 2000 was 65,871,094.
Documents Incorporated by Reference
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Portions of AvalonBay Communities, Inc.'s Proxy Statement for the 2000 annual
meeting of stockholders, a definitive copy of which will be filed with the SEC
within 120 days after the year end of the year covered by this Form 10-K, are
incorporated by reference herein as portions of Part III of this Form 10-K.
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TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS.........................................................1
ITEM 2. COMMUNITIES......................................................6
ITEM 3. LEGAL PROCEEDINGS...............................................30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS.................31
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................32
ITEM 6. SELECTED FINANCIAL DATA.........................................33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................36
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................56
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.....................57
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT..................57
ITEM 11. EXECUTIVE COMPENSATION..........................................57
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.............................................57
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................57
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND
REPORTS ON FORM 8-K........................................58
SIGNATURES ................................................................65
PART I
This Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Our actual results could differ materially from those set forth in each
forward-looking statement. Certain factors that might cause such a difference
are discussed in this report, including in the section entitled "Forward-Looking
Statements" on page 36 of this Form 10-K.
ITEM 1. BUSINESS
General
AvalonBay Communities, Inc. is a Maryland corporation that has elected to be
taxed as a real estate investment trust, or REIT, under the Internal Revenue
Code of 1986, as amended. We focus on the ownership and operation of upscale
apartment communities in high barrier-to-entry markets of the United States.
These markets include Northern and Southern California and selected states in
the Mid-Atlantic, Northeast, Midwest and Pacific Northwest regions of the
country. AvalonBay is the surviving corporation from the merger of Avalon
Properties, Inc. with and into Bay Apartment Communities, Inc. In connection
with the merger, Avalon Properties, Inc. ceased to exist and we changed our name
from Bay Apartment Communities, Inc. to AvalonBay Communities, Inc.
As of March 1, 2000, we owned or held a direct or indirect ownership interest in
121 operating apartment communities containing 35,648 apartment homes in eleven
states and the District of Columbia, of which four communities containing 1,455
apartment homes were under redevelopment. In addition to these operating
communities, we also owned 12 communities under construction that will contain
3,173 apartment homes and rights to develop ("Development Rights") an additional
30 communities that, if developed as expected, will contain an estimated 8,624
apartment homes. We generally obtain ownership in an apartment community by
developing vacant land into a new community or by acquiring and either
repositioning or redeveloping an existing community. In selecting sites for
development, redevelopment or acquisition, we favor locations that are near
expanding employment centers and convenient to recreation areas, entertainment,
shopping and dining.
Our principal operating objectives are to increase operating cash flow and Funds
from Operations, or FFO, and, as a result, long-term stockholder value. For a
description of the meaning of FFO and its use and limitation as an operating
measure, see the discussion titled "Funds from Operations" in Item 7 of this
report. Our strategies and goals to achieve these objectives include:
- generating consistent, sustained earnings growth at each community
through increased revenue, by balancing high occupancy with premium
pricing, and increased operating margins from aggressive operating
expense management;
- investing selectively in new development, redevelopment and
acquisition communities in markets with growing demand and high
barriers-to-entry;
- disposing of communities in markets where we have limited market
presence; and
- maintaining a conservative capital structure to provide continued
access to capital markets at a cost that is low enough in relation to
the expected yields on our developments and redevelopments that
financing of new undertakings is desirable.
We believe that we can generally implement these strategies best by building,
rebuilding, acquiring and managing upscale assets in supply-constrained markets
while maintaining the financial discipline to ensure balance sheet flexibility.
We believe that we can achieve high occupancy levels, increased rental rates and
growth in cash flow, although we cannot provide assurance that these results
will be achieved.
Development Strategy. We carefully select land for development and follow
established procedures that we believe minimize both the cost and the risks of
development. As one of the largest developers of multifamily apartment
communities in high barrier-to-entry markets of the United States, we identify
development opportunities through local market presence and access to local
market information achieved through our regional offices. In addition to our
principal executive offices in Alexandria, Virginia, we also maintain regional
offices and administrative or specialty offices in or near the following cities:
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- San Jose, California;
- Wilton, Connecticut;
- Boston, Massachusetts;
- Chicago, Illinois;
- Los Angeles, California;
- Minneapolis, Minnesota;
- Newport Beach, California;
- New York, New York;
- Princeton, New Jersey; and
- Seattle, Washington.
After selecting a target site, we negotiate for the right to acquire the site
either through an option or a long-term conditional contract. After we acquire
land, we generally shift our focus to construction. Except for certain mid-rise
and high-rise apartment communities where we have historically used third-party
general contractors, we act as our own general contractor. We believe this
enables us to achieve higher quality, greater control over schedules and
significant cost savings. Our development and property management teams monitor
construction progress to ensure high quality workmanship and a smooth and timely
transition into the leasing and operational phase.
Redevelopment Strategy. We selectively seek existing under-managed apartment
communities in fully-developed neighborhoods and create value by substantially
rebuilding these communities. When we undertake the redevelopment of a
community, our goal is to rebuild the community so that our total investment is
significantly below replacement cost and the community is the highest quality
apartment community or best rental value for an upscale apartment community in
its local area. We have established procedures to minimize both the cost and
risks of redevelopment. Our redevelopment teams, which include key
redevelopment, construction and property management personnel, monitor
redevelopment progress. We believe we achieve significant cost savings by acting
as our own general contractor. More importantly, this helps to ensure high
quality design and workmanship and a smooth and timely transition into the
lease-up and restabilization phase.
Disposition Strategy. During 1998, we determined that we would pursue a
disposition strategy for certain assets in markets that did not meet our
long-term strategic direction. This disposition strategy also acts as a source
of capital because we are able to redeploy the net proceeds from our
dispositions in lieu of raising that amount of capital externally. Under this
program, we solicit competing bids from unrelated parties for these individual
assets, and consider the sales price and tax ramifications of each proposal. In
connection with this disposition program, we have disposed of a total of 24
communities and a participating mortgage note since September 1998. The net
proceeds from the sale of these assets were approximately $384,143,000. We
intend to actively seek buyers for the remaining communities held for sale. We
anticipate reinvesting capital obtained from dispositions of these assets into
development of new communities and redevelopment of existing communities that
offer greater investment returns and long-term growth potential than those
communities identified for disposition. However, we cannot provide assurance
that we will be able to complete our disposition strategy or that assets
identified for sale can be sold on terms that are satisfactory to us.
Acquisition Strategy. We have observed and been impacted by a reduction in the
availability of cost effective capital beginning in the third quarter of 1998.
As a result, we limited our acquisition activity in 1999 to the purchase of one
community that we acquired on a presale basis in connection with a forward
purchase agreement signed in 1997 with an unaffiliated party. The forward
purchase agreement provided for the purchase of ten communities, primarily in
the Pacific Northwest and Midwest regions of the country, to be developed. The
remaining nine presale acquisitions are expected to close during the next 31
months for an estimated aggregate purchase price of $347.1 million. Together,
these communities are expected to contain 2,753 apartment homes when completed.
We will manage these communities after acquiring ownership. This expansion is
consistent with our strategy to achieve long term earnings growth by providing a
high quality platform for expansion while also providing additional economic and
geographic diversity. We believe that the acquisition of these presale
communities will enable us to achieve rapid penetration into supply-constrained
markets. We believe that we have now targeted and penetrated substantially all
of the high barrier-to-entry markets of the United States.
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Property Management Strategy. We intend to increase earnings through innovative,
proactive property management that will result in higher revenue from
communities. Our principle strategies for maximizing revenue include:
- intense focus on resident satisfaction;
- increasing rents as market conditions permit; and
- managing community occupancy for optimal rental revenue levels.
Generally, lease terms are staggered based on vacancy exposure by apartment
type, so that lease expirations are better matched to each community's traffic
patterns. On-site property management teams receive bonuses based largely upon
the net operating income produced at their respective communities. We are also
pursuing ancillary services which could provide additional revenue sources.
Controlling operating expenses is another way in which we intend to increase
earnings growth. An increase in 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 also aggressively
pursue real estate tax appeals and scrutinize other operating costs. To control
operating expenses we:
- record invoices on-site to ensure careful monitoring of budgeted
versus actual expenses;
- purchase supplies in bulk where possible;
- bid on third-party contracts on a volume basis;
- perform turnover work in-house or hire third-parties generally
depending upon the least costly alternative; and
- undertake preventive maintenance regularly to maximize resident
satisfaction and property and equipment life.
In addition, 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 utility costs.
On a limited basis, we also manage properties for third parties, believing that
doing so will provide information about new markets or provide an acquisition
opportunity, thereby enhancing opportunities for growth.
Technology Strategy. We believe that an innovative management information
systems infrastructure will be an important element in managing our future
growth. This is because timely and accurate collection of financial and resident
profile data will enable us to maximize revenue through careful leasing
decisions and financial management. We currently employ a proprietary
company-wide intranet using a digital network with high-speed digital lines.
This network connects all of our communities and offices to central servers in
Alexandria, Virginia, providing access to our associates and to AvalonBay's
corporate information throughout the country from all locations.
We are currently engaged in the development of an innovative on-site property
management system and a leasing automation system to enable management to
capture, review and analyze data to a greater extent than is possible using
existing commercial software. We have entered into a formal joint venture
agreement, in the form of a limited liability company agreement, with United
Dominion Realty Trust, Inc., another public multifamily real estate company, to
continue development of these systems and system software, which are
collectively referred to in this discussion as the "system." The system
development process is currently managed by our employees, who have significant
related project management experience, and the employees of the joint venturer.
The actual programming and documentation of the system is being conducted by our
employees, the employees of our joint venturer and third party consultants under
the supervision of these experienced project managers. We currently expect that
the total development costs over a three-year period will be approximately $7.5
million including hardware costs and expenses, the costs of employees and
related overhead, and the costs of engaging third party consultants. These
development costs will be shared on an equal basis by us and our joint venturer.
Once developed, we intend to use the property management system in place of
current property management information software for which we pay a license fee
to third parties, and we intend to use the leasing automation system to make
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the lease application process easier for residents and more efficient for us to
manage. We currently project that the property management system will undergo an
on-site test (i.e., a "beta test") during the third quarter of 2000 and that the
system will be functional and implemented during 2001. The leasing automation
system is currently in beta testing at two communities.
We believe that when implemented the system will result in cost savings due to
increased data reliability and efficiencies in management time and overhead, and
that these savings will largely offset the expense associated with amortizing
the system development costs and maintaining the software. We also believe that
it is possible that other real estate companies may desire to use the system
concept and system software that we are developing and that therefore there may
be an opportunity to recover, in the future, a portion of our investment by
licensing the system to others. However, at the present time these potential
cost savings and ancillary revenue are speculative, and we cannot assure that
the system will provide sufficient benefits to offset the cost of development
and maintenance.
We have never before engaged in the development of systems or system software on
this scale and have never licensed a system concept or system software to
others. There are a variety of risks associated with the development of the
system, both for internal use and for potential sale or licensing to third
parties. Among the principal risks associated with this undertaking are the
following:
- we may not be able to maintain the schedule or budget that we have
projected for the development and implementation of the system;
- we may be unable to implement the system with the functionality and
efficiencies we desire on commercially reasonable terms;
- we may decide not to endeavor to license the system to other
enterprises, the system may not be attractive to other enterprises,
and we may not be able to effectively manage the licensing of the
system to other enterprises; and
- the system may not provide AvalonBay with meaningful cost savings or a
meaningful source of ancillary revenues.
The occurrence of any of the events described above could prevent us from
achieving increased efficiencies, realizing revenue growth produced by ancillary
revenues or recovering our initial investment.
Financing Strategy. We have consistently maintained, and intend to continue to
maintain, a conservative capital structure, largely comprised of common equity.
At December 31, 1999, debt-to-total market capitalization was 36.6%, and
permanent long-term floating rate debt, not including borrowings under the
unsecured facility, was only 1.6% of total market capitalization. We currently
intend to limit long-term floating rate debt to less than 10% of total market
capitalization, although that policy may change from time to time.
We have observed and been impacted by a reduction in the availability of cost
effective capital beginning in the third quarter of 1998. We cannot assure you
that cost effective capital will be available to meet future expenditures
required to begin planned reconstruction activity or the construction of the
Development Rights. Before planned reconstruction activity or the construction
of a Development Right begins, we intend to arrange adequate capital sources to
complete such undertakings, although we cannot assure you that we will be able
to obtain such financing. In the event that financing cannot be obtained, we may
have to abandon Development Rights, write-off associated pursuit costs and
forego reconstruction activity which we believe would have increased revenues
and earnings.
We estimate that a significant portion of our liquidity needs will be met from
retained operating cash and borrowings under our $600,000,000 variable rate
unsecured credit facility. At March 1, 2000, $203,500,000 was outstanding,
$75,481,000 was used to provide letters of credit and $321,019,000 was available
for borrowing under the unsecured facility. If required, to meet the balance of
our liquidity needs we will need to arrange additional capacity under our
existing unsecured facility, sell additional existing communities and/or issue
additional debt or equity securities. While we believe we have the financial
position to expand our short term credit capacity and support our capital
markets activity, we cannot assure you that we will be successful in completing
these arrangements, sales or offerings. The failure to complete these
transactions on a cost-effective basis could have a
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material adverse impact on our operating results and financial condition,
including the abandonment of deferred development costs and a resultant charge
to earnings.
For the year ended December 31, 1999, FFO increased to $212,840,000 from
$148,487,000 for the year ended December 31, 1998. FFO for the year ended
December 31, 1998 reflects the operating results for Avalon through June 4, 1998
and for the combined company after that date.
Inflation and Tax Matters
Substantially all of our leases are for a term of one year or less, which may
enable us to realize increased rents upon renewal of existing leases or the
beginning of new leases. Such short-term leases generally minimize the risk to
us of the adverse effects of inflation, although as a general rule these leases
permit residents to leave at the end of the lease term without penalty. Our
current policy is generally to permit residents to terminate leases upon an
agreed advanced written notice and payment of a certain number of months rent,
as stated in the resident's lease, as compensation for early termination.
Short-term leases combined with relatively consistent demand allow rents, and
therefore cash flow from the portfolio to provide an attractive inflation hedge.
We filed an election with our initial federal income tax return to be taxed as a
REIT under the Internal Revenue Code of 1986, as amended, and intend to maintain
our qualification as a REIT in the future. As a qualified REIT, with limited
exceptions, we will not be taxed under federal and certain state income tax laws
at the corporate level on our net income to the extent net income is distributed
to our stockholders. We expect to distribute all of our taxable income and
therefore generally avoid income tax at the corporate level.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required, in many instances regardless of knowledge or responsibility, to
investigate and remediate the effects of hazardous or toxic substances or
petroleum product releases at such property. The owner or operator may be held
liable to a governmental entity or to third parties for property damage and for
investigation and remediation costs incurred by such parties in connection with
the contamination, which may be substantial. The presence of such substances, or
the failure to properly remediate the contamination, may adversely affect the
owner's ability to borrow against, sell or rent such property. In addition, some
environmental laws create a lien on the contaminated site in favor of the
government for damages and costs it incurs in connection with the contamination.
5
Certain federal, state and local laws, regulations and ordinances govern the
removal, encapsulation or disturbance of asbestos-containing materials, or ACMs,
when such materials are in poor condition or in the event of construction,
remodeling, renovation or demolition of a building. Such laws may impose
liability for release of ACMs and may provide for third parties to seek recovery
from owners or operators of real properties for personal injury associated with
ACMs. In connection with our ownership and operation of apartment communities,
we potentially may be liable for such costs. We are not aware that any ACMs were
used in connection with the construction of the communities developed by us.
However, we are aware that ACMs were used in connection with the construction of
certain communities acquired by us. We do not anticipate that we will incur any
material liabilities in connection with the presence of ACMs at these
communities. We currently have or intend to implement an operations and
maintenance program for ACMs at each of the communities at which ACMs have been
detected.
All of our stabilized operating communities, and all of the communities that we
are currently developing or redeveloping, have been subjected to a Phase I or
similar environmental assessment which generally does not involve invasive
techniques such as soil or ground water sampling. These assessments have not
revealed any environmental conditions that we believe will have a material
adverse effect on our business, assets, financial condition or results of
operations. We are not aware of any other environmental conditions which would
have such a material adverse effect.
However, we are aware that the migration of contamination from an upgradient
landowner near Toscana, a community owned by us, has affected the groundwater
there. The upgradient landowner is undertaking remedial response actions and as
of December 31, 1999, a ground water treatment system had been installed. We
expect that the upgradient landowner will take all necessary remediation actions
and ensure the ongoing operation and maintenance of the ground water treatment
system. The upgradient landowner has also provided an indemnity that runs to
current and future owners of the Toscana property and upon which we may be able
to rely if it incurs environmental liability arising from the groundwater
contamination. We are also aware that certain communities have lead paint and we
are undertaking or intend to undertake appropriate remediation.
Additionally, prior to 1994, we had been occasionally involved in developing,
managing, leasing and operating various properties for third parties.
Consequently, we may be considered to have been an operator of such properties
and, therefore, potentially liable for removal or remediation costs or other
potential costs which could relate to hazardous or toxic substances. We are not
aware of any material environmental liabilities with respect to properties that
we managed or developed for such third parties.
We cannot provide assurance that:
- the environmental assessments 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 developed since such 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 such communities; or
- future uses or conditions, including, without limitation, changes in
applicable environmental laws and regulations, will not result in the
imposition of environmental liability.
ITEM 2. COMMUNITIES
Our real estate investments as of March 1, 2000 consist primarily of stabilized
operating apartment communities, communities in various stages of the
development and redevelopment cycle and land or land options held for
development. We classify these investments into the following categories:
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(*) Represents an estimate
Current Communities are apartment communities that have been completed and have
reached occupancy of at least 95%, have been complete for one year, are in the
initial lease-up process or are under redevelopment. Current Communities consist
of the following:
Stabilized Communities. Represents all Current Communities that have
completed initial lease-up by attaining physical occupancy levels of at
least 95% or have been completed for one year, whichever occurs earlier.
Stabilized Communities are categorized as either Established Communities or
Other Stabilized Communities.
- Established Communities. Represents all Stabilized Communities owned
by Avalon and, on a pro forma basis, those owned by Bay as of January
1, 1998, with stabilized operating costs as of January 1, 1998 such
that a comparison of 1998 operating results to 1999 operating results
is meaningful. Each of the Established Communities falls into one of
six geographic areas including Northern California, Southern
California, Mid-Atlantic, Northeast, Midwest, and Pacific Northwest
regions. At December 31, 1999, there were no Established Communities
in the Pacific Northwest.
- Other Stabilized Communities. Represents Stabilized Communities as
defined above, but which became stabilized or were acquired after
January 1, 1998.
Lease-Up Communities. Represents all communities where construction has
been complete for less than one year and where occupancy has not reached at
least 95%.
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Redevelopment Communities. Represents all communities where
substantial redevelopment has begun. Redevelopment is considered
substantial when capital invested during the reconstruction effort
exceeds the lesser of $5 million or 10% of the community's
acquisition cost.
Development Communities are communities that are under construction and
for which a final certificate of occupancy has not been received. These
communities may be partially complete and operating.
Development Rights are development opportunities in the early phase of
the development process for which we have an option to acquire land,
that we are the buyer under a long-term conditional contract to
purchase land, or with respect to which we own land on which we might
in the future develop a new community. We capitalize all related
pre-development costs incurred in pursuit of these new developments.
Our holdings under each of the above categories are discussed on the
following pages.
Current Communities
The Current Communities are primarily garden-style apartment communities
consisting of two and three-story buildings in landscaped settings. The Current
Communities, as of March 1, 2000, include 102 garden-style, 14 high-rise and 5
mid-rise apartment communities. The Current Communities offer many attractive
amenities including some or all of the following:
- vaulted ceilings;
- lofts;
- fireplaces;
- patios/decks; and
- modern appliances.
Other features at various communities may include:
- swimming pools;
- fitness centers;
- tennis courts; and
- business centers.
We also have an extensive and ongoing maintenance program to keep all
communities and apartment homes free of deferred maintenance and, where vacant,
available for immediate occupancy. We believe that excellent design and service
oriented property management focused on the specific needs of residents enhances
market appeal to discriminating residents. We believe this will ultimately
achieve higher rental rates and occupancy levels while minimizing resident
turnover and operating expenses. These Current Communities are upscale
multifamily apartment communities located in the following six geographic
markets:
8
We manage and operate all of the Current Communities. During the year ended
December 31, 1999, we completed construction of 2,335 apartment homes in ten
communities for a total cost of $391.6 million. The average age of the Current
Communities, on a weighted average basis according to number of apartment homes,
is approximately ten years.
Of the Current Communities as of March 1, 2000 we own:
- a fee simple, or absolute, ownership interest in 106 operating
communities, one of which is on land subject to a 149 year land lease;
- a general partnership interest in five partnerships that in the
aggregate hold a fee simple interest in five other operating
communities;
- a general partnership interest in four partnerships structured as
DownREITs, as described more fully below, that own an aggregate of
nine communities; and
- a 100% interest in a senior participating mortgage note secured by one
community, which allows us to share in part of the rental income or
resale proceeds of the community.
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We also hold a fee simple ownership interest in 11 of the Development
Communities and a membership interest in a limited liability company that holds
a fee simple interest in one Development Community.
In each of the four partnerships structured as DownREITs, either AvalonBay or
one of our wholly-owned subsidiaries is the general partner, and there are one
or more limited partners whose interest in the partnership is represented by
units of limited partnership interest. For each DownREIT partnership, limited
partners are entitled to receive distributions before any distribution is made
to the general partner. Although the partnership agreements for each of the
DownREITs are different, generally the distributions paid to the holders of
units of limited partnership interests approximate the current AvalonBay common
stock dividend rate. Each DownREIT partnership has been structured so that it is
unlikely the limited partners will be entitled to a distribution greater than
the initial distribution provided for in the partnership agreement. The holders
of units of limited partnership interest have the right to present each unit of
limited partnership interest for redemption for cash equal to the fair market
value of a share of AvalonBay common stock on the date of redemption. In lieu of
a cash redemption of a unit, we may elect to acquire any unit presented for
redemption for one share of common stock. As of March 1, 2000, there were
966,822 units outstanding. The DownREIT partnerships are consolidated for
financial reporting purposes.
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PROFILE OF CURRENT AND DEVELOPMENT COMMUNITIES
(DOLLARS IN THOUSANDS, EXCEPT PER APARTMENT HOME DATA)
11
PROFILE OF CURRENT AND DEVELOPMENT COMMUNITIES
(DOLLARS IN THOUSANDS, EXCEPT PER APARTMENT HOME DATA)
12
PROFILE OF CURRENT AND DEVELOPMENT COMMUNITIES
(DOLLARS IN THOUSANDS, EXCEPT PER APARTMENT HOME DATA)
13
PROFILE OF CURRENT AND DEVELOPMENT COMMUNITIES
(DOLLARS IN THOUSANDS, EXCEPT PER APARTMENT HOME DATA)
14
FEATURES AND RECREATIONAL AMENITIES - CURRENT AND DEVELOPMENT COMMUNITIES
15
FEATURES AND RECREATIONAL AMENITIES - CURRENT AND DEVELOPMENT COMMUNITIES
16
FEATURES AND RECREATIONAL AMENITIES-CURRENT AND DEVELOPMENT COMMUNITIES
17
FEATURES AND RECREATIONAL AMENITIES - CURRENT AND DEVELOPEMENT COMMUNITIES
18
19
FEATURES AND RECREATIONAL AMENITIES - CURRENT AND DEVELOPMENT COMMUNITIES
(CONTINUED)
20
FEATURES AND RECREATION AMENITIES - CURRENT AND DEVELOPMENT COMMUNITIES
(CONTINUED)
21
FEATURES AND RECREATIONAL AMENITIES - CURRENT AND DEVELOPMENT COMMUNITIES
(CONTINUED)
22
Notes to Community Information tables on pages 11 through 22
(1) Represents the average rental revenue per occupied apartment home.
(2) Costs are presented in accordance with generally accepted accounting
principles. For Development Communities, cost represents total costs
incurred through December 31, 1999.
(3) For purposes of these tables, Current Communities include only communities
for which we held fee simple ownership interests or which we held through
DownREIT partnerships.
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Development Communities
As of March 1, 2000, we had 12 Development Communities under construction. We
expect these Development Communities, when completed, to add a total of 3,173
apartment homes to our portfolio for a total capitalized cost, including land
acquisition costs, of approximately $505.9 million. Statements regarding the
future development or performance of the Development Communities are
forward-looking statements. We cannot assure you that:
- we will complete the Development Communities;
- our budgeted costs or estimates of occupancy rates will be realized;
- our schedule of leasing start dates or construction completion dates
will be achieved; or
- future developments will realize returns comparable to our past
developments.
You should carefully review the discussion under "Risks of Development and
Redevelopment" below.
We hold a fee simple ownership interest in 11 of the Development Communities and
a membership interest in a limited liability company that holds a fee simple
interest in one Development Community. The following table presents a summary of
the Development Communities:
(1) Total budgeted cost includes all capitalized costs projected to be incurred
to develop the respective Development Community, including land acquisition
costs, construction costs, real estate taxes, capitalized interest and loan
fees, permits, professional fees, allocated development overhead and other
regulatory fees determined in accordance with generally accepted accounting
principles.
(2) Future initial occupancy dates are estimates.
(3) Stabilized operations is defined as the first full quarter of 95% or
greater occupancy after completion of construction.
(4) This community will be developed under a joint venture structure and the
joint venture entity (a limited liability company) will obtain third party
debt financing which initially will be guaranteed by AvalonBay.
AvalonBay's equity funding of the budgeted cost is expected to be $13.8
million.
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Redevelopment Communities
As of March 1, 2000, we had four communities under redevelopment. We expect the
total budgeted cost to complete these Redevelopment Communities, including the
cost of acquisition and redevelopment, to be approximately $154.0 million, of
which approximately $38.7 million is the additional capital invested or expected
to be invested above the original purchase cost. Statements regarding the future
redevelopment or performance of the Redevelopment Communities are
forward-looking statements. We have found that the cost to redevelop an existing
apartment community is more difficult to budget and estimate than the cost to
develop a new community. Accordingly, we expect that actual costs may vary over
a wider range than for a new development community. We cannot assure you that we
will meet our schedules for reconstruction completion, or that we will meet our
budgeted costs, either individually or in the aggregate. See the discussion
under "Risks of Development and Redevelopment" below.
The following presents a summary of Redevelopment Communities:
(1) Total budgeted cost includes all capitalized costs projected to be incurred
to redevelop the respective Redevelopment Community, including costs to
acquire the community, reconstruction costs, real estate taxes, capitalized
interest and loan fees, permits, professional fees, allocated redevelopment
overhead and other regulatory fees determined in accordance with generally
accepted accounting principles.
(2) Reconstruction completion dates are estimates.
(3) Restabilized operations is defined as the first full quarter of 95% or
greater occupancy after completion of reconstruction.
Development Rights
As of March 1, 2000, we are considering the development of 30 new apartment
communities. These Development Rights range from land owned or under contract
for which design and architectural planning has just begun to land under
contract or owned by us with completed site plans and drawings where
construction can begin almost immediately. We estimate that the successful
completion of all of these communities would ultimately add 8,624 upscale
apartment homes to our portfolio. At December 31, 1999, the cumulative
capitalized costs incurred in pursuit of the 30 Development Rights, including
the cost of land acquired in connection with six of the Development Rights, was
approximately $64.8 million, of which $40.5 was land. Substantially all of these
apartment homes will offer features like those offered by the communities we
currently own.
We generally hold Development Rights through options to acquire land, although
one Development Right located in New Canaan, CT is controlled through a joint
venture partnership that owns the land. The properties comprising the
Development Rights are in different stages of the due diligence and regulatory
approval process. The decisions as to which of the Development Rights to pursue,
if any, or to continue to pursue once an investment in a Development Right is
made are business judgments that we make after we perform financial, demographic
and other analysis. Finally, we currently intend to limit the percentage of debt
used to finance new developments in order to maintain our general historical
practice with respect to the proportion of debt in our capital structure.
Therefore, other financing alternatives may be required to finance the
development of those Development Rights scheduled to start construction after
January 1, 2000. Although the development of any particular Development Right
cannot be
25
assured, we believe that the Development Rights, in the aggregate, present
attractive potential opportunities for future development and growth of our FFO.
Statements regarding the future development of the Development Rights are
forward-looking statements. We cannot assure you that:
- we will succeed in obtaining zoning and other necessary governmental
approvals or the financing required to develop these communities, or
that we will decide to develop any particular community; or
- if we undertake construction of any particular community, that we will
complete construction at the total budgeted cost assumed in the
financial projections below.
The following presents a summary of the 30 Development Rights we are currently
pursuing:
(1) AvalonBay owns land, but construction has not yet begun.
(2) The land currently is owned by a limited partnership in which
AvalonBay is a majority partner. It is currently anticipated that
the land seller will retain a minority limited partner interest.
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Risks of Development and Redevelopment
We intend to continue to pursue the development and redevelopment of apartment
home communities. Our development and redevelopment activities may be exposed to
the following industry risks:
- we may abandon opportunities we have already begun to explore based on
further review of, or changes in, financial, demographic,
environmental or other factors;
- we may encounter liquidity constraints, including the unavailability
of financing on favorable terms for the development or redevelopment
of a community;
- we may be unable to obtain, or we may experience delays in obtaining,
all necessary zoning, land-use, building, occupancy, and other
required governmental permits and authorizations;
- we may incur construction or reconstruction costs for a community that
exceed our original estimates due to increased materials, labor or
other expenses, which could make completion or redevelopment of the
community uneconomical;
- occupancy rates and rents at a newly completed or redevelopment
community may fluctuate depending on a number of factors, including
market and general economic conditions, and may not be sufficient to
make the community profitable; and
- we may be unable to complete construction and lease-up on schedule,
resulting in increased debt service expense and construction costs.
The occurrence of any of the events described above could adversely affect our
ability to achieve our projected yields on communities under development or
redevelopment and could affect our payment of distributions to our stockholders.
Construction costs are projected by us based on market conditions prevailing in
the community's market at the time our budgets are prepared and reflect changes
to those market conditions that we anticipated at that time. Although we attempt
to anticipate changes in market conditions, we cannot predict with certainty
what those changes will be. Construction costs have been increasing and, for
some of our Development Communities, the total construction costs have been or
are expected to be higher than the original budget. Total budgeted cost includes
all capitalized costs projected to be incurred to develop the respective
Development or Redevelopment Community, including:
- land and/or property acquisition costs;
- construction costs;
- real estate taxes;
- capitalized interest;
- loan fees;
- permits;
- professional fees;
- allocated development overhead; and
- other regulatory fees determined in accordance with generally accepted
accounting principles.
Nonetheless, because of increases in prevailing market rents we believe that, in
the aggregate, we will still achieve our targeted projected yield (i.e., return
on invested capital) for those communities experiencing costs in excess of the
original budget. We believe that we could experience similar increases in
construction costs and market rents with respect to other development
communities resulting in total construction costs that exceed original budgets.
Likewise, costs to redevelop communities that have been acquired have, in some
cases, exceeded our original estimates and similar increases in costs may be
experienced in the future. We cannot assure that market rents in effect at the
time new development communities or repositioned communities complete lease-up
will be sufficient to fully offset the effects of any increased construction or
reconstruction costs.
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Capitalized Interest
In accordance with generally accepted accounting principles, we capitalize
interest expense during construction or reconstruction until a building obtains
a certificate of occupancy. Thereafter, the interest allocated to that completed
building within the community is expensed. Capitalized interest during the years
ended December 31, 1999, 1998 and 1997 totaled $21,888,000, $14,724,000 and
$9,024,000, respectively.
Acquisition Activities and Other Recent Developments
Acquisitions of Existing Communities. On July 12, 1999 we acquired Avalon at
Woodbury through a DownREIT partnership for approximately $25,750,000 (including
117,178 units of limited partnership in the DownREIT partnership valued at
$4,614,000) pursuant to a presale agreement signed in 1997 with an unaffiliated
company. The community contains 224 apartment homes, and is located in the
Minneapolis, Minnesota area.
Sales of Existing Communities. During 1998, we completed a strategic planning
effort that resulted in our decision to increase our geographical concentration
in selected high barrier-to-entry markets where we believe we can:
- apply sufficient market and management presence to enhance revenue
growth;
- reduce operating expenses; and
- leverage management talent.
To effect this increased concentration, we adopted an aggressive capital
redeployment strategy and are selling assets in markets where our current
presence is limited. In connection with this capital redeployment strategy,
since January 1, 1999 we sold 17 communities, totaling 4,824 apartment homes,
and a participating mortgage note secured by a community for a gross sales price
of $346,212,000. Net proceeds from the sale of these assets totaled
$310,243,000.
Land Acquisitions and Leases for New Developments. We carefully select land for
development and follow established procedures that we believe minimize both the
cost and the risks of development. During 1999, we acquired the following land
parcels for future development:
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(1) Total budgeted cost includes all capitalized costs projected to be
incurred to develop the respective Development Community, including
land acquisition costs, construction costs, real estate taxes,
capitalized interest and loan fees, permits, professional fees,
allocated development overhead and other regulatory fees determined in
accordance with generally accepted accounting principles.
(2) Future construction start and completion dates are estimates.
(3) This community will be developed on land being leased from an
unrelated third party.
Natural Disasters
Many of our West Coast communities are located in the general vicinity of active
earthquake faults. In July 1998, we obtained a seismic risk analysis from an
engineering firm which estimated the probable maximum damage for each of the 60
West Coast communities that we owned at that time and for each of the five West
Coast communities under development at that time. The seismic risk analysis was
obtained for each individual community and for all of those communities
combined. To establish a probable maximum damage, the engineers first define a
severe earthquake event for the applicable geographic area, which is an
earthquake that has only a 10% likelihood of occurring over a 50-year period.
The probable maximum damage is determined as the structural and architectural
damage and business interruption loss that is estimated to have only a 10%
probability of being exceeded in the event of such an earthquake. Because a
significant number of our communities are located in the San Francisco Bay Area,
the engineers' analysis defined an earthquake on the Hayward Fault with a
Richter Scale magnitude of 7.1 as a severe earthquake with a 10% probability of
occurring within a 50-year period. The engineers then established an aggregate
probable maximum damage at that time of $113 million for the 60 West Coast
communities that we owned at that time and the five West Coast communities under
development. The $113 million probable maximum damage for those communities was
a probable maximum level that the engineers expected to be exceeded only 10% of
the time in the event of such a severe earthquake. The actual aggregate probable
maximum damage could be higher or lower as a result of variations in soil
classifications and structural vulnerabilities. For each community, the
engineers' analysis calculated an individual probable maximum damage as a
percentage of the community's replacement cost and projected revenues. We cannot
assure you that:
29
- an earthquake would not cause damage or losses greater than the
probable maximum damage assessments indicate;
- future probable maximum damage levels will not be higher than the
current probable maximum damage levels described above for our
communities located on the West Coast; or
- acquisitions or developments after July 1998 will not have probable
maximum damage assessments indicating the possibility of greater
damage or losses than currently indicated.
In August 1999, we renewed our earthquake insurance, both for physical damage
and lost revenue, with respect to all communities we owned at that time and all
of the communities under development. For any single occurrence, we have in
place $75,000,000 of coverage with a five percent deductible. The five percent
deductible is subject to a minimum of $100,000 and a maximum of $25,000,000 per
occurrence. In addition, our general liability and property insurance program
provides coverage for public liability and fire damage. In the event an
uninsured disaster or a loss in excess of insured limits were to occur, we could
lose our capital invested in the affected community, as well as anticipated
future revenue from that community. We would also continue to be obligated to
repay any mortgage indebtedness or other obligations related to the community.
Any such loss could materially and adversely affect our business and our
financial condition and results of operations.
Americans with Disabilities Act
The apartment communities we own and any apartment communities that we acquire
must comply with Title III of the Americans with Disabilities Act to the extent
that such properties are "public accommodations" and/or "commercial facilities"
as defined by the Americans with Disabilities Act. Compliance with the Americans
with Disabilities Act requirements could require removal of structural barriers
to handicapped access in certain public areas of our properties where such
removal is readily achievable. The Americans with Disabilities Act does not,
however, consider residential properties, such as apartment communities, to be
public accommodations or commercial facilities, except to the extent portions of
such facilities, such as leasing offices, are open to the public. We believe our
properties comply in all material respects with all present requirements under
the Americans with Disabilities Act and applicable state laws. Noncompliance
could result in imposition of fines or an award of damages to private litigants.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time subject to claims and administrative
proceedings arising in the ordinary course of business. Some of these claims and
proceedings are expected to be covered by liability insurance. The following
matter, for which the Company believes it has meritorious defenses and is
therefore vigorously defending against, is not covered by liability insurance.
However, outstanding litigation matters, individually or in the aggregate,
including the matter described below, are not expected to have a material
adverse effect on the business or financial condition of the Company.
AvalonBay is currently involved in litigation with York Hunter Construction,
Inc. and National Union Fire Insurance Company. The litigation involves
construction work at AvalonBay's Avalon Willow community in Mamaroneck, New
York. York Hunter initiated the litigation in October 1999, when it filed a
complaint against AvalonBay and other defendants, claiming more than $15 million
in damages. AvalonBay has filed counterclaims against York Hunter for more than
$6 million in damages, and has also filed a claim against National Union Fire
Insurance, which furnished construction and performance bonds to AvalonBay on
behalf of York Hunter. AvalonBay believes that it has meritorious defenses
against all of York Hunter's claims and is vigorously contesting those claims.
AvalonBay also intends to pursue its counterclaims against York Hunter and
National Union Fire Insurance aggressively.
The action arises from AvalonBay's October 8, 1999 termination of York Hunter as
construction manager under a contract relating to construction of the Avalon
Willow community because of alleged failures and deficiencies by York Hunter and
its subcontractors in performing under the contract. On or about October 19,
1999, York Hunter filed a Summons with Notice in the Supreme Court of the State
of New York, County of Westchester. In addition to AvalonBay, the Summons named
The State of New York, The Village of Mamaroneck, and tenants of the Avalon
30
Willow Community as defendants. In its Summons, and in a Verified Complaint
filed on December 17, 1999, in the United States District Court for the Southern
District of New York, York Hunter alleged that AvalonBay breached and wrongfully
terminated the construction management contract, among other claims. The
complaint also seeks foreclosure upon York Hunter's mechanic's lien.
On November 24, 1999, AvalonBay removed the litigation from the state court to
the United States District Court for the Southern District of New York, and
moved to dismiss the other defendants from the action. York Hunter filed a
motion to have the action remanded to state court. On February 14, 2000, the
District Court granted AvalonBay's motion and denied York Hunter's motion to
remand.
On January 6, 2000, AvalonBay filed its Answer and Counterclaims. The Answer
denies York Hunter's allegations. It also states eight causes of action against
York Hunter, including breach of contract and contract damages related to
AvalonBay's termination of the contract for cause. AvalonBay has also joined
National Union Fire Insurance Company as a counter-defendant in the action,
seeking recovery on the payment and performance bonds.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
No matter was submitted to a vote of our security holders during the fourth
quarter of 1999.
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the New York Stock Exchange (NYSE) and the
Pacific Stock Exchange (PCX) under the ticker symbol AVB. The following table
sets forth the quarterly high and low sales prices per share of our common stock
on the NYSE for the years ended December 31, 1999 and 1998, as reported by the
NYSE. On March 1, 2000, there were 928 holders of record of an aggregate of
65,871,094 shares of our outstanding common stock.
We expect to continue our policy of paying regular quarterly cash
dividends. However, dividend distributions will be declared at the discretion of
the Board of Directors and will depend on actual funds from operations, our
financial condition, capital requirements, the annual distribution requirements
under the REIT provisions of the Internal Revenue Code and other factors as the
Board of Directors may consider relevant. The Board of Directors may modify our
dividend policy from time to time.
We have an optional Dividend Reinvestment and Stock Purchase Plan (DRIP)
which provides a simple and convenient method for stockholders to invest cash
dividends and optional cash payments in shares of our common stock. All holders
of capital stock are eligible to participate in the DRIP, including stockholders
whose shares are held in the name of a nominee or broker. These participants in
the DRIP may purchase additional shares of common stock by:
- having the cash dividends on all or part of their shares of common
stock and preferred stock automatically reinvested;
- receiving directly, as usual, their cash dividends, if and when
declared, on their shares of capital stock and investing in the DRIP
by making cash payments of not less than $100 or more than $100,000,
or such larger amount as we may approve, per quarter; and/or
- investing both their cash dividends and such optional cash payments in
shares of common stock.
Common stock acquired pursuant to the DRIP with reinvested dividends may be
purchased at a price per share equal to 97% of the closing price on the NYSE for
such shares of common stock on the applicable investment date. Common stock
purchased with optional cash payments of up to $100,000 per calendar quarter may
be purchased at a price per share equal to 100% of the last reported sale price
for a share of common stock as reported by the NYSE on the applicable investment
date. In addition, common stock purchased with optional cash payments in excess
of $100,000 per calendar quarter pursuant to a Request for Waiver may be
purchased at a price per share equal to 100% of the average of the daily high
and low sales prices of our common stock on the NYSE for the ten trading days
immediately preceding the applicable investment date. Generally, no brokerage
commissions, fees or service charges are paid by participants in connection with
purchases under the DRIP. Stockholders who do not participate in the DRIP
continue to receive cash dividends as declared.
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ITEM 6. SELECTED FINANCIAL DATA
The following table provides historical consolidated financial, operating
and other data for AvalonBay Communities, Inc. You should read the table with
our consolidated financial statements and the notes included in this report.
33
Notes to Selected Financial Data
(1) See our consolidated financial statements and the related notes included in
this report, including footnote 2 thereof for a discussion of a revision to
the financial presentation resulting from a change in accounting.
(2) Gross EBITDA represents earnings before interest, income taxes,
depreciation and amortization, non-recurring items, gain on sale of
communities and extraordinary items. Gross EBITDA is relevant to an
understanding of the economics of AvalonBay because it indicates cash flow
available from operations to service fixed obligations. Gross EBITDA should
not be considered as an alternative to operating income, as determined in
accordance with GAAP, as an indicator of our operating performance, or to
cash flows from operating activities (as determined in accordance with
GAAP) as a measure of liquidity. Our calculation of gross EBITDA may not be
comparable to gross EBITDA as calculated by other companies.
(3) We generally consider Funds from Operations, or FFO, to be an appropriate
measure of our operating performance because it helps investors understand
our ability to incur and service debt and to make capital expenditures. We
believe that to gain a clear understanding of our operating results, FFO
should be examined with net income as presented in the consolidated
financial statements included elsewhere in this report. FFO is determined
based on a definition adopted by the Board of Governors of the National
Association of Real Estate Investment Trusts(R) and is defined as:
- net income or loss computed in accordance with GAAP, excluding gains or
losses from debt restructuring, other non-recurring items and sales of
property;
- plus depreciation of real estate assets; and
- after adjustments for unconsolidated partnerships and joint ventures.
FFO does not represent cash generated from operating activities in
accordance with GAAP. Therefore it should not be considered as an
alternative to net income or as an indication of performance. FFO should
also not be considered an alternative to net cash flows from operating
activities as determined by generally accepted accounting principles as a
measure of liquidity. Additionally, it is not necessarily indicative of
34
cash available to fund cash needs. Further, FFO as calculated by other
REITs may not be comparable to our calculation of FFO. The calculation of
FFO for the periods presented is reflected in the following table:
(4) These amounts include communities only after stabilized occupancy has
occurred. We consider a community to have achieved stabilized occupancy on
the earlier of (i) the first day of any month in which the community
reaches 95% physical occupancy or (ii) one year after completion of
construction or reconstruction. These amounts also include joint venture
investments.
(5) Year to date consists of $16,076 related to management and other
organizational changes and $706 for Y2K compliance costs.
35
ITEM 7. MANAGMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
This Form 10-K, including the footnotes to the Company's consolidated financial
statements, contains "forward-looking statements" as that term is defined under
the Private Securities Litigation Reform Act of 1995. You can identify
forward-looking statements by our use of the words "believe," "expect,"
"anticipate," "intend," "estimate," "assume," and other similar expressions in
this Form 10-K, that predict or indicate future events and trends or that do not
relate to historical matters. In addition, information concerning the following
are forward-looking statements:
- the timing and cost of completion of apartment communities under
construction, reconstruction, development or redevelopment;
- the timing of lease-up and occupancy of apartment communities; the
pursuit of land on which we are considering future development;
- cost, yield and earnings estimates;
- the development, implementation and use of management information
systems.
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. You should not rely on
forward-looking statements since they involve known and unknown risks,
uncertainties and other factors, some of which are beyond our control. These
risks, uncertainties and other factors may cause our actual results, performance
or achievements to differ materially from the anticipated future results,
performance or achievements expressed or implied by these forward-looking
statements. Some of the factors that could cause our actual results, performance
or achievements to differ materially from those expressed or implied by these
forward-looking statements include, but are not limited to, the following:
- we may be unsuccessful in managing our current growth in the number of
apartment communities and the related growth of our business
operations;
- our previous or possible future expansion into new geographic market
areas may not produce financial results that are consistent with our
historical performance;
- we may fail to secure development opportunities due to an inability to
reach agreements with third parties or to obtain desired zoning and
other local approvals;
- we may abandon development opportunities for a number of reasons,
including changes in local market conditions which make development
less desirable, increases in costs of development and increases in the
cost of capital;
- construction costs of a community may exceed our original estimates;
- we may not complete construction and lease-up of communities under
development or redevelopment on schedule, resulting in increased
interest expense, construction costs and reduced rental revenues;
- occupancy rates and market rents may be adversely affected by local
economic and market conditions which are beyond our control;
- financing may not be available on favorable terms and our cash flow
from operations and access to cost effective capital may be
insufficient for the development of our pipeline and could limit our
pursuit of opportunities;
- our cash flow may be insufficient to meet required payments of
principal and interest, and we may be unable to refinance existing
indebtedness or the terms of such refinancing may not be as favorable
as the terms of existing indebtedness;
- the development, implementation and use of new management information
systems may cost more than anticipated or may be delayed for a number
of reasons, including unforeseen technological or integration issues.
36
You should read our consolidated financial statements and notes for the year
ended December 31, 1999 included in this report in conjunction with the
following discussion. These forward-looking statements represent our estimates
and assumptions only as of the date of this report. We do not undertake to
update these forward-looking statements, and you should not rely upon them after
the date of this report.
Business Description and Community Information
AvalonBay is a Maryland corporation that has elected to be treated as a real
estate investment trust, or REIT, for federal income tax purposes. We focus on
the ownership and operation of upscale apartment communities (which we consider
to be apartment communities that generally command among the highest rents in
their submarkets) in high barrier-to-entry markets of the United States. This is
because we believe that the limited new supply of upscale apartment homes in
these markets helps achieve more predictable cash flows. These barriers-to-entry
generally include a difficult and lengthy entitlement process with local
jurisdictions and dense in-fill locations where zoned and entitled land is in
limited supply. These markets are located in Northern and Southern California
and selected states in the Mid-Atlantic, Northeast, Midwest and Pacific
Northwest regions of the country.
AvalonBay is the surviving corporation from the merger of Avalon Properties,
Inc. with and into Bay Apartment Communities, Inc. Prior to December 31, 1999,
we accounted for the merger under the purchase method of accounting, using the
historical financial statements of Bay prior to and after the merger. Based on
discussions with the Securities and Exchange Commission, we agreed to revise our
financial presentation as of and for the years ended December 31, 1998 and 1997
to present the merger whereby the historical financial statements for Avalon are
presented prior to the merger. At that time, Avalon ceased to legally exist, and
Bay as the surviving legal entity adopted the historical financial statements of
Avalon, with Bay's assets recorded in the historical financial statements of
Avalon at an amount equal to Bay's debt outstanding at that time plus the value
of capital stock retained by the Bay stockholders, which approximates fair
value.
We are a fully-integrated real estate organization with in-house expertise in
the following areas:
- acquisition;
- development and redevelopment;
- construction and reconstruction;
- financing;
- marketing;
- leasing and management; and
- information technologies.
With our expertise and in-house capabilities, we believe we are well-positioned
to continue to pursue opportunities to develop and acquire upscale apartment
homes in our target markets. Our ability to pursue attractive opportunities,
however, may be constrained by capital market conditions that limit the
availability of cost effective capital to finance these activities. We limited
our acquisition activity in 1999 as compared to prior years due to these capital
constraints, and we expect to direct most of our invested capital to new
developments and redevelopments for the foreseeable future.
We believe apartment communities present an attractive investment opportunity
compared to other real estate investments because a broad potential resident
base results in relatively stable demand during all phases of a real estate
cycle. We intend to pursue appropriate new investments, including both new
developments and acquisitions of communities, in markets where constraints to
new supply exist and where new household formations have out-paced multifamily
permit activity in recent years.
Our real estate investments as of March 1, 2000 consist primarily of stabilized
operating apartment communities as well as communities in various stages of the
development and redevelopment cycle and land or land options held for
development. We classify these investments into the following categories:
37
(*) Represents an estimate
Current Communities are apartment communities that have been completed and
have reached occupancy of at least 95%, have been complete for one year,
are in the initial lease-up process or are under redevelopment. Current
Communities consist of the following:
Stabilized Communities. Represents all Current Communities that have
completed initial lease-up by attaining physical occupancy levels of
at least 95% or have been completed for one year, whichever occurs
earlier. Stabilized Communities are categorized as either Established
Communities or Other Stabilized Communities.
- Established Communities. Represents all Stabilized Communities
owned by Avalon and, on a pro forma basis, those owned by Bay as
of January 1, 1998, with stabilized operating costs as of January
1, 1998 such that a comparison of 1998 operating results to 1999
operating results is meaningful. Each of the Established
Communities falls into one of the following six geographic areas:
Northern California, Southern California, Mid-Atlantic,
Northeast, Midwest and Pacific Northwest regions. At December 31,
1999, there were no Established Communities in the Pacific
Northwest. When used in connection with a comparison of 1998 and
1997 results, the term "Established Communities" refers to
communities that were stabilized as of January 1, 1997.
38
- Other Stabilized Communities. Represents Stabilized Communities
as defined above, but which became stabilized or were acquired
after January 1, 1998.
Lease-Up Communities. Represents all communities where construction
has been complete for less than one year and where occupancy has not
reached at least 95%.
Redevelopment Communities. Represents all communities where
substantial redevelopment has begun. Redevelopment is considered
substantial when capital invested during the reconstruction effort
exceeds the lesser of $5 million or 10% of the community's acquisition
cost.
Development Communities are communities that are under construction and for
which a final certificate of occupancy has not been received. These
communities may be partially complete and operating.
Development Rights are development opportunities in the early phase of the
development process for which we have an option to acquire land or where we
own land to develop a new community. We capitalize all related
pre-development costs incurred in pursuit of these new developments.
Of the Current Communities as of March 1, 2000, we own:
- a fee simple, or absolute, ownership interest in 106 operating
communities, one of which is on land subject to a 149 year land lease;
- a general partnership interest in five partnerships that in the
aggregate hold a fee simple interest in five other operating
communities;
- a general partnership interest in four partnerships structured as
"DownREITs," as described more fully below, that own an aggregate of
nine communities; and
- a 100% interest in a senior participating mortgage note secured by one
community, which allows us to share in part of the rental income or
resale proceeds of the community.
We also hold a fee simple ownership interest in 11 of the Development
Communities and a membership interest in a limited liability company that holds
a fee simple interest in one Development Community.
In each of the four partnerships structured as DownREITs, either AvalonBay or
one of our wholly-owned subsidiaries is the general partner, and there are one
or more limited partners whose interest in the partnership is represented by
units of limited partnership interest. For each DownREIT partnership, limited
partners are entitled to receive distributions before any distribution is made
to the general partner. Although the partnership agreements for each of the
DownREITs are different, generally the distributions paid to the holders of
units of limited partnership interests approximate the current AvalonBay common
stock dividend rate. Each DownREIT partnership has been structured so that it is
unlikely the limited partners will be entitled to a distribution greater than
the initial distribution provided for in the partnership agreement. The holders
of units of limited partnership interest have the right to present each unit of
limited partnership interest for redemption for cash equal to the fair market
value of a share of AvalonBay common stock on the date of redemption. In lieu of
a cash redemption of a unit, we may elect to acquire any unit presented for
redemption for one share of our common stock. As of December 31, 1999, there
were 973,870 units outstanding. The DownREIT partnerships are consolidated for
financial reporting purposes.
At December 31, 1999, we had positioned our portfolio of Stabilized Communities,
excluding communities owned by unconsolidated joint ventures, to an average
physical occupancy level of 96.7%. Our strategy is to maximize total rental
revenue through management of rental rates and occupancy levels. Our strategy of
39
maximizing total rental revenue could lead to lower occupancy levels. Given the
current high occupancy level of our portfolio, we believe that any rental
revenue and net income gains from our Established Communities would be achieved
primarily through higher rental rates and the lower average operating costs per
apartment home that result from economies of scale due to national and regional
growth of our portfolio.
We elected to be taxed as a REIT for federal income tax purposes for the year
ended December 31, 1994 and we have not revoked that election. We were
incorporated under the laws of the State of California in 1978, and we were
reincorporated in the State of Maryland in July 1995. Our principal executive
offices are located at 2900 Eisenhower Avenue, Suite 300, Alexandria, Virginia,
22314, and our telephone number at that location is (703) 329-6300. We also
maintain regional offices and administrative or specialty offices in or near the
following cities:
- San Jose, California;
- Wilton, Connecticut;
- Boston, Massachusetts;
- Chicago, Illinois;
- Los Angeles, California;
- Minneapolis, Minnesota;
- Newport Beach, California;
- New York, New York;
- Princeton, New Jersey; and
- Seattle, Washington.
Recent Developments
Sales of Existing Communities. During 1998, we completed a strategic planning
effort that resulted in our decision to increase our geographical concentration
in selected high barrier-to-entry markets where we believe we can:
- apply sufficient market and management presence to enhance revenue
growth;
- reduce operating expenses; and
- leverage management talent.
To effect this increased concentration, we adopted an aggressive capital
redeployment strategy and are selling assets in markets where our current
presence is limited. We intend to redeploy the proceeds from sales to develop
and redevelop communities currently under construction or reconstruction.
Pending such redeployment, the proceeds from the sale of these communities will
be used to repay amounts outstanding under our variable rate unsecured credit
facility. Accordingly, we sold seven communities with an aggregate of 2,039
apartment homes in connection with our capital redeployment strategy in 1998.
The net proceeds from these sales totaled $73,900,000. In 1999, we sold 16
communities with an aggregate of 4,464 apartment homes. Net proceeds from these
sales totaled $255,618,000. In addition, during 1999 we sold a participating
mortgage note secured by an apartment home community for net proceeds of
$25,300,000. Since January 1, 2000, we have sold one additional community
containing 360 apartment homes in connection with our capital redeployment
strategy. The net proceeds from the sale of this community were approximately
$29,325,000. We intend to dispose of additional assets as described more fully
under "Future Financing and Capital Needs."
Development, Redevelopment and Acquisition Activities. We began the development
of eight new communities during 1999. These communities are expected to contain
a total of 2,246 apartment homes upon completion, and the total investment,
including land acquisition costs, is projected to be approximately $366,100,000.
Also, we completed the development of ten new communities containing a total of
2,335 apartment homes for a total investment of $391,600,000.
40
We also acquired three land parcels during 1999 on which construction has not
yet commenced. We expect to develop three new communities containing a total of
878 apartment homes on these parcels. The total investment in these
communities, including land acquisition costs of $22,078,000, is projected to be
approximately $111,300,000.
We completed the redevelopment of thirteen communities during 1999 for a total
investment in redevelopment (i.e. excluding acquisition costs) of $77,300,000.
We acquired one community, containing 224 apartment homes, during 1999 for
approximately $25,750,000, including 117,178 units of limited partnership in a
DownREIT partnership valued at $4,614,000. We acquired this community in
connection with a forward purchase agreement signed in 1997 with an unaffiliated
party.
The development and redevelopment of communities involves risks that the
investment will fail to perform in accordance with expectations. See "Risks of
Development and Redevelopment" in Part I of this Form 10-K for our discussion of
these and other risks inherent in developing or redeveloping communities.
Results of Operations
Historically, the changes in our operating results from period-to-period have
been primarily the result of increases in the number of apartment homes owned.
Where appropriate, period-to-period comparisons of the number of occupied
apartment homes are made on a weighted average basis to adjust for changes in
the number of apartment homes during the period. For Stabilized Communities,
excluding communities owned by unconsolidated joint ventures, all occupied
apartment homes are included in the calculation of weighted average occupied
apartment homes for each reporting period. For communities in the initial
lease-up phase, only apartment homes of communities that are completed and
occupied are included in the weighted average number of occupied apartment homes
calculation for each reporting period.
A comparison of our operating results for the years ended December 31, 1999 and
December 31, 1998 as well as a comparison of our operating results for the years
ended December 31, 1998 and December 31, 1997 follows.
COMPARISON OF YEAR ENDED DECEMBER 31, 1999 TO YEAR ENDED DECEMBER 31, 1998
Net income available to common stockholders increased $37,094,000 (38.9%) to
$132,497,000 for the year ended December 31, 1999 compared to $95,403,000 for
the preceding year. Excluding non-recurring charges, gain on sale of communities
and extraordinary items, net income available to common stockholders increased
by $31,808,000 for the year ended December 31, 1999 compared to the preceding
year. The increase in net income, as adjusted, for the year ended December 31,
1999 is primarily attributable to additional operating income from additional
communities attributable to the merger. Additional operating income from newly
developed or redeveloped communities and growth in operating income from
Established Communities also contributed to the increase in net income.
Rental income increased $133,187,000 (36.0%) to $503,132,000 for the year ended
December 31, 1999 compared to $369,945,000 for the preceding year. The increase
is primarily attributable to additional revenue from additional communities
attributable to the merger and secondarily to newly developed and redeveloped
communities, partially offset by the sale of communities in 1998 and 1999.
Overall Portfolio - The $133,187,000 increase in rental income is primarily
due to increases in the weighted average number of occupied apartment homes
as well as an increase in the weighted average monthly rental income per
occupied apartment home. The weighted average number of occupied apartment
homes increased from 28,333 apartment homes for the year ended December 31,
1998 to 33,726 apartment homes for the year ended December 31, 1999
primarily as a result
41
of the additional apartment homes from additional communities attributable
to the merger being part of the portfolio for all of 1999 and the
development, redevelopment and acquisition of new communities, offset by
the sale of communities in 1998 and 1999. For the year ended December 31,
1999, the weighted average monthly revenue per occupied apartment home
increased $160 (14.8%) to $1,242 compared to $1,082 for the preceding year,
which is primarily attributable to the development of new upscale apartment
communities in premium locations, the sale of communities with lower
average rents as well as the merger. These apartment communities were
funded in part from the proceeds of communities sold in markets where
rental rates are lower.
Established Communities, on a pro forma basis, assuming the merger had
occurred on January 1, 1998 - Rental revenue increased $10,114,000 (4.1%)
for the year ended December 31, 1999 compared to the preceding year. The
increase is due to market conditions that allowed for higher average rents
that were partially offset by lower economic occupancy levels. For the year
ended December 31, 1999, weighted average monthly revenue per occupied
apartment home increased $52 (4.4%) to $1,226 compared to $1,174 for the
preceding year. The average economic occupancy decreased from 96.9% for the
year ended December 31, 1998 to 96.6% for the year ended December 31, 1999.
Regions showing occupancy gains include the Mid-Atlantic, with an increase
from 96.8% for the year ended December 31, 1998 to 97.1% for the year ended
December 31, 1999, and the Midwest, with an increase from 97.1% for the
year ended December 31, 1998 to 97.2% for the year ended December 31,
1999. Occupancy decreased in Northern California from 97.1% for the year
ended December 31, 1998 to 96.2% for the year ended December 31, 1999
primarily due to softening in sub-markets dependent on Silicon Valley
employment.
Management fees decreased $201,000 to $1,176,000 for the year ended December 31,
1999 compared to $1,377,000 for the preceding year. Management fees represent
revenue from third-party contracts. We anticipate that management and
development fees will increase over the next several years due to the receipt of
fees pursuant to joint venture arrangements.
Operating expenses, excluding property taxes increased $29,826,000 (28.6%) to
$134,172,000 for the year ended December 31, 1999 compared to $104,346,000 for
the preceding year.
Overall Portfolio - The increase for the year ended December 31, 1999 is
primarily due to additional operating expenses from additional communities
attributable to the merger and secondarily due to the addition of newly
developed, redeveloped and acquired apartment homes, partially offset by
the sale of communities in 1998 and 1999. Maintenance, insurance and other
costs associated with Development and Redevelopment Communities are
expensed as communities move from the initial construction and lease-up
phase to the stabilized operating phase.
Established Communities, on a pro forma basis, assuming the merger had
occurred on January 1, 1998 - Operating expenses increased $1,821,000
(3.7%) to $50,912,000 for the year ended December 31, 1999 compared to
$49,091,000 for the preceding year. The net changes are the result of
higher redecorating, maintenance, payroll and administrative costs offset
by lower utility, marketing, and insurance costs.
Property taxes increased $10,926,000 (34.4%) to $42,701,000 for the year ended
December 31, 1999 compared to $31,775,000 for the preceding year.
Overall Portfolio - The increase for the year ended December 31, 1999 is
primarily due to additional expenses from additional communities
attributable to the merger and secondarily due to the addition of newly
developed, redeveloped or acquired apartment homes, partially offset by the
sale of communities in 1998 and 1999. Property taxes on Development and
Redevelopment
42
Communities are expensed as communities move from the initial construction
and lease-up phase to the stabilized operating phase.
Established Communities, on a pro forma basis, assuming the merger had
occurred on January 1, 1998 - Property taxes decreased $30,000 (0.1%) to
$21,197,000 for the year ended December 31, 1999 compared to $21,227,000
for the preceding year. The decrease is primarily a result of revised base
year tax assessments for previously renovated communities which resulted in
supplemental taxes that were lower than those than originally projected.
Interest expense increased $20,049,000 (36.7%) to $74,699,000 for the year ended
December 31, 1999 compared to $54,650,000 for the preceding year. The increase
is primarily attributable to approximately $600 million of debt assumed in
connection with the merger and the issuance of $625,000,000 of unsecured notes
during 1999 and 1998, offset by an increase in capitalized interest.
Depreciation and amortization increased $32,385,000 (41.9%) to $109,759,000 for
the year ended December 31, 1999 compared to $77,374,000 for the preceding year.
The increase is attributable primarily to additional expense from additional
communities attributable to the merger and secondarily to newly developed and
redeveloped communities, partially offset by the sale of communities in 1998 and
1999.
General and administrative increased $378,000 (4.1%) to $9,502,000 for the year
ended December 31, 1999 compared to $9,124,000 for the preceding year. The
increase is impacted by additional overhead from the combination of the two
companies and related organizational structures, partially offset by a
reorganization in February 1999 that reduced the management structure of the
merged company.
Equity in income of unconsolidated joint ventures increased $229,000 (8.7%) to
$2,867,000 for the year ended December 31, 1999 compared to $2,638,000 for the
preceding year. Equity in income of unconsolidated joint ventures represents our
share of income from joint ventures.
Interest income increased $3,854,000 (109.9%) to $7,362,000 for the year ended
December 31, 1999 compared to $3,508,000 for the preceding year. These increases
are primarily from an increase in interest from participating mortgage notes,
including the Fairlane Woods participating mortgage note acquired in the third
quarter of 1998. The Fairlane Woods promissory note was sold in the fourth
quarter of 1999.
Gain on sale of communities increased $21,823,000 to $47,093,000 for the year
ended December 31, 1999 compared to $25,270,000 for the preceding year. The
increase is due to an increase in the number of communities sold during 1999 as
compared to 1998 as a result of the disposition strategy we implemented in the
third quarter of 1998.
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997
Net income available to common stockholders increased $50,143,000 (110.8%) to
$95,403,000 for the year ended December 31, 1998 compared to $45,260,000 for the
preceding year. Excluding gain on sale of communities and extraordinary items,
net income available to common stockholders increased by $24,612,000 (53.8%) for
the year ended December 31, 1998 compared to the preceding year. The increase in
net income, as adjusted, for the year ended December 31, 1998 is attributable
primarily to gains from increased community sales, additional operating income
from additional communities attributable to the merger, and additional
operating income from communities developed, redeveloped or acquired during
1998 and 1997 as well as growth in operating income from Established
Communities.
Rental income increased $200,503,000 (118.3%) to $369,945,000 for the year ended
December 31, 1998 compared to $169,442,000 for the preceding year. The increase
is attributable primarily to additional revenue from additional communities
attributable to the merger and secondarily to developed, redeveloped and
acquired communities in 1998 and 1997.
43
Overall Portfolio - The $200,503,000 increase in rental income is primarily
due to increases in the weighted average number of occupied apartment homes
as well as an increase in the weighted average monthly rental income per
occupied apartment home. The weighted average number of occupied apartment
homes increased from 13,949 apartment homes for the year ended December 31,
1997 to 28,333 apartment homes for the year ended December 31, 1998
primarily as a result of additional apartment homes from additional
communities attributable to the merger, as well as the development,
redevelopment and acquisition of new communities. For the year ended
December 31, 1998, the weighted average monthly revenue per occupied
apartment home increased $74 (7.3%) to $1,082 compared to $1,008 for the
preceding year.
Established Communities, on a pro forma basis, assuming the merger had
occurred on January 1, 1997 - Rental revenue increased $11,318,000 (6.2%)
for the year ended December 31, 1998 compared to the preceding year. The
increase is due to market conditions that allowed for higher average rents,
with relatively stable economic occupancy levels. For the year ended
December 31, 1998, weighted average monthly revenue per occupied apartment
home increased $61 (6.2%) to $1,048 compared to $987 for the preceding
year. Beginning in October 1998, the Northern California sub-markets that
are primarily dependent on Silicon Valley employment softened. These
sub-markets have experienced reduced rental rate growth and occupancy
declines as compared to other Northern California sub-markets and our other
markets as a whole.
Management fees increased $348,000 (33.8%) to $1,377,000 for the year ended
December 31, 1998 compared to $1,029,000 for the preceding year. Management fees
represent revenue from third-party contracts. The increase is primarily due to
certain third-party management contracts acquired in connection with the
purchase of a portfolio of assets in December 1997.
Operating expenses, excluding property taxes increased $57,067,000 (120.7%) to
$104,346,000 for the year ended December 31, 1998 compared to $47,279,000 for
the preceding year.
Overall Portfolio - The increase for the year ended December 31, 1998 is
primarily due to additional operating expenses from additional communities
attributable to the merger and secondarily due to the addition of newly
developed, redeveloped and acquired apartment homes. Maintenance, insurance
and other costs associated with Development and Redevelopment Communities
are expensed as communities move from the initial construction and lease-up
phase to the stabilized operating phase.
Established Communities, on a pro forma basis, assuming the merger had
occurred on January 1, 1997 - Operating expenses increased $1,711,000
(4.2%) to $42,395,000 for the year ended December 31, 1998 compared to
$40,684,000 for the preceding year. The net changes are the result of
higher payroll and maintenance costs, offset by lower utility,
administrative and insurance costs. Lower insurance costs are directly
attributable to better pricing and risk sharing provided by the merger.
Property taxes increased $17,346,000 (120.2%) to $31,775,000 for the year ended
December 31, 1998 compared to $14,429,000 for the preceding year.
Overall Portfolio - The increase for the year ended December 31, 1998 is
primarily due to additional expense from additional communities
attributable to the merger and secondarily to the addition of newly
developed, redeveloped or acquired apartment homes. Property taxes on
Development and Redevelopment Communities are expensed as communities move
from the initial construction and lease-up phase to the stabilized
operating phase.
Established Communities, on a pro forma basis, assuming the merger had
occurred on January 1, 1997 - Property taxes increased $535,000 (3.6%) to
$15,265,000 for the year ended December 31, 1998 compared to $14,730,000
for the preceding year. The increase is primarily the result of
44
increased assessments of property values and increased property tax rates
on the Mid-Atlantic, Northeast and Midwest communities as well as lower
than estimated property tax assessments for our Northern and Southern
California communities that resulted in a reduction in 1997 of previously
accrued expenses.
Interest expense increased $37,673,000 (221.9%) to $54,650,000 for the year
ended December 31, 1998 compared to $16,977,000 for the preceding year. The
increase is primarily attributable to $600 million of debt assumed in connection
with the merger and secondarily to the issuance of unsecured notes in 1998 and
1997.
Depreciation and amortization increased $48,261,000 (165.8%) to $77,374,000 for
the year ended December 31, 1998 compared to $29,113,000 for the preceding year.
The increase is primarily attributable to additional expense from additional
communities attributable to the merger and secondarily to developed, redeveloped
and acquired communities in 1998 and 1997.
General and administrative increased $4,031,000 (79.1%) to $9,124,000 for the
year ended December 31, 1998 compared to $5,093,000 for the preceding year. The
increase is primarily due to the combination of the two companies and related
increase in portfolio size.
Equity in income of unconsolidated joint ventures decreased $3,051,000 (53.6%)
to $2,638,000 for the year ended December 31, 1998 compared to $5,689,000 for
the preceding year. Equity in income of unconsolidated joint ventures represents
our share of income from joint ventures. The decrease is primarily due to
non-recurring income from the Avalon Grove joint venture in which we were
allocated 100% of the lease-up period income prior to the formation of the
partnership in December 1997.
Interest income increased $2,162,000 (160.6%) to $3,508,000 for the year ended
December 31, 1998 compared to $1,346,000 for the preceding year. The increase is
primarily due to an increase in interest from participating mortgage notes,
including the Fairlane Woods promissory note acquired in August 1998.
Gain on sale of communities increased $24,593,000 to $25,270,000 for the year
ended December 31, 1999 compared to $677,000 for the preceding year. The
increase in the gain on sale of communities is a result of the disposition
strategy we implemented in the third quarter of 1998.
Capitalization of Fixed Assets and Community Improvements
Our policy with respect to capital expenditures is generally to capitalize only
non-recurring expenditures. We capitalize improvements and upgrades only if the
item:
- exceeds $15,000;
- extends the useful life of the asset; and
- is not related to making an apartment home ready for the next
resident.
Under this policy, virtually all capitalized costs are non-recurring, as
recurring make-ready costs are expensed as incurred. Recurring make-ready costs
include the following:
- carpet and appliance replacements;
- floor coverings;
- interior painting; and
- other redecorating costs.
We capitalize purchases of personal property, such as computers and furniture,
only if the item is a new addition and the item exceeds $2,500. We generally
expense purchases of personal property made for
45
replacement purposes. The application of these policies for the year ended
December 31, 1999 resulted in non-revenue generating capitalized expenditures
for Stabilized Communities of approximately $207 per apartment home. For the
year ended December 31, 1999, we charged to maintenance expense, including
carpet and appliance replacements, a total of approximately $32,411,000 for
Stabilized Communities or $1,213 per apartment home. We anticipate that
capitalized costs per apartment home will gradually rise as the average age of
our communities increases.
Liquidity and Capital Resources
Liquidity. The primary source of liquidity is our cash flows from operations.
Operating cash flows have historically been determined by:
- the number of apartment homes;
- rental rates;
- occupancy levels; and
- our expenses with respect to these apartment homes.
The timing, source and amount of cash flows provided by financing activities and
used in investing activities are sensitive to the capital markets environment,
particularly to changes in interest rates that are charged to us as changes in
interest rates affect our decision as to whether to issue debt securities,
borrow money and invest in real estate. Thus, changes in the capital markets
environment will affect our plans for the undertaking of construction and
development as well as acquisition activity.
Cash and cash equivalents decreased from $8,890,000 at December 31, 1998 to
$7,621,000 at December 31, 1999 due to the excess of cash used in investing and
financing activities over cash provided by operating activities.
Net cash provided by operating activities increased by $56,588,000 from
$193,478,000 for the year ended December 31, 1998 to $250,066,000 for the
year ended December 31, 1999. The increase is primarily from additional
operating cash flow from additional communities attributable to the merger,
which were part of our portfolio for all of 1999 and the development,
redevelopment and acquisition of new communities, offset by the loss of
cash flow from communities sold in 1998 and 1999.
Net cash used in investing activities decreased by $353,066,000 from
$617,685,000 for the year ended December 31, 1998 to $264,619,000 for the
year ended December 31, 1999. This decrease in expenditures reflects
increased sales of communities and decreased acquisitions, offset by
increased construction and reconstruction activity. The decrease in
acquisitions is attributable to a shift in our investment focus away from
acquisitions and towards development opportunities that offer higher
projected yields, primarily in response to the lack of available properties
that meet our increased yield requirements combined with a decrease in the
availability of cost-effective capital.
Net cash provided by financing activities decreased by $413,091,000 from
$426,375,000 for the year ended December 31, 1998 to $13,284,000 for the
year ended December 31, 1999. The decrease is primarily due to our
development activities increasingly being funded through the sale of
existing communities as opposed to incurring debt or selling equity, which
reflects a reduction in our use of debt financing as opposed to other
sources of financing in response to market conditions. Also, dividends paid
increased as a result of additional common and preferred shares issued in
connection with the merger.
Cash and cash equivalents increased from $6,722,000 at December 31, 1997 to
$8,890,000 at December 31, 1998 due to the excess of cash provided by financing
and operating activities over cash flow used in investing activities.
46
Net cash provided by operating activities increased by $99,829,000 from
$93,649,000 for the year ended December 31, 1997 to $193,478,000 for the
year ended December 31, 1998 primarily due to an increase in operating
income from additional communities attributable to the merger as well as
increased operating income from existing communities.
Net cash used in investing activities increased $196,265,000 from
$421,420,000 for the year ended December 31, 1997 to $617,685,000 for the
year ended December 31, 1998. This increase primarily reflects
increased construction and reconstruction activity, offset by community
sales.
Net cash provided by financing activities increased by $106,123,000 from
$320,252,000 for the year ended December 31, 1997 to $426,375,000 for the
year ended December 31, 1998 primarily due to an increase in our use of
debt financing as opposed to other sources of financing to fund
acquisitions and construction and reconstruction activity. The increase is
also offset by an increase in dividends paid as a result of additional
common and preferred shares issued in connection with the merger.
We regularly review our short and long-term liquidity needs and the adequacy of
Funds from Operations, as defined below, and other expected liquidity sources to
meet these needs. We believe our principal short-term liquidity needs are to
fund:
- normal recurring operating expenses;
- debt service payments;
- the distributions required with respect to our series of preferred
stock;
- the minimum dividend payments required to maintain our REIT
qualification under the Internal Revenue Code of 1986; and
- development and redevelopment activity in which we are currently
engaged.
We anticipate that we can fully satisfy these needs from a combination of cash
flows provided by operating activities and capacity under the unsecured
facility. We anticipate that we can satisfy any short-term liquidity needs not
satisfied by current operating cash flows from our unsecured revolving credit
facility.
We believe our principal long-term liquidity needs are the repayment of medium
and long-term debt, as well as the procurement of long-term debt to refinance
construction and other development related short-term debt. We anticipate that
no significant portion of the principal of any indebtedness will be repaid prior
to maturity. If we do not have funds on hand sufficient to repay our
indebtedness, it will be necessary for us to refinance this debt. This
refinancing may be accomplished through additional debt financing, which may be
collateralized by mortgages on individual communities or groups of communities,
by uncollateralized private or public debt offerings or by additional equity
offerings. We also anticipate having significant retained cash flow in each year
so that when a debt obligation matures, some or all of each maturity can be
satisfied from this retained cash. Although we believe we will have the capacity
to meet our long-term liquidity needs, we cannot assure you that additional debt
financing or debt or equity offerings will be available or, if available, that
they will be on terms we consider satisfactory.
47
Capital Resources. We intend to match the long-term nature of our real estate
assets with long-term cost effective capital to the extent permitted by
prevailing market conditions. We have raised approximately $950 million, on a
pro forma basis to reflect the merger, in capital markets offerings since
January 1998. The following table summarizes capital market activity for both
Avalon and the Company since January 1, 1998:
We follow a focused strategy to help facilitate uninterrupted access to capital.
This strategy includes:
1. Hiring, training and retaining associates with a strong resident service
focus, which should lead to higher rents, lower turnover and reduced
operating costs;
2. Managing, acquiring and developing upscale communities in dense locations
where the availability of zoned and entitled land is limited to provide
consistent, sustained earnings growth;
3. Operating in markets with growing demand, as measured by household
formation and job growth, and high barriers-to-entry. We believe these
characteristics generally combine to provide a favorable demand-supply
balance, which we believe will create a favorable environment for future
rental rate growth while protecting existing and new communities from new
supply. We expect this strategy to result in a high level of quality to the
revenue stream;
4. Maintaining a conservative capital structure largely comprised of equity
and with modest, cost-effective leverage. We generally avoid secured debt
except in order to obtain low cost, tax-exempt debt. We believe that such a
structure should promote an environment whereby current ratings levels can
be maintained;
5. Following accounting practices that provide a high level of quality to
reported earnings; and
6. Providing timely, accurate and detailed disclosures to the investment
community.
We believe these strategies provide a disciplined approach to capital access to
help position AvalonBay to fund portfolio growth.
Capital markets conditions have decreased our access to cost effective capital.
See "Future Financing and Capital Needs" for a discussion of our response to the
current capital markets environment.
The following is a discussion of specific capital transactions, arrangements and
agreements.
Unsecured Facility
Our unsecured revolving credit facility is furnished by a consortium of banks
and provides $600,000,000 in short-term credit. We pay these banks an annual
facility fee of $900,000 in equal quarterly installments. The unsecured facility
bears interest at varying levels tied to the London Interbank Offered Rate
(LIBOR)
48
based on ratings levels achieved on our unsecured notes and on a maturity
selected by us. The current stated pricing is LIBOR plus 0.6% per annum. The
unsecured facility matures in July 2001, however we have two one-year extension
options. Therefore, subject to certain conditions, we may extend the maturity to
July 2003. A competitive bid option is available for borrowings of up to
$400,000,000. This option allows banks that are part of the lender consortium to
bid to provide us loans at a rate that is lower than the stated pricing provided
by the unsecured facility. The competitive bid option may result in lower
pricing if market conditions allow. Pricing under the competitive bid option
resulted in average pricing of LIBOR plus .50% for balances most recently
placed under the competitive bid option. At March 1, 2000, $203,500,000 was
outstanding, $75,481,000 was used to provide letters of credit and $321,019,000
was available for borrowing under the unsecured facility. We intend to use
borrowings under the unsecured facility for:
- capital expenditures;
- construction, development and redevelopment costs;
- acquisitions of developed or undeveloped communities;
- credit enhancement for tax-exempt bonds; and
- working capital purposes.
Interest Rate Protection Agreements
We are not a party to any long-term interest rate agreements, other than
interest rate protection and swap agreements on approximately $190 million of
our variable rate tax-exempt indebtedness. We intend, however, to evaluate the
need for long-term interest rate protection agreements as interest rate market
conditions dictate, and we have engaged a consultant to assist in managing our
interest rate risks and exposure.
Financing Commitments/Transactions Completed
In January 1999, we issued $125,000,000 of medium-term unsecured notes bearing
interest at 6.58% and maturing in February 2004. Semi-annual interest payments
are payable on February 15 and August 15. The net proceeds of approximately
$124,000,000 were used to repay amounts outstanding under our unsecured
facility.
In July 1999, we issued $150,000,000 of unsecured notes bearing interest at
7.50% and maturing in August 2009. Semi-annual interest payments are payable on
February 1 and August 1. The net proceeds of approximately $148,400,000 were
used to repay amounts outstanding under our unsecured facility.
In October 1999, we completed a refinancing of approximately $18,755,000 of
variable rate tax-exempt bonds. The bonds have a maturity date of May 1, 2026,
are fully amortizing and are credit enhanced by the Federal National Mortgage
Association (Fannie Mae).
During January 2000, the Company entered into a joint venture agreement with an
entity controlled by Multi-Employer Development Partners (MEDP) to develop
Avalon on the Sound, a 412 apartment high rise community in New Rochelle, New
York, with total capitalized costs estimated to be $93,300,000. The terms of the
limited liability company operating agreement contemplate a long-term capital
structure comprised of 60% equity and 40% debt. Equity contributions will be
funded 25% by AvalonBay and 75% by MEDP. Construction financing that converts to
long-term financing following completion of construction will provide the debt
capital. Operating cash flow will be distributed 25% to AvalonBay and 75% to
MEDP until each receives a 9% return on invested capital. Thereafter, operating
cash flow will be distributed equally to AvalonBay and MEDP. Upon a sale to a
third party, cash is distributed first to each partner until capital
contributions are recovered. Thereafter, sales proceeds are distributed based
upon achievement of certain internal rate of return levels. Distributions that
result in an internal rate of return to MEDP and the Company of 12-15% are made
40% to AvalonBay and 60% to MEDP. Thereafter, sales proceeds are distributed
equally to AvalonBay and MEDP. After three years following completion of
49
construction, buy-sell provisions are in effect. AvalonBay will receive
construction, development and management fees for services rendered to the joint
venture.
Registration Statements Filed in Connection with Financings
On August 18, 1998, we filed a shelf registration statement on Form S-3 with the
Securities and Exchange Commission relating to the sale of up to $750,000,000 of
securities. The registration statement provides for the issuance of common
stock, preferred stock and debt securities.
Future Financing and Capital Needs
As of December 31, 1999, we had 21 new communities under construction either by
us or by unaffiliated third parties with whom we have entered into forward
purchase commitments. As of December 31, 1999, a total estimated cost of
$295,071,000 remained to be invested in these communities. In addition, we had
four other communities under reconstruction, for which an estimated $71,209,000
remained to be invested as of December 31, 1999.
Substantially all of the capital expenditures necessary to complete the
communities currently under construction and reconstruction will be funded from:
- the remaining capacity under our $600,000,000 unsecured credit
facility;
- the net proceeds from sales of existing communities;
- retained operating cash; and/or the issuance of debt or equity
securities.
We expect to continue to fund deferred development costs related to future
developments from retained operating cash and borrowings under the unsecured
facility. We believe these sources of capital will be adequate to take the
proposed communities to the point in the development cycle where construction
can begin.
We have observed and been impacted by a reduction in the availability of cost
effective capital beginning in the third quarter of 1998. We cannot assure you
that cost effective capital will be available to meet future expenditures
required to begin planned reconstruction activity or the construction of the
Development Rights. Before planned reconstruction activity or the construction
of a Development Right begins, we intend to arrange adequate capital sources to
complete these undertakings, although we cannot assure you that we will be able
to obtain such financing. In the event that financing cannot be obtained, we may
have to abandon Development Rights, write-off associated pursuit costs and
forego reconstruction activity; in such event, we will not realize the increased
revenues and earnings that we expected from such pursuits, and the related
write-off of costs will increase current period expenses and reduce FFO.
To meet the balance of our liquidity needs, we will need to arrange additional
capacity under our existing unsecured facility, sell additional existing
communities and/or issue additional debt or equity securities. While we believe
we have the financial position to expand our short term credit capacity and
support our capital markets activity, we cannot assure you that we will be
successful in completing these arrangements, offerings or sales. The failure to
complete these transactions on a cost-effective basis could have a material
adverse impact on our operating results and financial condition, including the
abandonment of deferred development costs and a resultant charge to earnings.
During 1998, the Company determined that it would pursue a disposition strategy
for certain assets in markets that did not meet its long-term strategic
direction. Under this program, we solicit competing bids from unrelated parties
for these individual assets, and consider the sales price and tax ramifications
of each proposal. In connection with this disposition program, we disposed of
seven communities in 1998 for aggregate net proceeds of approximately
$73,900,000. We have disposed of an additional 17 communities and a
participating mortgage note since January 1, 1999. The net proceeds from the
sale of these assets
50
were approximately $310,243,000. We intend to actively seek buyers for the
remaining communities held for sale. However, we cannot assure you that these
assets can be sold on terms that we consider satisfactory.
The remaining assets that we have identified for disposition include land,
buildings and improvements and furniture, fixtures and equipment. Total real
estate, net of accumulated depreciation, of all communities identified for sale
at December 31, 1999 totaled $164,758,000. Certain individual assets are secured
by mortgage indebtedness which may be assumed by the purchaser or repaid from
our net sales proceeds. Our Consolidated Statements of Operations include net
income from the communities held for sale of $11,361,000 for the year ended
December 31, 1999. Our Consolidated Statements of Operations include net income
from the communities held for sale for the year ended December 31, 1998 of
$10,262,000, or $10,724,000 on a pro forma basis assuming the merger had
occurred on January 1, 1998.
Because the proceeds from the sale of communities are used initially to reduce
borrowings under our unsecured facility, the immediate effect of a sale of a
community is to reduce Funds from Operations. This is because the yield on a
community that is sold exceeds the interest rate on the borrowings that are
repaid from such net proceeds. Therefore, changes in the number and timing of
dispositions, and the redeployment of the resulting net proceeds, may have a
material and adverse effect on our Funds from Operations.
51
Debt Maturities
The following table details debt maturities for the next five years, excluding
the unsecured facility:
(1) Includes credit enhancement fees, facility fees, trustees, etc.
Inflation
Substantially all of the leases at the Current Communities are for a term of one
year or less. This may enable us to realize increased rents upon renewal of
existing leases or the beginning of new leases. Short-term leases generally
minimize our risk from the adverse effects of inflation, although these leases
generally permit residents to leave at the end of the lease term without
penalty. We believe that short-term leases combined with relatively consistent
demand allow rents, and therefore cash flow, from our portfolio of apartments to
provide an attractive inflation hedge.
Year 2000 Compliance
The Year 2000 compliance issue arose out of concerns that computer systems would
be unable to accurately calculate, store or use a date after December 31, 1999.
It was widely believed that this inability could result in a system failure
causing disruptions of operations or creating erroneous results. The Year
52
2000 issue affected virtually all companies and organizations, and could have
potentially affected both information technology and non-information technology
systems.
In the normal course of business, we completed the replacement and upgrade of
our existing hardware and software information systems, resulting in Year 2000
compliance. The vendor that provided our previous accounting software has a
compliant version of its product, but growth in our operations required a
general ledger system with scope and functionality that is not present in either
the system we previously used or the Year 2000 compliant version of that system.
Accordingly, we replaced that general ledger system with an enhanced system that
provides increased functionality. The implementation of the new general ledger
system was completed July 1, 1999, and there have been no apparent effects from
the Year 2000 issue. We have not treated the cost of this new system as a Year
2000 expense because the implementation date was not accelerated due to Year
2000 compliance concerns. The cost of the new general ledger system, after
considering anticipated efficiencies provided by the new system, has not had a
material effect, either beneficial or adverse, on our financial condition or
results of operations.
We also took action to ensure the compliance of our non-information embedded
systems, such as security, heating and cooling, and fire and elevator systems,
at each community. We are not aware of any non-information embedded systems at
our communities that have functioned improperly as a result of the Year 2000
issue.
The total costs incurred to become Year 2000 compliant for all potentially
affected systems was approximately $706,000, which was less than our budgeted
cost of completion.
We did not delay any information technology or non-information technology
projects due to our Year 2000 compliance efforts.
Funds from Operations
For the year ended December 31, 1999, FFO increased to $212,840,000 from
$148,487,000 for the year ended December 31, 1998. FFO for the year ended
December 31, 1998 reflects the operating results for Avalon through June 4, 1998
and for the combined company after that date.
We generally consider Funds from Operations, or FFO, to be an appropriate
measure of our operating performance because it helps investors understand our
ability to incur and service debt and to make capital expenditures. We believe
that to understand our operating results, FFO should be examined with net income
as presented in the consolidated financial statements included elsewhere in this
report. FFO is determined based on a definition adopted by the Board of
Governors of the National Association of Real Estate Investment Trusts(R), and
is defined as:
- net income or loss computed in accordance with GAAP, except that
excluded from net income or loss are gains or losses from debt
restructuring, other non-recurring items and sales of property;
- plus depreciation of real estate assets; and
- after adjustments for unconsolidated partnerships and joint ventures.
FFO does not represent cash generated from operating activities in accordance
with GAAP. Therefore it should not be considered an alternative to net income as
an indication of our performance. FFO should also not be considered an
alternative to net cash flows from operating activities as determined by GAAP as
a measure of liquidity. Additionally, it is not necessarily indicative of cash
available to fund cash needs. Further, FFO as calculated by other REITs may not
be comparable to our calculation of FFO.
For the year ended December 31, 1999, FFO increased to $212,840,000 from
$148,487,000 for the preceding year. This increase is primarily from additional
communities attributable to the merger and secondarily due to the completion of
new development and redevelopment communities. Growth in earnings from
Established Communities also contributed to the increase.
53
FFO for the three months and twelve months ended December 31, 1999 and 1998
respectively are summarized as follows, with cash flows from operating,
investing and financing activities provided for comparison purposes (dollars in
thousands):
(1) Year to date total consists of $16,076 related to management and other
organizational changes and $706 for Y2K compliance costs.
Management Information Systems
We believe that an innovative management information systems infrastructure will
be an important element in managing our future growth. This is because timely
and accurate collection of financial and resident profile data will enable us to
maximize revenue through careful leasing decisions and financial management. We
currently employ a proprietary company-wide intranet using a digital network
with high-speed digital lines. This network connects all of our communities and
offices to central servers in Alexandria, Virginia, providing access to our
associates and to AvalonBay's corporate information throughout the country from
all locations.
We are currently engaged in the development of an innovative on-site property
management system and a leasing automation system to enable management to
capture, review and analyze data to a greater extent than is possible using
existing commercial software. We have entered into a formal joint venture
54
agreement, in the form of a limited liability company agreement, with United
Dominion Realty Trust, Inc., another public multifamily real estate company, to
continue development of these systems and system software, which are
collectively referred to in this discussion as the "system." The system
development process is currently managed by our employees, who have significant
related project management experience, and the employees of the joint venturer.
The actual programming and documentation of the system is being conducted by our
employees, the employees of our joint venturer and third party consultants under
the supervision of these experienced project managers. We currently expect that
the total development costs over a three-year period will be approximately $7.5
million including hardware costs and expenses, the costs of employees and
related overhead, and the costs of engaging third party consultants. These
development costs will be shared on an equal basis by us and our joint venturer.
Once developed, we intend to use the property management system in place of
current property management information software for which we pay a license fee
to third parties, and we intend to use the leasing automation system to make the
lease application process easier for residents and more efficient for us to
manage. We currently project that the property management system will undergo an
on-site test (i.e., a "beta test") during the third quarter of 2000 and that the
system will be functional and implemented during 2001. The leasing automation
system is currently in beta testing at two communities.
We believe that when implemented the system will result in cost savings due to
increased data reliability and efficiencies in management time and overhead, and
that these savings will largely offset the expense associated with amortizing
the system development costs and maintaining the software. We also believe that
it is possible that other real estate companies may desire to use the system
concept and system software that we are developing and that therefore there may
be an opportunity to recover, in the future, a portion of our investment by
licensing the system to others. However, at the present time these potential
cost savings and ancillary revenue are speculative, and we cannot assure that
the system will provide sufficient benefits to offset the cost of development
and maintenance.
We have never before engaged in the development of systems or system software on
this scale and have never licensed a system concept or system software to
others. There are a variety of risks associated with the development of the
system, both for internal use and for potential sale or licensing to third
parties. Among the principal risks associated with this undertaking are the
following:
- we may not be able to maintain the schedule or budget that we have
projected for the development and implementation of the system;
- we may be unable to implement the system with the functionality and
efficiencies we desire on commercially reasonable terms;
- we may decide not to endeavor to license the system to other
enterprises, the system may not be attractive to other enterprises,
and we may not be able to effectively manage the licensing of the
system to other enterprises; and
- the system may not provide AvalonBay with meaningful cost savings or a
meaningful source of ancillary revenues.
The occurrence of any of the events described above could prevent us from
achieving increased efficiencies, realizing revenue growth produced by ancillary
revenues or recovering our initial investment.
55
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain financial market risks, the most predominant being
fluctuations in interest rates. Interest rate fluctuations are monitored by us
as an integral part of our overall risk management program, which recognizes the
unpredictability of financial markets and seeks to reduce the potentially
adverse effect on our results of operations. The effect of interest rate
fluctuations historically has been small relative to other factors affecting
operating results, such as rental rates and occupancy. The specific market risks
and the potential impact on our operating results are described below.
Our operating results are affected by changes in interest rates as a result of
borrowing under our variable rate unsecured credit facility as well as issuing
bonds with variable interest rates. If interest rates under the variable rate
unsecured credit facility and other variable rate indebtedness had been one
percent higher throughout 1999, our annual interest costs would have increased
by approximately $3,300,000, based on balances outstanding during the year
ending December 31, 1999. Changes in interest rates also impact the fair value
of our fixed rate debt. If the market interest rate applicable to fixed rate
indebtedness with maturities similar to our fixed rate indebtedness had been one
percent higher, the fair value of our fixed rate indebtedness on December 31,
1999 would have decreased by approximately $67,000,000, based on balances
outstanding at December 31, 1999.
We currently use interest rate swap agreements to reduce the impact of interest
rate fluctuations on certain variable rate indebtedness. Under swap agreements,
(A) we agree to pay to a counterparty the interest that would have been incurred
on a fixed principal amount at a fixed interest rate (generally, the interest
rate on a particular treasury bond on the date the agreement is entered into,
plus a fixed increment), and (B) the counterparty agrees to pay to us the
interest that would have been incurred on the same principal amount at an
assumed floating interest rate tied to a particular market index. As of December
31, 1999, the effect of swap agreements is to fix the interest rate on
approximately $190 million of our variable rate tax-exempt debt. The swap
agreements were not electively entered into by us but, rather, were a
requirement of either the bond issuer or the credit enhancement provider related
to certain of our tax-exempt bond financings. In addition, because the
counterparties providing the swap agreements are major financial institutions
with AAA credit ratings by the Standard & Poor's Ratings Group and the interest
rates fixed by the swap agreements are significantly higher than current market
rates for such agreements, we do not believe there is exposure at this time to a
default by a counterparty provider.
56
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
On November 11, 1998, PricewaterhouseCoopers LLP was dismissed and Arthur
Andersen LLP was engaged as the principal independent public accountant for the
Company. The decision to change accountants was unanimously approved by the
Company's Board of Directors.
The report of PricewaterhouseCoopers LLP on the financial statements of the
Company for the year ended December 31, 1997 did not contain any adverse opinion
or disclaimer of opinion, nor was it qualified or modified as to uncertainty,
audit scope, or accounting principles. During the Company's fiscal year ended
December 31, 1997, and the subsequent interim period through November 11, 1998,
there were no disagreements with PricewaterhouseCoopers LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures, which disagreements, if not resolved to the satisfaction of
PricewaterhouseCoopers LLP, would have caused them to make reference thereto in
their report on the financial statements for such year.
During the Company's fiscal year ended December 31, 1997, and the
subsequent interim period through November 11, 1998, Arthur Andersen LLP was not
engaged as an independent accountant to audit either the Company's financial
statements or the financial statements of any of its subsidiaries, nor was it
consulted regarding the application of the Company's accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's financial statements.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information pertaining to directors and executive officers of the
registrant is incorporated herein by reference to the registrant's Proxy
Statement to be filed with the Securities and Exchange Commission within 120
days after the end of the year covered by this Form 10-K with respect to the
Annual Meeting of Stockholders to be held on May 10, 2000.
ITEM 11. EXECUTIVE COMPENSATION
Information pertaining to executive compensation is incorporated herein by
reference to the registrant's Proxy Statement to be filed with the Securities
and Exchange Commission within 120 days after the end of the year covered by
this Form 10-K with respect to the Annual Meeting of Stockholders to be held on
May 10, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information pertaining to security ownership of management and certain
beneficial owners of the registrant's Common Stock is incorporated herein by
reference to the registrant's Proxy Statement to be filed with the Securities
and Exchange Commission within 120 days after the end of the year covered by
this Form 10-K with respect to the Annual Meeting of Stockholders to be held on
May 10, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information pertaining to certain relationships and related transactions is
incorporated herein by reference to the registrant's Proxy Statement to be filed
with the Securities and Exchange Commission within 120 days after the end of the
year covered by this Form 10-K with respect to the Annual Meeting of
Stockholders to be held on May 10, 2000.
57
PART IV
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1999.
58
INDEX TO EXHIBITS
59
60
61
62
63
- --------------
+ Management contract or compensatory plan or arrangement required to be filed
or incorporated by reference as an exhibit to this Form 10-K pursuant to Item
14(c) of Form 10-K.
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AVALONBAY COMMUNITIES, INC.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
65
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
AvalonBay Communities, Inc.:
We have audited the accompanying consolidated balance sheets of AvalonBay
Communities, Inc. (a Maryland corporation, the "Company") and subsidiaries as of
December 31, 1999 and 1998 (as revised for 1998 - see Note 2), and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended (as revised for 1998 - see Note 2). These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AvalonBay
Communities, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The Schedule of Real Estate and Accumulated
Depreciation is presented for purposes of complying with the rules of the
Securities and Exchange Commission and is not a required part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Vienna, Virginia
March 3, 2000
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Avalon Properties, Inc.
We have audited the consolidated statements of operations, stockholders' equity
and cash flows of Avalon Properties, Inc. (the "Company") for the year ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows for
the year ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
New York, New York
January 13, 1998, except for the 1997 information in Note 10, as to which
the date is March 9, 2000
F-2
AVALONBAY COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
See accompanying notes to consolidated financial statements.
Amounts for 1998 have been revised to conform with the 1999 presentation
(see note 2).
F-3
AVALONBAY COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
See accompanying notes to consolidated financial statements.
Amounts for 1998 and 1997 have been revised to conform with the 1999
presentation (see note 2).
F-4
AVALONBAY COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except share data)
See accompanying notes to consolidated financial statements.
Amounts for 1998 and 1997 have been revised to conform with the 1999
presentation (see note 2).
F-5
AVALONBAY COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
See accompanying notes to consolidated financial statements.
Amounts for 1998 and 1997 have been revised to conform with the
1999 presentation (see note 2).
F-6
Supplemental disclosures of non-cash investing and financing activities (dollars
in thousands):
During the year ended December 31, 1997, the Company assumed $27,305 of debt and
issued 464,966 units of limited partnership in DownREIT partnerships, valued at
$18,157, in connection with acquisitions.
In June 1998, Avalon Properties, Inc. merged into Bay Apartment Communities,
whereupon Avalon ceased to exist and Bay legally succeeded to all of the assets
and liabilities of Avalon. In these financial statements, the merger was
accounted for under the purchase method of accounting whereby Bay, as the
surviving legal entity, adopted the historical financial statements of Avalon,
and therefore the historical financial statements for Avalon are presented prior
to the merger and Bay's assets were recorded in the historical financial
statements of Avalon, as of the date of the merger, at an amount equal to Bay's
debt outstanding at that time plus the value of capital stock retained by the
Bay stockholders, which approximates fair value. As a result, the financial
statements presented reflect that, in connection with the merger, the following
was assumed or acquired: debt of $604,663; net other liabilities of $25,239;
cash and cash equivalents of $1,419; and a minority interest of $9,020.
During the year ended December 31, 1998, the Company assumed $10,400 of debt and
issued 104,222 units of limited partnership in DownREIT partnerships, valued at
$3,851, in connection with acquisitions. A total of 6,818 units of limited
partnership were presented for redemption to the DownREIT partnership that
issued such units and were acquired by the Company for an equal number of shares
of the Company's Common Stock. Additionally, 950,064 shares of Series A
Preferred Stock and 405,022 shares of Series B Preferred Stock were converted
into an aggregate of 1,355,086 shares of Common Stock.
During the year ended December 31, 1999, 117,178 units of limited partnership in
DownREIT partnerships, valued at $4,614, were issued in connection with an
acquisition for cash and units pursuant to a forward purchase agreement signed
in 1997 with an unaffiliated party. Also during the year ended December 31,
1999, 22,623 units of limited partnership were presented for redemption to the
DownREIT partnership that issued such units and were acquired by the Company for
an equal number of shares of the Company's Common Stock.
Common and preferred dividends declared but not paid as of December 31, 1999,
1998 totaled $44,139 and $43,323, respectively. There were no dividends declared
that were not paid as of December 31, 1997.
F-7
AVALONBAY COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. Organization and Significant Accounting Policies
Organization and Recent Developments
AvalonBay Communities, Inc. (the "Company," which term is often used to refer to
AvalonBay Communities, Inc. together with its subsidiaries) is a Maryland
corporation that has elected to be taxed as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended. The Company
focuses on the ownership and operation of institutional-quality apartment
communities in high barrier-to-entry markets of the United States. These markets
include Northern and Southern California and selected markets in the
Mid-Atlantic, Northeast, Midwest and Pacific Northwest regions of the country.
The Company is the surviving corporation from the merger (the "Merger") of Bay
Apartment Communities, Inc. ("Bay") and Avalon Properties, Inc. (sometimes
hereinafter referred to as "Avalon" before the Merger) on June 4, 1998, where
Avalon shareholders received 0.7683 share of common stock of the Company for
each share owned of Avalon common stock. The merger was accounted for under the
purchase method of accounting, with the historical financial statements for
Avalon presented prior to the Merger. At that time, Avalon ceased to legally
exist, and Bay as the surviving legal entity adopted the historical financial
statements of Avalon, with Bay's assets recorded in the historical financial
statements of Avalon at an amount equal to Bay's debt outstanding at that time
plus the value of capital stock retained by the Bay stockholders, which
approximates fair value. All disclosures related to 1997 share and per share
information of Avalon have been revised to reflect the 0.7683 share conversion
ratio used in the merger. In connection with the Merger, the Company changed its
name from Bay Apartment Communities, Inc. to AvalonBay Communities, Inc.
At December 31, 1999, the Company owned or held a direct or indirect ownership
interest in 122 operating apartment communities containing 36,008 apartment
homes in twelve states and the District of Columbia, of which four communities
containing 1,455 apartment homes were under reconstruction. The Company also
owned 12 communities with 3,173 apartment homes under construction and rights to
develop an additional 30 communities that, if developed as expected, will
contain an estimated 8,624 apartment homes.
During the period January 1, 1998 through June 4, 1998, Avalon acquired four
communities containing a total of 1,084 apartment homes from unrelated third
parties for an aggregate acquisition price of approximately $75,335. One of
these communities had been sold as of December 31, 1999. The cumulative
capitalized cost of the remaining three communities at December 31, 1999 was
$47,124. During the period subsequent to the Merger through December 31, 1998,
the Company acquired three communities containing a total of 1,433 apartment
homes from unrelated third parties for an aggregate acquisition price of
approximately $201,800 (cumulative capitalized cost of $205,214 as of December
31, 1999). The Company also acquired a participating mortgage note for $24,000
which was sold by the Company for a gross sales price of $25,300 in October
1999.
During the year ended December 31, 1999, the Company acquired one community
containing 224 apartment homes through a DownREIT partnership for an acquisition
price of approximately $25,750, including 117,178 units of limited partnership
in the DownREIT partnership valued at $4,614. The community was acquired in
connection with a forward purchase agreement signed in 1997 with an unaffiliated
party.
During 1999, the Company completed development of ten communities, containing
2,335 apartment homes for a total investment of approximately $391,600. Also,
during 1999, the Company completed redevelopment of thirteen communities,
containing 4,051 apartment homes for a total investment in redevelopment (i.e.,
excluding acquisition costs) of $77,300.
In 1998, the Company adopted a strategy of disposing of certain assets in
markets that did not meet its long-term strategic direction. In connection with
this strategy, the Company sold seven communities in 1998 containing a total of
2,039 apartment homes for net proceeds of approximately $73,900. During 1999,
the Company also sold 16
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communities containing 4,464 apartment homes and a participating mortgage note
secured by a community for net proceeds of approximately $280,918. This
disposition strategy is also enabling redeployment of capital; the net proceeds
from these dispositions will be redeployed to develop and redevelop communities
currently under construction or reconstruction. Pending such redeployment, the
proceeds from the sale of these communities were used to repay amounts
outstanding under the Company's variable rate unsecured credit facility.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned partnerships and two joint venture partnerships in
addition to four subsidiary partnerships structured as DownREITs. All
significant intercompany balances and transactions have been eliminated in
consolidation.
In each of the four partnerships structured as DownREITs, either AvalonBay or
one of our wholly-owned subsidiaries is the general partner, and there are one
or more limited partners whose interest in the partnership is represented by
units of limited partnership interest. For each DownREIT partnership, limited
partners are entitled to receive distributions before any distribution is made
to the general partner. Although the partnership agreements for each of the
DownREITs are different, generally the distributions paid to the holders of
units of limited partnership interests approximate the current AvalonBay common
stock dividend rate. Each DownREIT partnership has been structured so that it is
unlikely the limited partners will be entitled to a distribution greater than
the initial distribution provided for in the partnership agreement. The holders
of units of limited partnership interest have the right to present each unit of
limited partnership interest for redemption for cash equal to the fair market
value of a share of AvalonBay common stock on the date of redemption. In lieu of
a cash redemption of a unit by a partner, we may elect to acquire any unit
presented for redemption for one share of common stock.
Real Estate
Significant expenditures which improve or extend the life of an asset are
capitalized. The operating real estate assets are stated at cost and consist of
land, buildings and improvements, furniture, fixtures and equipment, and other
costs incurred during their development, redevelopment and acquisition.
Expenditures for maintenance and repairs are charged to operations as incurred.
The capitalization of costs during the development of assets (including interest
and related loan fees, property taxes and other direct and indirect costs)
begins when active development commences and ends when the asset is delivered
and a final certificate of occupancy is issued. Cost capitalization during
redevelopment of assets (including interest and related loan fees, property
taxes and other direct and indirect costs) begins when an apartment home is
taken out-of-service for redevelopment and ends when the apartment home
redevelopment is completed and the apartment home is placed in-service. The
accompanying consolidated financial statements include a charge to expense for
unrecoverable deferred development costs related to pre-development communities
that are unlikely to be developed.
Depreciation is calculated on buildings and improvements using the straight-line
method over their estimated useful lives, which range from seven to thirty
years. Furniture, fixtures and equipment are generally depreciated using the
straight-line method over their estimated useful lives, which range from three
years (computer related equipment) to seven years.
Lease terms for apartment homes are generally one year or less. Rental income
and operating costs incurred during the initial lease-up or post-redevelopment
lease-up period are fully recognized as they accrue.
If there is an event or change in circumstance that indicates an impairment in
the value of a community, the Company's policy is to assess any impairment in
value by making a comparison of the current and projected operating cash flows
of the community over its remaining useful life, on an undiscounted basis, to
the carrying amount of the community. If such carrying amounts are in excess of
the estimated projected operating cash flows of the community, the Company
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would recognize an impairment loss equivalent to an amount required to adjust
the carrying amount to its estimated fair market value. The Company has not
recognized an impairment loss in 1999, 1998 or 1997 on any of its real estate.
Investments in Unconsolidated Joint Ventures
Investments in unconsolidated real estate joint ventures are accounted for under
the equity method as the Company does not control the significant operating and
financial decisions of the joint ventures. The joint venture agreements require
that a majority voting interest of the partners approve potential sales,
liquidations, significant refinancings, as well as operating budget and capital
and financing plans.
Income Taxes
The Company elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended, for the year ended December 31, 1994 and has not revoked such
election. A corporate REIT is a legal entity which holds real estate interests
and, if certain conditions are met (including but not limited to the payment of
a minimum level of dividends to stockholders), the payment of federal and state
income taxes at the corporate level is avoided or reduced. Management believes
that all such conditions for the avoidance of taxes have been met for the
periods presented. Accordingly, no provision for federal and state income taxes
has been made.
The following summarizes the tax components of the Company's common dividends
declared for the years ended December 31, 1999, 1998 and 1997:
(1) Information presented for Bay for periods prior to Merger is unaudited.
Dividends declared on all series of the Company's preferred stock in 1999
represented 76.0% of ordinary income, 11.0% of twenty percent rate gain and
13.0% of unrecaptured Section 1250 gain. Dividends declared on all series of the
Company's preferred stock subsequent to the Merger through December 31, 1998
represented ordinary income. Dividends declared on all series of Bay's preferred
stock during 1998 prior to the Merger and in 1997 represented ordinary income.
Dividends declared on all series of Avalon's preferred stock during 1998 prior
to the Merger represented ordinary income. Dividends declared on all series of
Avalon's preferred stock in 1997 represented 97.0% of ordinary income, 1.0% of
twenty percent rate gain and 2.0% of unrecaptured Section 1250 gain.
Development Costs of Software for Internal Use
The Company has entered into a formal joint venture cost sharing agreement with
another public multifamily real estate company to develop a new on-site property
management system and a leasing automation system to enable the Company to
capture, review and analyze data to a greater degree than the Company found
currently possible with third-party software products. The software development
process is currently being managed by Company employees who oversee a project
team of employees and third-party consultants. Development costs associated with
the software project include computer hardware costs, direct labor costs and
third-party consultant costs related to programming and documenting the system.
The project began in January 1998 and is expected to be fully implemented by
March 2001, although no assurance can be provided in this regard. The Company
will continue to develop these systems through the joint venture agreement and
the total cost of development will be shared equally between the Company and the
joint venture partner. Once developed, the Company and the joint venture partner
intend to use the property management
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and leasing systems in place of their respective systems currently in use for
which fees are generally paid to third party vendors.
Costs associated with the project are accounted for in accordance with the
American Institute of Certified Public Accountants' Statement of Position 98-1
("SOP 98-1") "Accounting for Costs of Computer Software Developed or Obtained
for Internal Use." Under SOP 98-1, costs of acquiring hardware and costs of
coding, documenting and testing the software are capitalized during the
application development stage. Following implementation, capitalized development
costs are amortized over the system's estimated useful life and other costs such
as training and application maintenance are expensed as incurred.
Deferred Financing Costs
Deferred financing costs include fees and costs incurred to obtain debt
financing and are amortized on a straight-line basis, which approximates the
effective interest method, over the shorter of the term of the loan or the
related credit enhancement facility, if applicable. Unamortized financing costs
are written-off when debt is retired before the maturity date.
Cash and Cash Equivalents
Cash and cash equivalents include all cash and liquid investments with an
original maturity of three months or less from the date acquired. The majority
of the Company's cash, cash equivalents, and cash in escrows is held at major
commercial banks.
Earnings per Common Share
In accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share", basic earnings per share for the years
ended December 31, 1999, 1998 and 1997 is computed by dividing earnings
available to common shares (net income less preferred stock dividends) by the
weighted average number of shares and Units outstanding during the period.
Additionally, other potentially dilutive common shares are considered when
calculating earnings per share on a diluted basis. The Company's basic and
diluted weighted average shares outstanding for the years ended December 31,
1999, 1998 and 1997 are as follows:
Certain options to purchase shares of common stock in the amount of 2,282,192,
2,643,190 and 899,679 were outstanding during 1999, 1998 and 1997, respectively
but were not included in the computation of diluted earnings per share because
the options' exercise prices were greater than the average market price of the
common shares.
Non-recurring Charges
In February 1999, the Company announced certain management changes including (i)
the departure of three senior officers (including the former President of
Avalon) who became entitled to severance benefits in accordance with the
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terms of their employment agreements with the Company dated as of March 9, 1998
and (ii) elimination of duplicate accounting functions and related employee
departures. The Company recorded a non-recurring charge of approximately $16,100
in the first quarter of 1999 related to the expected costs associated with this
management realignment and certain related organizational adjustments.
Because a plan of management realignment was not in existence on June 4, 1998,
the date of the Merger, this charge is not considered a cost of the Merger.
Accordingly, the expenses associated with the management realignment have been
treated as a non-recurring charge. The charge includes severance and benefits
expenses, costs to eliminate duplicate accounting functions and legal fees.
Certain former employees have elected to receive their severance benefits in an
installment basis for up to twelve months. Accordingly, the Company had a
remaining liability of approximately $1,457 at December 31, 1999 related to
severance benefits after payments of $14,019 made for the year ended December
31, 1999.
The non-recurring charge also includes Year 2000 remediation costs of $706 that
has been incurred for the year ended December 31, 1999.
Selected information relating to the non-recurring charge is summarized below:
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") requires Management to make certain estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. Actual results could differ from those
estimates.
Reclassifications
Certain reclassifications have been made to amounts in prior years' financial
statements to conform with current year presentations.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosure about Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for determining an entity's operating segments and the
type and level of financial information to be disclosed. SFAS No. 131 became
effective for the Company for the fiscal year ending December 31, 1998. The
Company adopted SFAS No. 131 effective with the December 31, 1998 reporting
period.
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In March 1998, the Emerging Issues Task Force of the Financial Accounting
Standards Board issued Ruling 97-11 entitled "Accounting for Internal Costs
Relating to Real Estate Property Acquisitions," which requires that internal
costs of identifying and acquiring operating property be expensed as incurred.
Costs associated with the acquisition of non-operating property may still be
capitalized. The ruling is effective for acquisitions completed subsequent to
March 19, 1998. At December 31, 1999, this ruling does not have a material
effect on the Company's consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
pronouncement establishes accounting and reporting standards requiring that
every derivative instrument be recorded on the balance sheet as either an asset
or liability measured at its fair value. SFAS No. 133 requires that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. In June 1999, the Financial Accounting
Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective date of SFAS No. 133." SFAS No.
137 delays the effective date of SFAS No. 133 for one year, to fiscal years
beginning after June 15, 2000. The Company currently plans to adopt this
pronouncement effective January 1, 2001, and will determine both the method and
impact of adoption, which is expected to be immaterial, prior to that date.
2. Merger Between Bay and Avalon and Revised Financial Presentation
Prior to December 31, 1999, the Company accounted for the Merger between Avalon
and Bay under the purchase method of accounting, using the historical financial
statements of Bay prior to and after the merger. Based on discussions with the
Securities and Exchange Commission, the Company agreed to revise its financial
presentation as of and for the years ended December 31, 1998 and 1997 to present
the merger whereby the historical financial statements for Avalon are presented
prior to the Merger. At that time, Avalon ceased to legally exist and Bay as the
surviving legal entity adopted the historical financial statements of Avalon,
with Bay's assets recorded in the historical financial statements of Avalon at
an amount equal to Bay's debt outstanding at that time plus the value of capital
stock retained by the Bay stockholders, which approximates fair value. Unaudited
quarterly data for the years ended December 31, 1999 and 1998, as shown in Note
12, has also been revised. Except as otherwise stated herein, all information
presented in the consolidated financial statements and related notes includes
all such revisions.
Adjustments have been made in the revised financial statements to reflect the
following:
- - The financial statements presented for 1997 and the period from January 1,
1998 through the date of the Merger are the historical financial statements
of Avalon after giving effect to the number of shares outstanding based on
the Merger exchange ratio.
- - Assets and liabilities of Avalon as of the Merger date are recorded at
historical cost.
- - Assets and liabilities of Bay as of the Merger date are recorded at an
amount equal to Bay's debt outstanding plus the value of capital stock
retained by Bay, which approximates fair value; write-downs of assets or
additional accruals have been recorded as additional purchase price.
- - The results of operations of the Company for the year ended December 31,
1998 reflect the historical operations of Avalon prior to the Merger and
operations of the combined company after the merger date through December
31, 1998.
These revisions increased (decreased) previously reported total assets, total
stockholders' equity, net income and earnings per share for the years ended
December 31, 1998 and 1997 as follows:
F-13
The following unaudited pro forma information has been prepared as if the Merger
and related transactions had occurred on January 1, 1998. The pro forma
financial information is presented for informational purposes only and is not
necessarily indicative of what actual results would have been nor does it
purport to represent the results of operations for future periods had the Merger
been consummated on January 1, 1998.
3. Interest Capitalized
Capitalized interest associated with communities under development or
redevelopment totaled $21,888, $14,724 and $9,024 for the years ended December
31, 1999, 1998 and 1997, respectively.
F-14
4. Notes Payable, Unsecured Notes and Credit Facility
The Company's notes payable, unsecured notes and credit facility are summarized
as follows:
Mortgage notes payable are collateralized by certain apartment communities and
mature at various dates from May 2001 through December 2036. The weighted
average interest rate of the Company's variable rate notes and credit facility
was 6.9% at December 31, 1999. The weighted average interest rate of the
Company's fixed rate notes (conventional and tax-exempt) was 6.9% and 6.7% at
December 31, 1999 and 1998, respectively.
The maturity schedule for the Company's unsecured notes consists of the
following:
The Company's unsecured notes contain a number of financial and other covenants
with which the Company must comply, including, but not limited to, limits on the
aggregate amount of total and secured indebtedness the Company may have on a
consolidated basis and limits on the Company's required debt service payments.
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Scheduled maturities of notes payable and unsecured notes are as follows for the
years ending December 31:
The Company has a $600,000 variable rate unsecured credit facility (the
"Unsecured Facility") with Morgan Guaranty Trust Company of New York, Union Bank
of Switzerland and Fleet National Bank, serving as co-agents for a syndicate of
commercial banks. The Unsecured Facility bears interest at a spread over the
London Interbank Offered Rate ("LIBOR") based on rating levels achieved on the
Company's unsecured notes and on a maturity selected by the Company. The current
stated pricing is LIBOR plus 0.6% per annum (7.1% at December 31, 1999). In
addition, the Unsecured Facility includes a competitive bid option (which allows
banks that are part of the lender consortium to bid to make loans to the Company
at a rate that is lower than the stated rate provided by the Unsecured Facility)
for up to $400,000. The Company is subject to certain customary covenants under
the Unsecured Facility, including, but not limited to, maintaining certain
maximum leverage ratios, a minimum fixed charges coverage ratio, minimum
unencumbered assets and equity levels and restrictions on paying dividends in
amounts that exceed 95% of the Company's Funds from Operations, as defined
therein. The Unsecured Facility matures in July 2001 and has two, one-year
extension options.
5. Stockholders' Equity
As of December 31, 1999 and 1998, the Company had authorized for issuance
140,000,000 and 50,000,000 of Common and Preferred Stock, respectively.
Dividends on the Series C, Series D, Series F, Series G and Series H Preferred
Stock are cumulative from the date of original issue and are payable quarterly
in arrears on or before the 15th day of each month as stated in the table below.
None of the series of Preferred Stock are redeemable prior to the date stated in
the table below, but on or after the stated date, may be redeemed for cash at
the option of the Company in whole or in part, at a redemption price of $25 per
share, plus all accrued and unpaid dividends, if any. The series of Preferred
Stock have no stated maturity and are not subject to any sinking fund or
mandatory redemptions. In addition, the series of Preferred Stock are not
convertible into any other securities of the Company and may be redeemed solely
from proceeds of other capital stock of the Company, which may include shares of
other series of preferred stock.
F-16
The Company also has 1,000,000 shares of Series E Junior Participating
Cumulative Preferred Stock authorized for issuance pursuant to the Company's
Shareholder Rights Agreement. As of December 31, 1999, there were no shares of
Series E Preferred Stock outstanding.
6. Investments in Unconsolidated Joint Ventures
At December 31, 1999, the Company's investments in unconsolidated joint ventures
consisted of a 50% general partnership interest in Falkland Partners, a 49%
general partnership interest in Avalon Run and a 50% limited liability company
membership interest in Avalon Grove. Also during 1999, the Company entered into
a joint venture to develop an on-site property management system and a leasing
automation system; the Company's joint venture interest consists of a 60%
limited liability company membership interest. The following is a combined
summary of the financial position of these joint ventures as of the dates
presented.
The following is a combined summary of the operating results of these joint
ventures for the periods presented:
7. Communities Held for Sale
During 1998, the Company completed a strategic planning effort resulting in a
decision to pursue a disposition strategy for certain assets in markets that did
not meet its long-term strategic direction. In connection with this strategy,
the Company solicits competing bids from unrelated parties for individual
assets, and considers the sales price and tax ramifications of each proposal.
The Company sold seven communities with a total of 2,039 apartment
F-17
homes in connection with this strategy in 1998. The aggregate gross sales price
for these assets was $126,200, with total net proceeds of $73,900. A portion of
the gross sales price was used to repay $50,030 of debt secured by assets sold.
The communities sold during 1999 and the respective sales price and net proceeds
are summarized on the following page:
(1) Proceeds from The Pointe were deposited into an escrow account to facilitate
a like-kind exchange transaction.
(2) Fairlane Woods was a participating mortgage note, not an owned community.
In addition to assets disposed of in connection with this disposition strategy,
the Company disposed of two communities in July 1998 in connection with an
agreement executed by Avalon in March 1998 which provided for the buyout of
certain limited partners in DownREIT V Limited Partnership. Net proceeds from
the sale of the two communities, containing an aggregate of 758 apartment homes,
were approximately $44,000.
The following unaudited pro forma information has been prepared as if the
communities sold in connection with the disposition strategy during 1999 and
1998 had been sold as of January 1, 1998. The pro forma financial information is
presented for informational purposes only and is not necessarily indicative of
what actual results would have been nor does it purport to represent the results
of operations for future periods had the dispositions occurred as of January 1,
1998.
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Management intends to market additional communities for sale during 2000.
However, there can be no assurance that such assets will be sold, or that such
sales will prove to be beneficial to the Company. The assets targeted for sale
include land, buildings and improvements and furniture, fixtures and equipment,
and are recorded at the lower of cost or fair value less estimated selling
costs. The Company has not recognized a write-down in its real estate to arrive
at net realizable value, although there can be no assurance that the Company can
sell these assets for amounts that equal or exceed its estimates of net
realizable value. At December 31, 1999 and 1998, total real estate, net of
accumulated depreciation, subject to sale totaled $164,758 and $195,394,
respectively. Certain individual assets are secured by mortgage indebtedness
which may be assumed by the purchaser or repaid by the Company from the net
sales proceeds.
The Company's consolidated statements of operations include net income of the
communities held for sale at December 31, 1999 of $11,361, $10,262 and $9,146
for the years ended December 31, 1999, 1998 and 1997, respectively.
8. Commitments and Contingencies
Presale Commitments
The Company occasionally enters into forward purchase commitments with unrelated
third parties which allows the Company to purchase communities upon completion
of construction. As of December 31, 1999, the Company has an agreement to
purchase nine communities with an estimated 2,753 homes for an estimated
aggregate purchase price of $347,052. The Company expects these acquisitions to
close at different times through 2002. However, there can be no assurance that
such acquisitions will be consummated or consummated on the schedule currently
contemplated. As of December 31, 1999 and 1998, the Company had provided interim
construction financing of $145,241 and $67,129, respectively, for these
communities.
Employment Agreements and Arrangements
The Company has entered into employment agreements with five executive officers.
In addition, during 2000 and prior to March 1, 2000, three other senior officers
entered into employment agreements, which are generally similar in structure to
those entered into with executive officers but which do not provide for the same
level of severance payments. The employment agreements provide for severance
payments in the event of a termination of employment (except for a termination
by the Company with cause or a voluntary termination by the employee). The
initial term of these agreements ends on dates that vary between June 4, 2001
and March 29, 2002. The employment agreements provide for one-year automatic
renewals after the initial term unless an advance notice of non-renewal is
provided by either party. Upon a change in control, the agreements provide for
an automatic extension of three years (two years in the case of senior
officers). The employment agreements provide for base salary and incentive
compensation in the form of cash awards, stock options and stock grants subject
to the discretion of, and attainment of performance goals established by, the
Compensation Committee of the Board of Directors.
The employment agreements of the executive officers also provide that base
salary may be increased during the initial term in amounts determined by the
Compensation Committee, and that during any renewal term base salary increases
will be equal to the greater of 5% of the prior year's base salary, a factor
based on increases in the consumer price index, or an amount determined at the
discretion of the Compensation Committee.
During the fourth quarter of 1999, the Company adopted an Officer Severance
Program (the "Program") for the benefit of those officers of the Company who do
not have employment agreements. Under the Program, in the event an officer who
is not otherwise covered by a severance arrangement is terminated without cause
in connection with a change in control (as defined) of the Company, such officer
will generally receive a cash lump sum payment equal to one times the amount of
such officer's base salary and cash bonus.
F-19
Contingencies
The Company is subject to various legal proceedings and claims that arise in the
ordinary course of business. These matters are generally covered by insurance.
While the resolution of these matters cannot be predicted with certainty,
Management believes the final outcome of such matters will not have a material
adverse effect on the financial position or results of operations of the
Company.
9. Value of Financial Instruments
The Company has historically used interest rate swap agreements (the "Swap
Agreements") to reduce the impact of interest rate fluctuations on its variable
rate tax-exempt bonds. The Swap Agreements are held for purposes other than
trading. The amortization of the cost of the Swap Agreements is included in
interest expense. The remaining unamortized cost of the Swap Agreements is
included in prepaid expenses and other assets and is amortized over the
remaining life of the agreements. As of December 31, 1999, the effect of these
Swap Agreements is to fix $190,765 of the Company's tax-exempt debt at an
average interest rate of 6.1% with an average maturity of 7 years.
The off-balance-sheet risk in these contracts includes the risk of a
counterparty not performing under the terms of the contract. The counterparties
to these contracts are major financial institutions with AAA credit ratings by
the Standard & Poor's Ratings Group. The Company monitors the credit ratings of
counterparties and the amount of the Company's debt subject to swap agreements
with any one party. Therefore, the Company believes the likelihood of realizing
material losses from counterparty nonperformance is remote.
The Company has not entered into any interest rate hedge agreements or treasury
locks for its conventional unsecured debt.
Cash and cash equivalent balances are held with various financial institutions
and may at times exceed the applicable Federal Deposit Insurance Corporation
limit. The Company monitors credit ratings of these financial institutions and
the concentration of cash and cash equivalent balances with any one financial
institution and believes the likelihood of realizing material losses from the
excess of cash and cash equivalent balances over insurance limits is remote.
The following estimated fair values of financial instruments were determined by
Management using available market information and established valuation
methodologies, including discounted cash flows. Accordingly, the estimates
presented are not necessarily indicative of the amounts the Company could
realize on disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
- Cash equivalents, rents receivable, accounts payable and accrued
expenses, and other liabilities are carried at their face amounts,
which reasonably approximate their fair values.
- The Company's unsecured credit facility with an aggregate carrying
value of $178,600 and $329,000 at December 31, 1999 and 1998,
respectively approximates fair value.
Bond indebtedness and notes payable with an aggregate carrying value of
$1,415,047 and $1,155,371 had an estimated aggregate fair value of $1,346,288
and $1,137,411 at December 31, 1999 and 1998, respectively.
10. Segment Reporting
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," during 1998. SFAS No. 131 established standards for
reporting financial and descriptive information about operating segments in
annual financial statements. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision
F-20
maker, or decision making group, in deciding how to allocate resources and in
assessing performance. The Company's chief operating decision making group
consists primarily of the Company's senior officers.
The Company's reportable operating segments include Stable Communities,
Developed Communities and Redeveloped Communities:
- Stable Communities are communities that 1) have attained stabilized
occupancy levels (at least 95% occupancy) and operating costs since the
beginning of the prior calendar year (these communities are also known
as Established Communities); or 2) were acquired after the beginning of
the previous calendar year but were stabilized in terms of occupancy
levels and operating costs at the time of acquisition, and remained
stabilized throughout the end of the current calendar year. Stable
Communities do not include communities where planned redevelopment or
development activities have not yet commenced. The primary financial
measure for this business segment is Net Operating Income ("NOI"),
which represents total revenue less operating expenses and property
taxes. With respect to Established Communities, an additional financial
measure of performance is NOI for the current year as compared against
the prior year and against current year budgeted NOI. With respect to
other Stable Communities, performance is primarily based on reviewing
growth in NOI for the current period as compared against prior periods
within the calendar year and against current year budgeted NOI.
- Developed Communities are communities which completed development and
attained stabilized occupancy and expense levels during the prior
calendar year of presentation. The primary financial measure for this
business segment is Operating Yield (defined as NOI divided by total
capitalized costs). Performance of Developed Communities is based on
comparing Operating Yields against projected yields as determined by
Management prior to undertaking the development activity.
- Redeveloped Communities are communities that completed redevelopment
and attained stabilized occupancy and expense levels during the prior
calendar year of presentation. The primary financial measure for this
business segment is Operating Yield. Performance for Redeveloped
Communities is based on comparing Operating Yields against projected
yields as estimated by Management prior to undertaking the
redevelopment activity.
Other communities owned by the Company which are not included in the above
segments are communities that were under development or redevelopment or
lease-up at any point in time during the applicable calendar year. The primary
performance measure for these assets depends on the stage of development or
redevelopment of the community. While under development or redevelopment,
Management monitors actual construction costs against budgeted costs as well as
economic occupancy. While under lease-up, the primary performance measures for
these assets are projected Operating Yield as defined above, lease-up pace
compared to budget and rent levels compared to budget.
Net Operating Income for each community is generally equal to that community's
contribution to Funds from Operations ("FFO"), except that interest expense
related to indebtedness secured by an individual community and depreciation and
amortization on non-real estate assets are not included in the community's NOI
although such expenses decrease the Company's consolidated net income and FFO.
The segments are classified based on the individual community's status as of the
beginning of the given calendar year. Therefore, each year the composition of
communities within each business segment is adjusted. Accordingly, the amounts
between years are not directly comparable.
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In addition to reporting segments based on the above property types, the Company
previously reported results within these segments based on the East and West
Coast geographic areas. This disclosure was provided as the East and West Coast
geographic areas substantially reflected the operating communities of Avalon and
Bay, respectively, prior to the Merger. Management currently reviews its
operating segments by geographic regions, including Northern and Southern
California, Pacific Northwest, Northeast, Mid-Atlantic and Midwest regions.
Because the various locations within each individual region have similar
economic and other characteristics, Management finds it useful to review the
performance of the Company's communities in those locations on a regional,
aggregated basis.
The accounting policies applicable to the operating segments described above are
the same as those described in the summary of significant accounting policies.
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Operating expenses as reflected on the Consolidated Statements of Operations
include $23,950, $18,264 and $6,048 for the years ended December 31, 1999, 1998
and 1997, respectively, of property management overhead costs that are not
allocated to individual communities. These costs are not reflected in NOI as
shown in the above tables. The amount reflected for "Communities held for sale"
on the Consolidated Balance Sheets is net of $18,141 and $16,603 of accumulated
depreciation as of December 31, 1999 and 1998, respectively.
In June 1998, the Company completed the Merger. For comparative purposes, the
1998 and 1997 segment information for the Company is presented below on a pro
forma basis (unaudited) assuming the Merger had occurred as of January 1, 1997.
11. Stock-Based Compensation Plans
The Company has adopted the 1994 Stock Incentive Plan as amended and restated
(the "Plan") for the purpose of encouraging and enabling the Company's officers,
associates and directors to acquire a proprietary interest in the Company and as
a means of aligning management and stockholder interests and expanding
management's long-term perspective. Individuals who are eligible to participate
in the Plan include officers, other associates, outside directors and other key
persons of the Company and its subsidiaries who are responsible for or
contribute to the management, growth or profitability of the Company and its
subsidiaries. The Plan authorizes (i) the grant of stock options that qualify as
incentive stock options under Section 422 of the Internal Revenue Code, (ii) the
grant of stock options that do not so qualify, (iii) grants of shares of
restricted and unrestricted Common Stock, (iv) grants of deferred stock awards,
(v) performance share awards entitling the recipient to acquire shares of Common
Stock and (vi) dividend equivalent rights.
Under the Plan, a maximum of 2,500,000 shares of Common Stock, plus 9.9% of any
net increase in the total number of shares of Common Stock actually outstanding
from time to time after April 13, 1998, may be issued. Notwithstanding the
foregoing, the maximum number of shares of stock for which Incentive Stock
Options may be issued under the Plan shall not exceed 2,500,000 and no awards
shall be granted under the Plan after April 13, 2008. For purposes of this
limitation, shares of Common Stock which are forfeited, canceled and reacquired
by the Company, satisfied without the issuance of Common Stock or otherwise
terminated (other than by exercise) shall be added back to the shares of Common
Stock available for issuance under the Plan. Stock Options with respect to no
more than 300,000 shares of stock may be granted to any one individual
participant during any one calendar year period. Options granted to
officers and employees under the Plan vest over periods determined by the
Compensation Committee of the Board of Directors and expire ten years from the
date of grant. Options granted to
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non-employee directors under the Plan are subject to accelerated vesting under
certain limited circumstances and become exercisable on the first anniversary of
the date of grant and expire ten years from the date of grant. Restricted stock
granted to officers and employees under the Plan vest over periods determined by
the Compensation Committee of the Board of Directors which is generally four
years, with 20% vesting immediately on the grant date and the remaining 80%
vesting equally over the next four years from the date of grant. Restricted
stock granted to non-employee directors vests 20% on the date of issuance and
20% on each of the first four anniversaries of the date of issuance.
Information with respect to stock options granted under the Plan is as follows:
(1) The information presented for Bay for periods prior to June 4, 1998 is
unaudited.
The following table summarizes information concerning currently outstanding and
exercisable options:
F-24
Options to purchase 3,637,724, 4,488,189 and 348,400 shares of Common Stock were
available for grant under the Plan at December 31, 1999, 1998 and 1997,
respectively.
Before the Merger, Avalon had adopted its 1995 Equity Incentive Plan (the
"Avalon 1995 Incentive Plan"). The 1995 Incentive Plan authorized the grant of
(i) stock options that qualified as incentive stock options under Section 422 of
the Internal Revenue Code, (ii) stock options that did not so qualify, (iii)
shares of restricted and unrestricted common stock, (iv) shares of unrestricted
common stock and (v) dividend equivalent rights.
Under the Avalon 1995 Incentive Plan, a maximum number of 3,315,054 shares (or
2,546,956 shares as adjusted for the Merger) of common stock were issuable, plus
any shares of common stock represented by awards under Avalon's 1993 Stock
Option and Incentive Plan (the "Avalon 1993 Plan") that were forfeited,
canceled, reacquired by Avalon, satisfied without the issuance of common
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stock or otherwise terminated (other than by exercise). Options granted to
officers, non-employee directors and associates under the Avalon 1995 Incentive
Plan generally vested over a three-year term, expire ten years from the date of
grant and are exercisable at the market price on the date of grant.
In connection with the Merger, the exercise prices and the number of options
under the Avalon 1995 Incentive Plan and the Avalon 1993 Plan were adjusted to
reflect the equivalent Bay shares and exercise prices based on the 0.7683 share
conversion ratio used in the Merger. Officers, non-employee directors and
associates with Avalon 1995 Incentive Plan options may exercise their adjusted
number of options for the Company's Common Stock at the adjusted exercise price.
Information with respect to stock options granted under the Avalon 1995
Incentive Plan and the Avalon 1993 Plan is as follows:
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The following table summarizes information concerning currently outstanding and
exercisable options under the Avalon 1995 Incentive Plan and the Avalon 1993
Plan:
As of June 4, 1998, the date of the Merger, options ceased to be granted under
the Avalon 1995 Incentive Plan. Accordingly, there were no options to purchase
shares of Common Stock available for grant under the Avalon 1995 Incentive Plan
at December 31, 1999 or 1998. Options to purchase 561,232 shares of Common Stock
were available for grant under the Avalon 1995 Incentive Plan at December 31,
1997.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
Plans. Accordingly, no compensation expense has been recognized for the stock
option portion of the stock-based compensation plan. Had compensation expense
for the Company's stock option plan been determined based on the fair value at
the grant date for awards under the Plan consistent with the methodology
prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts (unaudited):
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The fair value of the options granted during 1999 is estimated at $3.40 per
share on the date of grant using the Black-Scholes option pricing model with the
following assumptions: dividend yield of 6.10%, volatility of 17.04%, risk free
interest rates of 5.54%, actual number of forfeitures, and an expected life of
approximately 3 years. The fair value of the options granted during 1998 is
estimated at $3.72 per share on the date of grant using the Black-Scholes option
pricing model with the following assumptions: dividend yield of 5.96%,
volatility of 16.77%, risk free interest rates of 5.55%, actual number of
forfeitures, and an expected life of approximately 3 years. The fair value of
the options granted during 1997 is estimated at $5.13 per share on the date of
grant using the Binomial option pricing model with the following assumptions:
dividend yield ranging from 5.0% to 5.5%, volatility factor of the expected
market price of the Company's Common Stock of .142, risk free interest rate
ranging from 5.8% to 6.7% and a weighted-average expected life of the options of
8 years.
In connection with the Merger, the Company adopted the 1996 Non-Qualified
Employee Stock Purchase Plan, as amended and restated (the "1996 ESP Plan"). The
primary purpose of the 1996 ESP Plan is to encourage Common Stock ownership by
eligible directors, officers and associates (the "Participants") in the belief
that such ownership will increase each Participant's interest in the success of
the Company. Until January 1, 2000, the 1996 ESP Plan provided for two purchase
periods per year. A purchase period was a six month period beginning each
January 1 and July 1 and ending each June 30 and December 31, respectively.
Beginning on January 1, 2000, there will be one purchase period per year, which
will begin May 1 and end October 31. Participants may contribute portions of
their compensation during a purchase period and purchase Common Stock at the end
thereof. One million shares of Common Stock are reserved for issuance under the
1996 ESP Plan. Participation in the 1996 ESP Plan entitles each Participant to
purchase Common Stock at a price which is equal to the lesser of 85% of the
closing price for a share of stock on the first day of such purchase period or
85% of the closing price on the last day of such purchase period. The Company
issued 35,408 and 23,396 shares under the 1996 ESP Plan for the two purchase
periods during the years ending December 31, 1999 and 1998, respectively.
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12. Quarterly Financial Information (Unaudited)
The following summary represents the quarterly results of operations for the
years ended December 31, 1999 and 1998:
The sum of the quarterly net income per common share, basic and diluted, for
1998 are not equal to the full year amounts primarily because of fluctuations in
quarterly net income during the year.
13. Subsequent Events
During January 2000, the Company sold one community, Avalon Chase, a 360
apartment home community located in Marlton, New Jersey. The net proceeds of
approximately $29,325 from the sale of this community will be redeployed to
development and redevelopment communities. Pending such redeployment, the
proceeds from the sale of this community were primarily used to repay amounts
outstanding under the Company's Unsecured Facility.
During January 2000, the Company entered into a joint venture agreement with an
entity controlled by Multi-Employer Development Partners ("MEDP") to develop
Avalon on the Sound, a 412 apartment high rise community in New Rochelle, New
York with total capitalized costs estimated to be $93,300. The terms of the
limited liability company agreement anticipate a capital structure, after
completion of construction, that is comprised of 60% equity and 40% debt. Equity
contributions will be funded 25% by the Company and 75% by MEDP. Construction
financing that converts to long-term financing following completion will provide
the debt capital. Operating cash flow will be distributed 25% to the Company and
75% to MEDP until each receives a 9% return on invested capital. Thereafter,
operating cash flow will be distributed equally to the Company and MEDP. Upon a
sale to a third party, cash is distributed first to each partner until capital
contributions are recovered. Thereafter, sales proceeds are distributed based
upon achievement of certain internal rate of return levels ("IRR").
Distributions that result in an IRR to MEDP and the Company of 12-15% are made
40% to the Company and 60% to MEDP. Thereafter, sales proceeds are distributed
equally to the Company and MEDP. Following the third year after completion of
construction, buy-sell provisions are in effect. The Company will receive
construction, development and management fees for services rendered to the joint
venture.
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SCHEDULE III
AVALONBAY COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
(Dollars in thousands)
F-30
AVALONBAY COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
(Dollars in thousands)
F-31
AVALONBAY COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
(Dollars in thousands)
F-32
AVALONBAY COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
(Dollars in thousands)
Depreciation of AvalonBay Communities, Inc. building, improvements, upgrades and
furniture, fixtures and equipment (FF&E) is calculated over the following useful
lives, on a straight line basis:
Building - 30 years
Improvements, upgrades and FF&E - not to exceed 7 years
The aggregate cost of total real estate for Federal income tax purposes was
approximately $4.3 billion at December 31, 1999.
The changes in total real estate assets for the years ended December 31, 1999,
1998 and 1997 are as follows:
The changes in accumulated depreciation for the years ended December 31, 1999,
1998 and 1997, are as follows:
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