UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

AVALONBAY COMMUNITIES, INC.

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

2900 Eisenhower Avenue, Suite 300
Alexandria, Virginia 22314
(Address of principal executive offices, including zip code)

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

(Former name, if changed since last report)

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

Yes þ      No o

Indicate by check mark whether the Exchange registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).

Large accelerated filer þ      Accelerated filer o      Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o      No þ

APPLICABLE ONLY TO CORPORATE ISSUERS

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

79,736,131 shares of common stock, par value $0.01 per share, were outstanding as of July 31, 2007

 

 

AVALONBAY COMMUNITIES, INC.
FORM 10-Q
INDEX

				Page
		PART I - FINANCIAL INFORMATION
Item 1.		Condensed Consolidated Financial Statements
		Condensed Consolidated Balance Sheets as of June 30, 2007 (unaudited) and December 31, 2006			2
		Condensed Consolidated Statements of Operations and Other Comprehensive Income (unaudited) for the three and six months ended June 30, 2007 and 2006 (restated)			3
		Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2007 and 2006 (restated)			4-5
		Notes to Condensed Consolidated Financial Statements (unaudited)			6-25
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			26-52
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			53
Item 4.		Controls and Procedures			53
		PART II - OTHER INFORMATION
Item 1.		Legal Proceedings			53
Item 1a.		Risk Factors			53-54
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			54
Item 3.		Defaults Upon Senior Securities			54
Item 4.		Submission of Matters to a Vote of Security Holders			54-55
Item 5.		Other Information			55
Item 6.		Exhibits			55-57
SIGNATURES					58

EXPLANATORY NOTE

We have filed Amendment No. 1 on Form 10-K/A on May 10, 2007 (the “Form 10-K/A”) to our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 filed on March 1, 2007 (the “Form 10-K”) (1) to restate our financial statements as of December 31, 2006, 2005 and 2004 and for the years then ended and to amend other Items contained in the Form 10-K to reflect such restatement, and (2) to correct a typographical error in the description of the Second Amended and Restated Revolving Loan Agreement of the Company referenced as Exhibit 10.32 to the Form 10-K. In addition we have restated our financial statements for the three and six months ended June 30, 2006. This restatement is reported in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2007. We have not amended and do not anticipate amending our Annual Reports on Form 10-K for any years prior to fiscal year 2006, nor will we be amending any of our previously filed Quarterly Reports on Form 10-Q. The financial statements and other information that have been previously filed or otherwise reported for these periods should no longer be relied upon; all such prior information is superseded by the information in the Form 10-K/A and this Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.

As discussed in the Form 10-K/A, this restatement revises our accounting for long-term land leases. We revised the accounting for leases with fixed, or minimum, escalations, recognizing as rental expense on a straight-line basis, the aggregate undiscounted payments required over the non-cancelable portion of the lease term, as opposed to our expected holding period of our interest in the related asset. This change primarily impacts the land lease accounting related to one consolidated asset with a 90-year lease that became effective in 1999, in which the land lessor is also our partner in the venture holding the asset. In addition, we recognized as a component of minority interest, the value associated with a provision allowing our partner in that same venture to put their interest in the venture to us based on the fair market value of the underlying real estate with the offset to stockholders’ equity.

AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)

		6-30-07				12-31-06
		(unaudited)
ASSETS
Real estate:
Land		$	1,001,996			$	961,035
Buildings and improvements			4,770,602				4,572,020
Furniture, fixtures and equipment			151,464				142,768
			5,924,062				5,675,823
Less accumulated depreciation			(1,181,799	)			(1,093,933	)
Net operating real estate			4,742,263				4,581,890
Construction in progress, including land			810,925				641,781
Land held for development			352,616				202,314
Operating real estate assets held for sale, net			84,338				84,377
Total real estate, net			5,990,142				5,510,362
Cash and cash equivalents			137,770				8,343
Cash in escrow			220,418				135,917
Resident security deposits			30,635				26,429
Investments in unconsolidated real estate entities			38,557				42,724
Deferred financing costs, net			27,665				26,140
Deferred development costs			46,811				39,365
Prepaid expenses and other assets			50,812				56,211
Total assets		$	6,542,810			$	5,845,491
LIABILITIES AND STOCKHOLDERS’ EQUITY
Unsecured notes, net		$	2,153,289			$	2,153,078
Variable rate unsecured credit facility			—				—
Mortgage notes payable, net			761,387				648,350
Dividends payable			69,951				60,417
Payables for construction			62,419				59,232
Accrued expenses and other liabilities			187,702				189,612
Accrued interest payable			40,215				37,189
Resident security deposits			41,565				38,376
Liabilities related to real estate assets held for sale			51,607				67,772
Total liabilities			3,368,135				3,254,026
Minority interest of unitholders in consolidated partnerships			24,883				18,311
Commitments and contingencies			—				—
Stockholders’ equity:
Preferred stock, $0.01 par value; $25 liquidation preference; 50,000,000 shares authorized at both June 30, 2007 and December 31, 2006; 4,000,000 shares issued and outstanding at both June 30, 2007 and December 31, 2006			40				40
Common stock, $0.01 par value; 140,000,000 shares authorized at both June 30, 2007 and December 31, 2006; 79,734,293 and 74,668,372 shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively			797				747
Additional paid-in capital			3,108,305				2,482,516
Accumulated earnings less dividends			43,319				93,430
Accumulated other comprehensive loss			(2,669	)			(3,579	)
Total stockholders’ equity			3,149,792				2,573,154
Total liabilities and stockholders’ equity		$	6,542,810			$	5,845,491

See accompanying notes to Condensed Consolidated Financial Statements.

AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share data)

		For the three months ended								For the six months ended
		6-30-07				6-30-06				6-30-07				6-30-06
						(restated)								(restated)
Revenue:
Rental and other income		$	200,448			$	177,688			$	394,169			$	350,111
Management, development and other fees			1,488				1,395				2,932				2,601
Total revenue			201,936				179,083				397,101				352,712
Expenses:
Operating expenses, excluding property taxes			58,480				53,798				115,704				105,011
Property taxes			18,791				16,642				36,289				33,318
Interest expense, net			22,662				26,115				46,159				54,311
Depreciation expense			44,195				41,285				88,023				81,251
General and administrative expense			6,642				6,479				13,422				12,762
Total expenses			150,770				144,319				299,597				286,653
Equity in income (losses) of unconsolidated entities			(196	)			207				(283	)			434
Minority interest in consolidated partnerships			(457	)			(128	)			(906	)			(260	)
Gain on sale of land			—				—				545				13,166
Income from continuing operations			50,513				34,843				96,860				79,399
Discontinued operations:
Income from discontinued operations			539				171				711				1,310
Gain on sale of communities			—				31,992				—				97,411
Total discontinued operations			539				32,163				711				98,721
Net income			51,052				67,006				97,571				178,120
Dividends attributable to preferred stock			(2,175	)			(2,175	)			(4,350	)			(4,350	)
Net income available to common stockholders		$	48,877			$	64,831			$	93,221			$	173,770
Other comprehensive income:
Unrealized gain on cash flow hedges			739				644				910				1,185
Comprehensive income		$	49,616			$	65,475			$	94,131			$	174,955
Dividends declared per common share		$	0.85			$	0.78			$	1.70			$	1.56
Earnings per common share — basic:
Income from continuing operations (net of dividends attributable to preferred stock)		$	0.61			$	0.44			$	1.17			$	1.01
Discontinued operations			0.01				0.43				0.01				1.34
Net income available to common stockholders		$	0.62			$	0.87			$	1.18			$	2.35
Earnings per common share — diluted:
Income from continuing operations (net of dividends attributable to preferred stock)		$	0.60			$	0.43			$	1.15			$	1.00
Discontinued operations			0.01				0.43				0.01				1.31
Net income available to common stockholders		$	0.61			$	0.86			$	1.16			$	2.31

See accompanying notes to Condensed Consolidated Financial Statements.

AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)

		For the six months ended
		6-30-07				6-30-06
						(restated)
Cash flows from operating activities:
Net income		$	97,571			$	178,120
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation expense, including discontinued operations			88,466				81,771
Amortization of deferred financing costs and debt premium/discount			2,416				2,076
Amortization of deferred compensation			7,799				6,268
Income allocated to minority interest in consolidated partnerships			906				260
Equity in income of unconsolidated entities, net of eliminations			779				(9	)
Return on investment of unconsolidated entities			122				172
Gain on sale of real estate assets			(545	)			(110,577	)
Decrease (increase) in cash in operating escrows			1,842				(1,875	)
Decrease (increase) in resident security deposits, prepaid expenses and other assets			4,381				(250	)
Increase (decrease) in accrued expenses, other liabilities and accrued interest payable			(2,471	)			29,050
Net cash provided by operating activities			201,266				185,006
Cash flows used in investing activities:
Development/redevelopment of real estate assets including land acquisitions and deferred development costs			(575,077	)			(308,325	)
Capital expenditures — existing real estate assets			(1,730	)			(7,701	)
Capital expenditures — non-real estate assets			(769	)			(225	)
Proceeds from sale of real estate assets, net of selling costs			5,129				237,270
Increase in payables for construction			3,186				16,271
Decrease in cash in construction escrows			13,657				19,572
Decrease (increase) in investments in unconsolidated real estate entities			3,153				(8,885	)
Net cash used in investing activities			(552,451	)			(52,023	)
Cash flows provided by (used in) financing activities:
Issuance of common stock			617,099				15,651
Dividends paid			(130,127	)			(114,542	)
Net borrowings under unsecured credit facility			—				(60,800	)
Issuance of mortgage notes payable			16,926				41,405
Repayments of mortgage notes payable			(19,869	)			(3,150	)
Repayment of unsecured notes			—				(4,000	)
Payment of deferred financing costs			(3,730	)			(533	)
Redemption of units for cash by minority partners			—				(80	)
Contributions from minority and profit-sharing partners			1,334				—
Distributions to DownREIT partnership unitholders			(172	)			(198	)
Distributions to joint venture and profit sharing partners			(849	)			(62	)
Net cash provided by (used in) financing activities			480,612				(126,309	)
Net increase in cash and cash equivalents			129,427				6,674
Cash and cash equivalents, beginning of period			8,343				6,106
Cash and cash equivalents, end of period		$	137,770			$	12,780
Cash paid during year for interest, net of amount capitalized		$	46,948			$	52,671

See accompanying notes to Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

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

During the six months ended June 30, 2007:

	•		As described in Note 4, “Stockholders’ Equity,” 72,296 shares of common stock valued at $10,605 were issued in connection with stock grants, 1,179 shares valued at $157 were issued through the Company’s dividend reinvestment plan, 40,539 shares valued at $4,153 were withheld to satisfy employees’ tax withholding and other liabilities and 4,007 shares valued at $274 were forfeited, for a net value of $6,335. In addition, the Company granted 335,749 options for common stock, net of forfeitures, at a value of $7,478.
	•		19,231 units of limited partnership, valued at $887, were presented for redemption to the DownREIT partnerships that issued such units and were acquired by the Company in exchange for an equal number of shares of the Company’s common stock.
	•		The Company recorded a decrease to other liabilities and a corresponding gain to other comprehensive income of $910 to adjust the Company’s Hedging Derivatives (as defined in Note 5, “Derivative Instruments and Hedging Activities”) to their fair value.
	•		The Company issued $100,000 of variable-rate tax-exempt debt relating to Avalon Morningside Park. The proceeds were placed in an escrow account until requisitioned for construction funding.
	•		Common and preferred dividends declared but not paid totaled $69,951.
	•		The Company recorded in increase of $6,124 to minority interest with a corresponding decrease to accumulated earnings less dividends to adjust the redemption value associated with a put option held by a joint venture partner. This put option allows our partner to put their interest in the investment to the Company at the future fair market value.

During the six months ended June 30, 2006:

	•		122,172 shares of common stock valued at $12,368 were issued in connection with stock grants, 943 shares valued at $94 were issued through the Company’s dividend reinvestment plan, and 45,267 shares valued at $3,365 were withheld to satisfy employees’ tax withholding and other liabilities, for a net value of $9,097. In addition, the Company granted 862,613 options for common stock, net of forfeitures, at a value of $9,863.
	•		301,298 units of limited partnership, valued at $13,953, were presented for redemption to the DownREIT partnerships that issued such units and were acquired by the Company in exchange for an equal number of shares of the Company’s common stock.
	•		The Company recorded a decrease to other liabilities and a corresponding gain to other comprehensive income of $1,185 to adjust the Company’s Hedging Derivatives to their fair value.
	•		Common and preferred dividends declared but not paid totaled $60,220.

AVALONBAY COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)

1. Organization and Significant Accounting Policies

Organization

AvalonBay Communities, Inc. (the “Company,” which term, unless the context otherwise requires, refers to AvalonBay Communities, Inc. together with its subsidiaries) is a Maryland corporation that has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986 (“the Code”), as amended. The Company focuses on the ownership and operation of apartment communities in high barrier-to-entry markets of the United States. These markets are located in the Northeast, Mid-Atlantic, Midwest, Pacific Northwest, and Northern and Southern California regions of the country. The Company is the surviving corporation from the merger (the “Merger”) of Bay Apartment Communities, Inc., and Avalon Properties, Inc. on June 4, 1998.

At June 30, 2007, the Company owned or held a direct or indirect ownership interest in 157 operating apartment communities containing 44,952 apartment homes in ten states and the District of Columbia, of which seven communities containing 2,188 apartment homes were under reconstruction. In addition, the Company owned or held a direct or indirect ownership interest in 19 communities under construction that are expected to contain an aggregate of 5,819 apartment homes when completed. The Company also owned or held a direct or indirect ownership interest in rights to develop an additional 53 communities that, if developed in the manner expected, will contain an estimated 14,108 apartment homes.

During the three months ended June 30, 2007:

	•		The Company completed the development of Avalon Shrewsbury, located in Shrewsbury, Massachusetts. Avalon Shrewsbury is a garden-style community containing 251 apartment homes and was completed for a total capitalized cost of $35,900.
	•		The Company commenced construction of four communities during the second quarter of 2007: Avalon White Plains, a high-rise community located in Westchester County, New York; Avalon at Tinton Falls, a garden-style community located in Central New Jersey; Avalon Fashion Valley, a mid-rise community located in San Diego, California and Avalon Anaheim, a mid-rise community located in Orange County, California. These four communities are expected to contain an aggregate of 1,021 apartment homes when completed for an estimated total capitalized cost of $363,100.
	•		The Company purchased a land parcel in San Francisco, California, for approximately $36,000 adjacent to its existing Avalon at Mission Bay North and Avalon at Mission Bay North II communities. The Company expects to begin construction of a 260 apartment home, high-rise community as the third phase of this community during the last three months of 2007.
	•		AvalonBay Value Added Fund, L.P. (the “Fund”), the private, discretionary investment vehicle in which the Company holds an equity interest of approximately 15%, acquired one community. The Fund also commenced redevelopment of Paseo Park, located in Fremont, California. Paseo Park is a garden-style community containing 134 homes. The projected total capitalized cost for redevelopment is $5,700, excluding costs incurred prior to redevelopment. See Note 6, “Investments in Real Estate Entities.”
	•		The Company issued $116,926 in mortgage notes, $100,000 of which is tax-exempt, secured by the assets of two communities.

The interim unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements required by GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited financial statements should be read in conjunction with the financial statements and notes included in the Form 10-K/A. The results of operations for the six months ended June 30, 2007 are not necessarily indicative of the operating results for the full year. Management believes the disclosures are adequate to ensure the information presented is not misleading. In the opinion of management, all adjustments and eliminations,

consisting only of normal, recurring adjustments necessary for a fair presentation of the financial statements for the interim periods, have been included.

Principles of Consolidation

The accompanying Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned partnerships, certain joint venture partnerships, subsidiary partnerships structured as DownREITs and any variable interest entities consolidated under FASB Interpretation No. 46 (“FIN 46(R)”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” as revised in December 2003. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company assesses consolidation of variable interest entities under the guidance of FIN 46(R). The Company accounts for joint venture entities and subsidiary partnerships, including those structured as DownREITs, that are not variable interest entities, in accordance with EITF Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights”, Statement of Position (“SOP”) 78-9, “Accounting for Investments in Real Estate Ventures”, Accounting Principles Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” and EITF Topic D-46, “Accounting for Limited Partnership Investments.” The Company uses EITF Issue No. 04-5 to evaluate the partnership of each joint venture entity and determine whether control over the partnership, as defined by the EITF, lies with the general partner, or the limited partners, when the limited partners have certain rights. The general partner in a limited partnership is presumed to control that limited partnership, unless that presumption is overcome by the limited partners having either: (i) the substantive ability, either by a single limited partner or through a simple majority vote, to dissolve the limited partnership or otherwise remove the general partner without cause; or (ii) substantive participating rights. If the Company is the general partner and has control over the partnership, or if the Company’s limited partnership ownership includes the ability to dissolve the partnership, or has substantive participating rights, as discussed above, the Company consolidates the investments. If the Company is not the general partner, or the Company’s partnership interest does not contain either of the above terms which overcome the presumption of control in a limited partnership residing with the general partner, the Company then looks to the guidance in SOP 78-9, APB 18 and EITF D-46 to determine the accounting framework to apply. The Company generally uses the equity method to account for these investments unless its ownership interest is so minor that it has virtually no influence over the partnership’s operating and financial policies. Investments in which the Company has little or no influence are accounted for using the cost method.

In each of the partnerships structured as DownREITs, either the Company or one of the Company’s wholly owned subsidiaries is the general partner, and there are one or more limited partners whose interest in the partnership is represented by units of limited partnership interest. For each DownREIT partnership, limited partners are entitled to receive an initial distribution before any distribution is made to the general partner. Although the partnership agreements for each of the DownREITs are different, generally the distributions per unit paid to the holders of units of limited partnership interests have approximated the Company’s current common stock dividend per share. The holders of units of limited partnership interests have the right to present all or some of their units for redemption for a cash amount as determined by the applicable partnership agreement and based on the fair value of the Company’s common stock. In lieu of cash redemption, the Company may elect to exchange such units for an equal number of shares of the Company’s common stock.

In conjunction with the acquisition and development of investments in unconsolidated entities, the Company may incur costs in excess of its equity in the underlying assets. These costs are capitalized and depreciated over the life of the underlying assets to the extent that the Company expects to recover the costs.

Revenue and Gain Recognition

Rental income related to leases is recognized on an accrual basis when due from residents in accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition,” and Statement of Financial Accounting Standards (“SFAS”) No. 13, “Accounting for Leases.” In accordance with the Company’s standard lease terms, rental payments are generally due on a monthly basis. Any cash concessions given at the inception of the lease are amortized over the approximate life of the lease, which is generally one year.

The Company accounts for sales of real estate assets and the related gain recognition in accordance with SFAS No. 66, “Accounting for Sales of Real Estate.”

Real Estate

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. Significant expenditures which improve or extend the life of an asset are capitalized. Expenditures for maintenance and repairs are charged to operations as incurred.

The Company’s policy with respect to capital expenditures is generally to capitalize only non-recurring expenditures. Improvements and upgrades are capitalized only if the item exceeds $15, extends the useful life of the asset and is not related to making an apartment home ready for the next resident. Purchases of personal property, such as computers and furniture, are capitalized only if the item is a new addition and exceeds $2.5. The Company generally expenses purchases of personal property made for replacement purposes.

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 the Company has determined that development of the future asset is probable and ends when the asset, or a portion of an asset, is delivered and is ready for its intended use. For redevelopment efforts, we capitalize costs beginning either (i) in advance of taking homes out of service when significant renovation of the common area has begun until the redevelopment is completed, or (ii) when an apartment home is taken out of service for redevelopment until the redevelopment is completed and the apartment home is available for a new resident. Rental income and operating costs incurred during the initial lease-up or post-redevelopment lease-up period are recognized as they accrue.

In accordance with SFAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects,” the Company capitalizes pre-development costs incurred in pursuit of new development opportunities for which the Company currently believes future development is probable (“Development Rights”). Future development of these Development Rights is dependent upon various factors, including zoning and regulatory approval, rental market conditions, construction costs and availability of capital. Pre-development costs incurred in the pursuit of Development Rights for which future development is not yet considered probable are expensed as incurred. In addition, if the status of a Development Right changes, making future development by the Company no longer probable, any capitalized pre-development costs are written-off with a charge to expense. The Company expensed costs related to abandoned pursuits, which includes the abandonment or impairment of Development Rights, acquisition pursuits and disposition pursuits, in the amounts of $1,287 and $1,043 for the three months ended June 30, 2007 and 2006, respectively, and $2,075 and $1,365 for the six months ended June 30, 2007 and 2006, respectively. These costs are included in operating expenses, excluding property taxes on the accompanying Condensed Consolidated Statements of Operations and Other Comprehensive Income. Abandoned pursuit costs can vary greatly, and the costs incurred in any given period may be significantly different in future years.

The Company owns land improved with office buildings and industrial space occupied by unrelated third parties in connection with five Development Rights. The Company intends to manage the current improvements until such time as all tenant obligations have been satisfied or eliminated through negotiation, and construction of new apartment communities is ready to begin. As provided under the guidance of SFAS No. 67, the revenue from incidental operations received from the current improvements in excess of any incremental costs are being recorded as a reduction of total capitalized costs of the Development Right and not as part of net income.

In connection with the acquisition of an operating community, the Company performs a valuation, allocating to each asset and liability acquired in such transaction, their estimated fair values at the date of acquisition in accordance with SFAS No. 141, “Business Combinations.” The purchase price allocations to tangible assets, such as land, buildings and improvements, and furniture, fixtures and equipment, are reflected in real estate assets and depreciated over their estimated useful lives. Any purchase price allocation to intangible assets, such as in-place leases, is included in prepaid expenses and other assets on the accompanying Condensed Consolidated Balance Sheets and amortized over the average remaining lease term of the acquired leases. The fair value of acquired in-place leases is determined based on the estimated cost to replace such leases, including foregone rents during an assumed re-lease period, as well as the impact on projected cash flow of acquired leases with leased rents above or below current market rents.

Depreciation is calculated on buildings and improvements using the straight-line method over their estimated useful lives, which range from seven to thirty years. Furniture, fixtures and equipment are generally depreciated using the straight-line method over their estimated useful lives, which range from three years (primarily computer-related equipment) to seven years.

It is the Company’s policy to perform a quarterly qualitative analysis to determine if there are changes in circumstances that suggest the carrying value of a long-lived asset may not be recoverable. If there is an event or change in circumstance that indicates an impairment in the value of an operating community, the Company compares the current and projected operating cash flow of the community over its remaining useful life, on an undiscounted basis, to the carrying amount of the community. If the carrying amount is in excess of the estimated projected operating cash flow of the community, the Company would recognize an impairment loss equivalent to an amount required to adjust the carrying amount to its estimated fair market value. The Company did not recognize an impairment loss on any of its operating communities during the three and six months ended June 30, 2007 or 2006.

Deferred Financing Costs

Deferred financing costs include fees and other expenditures necessary to obtain debt financing and are amortized on a straight-line basis, which approximates the effective interest method, over the shorter of the term of the loan or the related credit enhancement facility, if applicable. Unamortized financing costs are written-off when debt is retired before the maturity date. Accumulated amortization of deferred financing costs was $18,395 at June 30, 2007 and was $16,179 at December 31, 2006.

Cash, Cash Equivalents and Cash in Escrow

Cash and cash equivalents include all cash and liquid investments with an original maturity of three months or less from the date acquired. Cash in escrow consists primarily of construction financing proceeds that is restricted for use in the construction of a specific community. The majority of the Company’s cash, cash equivalents and cash in escrows are held at major commercial banks.

Interest Rate Contracts

The Company utilizes derivative financial instruments to manage interest rate risk and generally designates these financial instruments as cash flow hedges under the guidance of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. This statement requires that derivatives be recorded on the balance sheet as either an asset or liability measured at its fair value, with changes in fair value recognized currently in earnings unless specific hedge accounting criteria are met. For cash flow hedge relationships, changes in the fair value of the derivative instrument that are deemed effective at offsetting the risk being hedged are reported in other comprehensive income. For cash flow hedges where the cumulative changes in the fair value of the derivative exceed the cumulative changes in fair value of the hedged item, the ineffective portion is recognized in current period earnings. As of June 30, 2007 and December 31, 2006, the Company had approximately $237,169 and $229,159, respectively, in variable rate debt subject to cash flow hedges. As of June 30, 2007, the Company elected to not apply hedge accounting for an additional $38,970 in variable rate debt which is subject to interest rate caps. See Note 5, “Derivative Instruments and Hedging Activities,” for further discussion of derivative financial instruments.

Comprehensive Income

Comprehensive income, as reflected on the Condensed Consolidated Statements of Operations and Other Comprehensive Income, is defined as all changes in equity during each period except for those resulting from investments by or distributions to shareholders. Accumulated other comprehensive loss as reflected in Note 4, “Stockholders’ Equity,” reflects the effective portion of the cumulative changes in the fair value of derivatives in qualifying cash flow hedge relationships.

Earnings per Common Share

In accordance with the provisions of SFAS No. 128, “Earnings per Share,” basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating

earnings per share on a diluted basis. The Company’s earnings per common share are determined as follows:

		For the three months ended								For the six months ended
		6-30-07				6-30-06				6-30-07				6-30-06
						(restated)								(restated)
Basic and diluted shares outstanding
Weighted average common shares — basic			79,428,056				74,100,800				78,932,715				73,950,147
Weighted average DownREIT units outstanding			126,392				152,221				135,439				194,662
Effect of dilutive securities			1,093,066				1,108,890				1,214,989				1,141,137
Weighted average common shares — diluted			80,647,514				75,361,911				80,283,143				75,285,946
Calculation of Earnings per Share — basic
Net income available to common stockholders		$	48,877			$	64,831			$	93,221			$	173,770
Weighted average common shares — basic			79,428,056				74,100,800				78,932,715				73,950,147
Earnings per common share — basic		$	0.62			$	0.87			$	1.18			$	2.35
Calculation of Earnings per Share — diluted
Net income available to common stockholders		$	48,877			$	64,831			$	93,221			$	173,770
Add: Minority interest of DownREIT unitholders in consolidated partnerships, including discontinued operations			84				99				172				198
Adjusted net income available to common stockholders		$	48,961			$	64,930			$	93,393			$	173,968
Weighted average common shares — diluted			80,647,514				75,361,911				80,283,143				75,285,946
Earnings per common share — diluted		$	0.61			$	0.86			$	1.16			$	2.31

Certain options to purchase shares of common stock in the amounts of 338,749 and 862,613 were outstanding at June 30, 2007 and 2006, respectively, but were not included in the computation of diluted earnings per share because in applying the treasury stock method under the provisions of SFAS No.123(R), “Share Based Payment” (“SFAS 123(R)”), such options are anti-dilutive.

Legal and Other Contingencies

The Company is currently involved in litigation alleging that 100 communities owned by the Company, at the time of the suit, violate the accessibility requirements of the Fair Housing Act and the Americans with Disabilities Act. The lawsuit, Equal Rights Center v. AvalonBay Communities, Inc, was filed on September 23, 2005 in the federal district court in Maryland. The plaintiff seeks compensatory and punitive damages in unspecified amounts as well as injunctive relief (such as modification of existing assets), an award of attorneys’ fees, expenses and costs of suit. The Company has filed a motion to dismiss all or parts of the suit, which has not been ruled on yet by the court. We cannot predict or determine the outcome of this lawsuit, nor is it reasonably possible to estimate the amount of loss, if any, that would be associated with an adverse decision.

During 2006, the Company determined that contaminated soil from imported fill was delivered to its Avalon Lyndhurst development site by third parties. The contaminants exceeded allowable levels for residential use under New Jersey state and local regulations. The remediation effort is complete. The net cost associated with this remediation effort, after considering insurance proceeds received to date and including costs associated with construction delays necessary to complete construction and commence operations, is approximately $6,000. The Company is pursuing the recovery of these additional net costs from the third parties involved, but no assurance can be given as to the amount or timing of additional reimbursements to the Company. The Company is recording these incremental costs as they are incurred, and potential recoveries as they become certain or are received. Although the net costs to complete construction of this community exceeded the original construction budget, the Company has determined that there is not an impairment in value of this asset which would require a write down in the carrying value. The Company will continue to review this assessment based on changes in circumstances or market conditions.

In addition, the Company is subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are frequently covered by insurance. If it has been determined that a loss is probable to occur, the

estimated amount of the loss is expensed in the financial statements. While the resolution of these matters cannot be predicted with certainty, management currently 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.

Assets Held for Sale & Discontinued Operations

The Company follows SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) which requires that the assets and liabilities of any communities which have been sold, or otherwise qualify as held for sale, be presented separately in the Condensed Consolidated Balance Sheets. In addition, the results of operations for those assets that meet the definition of discontinued operations are presented as such in the Company’s Condensed Consolidated Statements of Operations and Other Comprehensive Income. Held for sale and discontinued operations classifications are provided in both the current and prior periods presented. Real estate assets held for sale are measured at the lower of the carrying amount or the fair value less the cost to sell. Both the real estate assets and corresponding liabilities are presented separately in the accompanying Condensed Consolidated Balance Sheets. Subsequent to classification of a community as held for sale, no further depreciation is recorded. For those assets qualifying for classification as discontinued operations, the community specific components of net income presented as discontinued operations include net operating income, minority interest expense, depreciation expense and interest expense, net. For periods prior to the asset qualifying for discontinued operations under SFAS 144, the Company reclassified the results of operations to discontinued operations in accordance with SFAS 144. Subsequent to the reclassification to discontinued operations, the impact of assets classified as discontinued operations on the statements of operations and other comprehensive income will include depreciation. In addition, the net gain or loss (including any impairment loss) on the eventual disposal of communities held for sale will be presented as discontinued operations when recognized. A change in presentation for held for sale or discontinued operations will not have any impact on the Company’s financial condition or results of operations. The Company combines the operating, investing and financing portions of cash flows attributable to discontinued operations with the respective cash flows from continuing operations on the accompanying Condensed Consolidated Statements of Cash Flows.

Use of Estimates

The preparation of financial statements in conformity with U.S. 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 periods’ financial statements to conform to current year presentations.

Recently Issued Accounting Standards

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109,” (“FIN 48”), on January 1, 2007. The Company did not have any unrecognized tax benefits and there was no material effect on either the financial condition or results of operations of the Company as a result of implementing FIN 48. We do not believe that there will be any material changes in our unrecognized tax positions over the next 12 months. The Company is subject to examination by the respective taxing authorities for the tax years 2003 through 2005.

2. Interest Capitalized

The Company capitalizes interest during the development and redevelopment of real estate assets in accordance with SFAS No. 34, “Capitalization of Interest Cost.” Capitalized interest associated with communities under development or redevelopment totaled $18,393 and $11,205 for the three months ended June 30, 2007 and June 30, 2006, respectively, and $33,826 and $19,569 for the six months ended June 30, 2007 and June 30, 2006, respectively.

3. Notes Payable, Unsecured Notes and Credit Facility

The Company’s mortgage notes payable, unsecured notes and variable rate unsecured credit facility as of June 30, 2007 and December 31, 2006 are summarized below. The following amounts and discussion do not include the construction loan payable or mortgage notes related to three communities classified as held for sale as of June 30, 2007 (see Note 7, “Real Estate Disposition Activities”).

		6-30-07				12-31-06
Fixed rate unsecured notes (1)		$	2,153,289			$	2,153,078
Fixed rate mortgage notes payable — conventional and tax-exempt			207,909				210,114
Variable rate mortgage notes payable — conventional and tax-exempt			553,478				438,236
Total notes payable and unsecured notes			2,914,676				2,801,428
Variable rate unsecured credit facility			—				—
Total mortgage notes payable, unsecured notes and unsecured credit facility		$	2,914,676			$	2,801,428

During the six months ended June 30, 2007, the Company repaid an outstanding mortgage note in the amount of $15,980, secured by the operating assets of a community. In addition, the Company issued a mortgage note for approximately $16,926 secured by the operating assets of a community, and a mortgage note for $100,000 for a development community.

In the aggregate, secured notes payable mature at various dates from October 2008 through April 2043 and are secured by certain apartment communities and improved land parcels (with a net carrying value of $840,928 as of June 30, 2007). As of June 30, 2007, the Company has guaranteed approximately $67,000 of mortgage notes payable held by wholly owned subsidiaries; all such mortgage notes payable are consolidated for financial reporting purposes. The weighted average interest rate of the Company’s fixed rate mortgage notes payable (conventional and tax-exempt) was 6.7 % and 6.8% at June 30, 2007 and December 31, 2006, respectively The weighted average interest rate of the Company’s variable rate mortgage notes payable and its unsecured credit facility (as discussed on the following page), including the effect of certain financing related fees, was 4.9% at June 30, 2007 and 5.8% at December 31, 2006.

Scheduled payments and maturities of mortgage notes payable and unsecured notes outstanding at June 30, 2007 are as follows:

														Stated
										Unsecured				interest rate
		Secured notes				Secured notes				notes				of unsecured
Year		payments				maturities				maturities				notes
2007		$	4,846			$	—			$	110,000				6.875	%
											150,000				5.000	%
2008			8,540				4,368				50,000				6.625	%
											146,000				8.250	%
2009			7,635				73,793				150,000				7.500	%
2010			6,279				28,989				200,000				7.500	%
2011			4,813				50,524				300,000				6.625	%
											50,000				6.625	%
2012			4,093				12,166				250,000				6.125	%
											250,000				5.500	%
2013			4,204				—				100,000				4.950	%
2014			2,777				34,882				150,000				5.375	%
2015			4,944				—				—				—
2016			5,358				—				250,000				5.750	%
Thereafter			225,937				277,239				—				—
		$	279,426			$	481,961			$	2,156,000

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.

The Company has a $650,000 revolving variable rate unsecured credit facility with a syndicate of commercial banks. There were no amounts outstanding under the current facility and $38,848 outstanding in letters of credit on June 30, 2007. The Company did not have any amounts outstanding under the current credit facility and $38,713 outstanding in letters of credit on December 31, 2006. Under the terms of the credit facility, the Company may elect to increase the facility up to $1,000,000, provided that one or more banks (from the syndicate or otherwise) voluntarily agree to provide the additional commitment. No member of the syndicate of banks can prohibit such increase; such an increase in the facility will only be effective to the extent banks (from the syndicate or otherwise) choose to commit to lend additional funds. The Company pays participating banks, in the aggregate, an annual facility fee of approximately $813, which is subject to increase in the event that the amount available on the facility is increased. The unsecured credit facility bears interest at varying levels based on the London Interbank Offered Rate (“LIBOR”), rating levels achieved on the Company’s unsecured notes and on a maturity schedule selected by the Company. The current stated pricing is LIBOR plus 0.40% per annum. The stated spread over LIBOR can vary from LIBOR plus 0.325% to LIBOR plus 1.00% based on the Company’s credit rating. In addition, the unsecured credit facility includes a competitive bid option, which allows banks that are part of the lender consortium to bid to make loans to the Company at a rate that is lower than the stated rate provided by the unsecured credit facility for up to $422,500. The competitive bid option may result in lower pricing than the stated rate if market conditions allow. The Company had no amounts outstanding under this competitive bid option as of June 30, 2007. The Company is in compliance with certain customary covenants under the unsecured credit facility, including, but not limited to, maintaining certain maximum leverage ratios, a minimum fixed charges coverage ratio and minimum unencumbered

assets and equity levels. The credit facility matures in November 2011, assuming exercise of a one-year renewal option by the Company.

4. Stockholders’ Equity

The following summarizes the changes in stockholders’ equity for the six months ended June 30, 2007:

														Accumulated				Accumulated
										Additional				earnings				other
		Preferred				Common				paid-in				less				comprehensive				Stockholders’
		stock				stock				capital				dividends				loss				equity
Balance at December 31, 2006		$	40			$	747			$	2,482,516			$	93,430			$	(3,579	)		$	2,573,154
Net income			—				—				—				97,571				—				97,571
Unrealized gain on cash flow hedges			—				—				—				—				910				910
Change in redemption value of minority interest			—				—				—				(6,124	)			—				(6,124	)
Dividends declared to common and preferred stockholders			—				—				—				(139,818	)			—				(139,818	)
Issuance of common stock, net of withholdings			—				50				615,406				(1,740	)			—				613,716
Amortization of deferred compensation			—				—				10,383				—				—				10,383
Balance at June 30, 2007		$	40			$	797			$	3,108,305			$	43,319			$	(2,669	)		$	3,149,792

During the six months ended June 30, 2007, the Company:

	(i)		Issued 4,600,000 shares of common stock in connection with an equity offering;
	(ii)		issued 417,761 shares of common stock in connection with stock options exercised;
	(iii)		issued 19,231 shares of common stock to acquire an equal number of DownREIT limited partnership units;
	(iv)		issued 1,179 shares through the Company’s dividend reinvestment plan;
	(v)		issued 72,296 common shares in connection with stock grants;
	(vi)		had 4,007 shares of restricted stock forfeited; and
	(vii)		withheld 40,539 shares to satisfy employees’ tax withholding and other liabilities.

In addition, the Company granted 342,429 options for common stock to employees. As required under SFAS 123(R), any deferred compensation related to the Company’s stock option and restricted stock grants during the six months ended June 30, 2007 is not reflected on the Company’s Condensed Consolidated Balance Sheet as of June 30, 2007 or above, and will not be reflected until earned as compensation cost.

Dividends per common share were $1.70 for the six months ended June 30, 2007 and $1.56 for the six months ended June 30, 2006. The average dividend for all non-redeemed preferred shares for the six months ended June 30, 2007 and 2006 was $1.09 per share.

In 2004, the Company resumed its Dividend Reinvestment and Stock Purchase Plan (the “DRIP”). The DRIP allows for holders of the Company’s common stock or preferred stock to purchase shares of common stock through either reinvested dividends or optional cash payments. The purchase price per share for newly issued shares of common stock under the DRIP will be equal to the last reported sale price for a share of the Company’s common stock as reported by the New York Stock Exchange (“NYSE”) on the applicable investment date.

5. Derivative Instruments and Hedging Activities

The Company enters into interest rate swap and interest rate cap agreements (collectively, the “Hedging Derivatives”) to reduce the impact of interest rate fluctuations on its variable rate, tax-exempt bonds and its variable rate conventional secured debt (collectively, the “Hedged Debt”). The Company has not entered into any interest rate hedge agreements for its conventional unsecured debt and does not enter into derivative transactions for trading or other speculative purposes. The following table summarizes the consolidated Hedging Derivatives at June 30, 2007 (dollars in thousands):

		Interest				Interest
		Rate Caps				Rate Swaps
Notional balance		$	218,713			$	64,928
Weighted average interest rate (1)			5.5	%			6.3	%
Weighted average capped interest rate			7.6	%			n/a
Earliest maturity date		Sep-07				Aug-07
Latest maturity date		Mar-14				Jun-10
Estimated derivative fair value		$	279			$	(2,189	)

At June 30, 2007, the Company had 11 derivatives designated as cash flow hedges and two derivatives not designated as hedges. For the derivative positions that the Company has determined qualify as effective cash flow hedges under SFAS No. 133, the Company has recorded the effective portion of cumulative changes in the fair value of the Hedging Derivatives in other comprehensive income. Amounts recorded in other comprehensive income will be reclassified into earnings in the periods in which earnings are affected by the hedged cash flow. To adjust the Hedging Derivatives to their fair value, the Company recorded unrealized gains in other comprehensive income of $910 and $1,185 during the six months ended June 30, 2007 and 2006, respectively. These amounts will be reclassified into earnings in conjunction with the periodic adjustment of the floating rates on the Hedged Debt, in interest expense, net. The amount reclassified into earnings for the six months ended June 30, 2007, as well as the estimated amount included in accumulated other comprehensive income as of June 30, 2007, expected to be reclassified into earnings within the next twelve months to offset the variability of cash flows of the hedged items during this period are not material.

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

Derivative financial instruments expose the Company to credit risk in the event of nonperformance by the counterparties under the terms of the Hedging Derivatives. The Company minimizes its credit risk on these transactions by dealing with major, creditworthy financial institutions which have an A+ or better credit rating by the Standard & Poor’s Ratings Group. As part of its on-going control procedures, the Company monitors the credit ratings of counterparties and the exposure of the Company to any single entity, thus minimizing credit risk concentration. The Company believes the likelihood of realizing losses from counterparty non-performance is remote.

6. Investments in Real Estate Entities

Investments in Unconsolidated Real Estate Entities

The Company accounts for its investments in unconsolidated real estate entities that are not considered variable interest entities under FIN 46(R) in accordance with EITF Issue No. 04-5. As of June 30, 2007, the Company’s investments in unconsolidated real estate entities accounted for under the equity method of accounting consisted of:

	•		a 50% limited liability company membership interest (with a right to 50% of distributions after achievement of a threshold return) in the limited liability company that owns the Avalon Grove community;
	•		a 20% limited liability company membership interest (with a right to 50% of distributions after achievement of a threshold return) in the limited liability company that owns the Avalon Chrystie Place I community;
	•		a 25% limited liability company membership interest (with a right to 45% of distributions after achievement of a threshold return) in the limited liability company that developed and owns the Avalon at Mission Bay North II community; and
	•		a 15.2% combined general partner and indirect limited partner equity interest in the Fund, which owns the following 16 communities: Avalon at Redondo Beach, Avalon Lakeside, Avalon Columbia, Avalon Redmond, Avalon Sunset, Avalon at Poplar Creek, Civic Center Place, Paseo Park, Avalon at Yerba Buena, Avalon at Aberdeen Station, The Springs, The Covington, Cedar Valley, Avalon Crystal Hill, Middlesex Crossing, and Avalon Centerpoint. In addition, during the three months ended June 30, 2007, the Fund acquired Skyway Terrace, located in San Jose, California. Skyway Terrace contains a total of 348 apartment homes and was acquired for a purchase price of $74,000.

In addition, as part of the formation of the Fund, the Company provided a guarantee to one of the limited partners. The guarantee provides that, if, upon final liquidation of the Fund, the total amount of all distributions to that partner during the life of the Fund (whether from operating cash flow or property sales) does not equal the total capital contributions made by that partner, then the Company will pay the partner an amount equal to the shortfall, but in no event more than 10% of the total capital contributions made by the partner (maximum of approximately $3,400 as of June 30, 2007). As of June 30, 2007, the fair value of the real estate assets owned by the Fund is considered adequate to cover such potential payment under a liquidation scenario. The estimated fair value of and the Company’s obligation under this guarantee, both at inception and as of June 30, 2007 was not significant and therefore the Company has not recorded any obligation for this guarantee as of June 30, 2007.

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

		6-30-07				12-31-06
		(unaudited)				(unaudited)
Assets:
Real estate, net		$	950,176			$	724,795
Other assets			36,864				55,716
Total assets		$	987,040			$	780,511
Liabilities and partners’ equity:
Mortgage notes payable and credit facility		$	748,338			$	510,784
Other liabilities			36,383				51,108
Partners’ equity			202,319				218,619
Total liabilities and partners’ equity		$	987,040			$	780,511

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

		For the three months ended								For the six months ended
		(unaudited)								(unaudited)
		6-30-07				6-30-06				6-30-07				6-30-06
Rental income		$	22,803			$	15,463			$	42,017			$	29,968
Operating and other expenses			(9,922	)			(6,984	)			(18,697	)			(13,732	)
Interest expense, net			(10,152	)			(5,158	)			(18,761	)			(10,071	)
Depreciation expense			(6,318	)			(3,999	)			(12,194	)			(7,757	)
Net income		$	(3,589	)		$	(678	)		$	(7,635	)		$	(1,592	)

Investments in Consolidated Real Estate Entities

The Company is subject to the following arrangements related to entities that are not accounted for under the equity method of accounting.

	•		The Company holds a 30% limited liability company membership interest in a limited liability company that owns the Avalon Del Rey community. In conjunction with the construction management services that the Company provided to Avalon Del Rey, the Company provided a construction completion guarantee to the construction loan lender in order to fulfill their standard financing requirements related to construction financing. The obligation of the Company under this guarantee will terminate following satisfaction of the lender’s standard completion requirements, which the Company expects to occur in 2007.
			The Company provided an operating guarantee to the third-party investor in the limited liability company that owns Avalon Del Rey. This guarantee, which extends until December 2007, provides that if the one-year return for the initial year of the joint venture partner’s investment is less than a threshold return of 7% on its initial equity investment, then the Company will pay the joint venture partner an amount equal to the shortfall, up to the 7% threshold return required. As of June 30, 2007, the cash flows and return on investment for Avalon Del Rey are expected to meet and exceed the initial year threshold return required by our joint venture partner. As a result, the Company’s obligation under this guarantee and its related fair value is insignificant, and the Company has therefore not recorded any liability associated with this guarantee as of June 30, 2007.
			The sale of the 70% ownership interest in 2006 is being accounted for under the deposit method of accounting pursuant to SFAS No. 66, with the recognition of the sale deferred until the Company is relieved of its obligation under the operating guarantee. Accordingly, the Company continues to consolidate this community for financial reporting purposes, reporting the joint venture partner’s interest in the net assets of

			the limited liability company as a component of accrued expenses and other liabilities, and recognizing the joint venture partner’s interest in the operating results of the limited liability company as a component of minority interest in consolidated partnerships.
	•		The Company holds an option to make a capital contribution to an entity in connection with the pursuit of a Development Right in Pleasant Hill, California. The Company currently does not have any equity or economic interest in this entity. However, due to the nature of the Company’s option to make a capital contribution, this entity is considered a variable interest entity under FIN 46(R), where the Company is the primary beneficiary. This entity does not have any operations and has minimal assets and equity, and is therefore not considered a significant variable interest entity.
	•		During the three months ended June 30, 2007, the Company entered into a low-income housing tax credit syndication arrangement related to Avalon at Bowery Place I, a 206 apartment-home community that completed construction at the end of 2006. Under a long-term master lease agreement, the Company is long-term leasing the homes at Avalon at Bowery Place I that have been designated as low-income housing (approximately 20% of the total homes) to a limited liability company in which the Company is the 0.01% managing member. The remaining 99.99% operating income and loss interests in the limited liability company are held by an unrelated third-party. Due to the nature of this arrangement, the limited liability company leasing the low-income homes is considered a variable interest entity under FIN 46(R), where the Company is the primary beneficiary. Therefore, the assets, liabilities and operations of this limited liability company have been consolidated with those of the Company in the accompanying Condensed Consolidated Financial Statements.

7. Real Estate Disposition Activities

During the six months ended June 30, 2007, the Company did not sell any communities. During the six months ended June 30, 2006, the Company sold three communities, Avalon Estates, located in the Boston, Massachusetts area, Avalon Cupertino, located in San Jose, California and Avalon Corners, located in Stamford, Connecticut. These three communities, which contained a total of 668 apartment homes, were sold for an aggregate sales price of $182,750. The sale of these three communities resulted in a gain as reported in accordance with GAAP of approximately $97,411.

As of June 30, 2007, the Company had two communities that qualified as held for sale and discontinued operations under the provisions of SFAS No. 144. In addition, Avalon Del Rey, which is accounted for under the deposit method due to the operating guarantee provided to its 70% joint venture partner (see Note 6, “Investments in Real Estate Entities”) also qualifies as held for sale as of June 30, 2007. However, due to the Company’s continuing involvement through its 30% ownership interest and its role as the managing member of the venture, Avalon Del Rey has been and will continue to be reported as a component of continuing operations in the accompanying Condensed Consolidated Financial Statements.

In accordance with the requirements of SFAS No. 144, the operations for any communities sold from January 1, 2006 through June 30, 2007 and the communities that qualify as discontinued operations as of June 30, 2007 have been presented as discontinued operations in the accompanying Condensed Consolidated Financial Statements. Accordingly, certain reclassifications have been made in prior periods to reflect discontinued operations consistent with current period presentation.

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

		For the three months ended								For the six months ended
		6-30-07				6-30-06				6-30-07				6-30-06
Rental income		$	1,604			$	1,749			$	3,145			$	4,908
Operating and other expenses			(730	)			(837	)			(1,452	)			(2,131	)
Interest expense, net			(158	)			(480	)			(539	)			(947	)
Depreciation expense			(177	)			(261	)			(443	)			(520	)
Income from discontinued operations		$	539			$	171			$	711			$	1,310

The Company’s Condensed Consolidated Balance Sheets include other assets (excluding net real estate) of $2,508 and $3,558 as of June 30, 2007 and December 31, 2006, respectively, and other liabilities of $51,607 as of June 30, 2007 and $67,772 as of December 31, 2006, relating to real estate assets sold or classified as held for sale.

During the six months ended June 30, 2007, the Company sold one parcel of land through a taxable REIT subsidiary, located in the Mid Atlantic, for a sales price of $5,800, resulting in a GAAP gain of $545.

8. Segment Reporting

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

	•		Established Communities (also known as Same Store Communities) are communities where a comparison of operating results from the prior year to the current year is meaningful, as these communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior year. For the year 2007, the Established Communities are communities that are consolidated for financial reporting purposes, had stabilized occupancy and operating expenses as of January 1, 2006, are not conducting or planning to conduct substantial redevelopment activities and are not held for sale or planned for disposition within the current year. A community is considered to have stabilized occupancy at the earlier of (i) attainment of 95% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment.
	•		Other Stabilized Communities includes all other completed communities that have stabilized occupancy, as defined above. Other Stabilized Communities do not include communities that are conducting or planning to conduct substantial redevelopment activities within the current year.
	•		Development/Redevelopment Communities consists of communities that are under construction and have not received a final certificate of occupancy, communities where substantial redevelopment is in progress or is planned to begin during the current year and communities under lease-up, that had not reached stabilized occupancy, as defined above, as of January 1, 2007.

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

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” requires that segment disclosures present the measure(s) used by the chief operating decision maker for purposes of assessing such segments’ performance. The Company’s chief operating decision maker is comprised of several members of its executive management team who use net operating income (“NOI”) as the primary financial measure for Established Communities and Other Stabilized Communities. NOI is defined by the Company as total revenue less direct property operating expenses. Although the Company considers NOI a useful measure of a community’s or communities’ operating performance, NOI should not be considered an alternative to net income or net cash flow from operating activities, as determined in accordance with GAAP. NOI excludes a number of income and expense categories as detailed in the reconciliation of NOI to net income.

A reconciliation of NOI to net income for the three and six months ended June 30, 2007 and 2006 is as follows:

		For the three months ended								For the six months ended
		6-30-07				6-30-06				6-30-07				6-30-06
						restated								restated
Net income		$	51,052			$	67,006			$	97,571			$	178,120
Indirect operating expenses, net of corporate income			7,220				6,911				14,214				14,338
Investments and investment management			2,483				2,398				4,508				3,869
Interest expense, net			22,662				26,115				46,159				54,311
General and administrative expense			6,642				6,479				13,422				12,762
Equity in loss (income) of unconsolidated entities			196				(207	)			283				(434	)
Minority interest in consolidated partnerships			457				128				906				260
Depreciation expense			44,195				41,285				88,023				81,251
Gain on sale of land			—				—				(545	)			(13,166	)
Gain on sale of communities			—				(31,992	)			—				(97,411	)
Income from discontinued operations			(539	)			(171	)			(711	)			(1,310	)
Net operating income		$	134,368			$	117,952			$	263,830			$	232,590

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

The table below provides details of the Company’s segment information as of the dates specified. The segments are classified based on the individual community’s status as of the beginning of the given calendar year. Therefore, each year the composition of communities within each business segment is adjusted. Accordingly, the amounts between years are not directly comparable. The accounting policies applicable to the operating segments described above are the same as those described in Note 1, “Organization and Significant Accounting Policies.” Segment information for the three and six months ended June 30, 2007 and 2006 has been adjusted for the communities that were sold from January 1, 2006 through June 30, 2007, or otherwise qualify as discontinued operations as of June 30, 2007, as described in Note 7, “Real Estate Disposition Activities.”

		For the three months ended																For the six months ended
		Total								% NOI change				Gross				Total								% NOI change				Gross
		revenue				NOI				from prior year				real estate(1)				revenue				NOI				from prior year				real estate (1)
For the period ended June 30, 2007
Established
Northeast		$	69,258			$	46,875				4.4	%		$	1,818,173			$	137,167			$	92,278				5.1	%		$	1,818,173
Mid-Atlantic			28,470				17,663				8.8	%			688,373				56,435				35,296				8.1	%			688,373
Midwest			3,015				1,910				7.4	%			92,408				6,010				3,678				6.8	%			92,408
Pacific Northwest			8,274				5,868				21.7	%			289,683				16,367				11,347				19.4	%			289,683
Northern California			39,595				28,642				13.3	%			1,386,947				78,475				56,934				13.0	%			1,386,947
Southern California			13,999				10,135				7.4	%			349,260				27,822				20,203				7.7	%			349,260
Total Established			162,611				111,093				8.4	%			4,624,844				322,276				219,736				8.5	%			4,624,844
Other Stabilized			14,162				9,351				n/a				397,595				27,749				18,247				n/a				397,595
Development / Redevelopment			23,675				13,924				n/a				1,667,526				44,144				25,847				n/a				1,667,526
Land Held for Future Development			n/a				n/a				n/a				352,616				n/a				n/a				n/a				352,616
Non-allocated (2)			1,488				n/a				n/a				45,022				2,932				n/a				n/a				45,022
Total		$	201,936			$	134,368				13.9	%		$	7,087,603			$	397,101			$	263,830				13.4	%		$	7,087,603
For the period ended June 30, 2006 (restated)
Established
Northeast		$	49,304			$	33,437				5.9	%		$	1,230,595			$	97,471			$	65,724				5.1	%		$	1,230,595
Mid-Atlantic			26,201				15,990				10.3	%			621,538				51,799				31,939				11.3	%			621,538
Midwest			2,832				1,778				(1.1	%)			92,069				5,567				3,444				(0.9	%)			92,069
Pacific Northwest			8,125				5,338				10.9	%			315,534				16,000				10,506				9.3	%			315,534
Northern California			36,161				25,167				8.8	%			1,374,113				71,720				50,161				9.1	%			1,374,113
Southern California			14,233				10,225				10.5	%			372,197				28,258				20,310				10.1	%			372,197
Total Established			136,856				91,935				8.2	%			4,006,046				270,815				182,084				8.0	%			4,006,046
Other Stabilized			24,419				15,486				n/a				827,326				48,055				30,764				n/a				827,326
Development / Redevelopment			16,413				10,531				n/a				905,647				31,241				19,742				n/a				905,647
Land Held for Future Development			n/a				n/a				n/a				208,810				n/a				n/a				n/a				208,810
Non-allocated (2)			1,395				n/a				n/a				31,860				2,601				n/a				n/a				31,860
Total		$	179,083			$	117,952				9.8	%		$	5,979,689			$	352,712			$	232,590				9.7	%		$	5,979,689

9. Stock-Based Compensation Plans

The Company has a stock incentive plan (the “1994 Plan”), which was amended and restated on December 8, 2004, and amended on February 9, 2006 and December 6, 2006. Individuals who are eligible to participate in the 1994 Plan include officers, other associates, outside directors and other key persons of the Company and its subsidiaries who are responsible for or contribute to the management, growth or profitability of the Company and its subsidiaries. The 1994 Plan authorizes (i) the grant of stock options that qualify as incentive stock options (“ISOs”) 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.

Shares of common stock of 2,143,789 and 1,791,861 were available for future option or restricted stock grant awards under the 1994 Plan as of June 30, 2007 and December 31, 2006, respectively. Annually on January 1^st, the maximum number available for issuance under the 1994 Plan is increased by between 0.48% and 1.00% of the total number of shares of common stock and DownREIT units actually outstanding on such date. Notwithstanding the foregoing, the maximum number of shares of stock for which ISOs may be issued under the 1994 Plan shall not exceed 2,500,000 and no awards shall be granted under the 1994 Plan after May 11, 2011. Options and restricted stock granted under the 1994 Plan vest and expire over varying periods, as determined by the Compensation Committee of the Board of Directors.

Information with respect to stock options granted under the 1994 Plan, the Avalon 1995 Incentive Plan and the Avalon 1993 Plan is as follows:

										Avalon 1995
						Weighted				Incentive Plan				Weighted
						average				and Avalon				average
		1994 Plan				exercise price				1993 Plan				exercise price
		shares				per share				shares				per share
Options Outstanding, December 31, 2006			2,487,239			$	69.65				4,240			$	36.81
Exercised			(414,673	)			57.35				(3,088	)			36.76
Granted			342,429				147.53				—				—
Forfeited			(19,991	)			110.79				—				—
Options Outstanding, June 30, 2007			2,395,004			$	82.57				1,152			$	36.96
Options Exercisable:
June 30, 2007			1,282,613			$	60.28				1,152			$	36.96

The weighted average fair value of the options granted during the six months ended June 30, 2007 is estimated at $21.84 per share on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield of 4.0% over the expected life of the option, volatility of 17.31%, risk-free interest rates of 4.73% and an expected life of approximately seven years.

The Company issued restricted stock as part of its stock-based compensation plan during the six months ended June 30, 2007. Compensation cost is recognized over the requisite service period, which varies, but does not exceed five years. The fair value of restricted stock is the closing stock price on the date of the grant. Provisions of SFAS 123(R) require the Company to recognize compensation cost taking into consideration retirement eligibility. The cost related to stock-based compensation for restricted stock included in the determination of net income is based on actual forfeitures for the given year. Restricted stock awards typically vest over a five-year period with the exception of accelerated vesting provisions. Restricted stock vesting during the six months ended June 30, 2007 had fair values ranging from $36.66 to $147.75 per share. The total fair value of shares vested was $8,444 for the six months ended June 30, 2007.

Total compensation cost recognized in income relating to deferred compensation was $7,799 and $6,268 for the six months ended June 30, 2007 and 2006, respectively, and total capitalized compensation cost relating to deferred compensation was $2,584 and $1,933 for the six months ended June 30, 2007 and 2006, respectively. At June 30,

2007, there was a total of $12,259 and $14,881 in unrecognized compensation cost for unvested stock options and unvested restricted stock, respectively. The unrecognized compensation cost for stock options does not take into account estimated forfeitures. The unrecognized compensation cost for unvested stock options and restricted stock is expected to be recognized over a weighted average period of 2.04 years and 2.67 years, respectively.

10. Related Party Arrangements

Unconsolidated Entities

The Company manages unconsolidated real estate entities for which it receives asset management, property management, development and redevelopment fee revenue. From these entities, the Company received fees of $1,488 and $2,932 in the three and six months ended June 30, 2007, respectively, and $1,395 and $2,601 for the three and six months ended June 30, 2006, respectively. These fees are included in management, development and other fees on the accompanying Condensed Consolidated Statements of Operations and Other Comprehensive Income.

In addition, in connection with the construction management services that the Company provided to MVP I, LLC, the entity that owns and developed Avalon at Mission Bay North II, the Company funds certain construction costs that are expected to be reimbursed through construction financing within 30 to 60 days. Although construction was completed in 2006, final payments to vendors are still being funded. The accompanying Condensed Consolidated Balance Sheets reflect a receivable in prepaid expenses and other assets in the amounts of $2,487 as of June 30, 2007 and $5,654 as of December 31, 2006, from MVP I, LLC.

Director Compensation

The 1994 Plan provides that directors of the Company who are also employees receive no additional compensation for their services as a director. On May 14, 2003, the Company’s Board of Directors approved an amendment to the 1994 Plan and certain cash compensation arrangements pursuant to which each non-employee director would receive, following the 2004 Annual Meeting of Stockholders and each annual meeting thereafter, (i) a number of shares of restricted stock (or deferred stock awards) having a value of $100 based on the last reported sale price of the common stock on the New York Stock Exchange (“NYSE”) on the fifth business day following the prior year’s annual meeting and (ii) $30 cash, payable in quarterly installments of $7.5. A non-employee director may elect to receive all or a portion of such cash payment in the form of a deferred stock award. In addition, the Lead Independent Director receives an annual fee of $30 payable in equal monthly installments of $2.5. In February 2006, the Company’s Board of Directors approved another amendment to the 1994 Plan and modified the cash compensation arrangements under which (i) following the 2006 Annual Meeting of Stockholders the cash payment was adjusted to $40, payable in quarterly installments of $10 and (ii) following the 2007 Annual Meeting of Stockholders, the number of shares of restricted stock (or deferred stock awards) will be calculated based on the closing price on the day of the award (rather than the closing price on the award date of the prior year). The Company recorded non-employee director compensation expense relating to the restricted stock grants, deferred stock awards and stock options in the amount of $92 and $182 for the three and six months ended June 30, 2007 as a component of general and administrative expense. Deferred compensation relating to these restricted stock grants, deferred stock awards and stock options was $896 and $778 on June 30, 2007 and December 31, 2006, respectively.

11. Subsequent Events

In July 2007, the Company sold Avalon View, located in Fishkill, New York. This community contains 288 apartment homes and was sold for a price of $54,000. On August 1, 2007, the Company sold San Marino for a sales price of $55,000. San Marino is a 248 apartment-home community located in San Jose, California. San Marino did not qualify as held for sale at June 30, 2007 and therefore is not included in discontinued operations.

In July 2007, the Company purchased a garden-style community located in San Jose, California adjacent to its existing Countrybrook community. This community, renamed Countrybrook II, contains 80 apartment homes and was acquired for a purchase price of $17,700. The Company will operate this community in conjunction with Countrybrook.

On August 1, 2007, the Company repaid $150,000 of unsecured notes with an effective interest rate of 5.2%, along with any unpaid interest, pursuant to their scheduled maturity. In addition, in August 2007, the Company executed a repurchase of common stock in the open market under the Stock Repurchase Program. The Board of Directors voted to increase the aggregate purchase price of shares that may be purchased under the existing Stock Repurchase Program from $100,000 to $300,000. As of August 7, 2007, 458,600 shares have been repurchased for approximately $51,300.

In July 2007, the Fund acquired two communities, Avalon Rutherford Station and South Hills Apartments. Avalon Rutherford Station is a garden-style community containing 108 apartment homes and is located in East Rutherford, New Jersey. This community was acquired for a purchase price of $35,850. South Hills Apartments is a garden-style community containing 85 apartment homes in Los Angeles, California and was acquired for a purchase price of $20,700.

12. Restatement of Previously Issued Financial Statements

The Company has restated its Condensed Consolidated Balance Sheet as of December 31, 2006 in the Form 10-K/A. In addition, the Company has restated its unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Income for the three and six months ended June 30, 2006 as presented in the table below. The restatement adjustments reflected in the following tables relate to the Company’s accounting for long-term land leases, changing the straight-line recognition of lease payments with fixed, or minimum, escalations over the period equal to the non-cancelable portion of the lease term as opposed to the Company’s expected holding period of its interest in the asset. This change primarily impacts the land lease accounting related to one consolidated asset with a 90-year lease in which the land lessor is also the partner in the venture holding the asset. The change resulted in an additional non-cash increase to operating expenses of approximately $2,655, per quarter in excess of the current quarterly cash payments, as well as additional depreciation expense. The effects of the restatement did not impact the total operating, investing or financing cash flows. The cumulative effect of the restatement on the Condensed Consolidated Statements of Operations for the periods affected is as follows:

		For the three months ended June 30, 2006												For the six months ended June 30, 2006
		As Previously												As Previously
		Reported				Adjustments				As Adjusted (1)				Reported				Adjustments				As Adjusted (1)
Revenue:
Rental and other income		$	179,280			$	—			$	179,280			$	353,232			$	—			$	353,232
Management, development and other fees			1,395				—				1,395				2,601				—				2,601
Total revenue			180,675				—				180,675				355,833				—				355,833
Expenses:
Operating expenses, excluding property taxes			51,665				2,655				54,320				100,736				5,310				106,046
Property taxes			16,871				—				16,871				33,775				—				33,775
Interest expense, net			26,595				—				26,595				55,259				—				55,259
Depreciation expense			41,238				308				41,546				81,153				616				81,769
General and administrative expense			6,479				—				6,479				12,762				—				12,762
Total expenses			142,848				2,963				145,811				283,685				5,926				289,611
Joint venture income and minority interest expense			207				—				207				434				—				434
Minority interest in consolidated partnerships			(128	)			—				(128	)			(260	)			—				(260	)
Gain on sale of land			—				—				—				13,166				—				13,166
Income from continuing operations			37,906				(2,963	)			34,943				85,488				(5,926	)			79,562
Discontinued operations:
Income from discontinued operations			71				—				71				1,147				—				1,147
Gain on sale of communities			31,992				—				31,992				97,411				—				97,411
Total discontinued operations			32,063				—				32,063				98,558				—				98,558
Net income			69,969				—				67,006				184,046				—				178,120
Dividends attributable to preferred stock			(2,175	)			—				(2,175	)			(4,350	)			—				(4,350	)
Net income available to common stockholders		$	67,794			$	—			$	64,831			$	179,696			$	—			$	173,770
Other comprehensive income:
Unrealized gain on cash flow hedges			644				—				644				1,185				—				1,185
Comprehensive income		$	68,438			$	—			$	65,475			$	180,881			$	—			$	174,955
Earnings per common share — basic:
Income from continuing operations (net of dividends attributable to preferred stock)		$	0.48			$	(0.04	)		$	0.44			$	1.10			$	(0.08	)		$	1.02
Discontinued operations			0.43				—				0.43				1.33				—				1.33
Net income per common share — basic		$	0.91			$	(0.04	)		$	0.87			$	2.43			$	(0.08	)		$	2.35
Earnings per common share — diluted:
Income from continuing operations (net of dividends attributable to preferred stock)		$	0.47			$	(0.04	)		$	0.43			$	1.08			$	(0.08	)		$	1.00
Discontinued operations			0.43				—				0.43				1.31				—				1.31
Net income per common share — diluted		$	0.90			$	(0.04	)		$	0.86			$	2.39			$	(0.08	)		$	2.31