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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

 

For the quarterly period ended June 30, 2012

 

Commission file number 1-12672

 

AVALONBAY COMMUNITIES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Ballston Tower

671 N. Glebe Rd, Suite 800

Arlington, Virginia  22203

(Address of principal executive offices, including zip code)

 

(703) 329-6300

(Registrant’s telephone number, including area code)

 

 

(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 x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the Exchange registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

 

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:

 

96,909,747 shares of common stock, par value $0.01 per share, were outstanding as of July 31, 2012

 

 

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AVALONBAY COMMUNITIES, INC.

FORM 10-Q

INDEX

 

PART I - FINANCIAL INFORMATION

 

		Page
Item 1. Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011	1
	Condensed Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended June 30, 2012 and 2011	2
	Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2012 and 2011	3-4
	Notes to Condensed Consolidated Financial Statements (unaudited)	5-18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		19-41
Item 3. Quantitative and Qualitative Disclosures About Market Risk		41
Item 4. Controls and Procedures		41
PART II - OTHER INFORMATION
Item 1. Legal Proceedings		42
Item 1a. Risk Factors		42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		42
Item 3. Defaults Upon Senior Securities		43
Item 4. Mine Safety Disclosures		43
Item 5. Other Information		43
Item 6. Exhibits		44
Signatures		46

 

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AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

		6-30-12			12-31-11
		(unaudited)
ASSETS
Real estate:
Land		$	1,378,785		$	1,336,225
Buildings and improvements		6,956,119			6,681,136
Furniture, fixtures and equipment		243,090			226,359
		8,577,994			8,243,720
Less accumulated depreciation		(1,947,431		)	(1,820,381		)
Net operating real estate		6,630,563			6,423,339
Construction in progress, including land		681,493			597,346
Land held for development		294,116			325,918
Operating real estate assets held for sale, net		—			78,427
Total real estate, net		7,606,172			7,425,030
Cash and cash equivalents		358,263			616,853
Cash in escrow		73,691			73,400
Resident security deposits		25,468			23,597
Investments in unconsolidated real estate entities		144,924			144,561
Deferred financing costs, net		29,470			33,653
Deferred development costs		27,677			24,770
Prepaid expenses and other assets		146,380			140,526
Total assets		$	8,412,045		$	8,482,390
LIABILITIES AND EQUITY
Unsecured notes, net		$	1,450,048		$	1,629,210
Variable rate unsecured credit facility		—			—
Mortgage notes payable		1,912,316			1,969,986
Dividends payable		93,698			84,953
Payables for construction		43,357			36,775
Accrued expenses and other liabilities		252,696			246,214
Accrued interest payable		30,672			34,210
Resident security deposits		39,702			36,620
Liabilities related to real estate assets held for sale		—			35,467
Total liabilities		3,822,489			4,073,435
Redeemable noncontrolling interests		7,316			7,063
Equity:
Preferred stock, $0.01 par value; $25 liquidation preference; 50,000,000 shares authorized at both June 30, 2012 and December 31, 2011; zero shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively		—			—
Common stock, $0.01 par value; 140,000,000 shares authorized at both June 30, 2012 and December 31, 2011; 96,586,916 and 95,175,677 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively		966			952
Additional paid-in capital		4,827,330			4,652,457
Accumulated earnings less dividends		(145,921		)	(171,648		)
Accumulated other comprehensive loss		(103,809		)	(87,020		)
Total stockholders’ equity		4,578,566			4,394,741
Noncontrolling interest		3,674			7,151
Total equity		4,582,240			4,401,892
Total liabilities and equity		$	8,412,045		$	8,482,390

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

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AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME

(unaudited)

(Dollars in thousands, except per share data)

 

		For the three months ended						For the six months ended
		6-30-12			6-30-11			6-30-12			6-30-11
Revenue:
Rental and other income		$	256,035		$	233,249		$	504,052		$	457,652
Management, development and other fees		2,770			2,332			5,319			4,652
Total revenue		258,805			235,581			509,371			462,304
Expenses:
Operating expenses, excluding property taxes		68,972			63,951			134,471			127,274
Property taxes		25,182			23,266			49,457			47,167
Interest expense, net		33,193			44,544			66,819			87,515
Loss on extinguishment of debt, net		—			—			1,179			—
Depreciation expense		64,875			60,836			127,436			120,059
General and administrative expense		8,316			8,145			18,026			15,437
Total expenses		200,538			200,742			397,388			397,452
Equity in income of unconsolidated entities		2,073			395			4,248			898
Gain on sale of land		280			—			280			—
Income from continuing operations		60,620			35,234			116,511			65,750
Discontinued operations:
Income from discontinued operations		1,152			283			2,870			303
Gain on sale of real estate assets		95,049			7,675			95,049			7,675
Total discontinued operations		96,201			7,958			97,919			7,978
Net income		156,821			43,192			214,430			73,728
Net (income) loss attributable to noncontrolling interests		88			181			237			(15		)
Net income attributable to common stockholders		$	156,909		$	43,373		$	214,667		$	73,713
Other comprehensive income:
Unrealized loss on cash flow hedges		(27,798		)	(19,336		)	(16,789		)	(19,420		)
Comprehensive income		$	129,111		$	24,037		$	197,878		$	54,293
Earnings per common share - basic:
Income from continuing operations attributable to common stockholders		$	0.63		$	0.41		$	1.22		$	0.76
Discontinued operations attributable to common stockholders		1.01			0.09			1.03			0.09
Net income attributable to common stockholders		$	1.64		$	0.50		$	2.25		$	0.85
Earnings per common share - diluted:
Income from continuing operations attributable to common stockholders		$	0.63		$	0.40		$	1.22		$	0.75
Discontinued operations attributable to common stockholders		1.00			0.09			1.02			0.09
Net income attributable to common stockholders		$	1.63		$	0.49		$	2.24		$	0.84
Dividends per common share:		$	0.9700		$	0.8925		$	1.9400		$	1.7850

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

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AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(Dollars in thousands)

 

		For the six months ended
		6-30-12			6-30-11
Net income		$	214,430		$	73,728
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation expense		127,436			120,059
Depreciation expense from discontinued operations		895			4,160
Amortization of deferred financing costs and debt premium/discount		3,040			3,485
Amortization of stock-based compensation		4,268			3,262
Loss on extinguishment of debt		1,781			—
Equity in (income) loss of unconsolidated entities and noncontrolling interests, net of eliminations		(3,182		)	421
Gain on sale of real estate assets		(95,329		)	(7,675		)
Expensed acquisition costs		163			958
Increase in cash in operating escrows		(1,988		)	(1,144		)
Increase in resident security deposits, prepaid expenses and other assets		(20,895		)	(9,943		)
Increase (decrease) in accrued expenses, other liabilities and accrued interest payable		(8,151		)	18,568
Net cash provided by operating activities		222,468			205,879
Cash flows from investing activities:
Development/redevelopment of real estate assets including land acquisitions and deferred development costs		(341,144		)	(266,374		)
Acquisition of real estate assets		(37,105		)	(46,275		)
Capital expenditures - existing real estate assets		(6,606		)	(7,765		)
Capital expenditures - non-real estate assets		(588		)	(7,748		)
Proceeds from exchange/sale of real estate, net of selling costs		182,225			22,371
Increase (decrease) in payables for construction		6,582			(612		)
Decrease in cash in construction escrows		1,697			10,917
Decrease in investments in unconsolidated real estate entities		2,188			2,458
Net cash used in investing activities		(192,751		)	(293,028		)
Cash flows from financing activities:
Issuance of common stock		175,682			264,134
Dividends paid		(177,322		)	(154,382		)
Repayments of mortgage notes payable		(103,621		)	(31,963		)
Repayment of unsecured notes		(179,400		)	—
Payment of deferred financing costs		(123		)	(252		)
Acquisition of joint venture partner equity interest		(3,350		)	(6,570		)
Distributions to DownREIT partnership unitholders		(15		)	(13		)
Distributions to joint venture and profit-sharing partners		(158		)	(127		)
Net cash (used in) provided by financing activities		(288,307		)	70,827
Net decrease in cash and cash equivalents		(258,590		)	(16,322		)
Cash and cash equivalents, beginning of period		616,853			306,426
Cash and cash equivalents, end of period		$	358,263		$	290,104
Cash paid during the period for interest, net of amount capitalized		$	62,012		$	76,315

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

 

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

 

During the six months ended June 30, 2012:

 

·                  As described in Note 4, “Equity,” 95,941 shares of common stock valued at $12,786,000 were issued in connection with stock grants; 1,336 shares valued at $180,000 were issued through the Company’s dividend reinvestment plan; 120,078 shares valued at $15,458,000 were withheld to satisfy employees’ tax withholding and other liabilities; and 7,558 shares and options valued at $393,000 previously issued in connection with employee compensation were cancelled upon forfeiture. In addition, the Company granted 113,804 options for common stock at a value of $3,306,000.

 

·                  The Company recorded an increase to other liabilities and a corresponding decrease to other comprehensive income of $16,789,000; and recorded a decrease to prepaid expenses and other assets of $11,000, with a corresponding offset to the basis of unsecured notes, net to record the impact of the Company’s hedge accounting activity.

 

·                  Common dividends declared but not paid totaled $93,698,000.

 

·                  The Company recorded an increase of $521,000 in redeemable noncontrolling interests with a corresponding decrease to accumulated earnings less dividends to adjust the redemption value associated with the put option held by a joint venture partner and DownREIT partnership units. For further discussion of the nature and valuation of these items, see Note 10, “Fair Value”.

 

·                  The Company assumed a 4.61% coupon fixed rate mortgage loan with an outstanding balance of $11,958,000 in conjunction with the acquisition of The Mark Pasadena.

 

During the six months ended June 30, 2011:

 

·                  498,810 shares of common stock valued at $63,061,000 were issued in connection with stock grants primarily associated with the Company’s 2008 deferred stock performance plan; 1,809 shares valued at $212,000 were issued through the Company’s dividend reinvestment plan; 126,928 shares valued at $14,825,000 were withheld to satisfy employees’ tax withholding and other liabilities; and 505 shares valued at $16,000 were forfeited.  In addition, the Company granted 144,827 options for common stock at a value of $4,258,000.

 

·                  7,500 units of limited partnership, valued at $365,000 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 an increase to other liabilities and a corresponding decrease to other comprehensive income of $19,420,000 and recorded an increase to prepaid expenses and other assets of $863,000, with a corresponding offset to the basis of unsecured notes, net to record the impact of the Company’s hedge accounting activity.

 

·                  Common dividends declared but not paid totaled $79,157,000.

 

·                  The Company recorded an increase of $1,218,000 in redeemable noncontrolling interests with a corresponding decrease to accumulated earnings less dividends to adjust the redemption value associated with the put options held by joint venture partners and DownREIT partnership units.

 

·                  The Company repaid all amounts due under a $93,440,000 variable-rate, tax-exempt bond financing using the proceeds which were held in escrow.

 

·                  The Company assumed a 4.75% coupon fixed-rate mortgage loan with an outstanding balance of $44,044,000 in conjunction with the acquisition of Fairfax Towers.

 

·                  As part of an asset exchange in April 2011, the Company assumed a $55,400,000 fixed-rate mortgage loan with a 5.24% interest rate and relinquished a $55,800,000 mortgage loan with a 5.86% fixed rate.

 

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AVALONBAY COMMUNITIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1.  Organization, Basis of Presentation and Significant Accounting Policies

 

Organization and Basis of Presentation

 

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

 

At June 30, 2012, the Company owned or held a direct or indirect ownership interest in 181 operating apartment communities containing 53,144 apartment homes in nine states and the District of Columbia, of which 11 communities containing 2,721 apartment homes were under reconstruction. In addition, the Company owned or held a direct or indirect ownership interest in 20 communities under construction that are expected to contain an aggregate of 6,114 apartment homes when completed. The Company also owned or held a direct or indirect ownership interest in land or rights to land in which the Company expects to develop an additional 33 communities that, if developed as expected, will contain an estimated 9,036 apartment homes.

 

The interim unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements required by GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited financial statements should be read in conjunction with the financial statements and notes included in the Company’s 2011 Annual Report on Form 10-K. The results of operations for the three and six months ended June 30, 2012 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.

 

Capitalized terms used without definition have the meaning as provided elsewhere in this Form 10-Q.

 

Earnings per Common Share

 

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

 

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		For the three months ended						For the six months ended
		6-30-12			6-30-11			6-30-12			6-30-11
Basic and diluted shares outstanding
Weighted average common shares - basic		95,308,163			87,317,602			95,082,172			86,746,992
Weighted average DownREIT units outstanding		7,500			7,707			7,500			8,992
Effect of dilutive securities		677,162			871,129			730,531			841,997
Weighted average common shares - diluted		95,992,825			88,196,438			95,820,203			87,597,981
Calculation of Earnings per Share - basic
Net income attributable to common stockholders		$	156,909		$	43,373		$	214,667		$	73,713
Net income allocated to unvested restricted shares		(547		)	(123		)	(845		)	(206		)
Net income attributable to common stockholders, adjusted		$	156,362		$	43,250		$	213,822		$	73,507
Weighted average common shares - basic		95,308,163			87,317,602			95,082,172			86,746,992
Earnings per common share - basic		$	1.64		$	0.50		$	2.25		$	0.85
Calculation of Earnings per Share - diluted
Net income attributable to common stockholders		$	156,909		$	43,373		$	214,667		$	73,713
Add: noncontrolling interests of DownREIT unitholders in consolidated partnerships, including discontinued operations		7			7			13			13
Adjusted net income attributable to common stockholders		$	156,916		$	43,380		$	214,680		$	73,726
Weighted average common shares - diluted		95,992,825			88,196,438			95,820,203			87,597,981
Earnings per common share - diluted		$	1.63		$	0.49		$	2.24		$	0.84

 

Certain options to purchase shares of common stock in the amounts of 424,357 and 320,698 were outstanding at June 30, 2012 and 2011, respectively, but were not included in the computation of diluted earnings per share because such options were anti-dilutive.

 

The Company is required to estimate the forfeiture of stock options and recognize compensation cost net of the estimated forfeitures. The estimated forfeitures included in compensation cost are adjusted to reflect actual forfeitures at the end of the vesting period.  The forfeiture rate at June 30, 2012 is based on the average forfeiture activity over a period equal to the estimated life of the stock options, and was 0.3%. The application of estimated forfeitures did not materially impact compensation expense for the three and six months ended June 30, 2012 or 2011.

 

Derivative Instruments and Hedging Activities

 

The Company enters into interest rate swap and interest rate cap agreements (collectively, the “Hedging Derivatives”) for interest rate risk management purposes and in conjunction with certain variable rate secured debt to satisfy lender requirements.  The Company does not enter into derivative transactions for trading or other speculative purposes. The Company assesses both at inception and on an on-going basis, the effectiveness of qualifying cash flow and fair value hedges. Hedge ineffectiveness is reported as a component of general and administrative expenses. The fair values of the Hedging Derivatives that are in an asset position are recorded in prepaid expenses and other assets. The fair value of the Hedging Derivatives that are in a liability position are included in accrued expenses and other liabilities. Fair value changes for derivatives that are not in qualifying hedge relationships are reported as a component of general and administrative expenses.  For the derivative positions that the Company has determined qualify as effective cash flow hedges, the Company has recorded the effective portion of cumulative changes in the fair value of the Hedging Derivatives in other comprehensive income.  Amounts recorded in other comprehensive income will be reclassified into earnings in the periods in which earnings are affected by the hedged cash flow. The effective portion of the change in fair value of the Hedging Derivatives that the Company has determined qualified as effective fair value hedges is reported as an adjustment to the carrying amount of the corresponding debt being hedged.

 

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Legal and Other Contingencies

 

The Company accounts for recoveries from legal matters as a reduction in the legal and related costs incurred associated with the matter, with recoveries in excess of these costs reported as a gain or, where appropriate, a reduction in the basis of a community to which the suit related.

 

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

 

Use of Estimates

 

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

 

Reclassifications

 

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

 

2.  Interest Capitalized

 

The Company capitalizes interest during the development and redevelopment of real estate assets. Capitalized interest associated with the Company’s development or redevelopment activities totaled $12,625,000 and $7,673,000 for the three months ended June 30, 2012 and 2011, respectively, and $24,945,000 and $14,016,000 for the six months ended June 30, 2012 and 2011, respectively.

 

3.  Notes Payable, Unsecured Notes and Credit Facility

 

The Company’s mortgage notes payable, unsecured notes and Credit Facility, as defined below, as of June 30, 2012 and December 31, 2011, are summarized below (dollars in thousands).  The following amounts and discussion do not include the mortgage notes related to the communities classified as held for sale, if any, as of June 30, 2012 and December 31, 2011, as shown in the Condensed Consolidated Balance Sheets (see Note 6, “Real Estate Disposition Activities”).

 

		6-30-12			12-31-11
Fixed rate unsecured notes (1)		$	1,451,601		$	1,556,001
Variable rate unsecured notes (1)		—			75,000
Fixed rate mortgage notes payable - conventional and tax-exempt (2)		1,534,037			1,528,783
Variable rate mortgage notes payable - conventional and tax-exempt		376,935			440,241
Total notes payable and unsecured notes		3,362,573			3,600,025
Credit Facility		—			—
Total mortgage notes payable, unsecured notes and Credit Facility		$	3,362,573		$	3,600,025

 

(1)         Balances at June 30, 2012 and December 31, 2011 exclude $1,553 and $1,802, respectively, of debt discount, and $0 and $11, respectively, for basis adjustments, as reflected in unsecured notes on the Company’s Condensed Consolidated Balance Sheets.

(2)         Balances at June 30, 2012 and December 31, 2011 exclude $1,344 and $962, respectively of debt premium as reflected in mortgage notes payable on the Company’s Condensed Consolidated Balance Sheets.

 

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The following debt activity occurred during the six months ended June 30, 2012:

 

·                  In January 2012, the Company repaid $179,400,000 principal amount of its 5.5% coupon unsecured notes pursuant to their scheduled maturity.

·                  In February 2012, in conjunction with the acquisition of a community, the Company assumed the existing 4.61% mortgage note in the amount of $11,958,000 that matures in June 2018, and is secured by the community.

·                  Also in February 2012, the Company repaid a variable rate secured mortgage note in the amount of $48,500,000 in advance of its November 2039 scheduled maturity date.  In conjunction with the early retirement the Company incurred a non-cash charge of $1,179,000 for the write off of deferred financing fees which was recognized as a loss on extinguishment of debt.

·                  In May 2012, the Company repaid a variable rate secured mortgage note in the amount of $14,566,000 in accordance with its scheduled maturity date.

·                  Also in May 2012 in conjunction with the disposition of an operating community, the Company repaid a variable rate secured mortgage note in the amount of $33,100,000 in advance of its scheduled maturity date. The Company incurred a charge of $602,000 for a prepayment penalty and the write off of deferred financing fees associated with the early repayment of this note.

 

The Company has a variable rate unsecured credit facility (the “Credit Facility”) with a syndicate of commercial banks, which has an available borrowing capacity of $750,000,000 and a 4-year term, plus a one year extension option.  The Credit Facility was entered into in September 2011 and it 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 1.075% per annum (1.32% at June 30, 2012). The Company did not have any borrowings outstanding under the Credit Facility and had $45,975,000 and $52,659,000 outstanding in letters of credit that reduced the borrowing capacity as of June 30, 2012 and December 31, 2011, respectively.

 

In the aggregate, secured notes payable mature at various dates from April 2013 through July 2066, and are secured by certain apartment communities and improved land parcels (with a net carrying value of $1,535,159,000 as of June 30, 2012).

 

As of June 30, 2012, the Company has guaranteed approximately $179,777,000 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 5.7% both at June 30, 2012 and at December 31, 2011.  The weighted average interest rate of the Company’s variable rate mortgage notes payable and its Credit Facility, including the effect of certain financing related fees, was 2.6% at June 30, 2012 and 2.3% at December 31, 2011.

 

Scheduled payments and maturities of mortgage notes payable and unsecured notes outstanding at June 30, 2012 are as follows (dollars in thousands):

 

											Stated
		Secured			Secured			Unsecured			interest rate
		notes			notes			notes			of unsecured
Year		payments (1)			maturities			maturities			notes
2012		$	6,966		$	—		$	201,601		6.125	%
2013		13,376			223,473			100,000			4.950	%
2014		14,284			—			150,000			5.375	%
2015		12,170			406,019			—			—
2016		12,807			—			250,000			5.750	%
2017		13,709			18,300			250,000			5.700	%
2018		14,330			11,073			—			—
2019		2,597			610,813			—			—
2020		2,768			—			250,000			6.100	%
2021		2,952			—			250,000			3.950	%
Thereafter		86,700			458,635			—			—
		$	182,659		$	1,728,313		$	1,451,601

 

(1)  Secured note payments are comprised of the principal pay downs for amortizing mortgage notes.

 

The Company was in compliance at June 30, 2012 with certain customary financial and other covenants under the Credit Facility and the Company’s unsecured notes.

 

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4.  Equity

 

The following summarizes the changes in stockholders’ equity for the six months ended June 30, 2012 (dollars in thousands):

 

								Accumulated			Accumulated			Total
					Additional			earnings			other			AvalonBay
		Common			paid-in			less			comprehensive			stockholders’			Noncontrolling			Total
		stock			capital			dividends			loss			equity			interests			equity
Balance at December 31, 2011		$	952		$	4,652,457		$	(171,648	)	$	(87,020	)	$	4,394,741		$	7,151		$	4,401,892
Net income attributable to common stockholders		—			—			214,667			—			214,667			—			214,667
Unrealized loss on cash flow hedges		—			—			—			(16,789		)	(16,789		)	—			(16,789		)
Change in redemption value of redeemable noncontrolling interest		—			—			(521		)	—			(521		)	—			(521		)
Noncontrolling interests		—			—			—			—			—			(3,477		)	(3,477		)
Dividends declared to common stockholders		—			—			(186,170		)	—			(186,170		)	—			(186,170		)
Issuance of common stock, net of withholdings		14			162,448			(2,249		)	—			160,213			—			160,213
Amortization of deferred compensation		—			12,425			—			—			12,425			—			12,425
Balance at June 30, 2012		$	966		$	4,827,330		$	(145,921	)	$	(103,809	)	$	4,578,566		$	3,674		$	4,582,240

 

During the six months ended June 30, 2012, the Company:

 

(i)                                     issued 1,119,892 shares of common stock through public offerings under CEP II, discussed below;

(ii)                                  issued 318,175 shares of common stock in connection with stock options exercised;

(iii)                               issued 1,336 common shares through the Company’s dividend reinvestment plan;

(iv)                              issued 95,941 common shares in connection with stock grants;

(v)                                 withheld 120,078 common shares to satisfy employees’ tax withholding and other liabilities; and

(vi)                              cancelled 4,027 shares of restricted common stock upon forfeiture.

 

In addition, the Company granted 113,804 options for common stock to employees.  Any deferred compensation related to the Company’s stock option and restricted stock grants during the six months ended June 30, 2012 is not reflected on the Company’s Condensed Consolidated Balance Sheet as of June 30, 2012, and will not be reflected until earned as compensation cost.

 

In November 2010, the Company commenced a second continuous equity program (“CEP II”), under which the Company was authorized to sell up to $500,000,000 of its common stock from time to time during a 36-month period. During the three and six months ended June 30, 2012, the Company sold 1,119,892 shares at an average sales price of $140.14 per share, for net proceeds of $154,588,000. The Company completed CEP II in July 2012, see Note 11, “Subsequent Events”.

 

5.  Investments in Real Estate Entities

 

Investments in consolidated entities

 

In June 2012, the Company acquired Eaves Cerritos, located in Artesia, CA.  Eaves Cerritos contains 151 apartment homes and was acquired for a purchase price of $29,500,000.

 

The Company accounted for the acquisition of Eaves Cerritos as a business combination and allocated the purchase price to the acquired assets and assumed liabilities, including identifiable intangibles, based on their fair values.  The Company looked to third party pricing for the value of the land, and an internal model to determine the fair value of the real estate assets and in place leases.  Given the heterogeneous nature of multi-family real estate, the fair values for the land, real estate assets and in place leases incorporated significant unobservable inputs and therefore are considered to be Level 3 prices within the fair value hierarchy.

 

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Investment in unconsolidated entities

 

As of June 30, 2012, the Company had investments in five unconsolidated real estate entities with ownership interest percentages ranging from 15.2% to 31.3%. The Company accounts for its investments in unconsolidated real estate entities under the equity method of accounting, except as otherwise noted below. The significant accounting policies of the Company’s unconsolidated real estate entities are consistent with those of the Company in all material respects.

 

During the three months ended June 30, 2012, AvalonBay Value Added Fund I, LP (“Fund I”) sold Avalon Lombard, located in Chicago, IL, containing 256 apartment homes for $35,450,000.  The Company’s proportionate share of the aggregate gain in accordance with GAAP was $385,000.

 

There were no other changes in the Company’s ownership interest in, or presentation of, its investments in unconsolidated real estate entities during the three months ended June 30, 2012.

 

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

 

		6-30-12			12-31-11
		(unaudited)			(unaudited)
Assets:
Real estate, net		$	1,544,617		$	1,583,397
Other assets		84,127			70,233
Total assets		$	1,628,744		$	1,653,630
Liabilities and partners’ capital:
Mortgage notes payable and credit facility		$	1,077,716		$	1,074,429
Other liabilities		22,320			27,335
Partners’ capital		528,708			551,866
Total liabilities and partners’ capital		$	1,628,744		$	1,653,630

 

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

 

		For the three months ended						For the six months ended
		(unaudited)						(unaudited)
		6-30-12			6-30-11			6-30-12			6-30-11
Rental and other income		$	44,505		$	38,632		$	87,132		$	76,454
Operating and other expenses		(19,131		)	(17,090		)	(37,800		)	(34,644		)
Gain on sale of communities		3,825			—			12,735			—
Interest expense, net		(12,659		)	(12,478		)	(25,726		)	(24,779		)
Depreciation expense		(12,597		)	(11,737		)	(25,297		)	(23,339		)
Net income (loss)		$	3,943		$	(2,673	)	$	11,044		$	(6,308	)

 

In conjunction with the formation of Fund I and AvalonBay Value Added Fund II, L.P. (“Fund II”), as well as the acquisition and development of certain other investments in unconsolidated entities, the Company incurred costs in excess of its equity in the underlying net assets of the respective investments. These costs represent $8,389,000 at June 30, 2012 and $9,167,000 at December 31, 2011 of the respective investment balances.

 

As part of the formation of Fund I and Fund II, the Company provided separate and distinct guarantees to one of the limited partners in each of the ventures.  These guarantees are specific to the respective fund and any impacts or obligation of the Company to perform under one of the guarantees has no impact on the Company’s obligations with respect to the other guarantee. The guarantees provide that, if, upon final liquidation of Fund I or Fund II, the total amount of all distributions to the guaranteed partner during the life of the respective fund (whether from operating cash flow or property sales) does not equal the total capital contributions made by that partner, then the Company will pay

 

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