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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 September 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:

 

97,706,463 shares of common stock, par value $0.01 per share, were outstanding as of October 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 September 30, 2012 (unaudited) and December 31, 2011		1
Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and nine months ended September 30, 2012 and 2011		2
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2012 and 2011		3-5
Notes to Condensed Consolidated Financial Statements (unaudited)		6-20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		21-43
Item 3. Quantitative and Qualitative Disclosures About Market Risk		43
Item 4. Controls and Procedures		43
PART II - OTHER INFORMATION
Item 1. Legal Proceedings		44
Item 1a. Risk Factors		44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		44
Item 3. Defaults Upon Senior Securities		45
Item 4. Mine Safety Disclosures		45
Item 5. Other Information		45
Item 6. Exhibits		45
Signatures		48

 

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AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

		9-30-12			12-31-11
		(unaudited)
ASSETS
Real estate:
Land		$	1,438,741		$	1,336,225
Buildings and improvements		7,171,769			6,681,136
Furniture, fixtures and equipment		251,497			226,359
		8,862,007			8,243,720
Less accumulated depreciation		(2,013,104		)	(1,820,381		)
Net operating real estate		6,848,903			6,423,339
Construction in progress, including land		725,450			597,346
Land held for development		304,295			325,918
Operating real estate assets held for sale, net		—			78,427
Total real estate, net		7,878,648			7,425,030
Cash and cash equivalents		664,133			616,853
Cash in escrow		49,851			73,400
Resident security deposits		25,242			23,597
Investments in unconsolidated real estate entities		139,405			144,561
Deferred financing costs, net		33,557			33,653
Deferred development costs		28,260			24,770
Prepaid expenses and other assets		149,470			140,526
Total assets		$	8,968,566		$	8,482,390
LIABILITIES AND EQUITY
Unsecured notes, net		$	1,899,208		$	1,629,210
Variable rate unsecured credit facility		—			—
Mortgage notes payable		1,908,872			1,969,986
Dividends payable		94,778			84,953
Payables for construction		51,194			36,775
Accrued expenses and other liabilities		225,111			246,214
Accrued interest payable		21,571			34,210
Resident security deposits		39,754			36,620
Liabilities related to real estate assets held for sale		—			35,467
Total liabilities		4,240,488			4,073,435
Redeemable noncontrolling interests		7,203			7,063
Equity:
Preferred stock, $0.01 par value; $25 liquidation preference; 50,000,000 shares authorized at both September 30, 2012 and December 31, 2011; zero shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively		—			—
Common stock, $0.01 par value; 140,000,000 shares authorized at both September 30, 2012 and December 31, 2011; 97,705,713 and 95,175,677 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively		977			952
Additional paid-in capital		4,980,937			4,652,457
Accumulated earnings less dividends		(153,811		)	(171,648		)
Accumulated other comprehensive loss		(110,787		)	(87,020		)
Total stockholders’ equity		4,717,316			4,394,741
Noncontrolling interest		3,559			7,151
Total equity		4,720,875			4,401,892
Total liabilities and equity		$	8,968,566		$	8,482,390

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

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AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME (LOSS)

(unaudited)

(Dollars in thousands, except per share data)

 

		For the three months ended						For the nine months ended
		9-30-12			9-30-11			9-30-12			9-30-11
Revenue:
Rental and other income		$	269,371		$	241,286		$	773,424		$	698,938
Management, development and other fees		2,533			2,433			7,852			7,085
Total revenue		271,904			243,719			781,276			706,023
Expenses:
Operating expenses, excluding property taxes		70,365			68,268			204,836			195,542
Property taxes		26,184			23,741			75,641			70,908
Interest expense, net		33,985			42,659			100,804			130,174
Loss on extinguishment of debt, net		—			—			1,179			—
Depreciation expense		65,998			60,893			193,434			180,953
General and administrative expense		8,372			6,087			26,398			21,524
Impairment loss		—			14,052			—			14,052
Total expenses		204,904			215,700			602,292			613,153
Equity in income of unconsolidated entities		5,553			2,615			9,801			3,513
Gain on sale of land		—			13,716			280			13,716
Gain on acquisition of unconsolidated entity		14,194			—			14,194			—
Income from continuing operations		86,747			44,350			203,259			110,099
Discontinued operations:
Income from discontinued operations		—			327			2,870			631
Gain on sale of real estate assets		—			—			95,049			7,675
Total discontinued operations		—			327			97,919			8,306
Net income		86,747			44,677			301,178			118,405
Net loss attributable to noncontrolling interests		97			147			334			132
Net income attributable to common stockholders		$	86,844		$	44,824		$	301,512		$	118,537
Other comprehensive income (loss):
Unrealized loss on cash flow hedges		(6,977		)	(60,270		)	(23,767		)	(79,691		)
Comprehensive income (loss)		$	79,867		$	(15,446	)	$	277,745		$	38,846
Earnings per common share - basic:
Income from continuing operations attributable to common stockholders		$	0.89		$	0.49		$	2.12		$	1.25
Discontinued operations attributable to common stockholders		—			—			1.02			0.09
Net income attributable to common stockholders		$	0.89		$	0.49		$	3.14		$	1.34
Earnings per common share - diluted:
Income from continuing operations attributable to common stockholders		$	0.89		$	0.49		$	2.11		$	1.24
Discontinued operations attributable to common stockholders		—			—			1.02			0.09
Net income attributable to common stockholders		$	0.89		$	0.49		$	3.13		$	1.33
Dividends per common share:		$	0.9700		$	0.8925		$	2.9100		$	2.6775

 

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 nine months ended
		9-30-12			9-30-11
Net income		$	301,178		$	118,405
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation expense		193,434			180,953
Depreciation expense from discontinued operations		895			6,002
Amortization of deferred financing costs and debt premium/discount		4,122			4,888
Loss on extinguishment of debt		1,781			—
Amortization of stock-based compensation		8,548			5,390
Equity in income of unconsolidated entities and noncontrolling interests, net of eliminations		(7,484		)	(1,177		)
Impairment loss		—			14,052
Gain on sale of real estate assets		(95,329		)	(21,391		)
Gain on acquisition of unconsolidated entity		(14,194		)	—
Expensed acquisition costs		—			1,010
(Increase)/decrease in cash in operating escrows		6,644			(2,553		)
Increase in resident security deposits, prepaid expenses and other assets		(8,069		)	(17,683		)
(Decrease) increase in accrued expenses, other liabilities and accrued interest payable		(16,353		)	7,116
Net cash provided by operating activities		375,173			295,012
Cash flows from investing activities:
Development/redevelopment of real estate assets including land acquisitions and deferred development costs		(567,867		)	(456,965		)
Acquisition of real estate assets		(105,904		)	(46,275		)
Capital expenditures - existing real estate assets		(13,449		)	(14,838		)
Capital expenditures - non-real estate assets		(1,094		)	(7,911		)
Proceeds from exchange/sale of real estate, net of selling costs		182,225			55,479
Increase in payables for construction		14,419			1,770
Decrease in cash in construction escrows		16,944			13,421
Increase in investments in unconsolidated real estate entities		(8,006		)	(14,163		)
Net cash used in investing activities		(482,732		)	(469,482		)
Cash flows from financing activities:
Issuance of common stock		326,653			1,037,630
Dividends paid		(270,866		)	(233,427		)
Repayments of mortgage notes payable		(106,255		)	(42,648		)
Issuance of unsecured notes		450,000			—
Settlement of interest rate contract		(54,930		)	—
Repayment of unsecured notes		(179,400		)	(189,900		)
Payment of deferred financing costs		(6,744		)	(5,996		)
Acquisition of joint venture partner equity interest		(3,350		)	(6,570		)
Distributions to DownREIT partnership unitholders		(22		)	(20		)
Distributions to joint venture and profit-sharing partners		(247		)	(194		)
Net cash provided by financing activities		154,839			558,875
Net increase in cash and cash equivalents		47,280			384,405
Cash and cash equivalents, beginning of period		616,853			305,644
Cash and cash equivalents, end of period		$	664,133		$	690,049
Cash paid during the period for interest, net of amount capitalized		$	101,121		$	129,005

 

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 nine months ended September 30, 2012:

 

·                  As described in Note 4, “Equity,” 96,592 shares of common stock valued at $12,883,000 were issued in connection with stock grants; 1,830 shares valued at $254,000 were issued through the Company’s dividend reinvestment plan; 120,952 shares valued at $15,491,000 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 115,303 options for common stock at a value of $3,357,000.

 

·                  The Company recorded an increase to other liabilities and a corresponding decrease to other comprehensive income of $23,767,000; 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 $94,778,000.

 

·                  The Company recorded an increase of $480,000 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 nine months ended September 30, 2011:

 

·                  499,461 shares of common stock valued at $63,147,000 were issued in connection with stock grants primarily associated with the Company’s 2008 deferred stock performance plan; 2,548 shares valued at $310,000 were issued through the Company’s dividend reinvestment plan; 129,176 shares valued at $14,825,000 were withheld to satisfy employees’ tax withholding and other liabilities; and 505 shares valued at $16,000 were cancelled upon forfeiture.  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 accrued expenses and other liabilities and a corresponding decrease to other comprehensive income of $79,691,000 and recorded a decrease to prepaid expenses and other assets of $1,324,000, 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 $84,815,000.

 

·                  The Company recorded an increase of $2,306,000 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.

 

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·                  As part of an asset exchange, 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.

 

·                  The Company entered into a ground lease that is considered a capital lease associated with a development community, recording a capital lease obligation of $14,500,000 in accrued expenses and other liabilities with a corresponding offset to construction in progress including land.

 

·                  The Company recorded an increase in noncontrolling interest of $3,350,000 associated with the consolidation of a development joint venture.

 

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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 September 30, 2012, the Company owned or held a direct or indirect ownership interest in 183 operating apartment communities containing 53,487 apartment homes in nine states and the District of Columbia, of which seven communities containing 1,802 apartment homes were under reconstruction. In addition, the Company owned or held a direct or indirect ownership interest in 22 communities under construction that are expected to contain an aggregate of 6,614 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 31 communities that, if developed as expected, will contain an estimated 8,837 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 nine months ended September 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 nine months ended
		9-30-12			9-30-11			9-30-12			9-30-11
Basic and diluted shares outstanding
Weighted average common shares - basic		97,044,603			91,388,357			95,742,676			88,312,930
Weighted average DownREIT units outstanding		7,500			7,707			7,500			8,559
Effect of dilutive securities		494,466			944,304			651,382			878,009
Weighted average common shares - diluted		97,546,569			92,340,368			96,401,558			89,199,498
Calculation of Earnings per Share - basic
Net income attributable to common stockholders		$	86,844		$	44,824		$	301,512		$	118,537
Net income allocated to unvested restricted shares		(186		)	(206		)	(1,003		)	(406		)
Net income attributable to common stockholders, adjusted		$	86,658		$	44,618		$	300,509		$	118,131
Weighted average common shares - basic		97,044,603			91,388,357			95,742,676			88,312,930
Earnings per common share - basic		$	0.89		$	0.49		$	3.14		$	1.34
Calculation of Earnings per Share - diluted
Net income attributable to common stockholders		$	86,844		$	44,824		$	301,512		$	118,537
Add: noncontrolling interests of DownREIT unitholders in consolidated partnerships, including discontinued operations		7			7			21			20
Adjusted net income attributable to common stockholders		$	86,851		$	44,831		$	301,533		$	118,557
Weighted average common shares - diluted		97,546,569			92,340,368			96,401,558			89,199,498
Earnings per common share - diluted		$	0.89		$	0.49		$	3.13		$	1.33

 

Certain options to purchase shares of common stock in the amounts of 418,177 and 320,698 were outstanding at September 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 September 30, 2012 is based on the average forfeiture activity over a period equal to the estimated life of the stock options, and was 1.5%. The application of estimated forfeitures did not materially impact compensation expense for the three and nine months ended September 30, 2012 and 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 accumulated other comprehensive loss.  Amounts recorded in accumulated other comprehensive loss 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 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 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.

 

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.

 

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 $12,504,000 and $8,946,000 for the three months ended September 30, 2012 and 2011, respectively, and $37,449,000 and $22,962,000 for the nine months ended September 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 September 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 September 30, 2012 and December 31, 2011, as shown in the Condensed Consolidated Balance Sheets (see Note 6, “Real Estate Disposition Activities”).

 

		9-30-12			12-31-11
Fixed rate unsecured notes (1)		$	1,901,601		$	1,556,001
Variable rate unsecured notes (1)		—			75,000
Fixed rate mortgage notes payable - conventional and tax-exempt (2)		1,530,681			1,528,783
Variable rate mortgage notes payable - conventional and tax-exempt		376,935			440,241
Total notes payable and unsecured notes		3,809,217			3,600,025
Credit Facility		—			—
Total mortgage notes payable, unsecured notes and Credit Facility		$	3,809,217		$	3,600,025

 

(1)         Balances at September 30, 2012 and December 31, 2011 exclude $2,393 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 September 30, 2012 and December 31, 2011 exclude $1,255 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 nine months ended September 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 included in income from discontinued operations on the accompanying Condensed Consolidated Statements of Comprehensive Income (Loss).

·                  In September 2012, the Company issued $450,000,000 principal amount of unsecured notes in a public offering under its existing shelf registration statement.  The notes mature in September 2022 and were issued at a 2.95% coupon rate. The notes have an effective interest rate of approximately 4.30%, including the effect of an interest rate hedge and offering costs.

 

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 (1.29% at September 30, 2012). The Company had no borrowings outstanding under the Credit Facility and had $45,596,000 and $52,659,000 outstanding in letters of credit that reduced the borrowing capacity as of September 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 $1,525,208,000 as of September 30, 2012).

 

As of September 30, 2012, the Company has guaranteed approximately $245,933,000 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 5.9% at September 30, 2012 and 5.7% 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 2.4% at September 30, 2012 and 2.3% at December 31, 2011.

 

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Scheduled payments and maturities of mortgage notes payable and unsecured notes outstanding at September 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		$	3,612		$	—		$	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		86,698			458,635			450,000			2.950	%
		$	179,303		$	1,728,313		$	1,901,601

 

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

 

The Company was in compliance at September 30, 2012 with all 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 equity for the nine months ended September 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		—			—			301,512			—			301,512			—			301,512
Unrealized loss on cash flow hedges, net of reclassifications		—			—			—			(23,767		)	(23,767		)	—			(23,767		)
Change in redemption value of redeemable noncontrolling interest		—			—			(480		)	—			(480		)	—			(480		)
Noncontrolling interests		—			—			—			—			—			(3,592		)	(3,592		)
Dividends declared to common stockholders		—			—			(280,945		)	—			(280,945		)	—			(280,945		)
Issuance of common stock, net of withholdings		25			313,455			(2,250		)	—			311,230			—			311,230
Amortization of deferred compensation		—			15,025			—			—			15,025			—			15,025
Balance at September 30, 2012		$	977		$	4,980,937		$	(153,811	)	$	(110,787	)	$	4,717,316		$	3,559		$	4,720,875

 

During the nine months ended September 30, 2012, the Company:

 

(i)                                     issued 2,165,206 shares of common stock through public offerings under CEP II and CEP III, discussed below;

(ii)                                  issued 391,387 shares of common stock in connection with stock options exercised;

(iii)                               issued 1,830 common shares through the Company’s dividend reinvestment plan;

(iv)                              issued 96,592 common shares in connection with stock grants;

(v)                                 withheld 120,952 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 115,303 options for common stock to employees.  Any deferred compensation related to the Company’s stock option and restricted stock grants during the nine months ended September 30, 2012 is not reflected on the Company’s Condensed Consolidated Balance Sheet as of September 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 nine months ended September 30, 2012, the Company completed the sale of common stock authorized under CEP II, selling 315,323 and 1,435,215 shares at an average sales price of $141.35 and $140.41 per share, for net proceeds of $43,901,000 and $198,489,000, respectively. From program inception in November 2010 through completion, the Company issued 3,925,980 common shares at an average price of $127.36 per share for net proceeds of $492,490,000.

 

In August 2012, the Company commenced a third continuous equity program (“CEP III”), under which the Company is authorized to sell up to $750,000,000 of shares of its common stock from time to time during a 36-month period.  During the three months ended September 30, 2012, the Company sold 729,991 shares at an average sales price of $142.09 per share, for net proceeds of $102,168,000.

 

5.  Investments in Real Estate Entities

 

Investments in consolidated entities

 

In July 2012, the Company acquired Avalon Del Rey, a 309 apartment home community which was owned by a joint venture in which the Company held a 30% ownership interest.  As part of this transaction, the venture repaid the $43,606,000 variable rate note secured by the community.  The Company paid approximately $67,200,000 for its joint venture partner’s 70% interest as well as contributing its proportionate share of the note repayment to the venture. Upon the acquisition of Avalon Del Rey, the Company consolidated the community, recognized income

 

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from its promoted interest of $4,055,000 included in equity in income of unconsolidated equities, and a gain of $14,194,000, as gain on acquisition of unconsolidated entity in the Condensed Consolidated Statements of Comprehensive Income (Loss). The gain recognized reflects the amount by which the fair value of the Company’s previously owned investment interest exceeded its carrying value.

 

The Company accounted for the acquisition of Avalon Del Rey as a business combination and recorded the acquired assets and assumed liabilities, including identifiable intangibles, at their fair values.  The Company looked to internal 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.

 

Investment in unconsolidated entities

 

As of September 30, 2012, the Company had investments in four 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. The significant accounting policies of the Company’s unconsolidated real estate entities are consistent with those of the Company in all material respects.

 

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 September 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):

 

		9-30-12			12-31-11
		(unaudited)			(unaudited)
Assets:
Real estate, net		$	1,477,756		$	1,583,397
Other assets		88,627			70,233
Total assets		$	1,566,383		$	1,653,630
Liabilities and partners’ capital:
Mortgage notes payable and credit facility		$	1,033,226		$	1,074,429
Other liabilities		26,379			27,335
Partners’ capital		506,778			551,866
Total liabilities and partners’ capital		$	1,566,383		$	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 nine months ended
		(unaudited)						(unaudited)
		9-30-12			9-30-11			9-30-12			9-30-11
Rental and other income		$	43,168		$	40,953		$	130,300		$	117,407
Operating and other expenses		(18,733		)	(18,829		)	(56,533		)	(53,474		)
Gain on sale of communities		44,723			12,445			57,457			12,445
Interest expense, net		(12,742		)	(12,818		)	(38,468		)	(37,596		)
Depreciation expense		(11,947		)	(12,363		)	(37,244		)	(35,702		)
Net income		$	44,469		$	9,388		$	55,512		$	3,080

 

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