November 5, 2013 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

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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, 2013

Commission file number 1-12672

AVALONBAY COMMUNITIES, INC.

(Exact name of registrant as specified in its charter)

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

Ballston Tower

671 N. Glebe Rd, Suite 800

Arlington, Virginia 22203

(Address of principal executive offices, including zip code)

(703) 329-6300

(Registrants 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):

Large accelerated filer x		Accelerated filer o
Non-accelerated filer (Do not check if a smaller reporting company) o		Smaller reporting company o

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 issuers classes of common stock as of the latest practicable date:

129,413,103 shares of common stock, par value $0.01 per share, were outstanding as of October 31, 2013

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AVALONBAY COMMUNITIES, INC.

FORM 10-Q

INDEX

			Page

PART I - FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements

		Condensed Consolidated Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012	1

		Condensed Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2013 and 2012	2

		Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2013 and 2012	3-4

		Notes to Condensed Consolidated Financial Statements (unaudited)	5-25

Item 2.	Managements Discussion and Analysis of Financial Condition and Results of Operations		26-53

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		54

Item 4.	Controls and Procedures		54

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings		55

Item 1a.	Risk Factors		55

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		55

Item 3.	Defaults Upon Senior Securities		55

Item 4.	Mine Safety Disclosures		55

Item 5.	Other Information		56

Item 6.	Exhibits		56

Signatures			59

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AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

	9-30-13			12-31-12
	(unaudited)
ASSETS
Real estate:
Land	$	3,302,403		$	1,424,797
Buildings and improvements	11,116,909			6,934,099
Furniture, fixtures and equipment	333,638			251,537
	14,752,950			8,610,433
Less accumulated depreciation	(2,445,294		)	(1,988,764		)
Net operating real estate	12,307,656			6,621,669
Construction in progress, including land	1,418,836			802,857
Land held for development	282,285			316,037
Operating real estate assets held for sale, net	275,874			274,556
Total real estate, net	14,284,651			8,015,119

Cash and cash equivalents	112,910			2,733,618
Cash in escrow	98,429			49,950
Resident security deposits	27,868			24,748
Investments in unconsolidated real estate entities	347,386			129,352
Deferred financing costs, net	39,085			38,700
Deferred development costs	33,799			24,665
Prepaid expenses and other assets	200,979			143,926
Total assets	$	15,145,107		$	11,160,078

LIABILITIES AND EQUITY
Unsecured notes, net	$	2,245,191		$	1,945,798
Variable rate unsecured credit facility
Mortgage notes payable	3,852,441			1,905,235
Dividends payable	138,459			110,966
Payables for construction	84,027			52,903
Accrued expenses and other liabilities	254,144			217,259
Accrued interest payable	23,965			33,056
Resident security deposits	47,020			37,691
Liabilities related to real estate assets held for sale	8,275			9,350
Total liabilities	6,653,522			4,312,258

Redeemable noncontrolling interests	18,255			7,027

Equity:
Preferred stock, $0.01 par value; $25 liquidation preference; 50,000,000 shares authorized at both September 30, 2013 and December 31, 2012; zero shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively
Common stock, $0.01 par value; 280,000,000 shares authorized at September 30, 2013 and 140,000,000 shares authorized at December 31, 2012; 129,402,556 and 114,403,472 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively	1,294			1,144
Additional paid-in capital	8,976,780			7,086,407
Accumulated earnings less dividends	(458,229		)	(142,329		)
Accumulated other comprehensive loss	(50,094		)	(108,007		)
Total equity	8,469,751			6,837,215
Noncontrolling interest	3,579			3,578
Total equity	8,473,330			6,840,793
Total liabilities and equity	$	15,145,107		$	11,160,078

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 nine months ended
	9-30-13			9-30-12			9-30-13			9-30-12

Revenue:
Rental and other income	$	390,113		$	258,788		$	1,072,273		$	742,254
Management, development and other fees	3,014			2,533			8,198			7,852
Total revenue	393,127			261,321			1,080,471			750,106

Expenses:
Operating expenses, excluding property taxes	97,650			67,471			258,605			196,325
Property taxes	42,678			25,475			116,515			73,171
Interest expense, net	43,945			33,985			127,772			100,804
Loss on interest rate contract	53,484						51,000
Loss on extinguishment of debt, net										1,179
Depreciation expense	160,682			62,750			457,837			183,688
General and administrative expense	9,878			8,372			31,262			26,398
Expensed acquisition, development and other pursuit costs	2,176			608			46,041			1,749
Total expenses	410,493			198,661			1,089,032			583,314

Equity in income (loss) of unconsolidated entities	3,260			5,553			(16,244		)	9,801
Gain on sale of land							240			280
Gain on acquisition of unconsolidated real estate entity				14,194						14,194

(Loss) income from continuing operations	(14,106		)	82,407			(24,565		)	191,067

Discontinued operations:
Income from discontinued operations	3,221			4,340			7,073			15,062
Gain on sale of real estate assets							118,173			95,049
Total discontinued operations	3,221			4,340			125,246			110,111

Net (loss) income	(10,885		)	86,747			100,681			301,178
Net loss attributable to noncontrolling interests	170			97			248			334

Net (loss) income attributable to common stockholders	$	(10,715	)	$	86,844		$	100,929		$	301,512

Other comprehensive income:
Unrealized loss on cash flow hedges				(6,977		)				(23,767		)
Cash flow hedge losses reclassified to earnings	54,948						57,913
Comprehensive income	$	44,233		$	79,867		$	158,842		$	277,745

Earnings per common share - basic:
(Loss) income from continuing operations attributable to common stockholders	$	(0.11	)	$	0.85		$	(0.19	)	$	1.99
Discontinued operations attributable to common stockholders	0.03			0.04			0.99			1.15

Net (loss) income attributable to common stockholders	$	(0.08	)	$	0.89		$	0.80		$	3.14

Earnings per common share - diluted:
(Loss) income from continuing operations attributable to common stockholders	$	(0.11	)	$	0.85		$	(0.19	)	$	1.99
Discontinued operations attributable to common stockholders	0.03			$	0.04		$	0.99		$	1.14

Net (loss) income attributable to common stockholders	$	(0.08	)	$	0.89		$	0.80		$	3.13

Dividends per common share:	$	1.07		$	0.97		$	3.21		$	2.91

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
	9-30-13			9-30-12

Cash flows from operating activities:
Net income	$	100,681		$	301,178
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation expense	457,837			183,688
Depreciation expense from discontinued operations	10,727			10,641
Amortization of deferred financing costs and debt (premium) discount	(15,831		)	4,122
Amortization of stock-based compensation	8,720			8,548
Equity in (income) loss of, and return on, unconsolidated entities and noncontrolling interests, net of eliminations	45,215			(7,484		)
Cash flow hedge losses reclassified to earnings	57,913
Loss on extinguishment of debt, net				1,781
Gain on sale of real estate assets	(118,413		)	(95,329		)
Gain on sale of joint venture real estate assets	(12,667		)
Gain on acquisition of unconsolidated entity				(14,194		)
(Increase) decrease in cash in operating escrows	(12,883		)	6,644
Increase in resident security deposits, prepaid expenses and other assets	(66,709		)	(8,069		)
Increase (decrease) in accrued expenses, other liabilities and accrued interest payable	15,333			(16,353		)
Net cash provided by operating activities	469,923			375,173

Cash flows from investing activities:
Development/redevelopment of real estate assets including land acquisitions and deferred development costs	(908,215		)	(567,867		)
Acquisition of real estate assets, including partnership interest	(749,275		)	(105,904		)
Capital expenditures - existing real estate assets	(10,527		)	(13,449		)
Capital expenditures - non-real estate assets	(7,286		)	(1,094		)
Proceeds from sale of real estate, net of selling costs	432,380			182,225
Increase in payables for construction	31,124			14,419
Decrease in cash in construction escrows				16,944
Decrease (increase) in investments in unconsolidated real estate entities	16,788			(8,006		)
Net cash used in investing activities	(1,195,011		)	(482,732		)

Cash flows from financing activities:
Issuance of common stock	2,874			326,653
Dividends paid	(387,658		)	(270,866		)
Issuance of mortgage notes payable	71,210
Repayments of mortgage notes payable, including prepayment penalties	(1,789,399		)	(106,255		)
Issuance of unsecured notes	400,000			450,000
Settlement of interest rate contract	(51,000		)	(54,930		)
Repayment of unsecured notes	(100,000		)	(179,400		)
Payment of deferred financing costs and issuance discounts	(6,093		)	(6,744		)
Acquisition of joint venture partner equity interest	(1,965		)	(3,350		)
Redemption of preferred interest obligation	(33,327		)
Distributions to DownREIT partnership unitholders	(24		)	(22		)
Distributions to joint venture and profit-sharing partners	(238		)	(247		)
Net cash (used in) provided by financing activities	(1,895,620		)	154,839

Net (decrease) increase in cash and cash equivalents	(2,620,708		)	47,280

Cash and cash equivalents, beginning of period	2,733,618			616,853

Cash and cash equivalents, end of period	$	112,910		$	664,133

Cash paid during the period for interest, net of amount capitalized	$	137,081		$	101,121

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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, 2013:

· As described in Note 4, Equity, 14,889,706 shares of common stock valued at $1,875,210,000 were issued as partial consideration for the Archstone Acquisition (as defined in this Form 10-Q); 123,977 shares of common stock valued at $16,019,000 were issued in connection with stock grants; 1,465 shares valued at $200,000 were issued through the Companys dividend reinvestment plan; 44,750 shares valued at $5,706,000 were withheld to satisfy employees tax withholding and other liabilities; and 5,214 shares and certain options valued at $780,000 previously issued in connection with employee compensation were cancelled upon forfeiture. In addition, the Company granted 215,230 options for common stock at a value of $5,768,000.

· The Company reclassified $4,429,000 of deferred cash flow hedge losses from other comprehensive income to interest expense, net, and $53,484,000 to loss on interest rate contract, to record the impact of the Companys derivative and hedge accounting activity.

· Common dividends declared but not paid totaled $138,459,000.

· The Company recorded $13,262,000 in redeemable noncontrolling interests associated with consolidated joint ventures acquired as part of the Archstone Acquisition. The Company also recorded an increase of $441,000 in redeemable noncontrolling interest with a corresponding decrease to accumulated earnings less dividends to adjust the redemption value associated with the put options held by joint venture partners and DownREIT partnership units. For further discussion of the nature and valuation of these items, see Note 11, Fair Value.

· The Company assumed secured indebtedness with a principal amount of $3,512,202,000 in conjunction with the Archstone Acquisition, discussed further in Note 3, Notes Payable, Unsecured Notes and Credit Facility. The Company also assumed an obligation related to outstanding preferred interests of approximately $66,500,000, included in accrued expenses and other liabilities, and discussed further in Note 5, Archstone Acquisition.

During the nine months ended September 30, 2012:

· The Company issued 96,592 shares of common stock valued at $12,883,000 in connection with stock grants; 1,830 shares valued at $254,000 were issued through the Companys 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 Companys 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.

· 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.

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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 primarily in high barrier to entry markets of the United States. The Companys primary 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, 2013, excluding real estate investments owned through the Residual JV discussed in this Form 10-Q, the Company owned or held a direct or indirect ownership interest in 247 operating apartment communities containing 73,884 apartment homes in 12 states and the District of Columbia, of which five communities containing 1,712 apartment homes were under reconstruction. In addition, the Company owned or held a direct or indirect ownership interest in 29 communities under construction that are expected to contain an aggregate of 8,692 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 45 communities that, if developed as expected, will contain an estimated 13,089 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 Companys 2012 Annual Report on Form 10-K. The results of operations for the three and nine months ended September 30, 2013 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 Companys 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
	9-30-13			9-30-12			9-30-13			9-30-12
Basic and diluted shares outstanding

Weighted average common shares - basic	129,208,839			97,044,603			126,057,793			95,742,676

Weighted average DownREIT units outstanding	7,500			7,500			7,500			7,500

Effect of dilutive securities (1)				494,466			411,821			651,382

Weighted average common shares - diluted	129,216,339			97,546,569			126,477,114			96,401,558

Calculation of Earnings per Share - basic

Net (loss) income attributable to common stockholders	$	(10,715	)	$	86,844		$	100,929		$	301,512
Net loss (income) allocated to unvested restricted shares	16			(186		)	(166		)	(1,003		)
Net (loss) income attributable to common stockholders, adjusted	$	(10,699	)	$	86,658		$	100,763		$	300,509

Weighted average common shares - basic	129,208,839			97,044,603			126,057,793			95,742,676

(Loss) earnings per common share - basic	$	(0.08	)	$	0.89		$	0.80		$	3.14

Calculation of Earnings per Share - diluted

Net (loss) income attributable to common stockholders	$	(10,715	)	$	86,844		$	100,929		$	301,512
Add: noncontrolling interests of DownREIT unitholders in consolidated partnerships, including discontinued operations	8			7			24			21

Adjusted net (loss) income attributable to common stockholders	$	(10,707	)	$	86,851		$	100,953		$	301,533

Weighted average common shares - diluted	129,216,339			97,546,569			126,477,114			96,401,558

(Loss) earnings per common share - diluted	$	(0.08	)	$	0.89		$	0.80		$	3.13

(1) Securities considered antidilutive for the three months ended September 30, 2013 due to recognition of net loss.

Certain options to purchase shares of common stock in the amounts of 605,899 and 418,177 were outstanding at September 30, 2013 and 2012, 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, 2013 is based on the average forfeiture activity over a period equal to the estimated life of the stock options, and was 1.2%. The application of estimated forfeitures did not materially impact compensation expense for the three and nine months ended September 30, 2013 or 2012.

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 interest expense, net. 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 is involved in various claims and/or administrative proceedings that arise in the ordinary course of the Companys 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 Companys financial position or results of operations.

Acquisitions of Investments in Real Estate

The Company accounts for acquisitions of investments in real estate in accordance with the authoritative guidance for the initial measurement, which require the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree to be recognized at fair value. Typical assets and liabilities acquired include land, building, furniture, fixtures, and equipment, and identified intangible assets and liabilities, consisting of the value of above-below market leases and in-place leases. In making estimates of fair values for purposes of allocating purchase price, we utilize various sources, including our own analysis of recently acquired and existing comparable properties in our portfolio and other market data.

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 Companys development or redevelopment activities totaled $17,205,000 and $12,504,000 for the three months ended September 30, 2013 and 2012, respectively, and $47,168,000 and $37,449,000 for the nine months ended September 30, 2013 and 2012, respectively.

3. Notes Payable, Unsecured Notes and Credit Facility

The Companys mortgage notes payable, unsecured notes and Credit Facility, as defined below, as of September 30, 2013 and December 31, 2012, 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, 2013 and December 31, 2012, as shown in the Condensed Consolidated Balance Sheets (see Note 7, Real Estate Disposition Activities).

	9-30-13		12-31-12

Fixed rate unsecured notes (1)	$	2,250,000	$	1,950,000
Fixed rate mortgage notes payable - conventional and tax-exempt (2)	2,710,673		1,427,133
Variable rate mortgage notes payable - conventional and tax-exempt(2)	1,011,609		476,935

Total notes payable and unsecured notes	5,972,282		3,854,068

Credit Facility

Total mortgage notes payable, unsecured notes and Credit Facility	$	5,972,282	$	3,854,068

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(1) Balances at September 30, 2013 and December 31, 2012 exclude $4,809 and $4,202, respectively, of debt discount as reflected in unsecured notes on the Companys Condensed Consolidated Balance Sheets.

(2) Balances at September 30, 2013 and December 31, 2012 exclude $130,159 and $1,167, respectively of debt premium as reflected in mortgage notes payable on the Companys Condensed Consolidated Balance Sheets.

The following debt activity occurred during the nine months ended September 30, 2013:

· In February 2013, as a portion of the consideration for the Archstone Acquisition, the Company assumed $3,512,202,000 consolidated principal amount of Archstones existing secured indebtedness, repaying $1,477,720,000 principal amount of the indebtedness assumed concurrent with the closing of the Archstone Acquisition.

· In March 2013, the Company repaid $100,000,000 of its 4.95% unsecured notes in accordance with the scheduled maturity.

· In April 2013, the Company obtained a 3.06% fixed rate, secured mortgage loan in the amount of $15,000,000 that matures in April 2018.

· In April 2013, the Company repaid a 4.69% fixed rate, secured mortgage note in the amount of $170,125,000 pursuant to its scheduled maturity date.

· In May 2013, the Company repaid a $5,393,000 fixed rate secured mortgage note with an interest rate of 5.55% at par and without penalty in advance of its July 2028 scheduled maturity date.

· In May 2013, the Company obtained a 3.08% fixed rate secured mortgage loan that matures in May 2020 in the amount of $56,210,000, in association with the refinancing of an existing $47,000,000 variable rate secured mortgage note.

· In May 2013, the Company repaid a $52,806,000 fixed rate secured mortgage note with an interest rate of 5.24% pursuant to its scheduled maturity date.

· In September 2013, the Company issued $400,000,000 principal amount of unsecured notes in a public offering under its existing shelf registration statement for net proceeds of approximately $396,212,000. The notes mature in October 2020 and were issued at a 3.63% interest rate. The notes have an effective interest rate of 3.79% including the effect of offering costs.

The Company has a $1,300,000,000 revolving variable rate unsecured credit facility with a syndicate of banks (the Credit Facility) which matures in April 2017. The Company has the option to extend the maturity by up to one year for a fee of $1,950,000. The Credit Facility bears interest at varying levels based on the London Interbank Offered Rate (LIBOR), rating levels achieved on our unsecured notes and on a maturity schedule selected by us. The current stated pricing is LIBOR plus 1.05% (1.23% at September 30, 2013, assuming a one month borrowing rate). The annual facility fee is approximately $1,950,000 based on the $1,300,000,000 facility size and based on our current credit rating.

The Company had no borrowings outstanding under the Credit Facility and had $72,610,000 and $44,883,000 outstanding in letters of credit that reduced the borrowing capacity as of September 30, 2013 and December 31, 2012, respectively.

In the aggregate, secured notes payable mature at various dates from May 2015 through July 2066, and are secured by certain apartment communities and improved land parcels (with a net carrying value of $4,697,609,000, excluding communities classified as held for sale, as of September 30, 2013).

As of September 30, 2013, the Company has guaranteed approximately $309,358,000 of mortgage notes payable by wholly owned subsidiaries; all such mortgage notes payable are consolidated for financial reporting purposes. The weighted average interest rate of the Companys fixed rate mortgage notes payable (conventional and tax-exempt) was 4.6% and 5.8% at September 30, 2013 and December 31, 2012, respectively. The weighted average interest rate of the Companys variable rate mortgage notes payable and its Credit Facility, including the effect of certain financing related fees, was 2.4% and 2.7% at September 30, 2013 and December 31, 2012, respectively.

Scheduled payments and maturities of mortgage notes payable and unsecured notes outstanding at September 30, 2013 are as follows (dollars in thousands):

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							Stated
	Secured		Secured		Unsecured		interest rate
	notes		notes		notes		of unsecured
Year	payments		maturities		maturities		notes

2013	$	4,395	$		$

2014	18,056				150,000		5.375	%

2015	16,722		904,011

2016	17,951		16,255		250,000		5.750	%

2017	19,033		710,491		250,000		5.700	%

2018	18,398		77,189

2019	7,125		610,814

2020	6,190		50,824		250,000		6.100	%

					400,000		3.625	%

2021	5,965		27,844		250,000		3.950	%

2022	6,332				450,000		2.950	%

2022	90,048		1,114,639		250,000		2.850	%

	$	210,215	$	3,512,067	$	2,250,000

The Company was in compliance at September 30, 2013 with certain customary financial and other covenants under the Credit Facility and the Companys unsecured notes.

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4. Equity

The following summarizes the changes in stockholders equity for the nine months ended September 30, 2013 (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, 2012	$	1,144	$	7,086,407	$	(142,329	)	$	(108,007	)	$	6,837,215		$	3,578	$	6,840,793

Net income attributable to common stockholders					100,929						100,929					100,929
Cash flow hedge loss reclassified to earnings								57,913			57,913					57,913
Change in redemption value of redeemable noncontrolling interest					(441		)				(441		)			(441		)
Noncontrolling interests income allocation														1		1
Dividends declared to common stockholders					(415,353		)				(415,353		)			(415,353		)
Issuance of common stock, net of withholdings	150		1,872,684		(1,035		)				1,871,799					1,871,799
Amortization of deferred compensation			17,689								17,689					17,689

Balance at September 30, 2013	$	1,294	$	8,976,780	$	(458,229	)	$	(50,094	)	$	8,469,751		$	3,579	$	8,473,330

During the nine months ended September 30, 2013, the Company:

(i) issued 33,900 shares of common stock in connection with stock options exercised;

(ii) issued 1,465 common shares through the Companys dividend reinvestment plan;

(iii) issued 123,977 common shares in connection with stock grants;

(iv) withheld 44,750 common shares to satisfy employees tax withholding and other liabilities;

(v) cancelled 5,214 shares of restricted common stock upon forfeiture; and

(vi) issued 14,889,706 common shares in connection with the closing of the Archstone Acquisition.

With respect to the 14,889,706 common shares issued in conjunction with the Archstone Acquisition to Lehman (as defined below), the Company and Lehman entered into a shareholders agreement (the Shareholders Agreement). Under the Shareholders Agreement, until February 27, 2014 Lehman will vote all of its shares of the Companys common stock in accordance with the recommendation of the Companys board of directors on any matter other than an extraordinary transaction. After February 14, 2014, and for so long as Lehman holds more than 5% of the Companys common stock, Lehman will vote all of its shares of the Companys common stock (i) in accordance with the recommendations of the Companys board of directors with respect to any election of directors, compensation and equity plan matters, and any amendment to our charter to increase our authorized capital stock; (ii) on all matters proposed by other shareholders, either proportionately in accordance with the votes of the other shareholders or, at its election, in accordance with the recommendation of the Companys board of directors; and (iii) on all other matters, in its sole and absolute discretion. In May 2013, Lehman sold 7,870,000 of the Companys common shares it received as consideration for the Archstone Acquisition. Lehman received all of the net proceeds from the offering, and the sale did not impact the total number of the Companys common shares outstanding.

In addition, during the nine months ended September 30, 2013 the Company granted 215,230 options for common stock to employees. Any deferred compensation related to the Companys stock option and restricted stock grants during the nine months ended September 30, 2013 is not reflected on the Companys Condensed Consolidated Balance Sheet as of September 30, 2013, and will not be reflected until earned as compensation cost.

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. The Company had no sales under CEP III during the nine months ended September 30, 2013, and has $646,274,000 of shares that remain authorized for issuance under this program as of September 30, 2013.

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5. Archstone Acquisition

On February 27, 2013, pursuant to an asset purchase agreement (the Purchase Agreement) dated November 26, 2012, by and among the Company, Equity Residential and its operating partnership, ERP Operating Limited Partnership (together, Equity Residential), Lehman Brothers Holdings, Inc. (Lehman, which term is sometimes used in this report to refer to Lehman Brothers Holdings, Inc., and/or its relevant subsidiary or subsidiaries), and Archstone Enterprise LP (Archstone, which has since changed its name to Jupiter Enterprise LP), the Company, together with Equity Residential, acquired, directly or indirectly, all of Archstones assets, including all of the ownership interests in joint ventures and other entities owned by Archstone, and assumed Archstones liabilities, both known and unknown, with certain limited exceptions.

Under the terms of the Purchase Agreement, the Company acquired approximately 40% of Archstones assets and liabilities and Equity Residential acquired approximately 60% of Archstones assets and liabilities (the Archstone Acquisition). The Company accounted for the acquisition as a business combination and recorded the purchase price to acquired tangible assets consisting primarily of direct and indirect interests in land and related improvements, buildings and improvements, construction in progress and identified intangible assets and liabilities, consisting primarily of the value of above and below market leases, and the value of in-places leases, at their fair values. The following table summarizes the Companys preliminary purchase price allocation:

	Acquisition Date Preliminary Fair Value (dollars in thousands)
Land and land improvements	$	1,760,100
Buildings and improvements	3,729,422
FF&E	52,290
Construction-in-progress, including land and land held for development (1)	404,765
In-place lease intangibles	182,467
Other assets	85,829
Total consolidated assets	$	6,214,873
Interest in unconsolidated real estate entities	256,454
Total assets	$	6,471,327
Fair value of assumed mortgage notes payable	3,732,980
Liability for preferred obligations	66,500
Other liabilities	34,100
Noncontrolling interest	13,262
Net Assets Acquired	2,624,485
Common shares issued	1,875,210
Cash consideration	$	749,275

(1) Includes amounts for in-place leases for development communities.

The allocation of the fair values to the assets acquired and liabilities assumed is subject to further adjustment due primarily to information not readily available at the acquisition date, additional market information and final purchase price settlement with Equity Residential in accordance with the terms of the Purchase Agreement. The Companys assessment of the fair values and the allocation of the purchase price to the identified tangible and intangible assets and assumed liabilities is its current best estimate of fair value.

The Company engaged a third party valuation specialist to assist in the determination of the fair value of each of the component parts of the operating communities, consisting of land and land improvements, buildings and improvements, furniture, fixtures and equipment, above and below market leases and in-place lease-related intangibles.

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Land valuation was based on a market approach, whereby recent sales of similar properties were used, adjusted for differences due to location, the state of entitlement as well as the shape and size of the parcel. Improvements to the land were valued using a replacement cost approach and considered the structures and amenities included for the communities. The approach applied industry standard replacement costs adjusted for geographic specific considerations, and reduced by estimated depreciation. The value for furniture, fixtures and equipment was also determined based on a replacement cost approach, adjusted for estimated depreciation. The FF&E value estimate considered both costs for items in the apartment homes, such as appliances and furnishings, and those for common areas such as exercise facilities and on site offices. The estimate of depreciation was made considering industry standard information and depreciation curves for the identified asset classes. The fair value of buildings acquired was estimated using the replacement cost approach, assuming the buildings were vacant at acquisition. The replacement cost approach considered the composition of structures in the acquired portfolio, adjusted for an estimate of depreciation. If the operating community is held in an unconsolidated joint venture, the Company valued its interest in the operating community based on its ownership interest.

The value of the acquired lease-related intangibles considered the estimated cost of leasing the apartment homes as if the acquired buildings were vacant, as well as the value of the current leases relative to market-rate leases. The in-place lease value was determined using an average total lease-up time, the number of apartment homes and net revenues generated during the lease-up time. The lease-up period for an apartment community was assumed to be 12 months to achieve stabilized occupancy. Net revenues were developed using market rent considering actual leasing and industry rental rate data. The value of current leases relative to a market-rate lease was based on market rents obtained for market comparables, and considered a market derived discount rate.

The Company is applying a weighted average depreciation period for the in-place lease intangibles of six months. During the three and nine months ended September 30, 2013, the Company recognized $60,162,000 and $184,763,000, respectively, of depreciation expense for in-place lease intangibles, recorded as a component of Depreciation expense on the accompanying Condensed Consolidated Statements of Comprehensive Income.

The Company used an internal model to determine the fair value for the development land parcels acquired. The internal model applied a discounted cash flow analysis on the expected cash flows for each land parcel as if the expected multifamily rental community is constructed. The cash flow analysis incorporated assumptions that market participants would make, including the application of (i) discount factors to the estimated future cash flows of the underlying asset, (ii) a compound annual growth rate for the revenue from the operating community, and (iii) an exit capitalization rate.

The Company valued the Development Communities under construction and/or in lease-up using either the invested capital basis, or an internal model, depending on the stage of construction completion. For Development Communities earlier in the construction process and not yet in lease-up, invested capital was the relevant metric and was considered reflective of the fair value of the community. For Development Communities that either had completed construction or that were substantially complete with construction and in lease-up, the Company used a capitalization rate model. The capitalization rate model considered the pro-forma NOI for the Development Community, relative to NOI for comparable operating communities, with adjustments for the location and/or quality of the community. A capitalization rate was applied to each Development Communitys NOI which was based on a relevant capitalization rate observed in comparable acquisition or disposition transactions, if available, as adjusted by the Company for differences in fundamentals between the Development Community and the referenced comparable transactions.

Given the significance of unobservable inputs, the Company has classified the valuations of the real estate assets acquired as Level 3 prices under the fair value hierarchy.

Other assets acquired consisted primarily of working capital determined by the Company to be reflective of the fair value.

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During the nine months ended September 30, 2013, the Company recognized $82,544,000 in acquisition related expenses associated with the Archstone Acquisition, with $37,295,000 reported as a component of Equity in income (loss) of unconsolidated entities, and the balance in Expensed acquisition, development, and other pursuit costs on the accompanying Condensed Consolidated Statements of Comprehensive Income.

Consideration

Pursuant to the Purchase Agreement and separate arrangements between the Company and Equity Residential governing the allocation of liabilities assumed under the Purchase Agreement, the Companys portion of consideration under the Purchase Agreement, consisted of the following:

· the issuance of 14,889,706 shares of the Companys common stock, valued at $1,875,210,000 as of the markets close on February 27, 2013;

· a cash payment of approximately $749,000,000;

· the assumption of consolidated indebtedness with a fair value of approximately $3,732,979,000, consisting of $3,512,202,000 principal amount of consolidated indebtedness and $220,777,000 representing the amount by which fair value of the aforementioned debt exceeds the principal face value, $70,479,000 of which excess related to debt the Company repaid concurrent with the Archstone Acquisition;

· the acquisition with Equity Residential of interests in entities that have preferred units outstanding some of which may be presented for redemption from time to time. The Companys 40% share of the fair value of the collective obligation, including accrued dividends on these outstanding Archstone preferred units as of the closing date of the Archstone Acquisition, is approximately $66,500,000; and

· the assumption with Equity Residential of all other liabilities, known or unknown, of Archstone, other than certain excluded liabilities. The Company shares approximately 40% of the responsibility for these liabilities.

The Company valued the assumed mortgage notes payable using a discounted cash flow analysis that incorporated assumptions that market participants would use. This analysis reflects the contractual terms of the instrument, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The process also considered credit valuation adjustments to appropriately reflect the Companys nonperformance risk. The Company has concluded that the value of the assumed mortgage notes payable are Level 2 prices as the majority of the inputs used to value its positions fall within Level 2 of the fair value hierarchy.

The Company valued its obligation under the preferred units outstanding based on the current liquidation price of the respective preferred unit series, including accrued but unpaid dividends as appropriate. During the nine months ended September 30, 2013, the Company paid approximately $33,300,000 to redeem its proportionate share of a portion of the preferred interest obligations assumed in conjunction with the Archstone Acquisition. The Company used the pricing for the settlement as the fair value at February 27, 2013.

Pro Forma Information

The following table presents information for assets acquired in the Archstone Acquisition that is included in our Condensed Consolidated Statement of Comprehensive Income from the acquisition date, February 27, 2013, through September 30, 2013 (in thousands).

	For the period including February 28, 2013 through September 30, 2013
Revenues	$	246,969
Loss attributable to common shareholders (1)	$	(128,542	)

(1) Amounts exclude acquisition costs for the Archstone Acquisition.

The following table presents the Companys supplemental consolidated pro forma information as if the acquisition had occurred on January 1, 2012 (in thousands, except per share amounts):

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	For the nine months ended September 30, 2013		For the nine months ended September 30, 2012
Revenues	$	1,152,418	$	1,053,169
Income from continuing operations	$	242,647	$	82,584
Earnings per common share - diluted (from continuing operations)	$	1.87	$	0.64

The unaudited proforma consolidated results are prepared for informational purposes only, and are based on assumptions and estimates considered appropriate by the Companys management. However, they are not necessarily indicative of what the Companys consolidated financial condition or results of operations actually would have been assuming the Archstone Acquisition had occurred on January 1, 2012, nor do they purport to represent the consolidated financial position or results of operations for future periods.

Investments in Archstone Consolidated Entities

In connection with the Archstone Acquisition, the Company entered into a limited liability company agreement with Equity Residential to acquire and own directly and indirectly certain Archstone entities (the Archstone Legacy Entities) which hold indirect interests in real estate assets, including 16 of the 60 of the consolidated communities acquired by the Company. As of September 30, 2013, the Archstone Legacy Entities have outstanding preferred interests held by unrelated third parties with an aggregate liquidation preference of approximately $91,000,000 (including accrued but unpaid distributions), which are generally subject to redemption at the election of the holders of such interests. One of the Archstone Legacy Entities previously entered into tax protection arrangements with the holders of certain of the preferred interests, which arrangements may limit for varying periods of time the Companys and Equity Residentials ability to dispose of the properties held indirectly by the Archstone Legacy Entities or to refinance certain related indebtedness, without making payments to the holders of such preferred interests. Pursuant to this LLC agreement, the Company has agreed to bear 40% of the economic cost of these preferred redemption obligations, and the tax protection payments that may arise from our disposition or refinancing of properties of the Archstone Legacy Entities that were contributed to a subsidiary that will be consolidated by the Company. The fair value of the Companys proportionate share of preferred redemption obligations of approximately $36,000,000 is recorded as a component of Accrued expenses and other liabilities on the accompanying Condensed Consolidated Balance Sheets. As part of the Archstone Acquisition, the Company and Equity Residential have agreed with Lehman and Archstone to require the acquired Archstone Legacy Entities to have sufficient funds available to honor their redemption obligations and to make any payments under its tax protection arrangements, when they may become due. The principal assets indirectly held by the limited liability company that acquired the Archstone Legacy Entities are interests in a subsidiary of the Companys (the AvalonBay Legacy Subsidiary) and a subsidiary of Equity Residential, each of which subsidiaries acquired certain properties formerly owned by the Archstone Legacy Entities. The Company consolidates the assets, liabilities and results of operations of the AvalonBay Legacy Subsidiary.

Investments in Archstone Unconsolidated Entities

In conjunction with the Archstone Acquisition, the Company acquired interests in the following entities:

· Archstone Multifamily Partners AC LP (the Archstone U.S. Fund) The Archstone U.S. Fund was formed in July 2011 and is fully invested. As of September 30, 2013, the Archstone U.S. Fund owns nine communities containing 1,728 apartment homes, one of which includes a marina containing 229 boat slips. Through subsidiaries the Company owns the general partner of the fund and holds a 28.6% interest in the fund.

Subsidiaries of the Archstone U.S. Fund have eight loans secured by individual assets with amounts outstanding in the aggregate of $330,315,000 with varying maturity dates, ranging from 2019 to 2022. The mortgage loans are payable by the subsidiaries of the Archstone U.S. Fund with operating cash flow or disposition proceeds from the underlying real estate. The Company has not guaranteed the debt of the Archstone U.S. Fund, nor does it have any obligation to fund this debt should the Archstone U.S. Fund be unable to do so.

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· Archstone Multifamily Partners AC JV LP (the AC JV) The AC JV is a joint venture in which the Company assumed Archstones 20% ownership interest. The AC JV was formed in 2011 and as of September 30, 2013 owned two apartment communities containing 818 apartment homes in Cambridge, MA and Herndon, VA. The AC JV partnership agreement contains provisions that require the Company to provide a right of first offer (ROFO) to the AC JV in connection with additional opportunities to acquire or develop additional interests in multifamily real estate assets within a specified geographic radius of the two existing assets, generally one mile or less. During the three months ended September 30, 2013, the Company provided the AC JV with the opportunity to acquire a parcel of land owned by the Company as required in the right of first offer provisions for the joint venture. The AC JV exercised its right to acquire the land parcel for development, where upon it commenced construction of an additional apartment community located in Cambridge, MA, which is expected to contain 103 apartment homes and be completed for a total capitalized cost of $28,000,000. The Company sold the parcel of land to the AC JV, in exchange for a cash payment and a capital account credit, and is overseeing the development in exchange for a developer fee. The Company owns one additional land parcel for the development of 301 apartment homes, classified as a Development Right in Cambridge, MA, acquired as part of the Archstone Acquisition that is subject to ROFO restrictions. The ROFO restriction expires in 2019.

As of September 30, 2013, subsidiaries of the AC JV have eight unsecured loans outstanding in the aggregate of $162,300,000 which mature in July 2021, and which were made by the investors in the venture, including us, in proportion to the investors respective equity ownership interest. The unsecured loans are payable by the subsidiaries of the AC JV with operating cash flow from the venture. The Company has not guaranteed the debt of the AC JV, nor does it have any obligation to fund this debt should the AC JV be unable to do so.

· Brandywine Apartments of Maryland, LLC (Brandywine)  Brandywine owns a 305 apartment home community located in Washington, DC. The community is managed by a third party. Brandywine is comprised of five members who hold various interests in the joint venture. In conjunction with the Archstone Acquisition, the Company assumed a 26.1% equity interest in the venture, and subsequently purchased an additional 2.6% interest such that as of September 30, 2013, the Company now holds a 28.7% equity interest in the venture.

Brandywine has an outstanding $24,960,000 fixed rate mortgage loan that is payable by the venture. The Company has not guaranteed the debt of Brandywine, nor does the Company have any obligation to fund this debt should Brandywine be unable to do so.

· Additionally, through subsidiaries the Company and Equity Residential entered into three limited liability company agreements (collectively, the Residual JV) through which the Company and Equity Residential acquired (i) certain assets of Archstone that the Company and Equity Residential plan to divest (to third parties or to the Company or Equity Residential) over time (the Residual Assets), and (ii) various liabilities of Archstone that the Company and Equity Residential agreed to assume in conjunction with the Archstone Acquisition (the Residual Liabilities). The Residual Assets include interests in apartment communities in Germany (including through a fund which Archstone managed), a 20.0% interest in a joint venture which owns and manages six apartment communities with 1,902 apartment homes in the United States, two land parcels, and various licenses, insurance policies, contracts, office leases and other miscellaneous assets. The Residual Liabilities generally include most existing or future litigation and claims related to Archstones operations for periods before the close of the Archstone Acquisition, except for (i) claims that principally relate to the physical condition of the assets acquired directly by the Company or Equity Residential, which generally remain the sole responsibility of the Company or Equity Residential, as applicable, and (ii) certain tax and other litigation between Archstone and various equity holders in Archstone related to periods before the close of the Archstone Acquisition, and claims which may arise due to changes in the capital structure of Archstone that occurred prior to closing, for which Lehman has agreed to indemnify the Company and Equity Residential. The Company and Equity Residential jointly control the Residual JV and the Company generally holds a 40% economic interest in the assets and liabilities of the Residual JV.

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6. Investments in Real Estate Entities

Investment in unconsolidated entities

As of September 30, 2013, including the interests in joint ventures acquired in the Archstone Acquisition, and excluding interest in the Residual JV, the Company had investments in seven 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 Companys unconsolidated real estate entities are consistent with those of the Company in all material respects.

During the three months ended September 30, 2013, AvalonBay Value Added Fund, LP (Fund I), a real estate discretionary investment fund in which the Company has an interest of approximately 15.2%, sold Avalon at Cedar Place, located in Columbia, MD. Avalon at Cedar Place, containing 156 homes, was sold for $26,000,000. The Companys share of the gain in accordance with GAAP for the disposition was $688,000.

During the three months ended September 30, 2013, the Company disposed of its interest in a for-sale joint venture, which held non-depreciable real estate assets, recognizing a gain in accordance with GAAP of $975,000, reported as a component of Equity in income (loss) of unconsolidated entities on the accompanying Condensed Consolidated Statements of Comprehensive Income. Previously, the Company recognized an impairment charge of $1,955,000 associated with this venture.

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

	9-30-13		12-31-12
	(unaudited)		(unaudited)
Assets:
Real estate, net	$	2,053,602	$	1,337,084
Other assets	100,304		73,252

Total assets	$	2,153,906	$	1,410,336

Liabilities and partners capital:
Mortgage notes payable and credit facility	$	1,358,891	$	943,259
Other liabilities	47,717		20,405
Partners capital	747,298		446,672

Total liabilities and partners capital	$	2,153,906	$	1,410,336

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

	For the three months ended						For the nine months ended
	(unaudited)						(unaudited)
	9-30-13			9-30-12			9-30-13			9-30-12

Rental and other income	$	56,240		$	43,168		$	157,456		$	130,300
Operating and other expenses	(22,866		)	(18,733		)	(63,575		)	(56,533		)
Gain on sale of communities	5,395			44,723			70,662			57,457
Interest expense, net	(15,376		)	(12,742		)	(46,474		)	(38,468		)
Depreciation expense	(15,668		)	(11,947		)	(46,602		)	(37,244		)
Net income	$	7,725		$	44,469		$	71,467		$	55,512

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In conjunction with the formation of Fund I and AvalonBay Value Added Fund II, L.P. (Fund II), the Company incurred costs in excess of its equity in the underlying net assets of the respective investments. These costs represent $6,237,000 at September 30, 2013 and $7,342,000 at December 31, 2012 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 Companys obligations with respect to the other guarantee. The guarantees provide that, if, upon final liquidation of Fund I or Fund II, the total amount of all distributions to the guaranteed partner during the life of the respective fund (whether from operating cash flow or property sales) does not equal the total capital contributions made by that partner, then the Company will pay the guaranteed partner an amount equal to the shortfall, but in no event more than 10% of the total capital contributions made by the guaranteed partner (maximum of approximately $7,500,000 for Fund I and approximately $8,910,000 for Fund II as of September 30, 2013). As of September 30, 2013, the expected realizable values of the real estate assets owned by Fund I and Fund II are considered adequate to cover such potential payments under a liquidation scenario. The estimated fair value of, and the Companys obligation under, these guarantees, both at inception and as of September 30, 2013, was not significant and therefore the Company has not recorded any obligation for either of these guarantees as of September 30, 2013.

Expensed Acquisition, Development and Other Pursuit Costs and Impairment of Long-Lived Assets

The Company capitalizes pre-development costs incurred in pursuit of new development opportunities for which the Company currently believes future development is probable (Development Rights). Future development of these Development Rights is dependent upon various factors, including zoning and regulatory approval, rental market conditions, construction costs and the availability of capital. Initial pre-development costs incurred for pursuits for which future development is not yet considered probable are expensed as incurred. In addition, if the status of a Development Right changes, making future development by the Company no longer probable, any capitalized pre-development costs are written off with a charge to expense. The Company expensed costs related to the abandonment of Development Rights as well as costs incurred in pursuing the acquisition of assets or costs incurred pursuing the disposition of assets for which such disposition activity did not occur, in the amounts of $351,000 and $608,000 for the three months ended September 30, 2013 and 2012, respectively, and $792,000 and $1,749,000 for the nine months ended September 30, 2013 and 2012, respectively. These costs are included in Expensed acquisition, development, and other pursuit costs on the accompanying Condensed Consolidated Statements of Comprehensive Income. Abandoned pursuit costs can vary greatly, and the costs incurred in any given period may be significantly different in future periods.

The Company evaluates its real estate and other long-lived assets for impairment when potential indicators of impairment exist. Such assets are stated at cost, less accumulated depreciation and amortization, unless the carrying amount of the asset is not recoverable. If events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, the Company assesses its recoverability by comparing the carrying amount of the long-lived asset to its estimated undiscounted future cash flows. If the carrying amount exceeds the aggregate undiscounted future cash flows, the Company recognizes an impairment loss to the extent the carrying amount exceeds the estimated fair value of the long-lived asset. Based on periodic tests of recoverability of long-lived assets, the Company did not record any impairment losses for the three and nine months ended September 30, 2013 and 2012.

The Company assesses its portfolio of land held for both development and investment for impairment if the intent of the Company changes with respect to either the development of, or the expected holding period for, the land. The Company did not recognize any impairment charges on its investment in land for the three and nine months ended September 30, 2013 and 2012.

The Company also evaluates its unconsolidated investments for impairment, considering both the carrying value of the investment, estimated as the expected proceeds that it would receive if the entity were dissolved and the net assets were liquidated at their current GAAP basis, as well as the Companys proportionate share of any impairment of assets held by unconsolidated investments. There were no impairment losses recognized by any of the Companys investments in unconsolidated entities during the three and nine months ended September 30, 2013 and 2012.

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7. Real Estate Disposition Activities

During the three months ended September 30, 2013, the Company did not sell any consolidated communities.

As of September 30, 2013, the Company had three communities that qualified as held for sale.

The operations for any real estate assets sold from January 1, 2012 through September 30, 2013 have been presented as income from discontinued operations in the accompanying Condensed Consolidated Statements of Comprehensive Income. Accordingly, certain reclassifications have been made to prior years to reflect discontinued operations consistent with current year presentation.

The following is a summary of income from discontinued operations for the periods presented (dollars in thousands):

	For the three months ended						For the nine months ended
	(unaudited)						(unaudited)
	9-30-13			9-30-12			9-30-13			9-30-12

Rental income	$	7,176		$	10,583		$	25,321		$	38,156
Operating and other expenses	(2,229		)	(2,995		)	(7,521		)	(11,718		)
Interest expense, net										(133		)
Loss on extinguishment of debt										(602		)
Depreciation expense	(1,726		)	(3,248		)	(10,727		)	(10,641		)
Income from discontinued operations	$	3,221		$	4,340		$	7,073		$	15,062

8. Segment Reporting

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

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

The Companys segment disclosures present the measure(s) used by the chief operating decision maker for purposes of assessing each segments performance. The Companys 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 communitys 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 nine months ended September 30, 2013 and 2012 is as follows (dollars in thousands):

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	For the three months ended						For the nine months ended
	9-30-13			9-30-12			9-30-13			9-30-12

Net (loss) income	$	(10,885	)	$	86,747		$	100,681		$	301,178
Indirect operating expenses, net of corporate income	10,780			7,396			30,673			24,049
Investments and investment management expense	1,043			1,582			3,154			4,526
Expensed acquisition, development and other pursuit costs	2,176			608			46,041			1,749
Interest expense, net	43,945			33,985			127,772			100,804
Loss on interest rate contract	53,484						51,000
Loss on extinguishment of debt, net										1,179
General and administrative expense	9,878			8,372			31,262			26,398
Equity in (income) loss of unconsolidated entities	(3,260		)	(5,553		)	16,244			(9,801		)
Depreciation expense	160,682			62,750			457,837			183,688
Gain on sale of real estate assets							(118,413		)	(95,329		)
Income from discontinued operations	(3,221		)	(4,340		)	(7,073		)	(15,062		)
Gain on acquisition of unconsolidated real estate entity				(14,194		)				(14,194		)
Net operating income	$	264,622		$	177,353		$	739,178		$	509,185

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

The following table provides details of the Companys segment information as of the dates specified (dollars in thousands). The segments are classified based on the individual communitys status as of the beginning of the given calendar year. Therefore, each year the composition of communities within each business segment is adjusted. Accordingly, the amounts between years are not directly comparable. Segment information for the three and nine months ended September 30, 2013 and 2012 have been adjusted for the real estate assets that were sold from January 1, 2012 through September 30, 2013, or otherwise qualify as discontinued operations as of September 30, 2013, as described in Note 7, Real Estate Disposition Activities.

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	For the three months ended						For the nine months ended
	Total				% NOI change		Total				% NOI change		Gross
	revenue		NOI		from prior year		revenue		NOI		from prior year		real estate (1)

For the period ended September 30, 2013

Established
New England	$	46,319	$	29,323	(0.6	)%	$	136,528	$	88,220	2.0	%	$	1,398,194
Metro NY/NJ	63,103		43,327		3.4	%	186,897		129,215		4.6	%	1,919,151
Mid-Atlantic	25,262		17,652		(1.0	)%	75,608		54,169		1.1	%	632,102
Pacific Northwest	11,773		7,752		1.7	%	34,752		23,539		7.4	%	443,812
Northern California	38,491		29,905		15.0	%	112,569		85,627		13.1	%	1,313,694
Southern California	30,001		20,165		4.7	%	88,873		60,640		5.7	%	1,057,512
Total Established	214,949		148,124		4.2	%	635,227		441,410		5.5	%	6,764,465

Other Stabilized	142,795		95,044		N/A		357,342		243,626		N/A		6,683,016
Development / Redevelopment	32,369		21,454		N/A		79,704		54,142		N/A		2,676,384
Land Held for Future Development	N/A		N/A		N/A		N/A		N/A		N/A		282,285
Non-allocated (2)	3,014		N/A		N/A		8,198		N/A		N/A		47,921

Total	$	393,127	$	264,622	49.2	%	$	1,080,471	$	739,178	45.2	%	$	16,454,071

For the period ended September 30, 2012

Established
New England	$	42,755	$	27,374	2.7	%	$	125,568	$	81,268	5.6	%	$	1,287,578
Metro NY/NJ	55,257		38,155		5.5	%	162,608		112,757		7.4	%	1,779,699
Mid-Atlantic	26,300		18,618		3.7	%	77,825		56,156		4.2	%	591,802
Pacific Northwest	8,401		5,984		19.6	%	24,426		17,207		13.6	%	304,381
Northern California	31,208		22,931		15.1	%	90,853		66,646		14.5	%	1,096,166
Southern California	25,131		17,224		6.2	%	74,000		51,225		8.8	%	946,802
Total Established	189,052		130,286		6.9	%	555,280		385,259		8.1	%	6,006,428

Other Stabilized	34,469		22,384		N/A		96,282		61,924		N/A		1,249,203
Development / Redevelopment	35,267		24,683		N/A		90,692		62,002		N/A		1,871,336
Land Held for Future Development	N/A		N/A		N/A		N/A		N/A		N/A		304,295
Non-allocated (2)	2,533		N/A		N/A		7,852		N/A		N/A		54,828

Total	$	261,321	$	177,353	14.7	%	$	750,106	$	509,185	14.6	%	$	9,486,090

(1) Does not include gross real estate assets held for sale of $318,406 and $405,662 as of September 30, 2013 and 2012, respectively.

(2) Revenue represents third party management, asset management and developer fees and miscellaneous income which are not allocated to a reportable segment.

9. Stock-Based Compensation Plans

Information with respect to stock options granted under the Companys 1994 Stock Option and Incentive Plan (the 1994 Plan) and its 2009 Stock Option and Incentive Plan (the 2009 Plan) are as follows (dollars in thousands, other than per share amounts):

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			Weighted				Weighted
			average				average
	2009 Plan		exercise price		1994 Plan		exercise price
	shares		per share		shares		per share

Options Outstanding, December 31, 2012	307,554		$	112.67	719,830		$	105.40
Exercised	(9,939	)	94.73		(23,961	)	79.84
Granted	215,230		129.03
Forfeited	(1,267	)	131.56		(4,012	)	127.56
Options Outstanding, September 30, 2013	511,578		$	119.85	691,857		$	106.16
Options Exercisable September 30, 2013	194,177		$	105.48	691,857		$	106.16

The weighted average fair value of the options granted under the 2009 Plan during the nine months ended September 30, 2013 is estimated at $26.78 per share on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield of 3.7% over the expected life of the option, volatility of 34.0%, risk-free interest rate of 0.9% and an expected life of approximately 5 years.

During 2013, the Company adopted a revised compensation framework under which share-based compensation will be granted, composed of annual awards and multiyear long term incentive performance awards. Annual awards will include restricted stock awards for which one third of the award will vest annually over a three year period following the measurement period. Under the multiyear long term incentive component of the revised framework, the Company will grant a target number of restricted stock units, with the ultimate award determined by the total shareholder return of the Companys common stock over a three-year measurement period. The share-based compensation earned will be in the form of restricted stock, or upon election of the recipient up to 25% in the form of stock options, for which one third of the award will vest annually over a three year period following the measurement period.

During the nine months ended September 30, 2013, the Company issued 123,977 shares of restricted stock with a fair value of $16,019,000. In addition, the Company granted awards for restricted stock units, with an estimated aggregate compensation cost of $21,011,000. The grant of restricted stock units includes an award which matures at the end of 2015 as well as two transitional awards that mature at the end of 2013 and 2014. The restricted stock units were valued using a Monte Carlo model with the following weighted average assumptions: baseline share value of $130.23, a dividend yield of 2.8%, estimated volatility figures over the life of the plan using 50% historical volatility and 50% implied volatility and risk free rates over the life of the plan ranging from 0.08% to 0.37%, resulting in an average estimated fair value per restricted stock unit of $110.00.

At September 30, 2013, the Company had 190,144 outstanding unvested shares granted under restricted stock awards. Restricted stock vesting during the nine months ended September 30, 2013 totaled 134,209 shares and had fair values at the grant date ranging from $48.60 to $149.05 per share. The total grant date fair value of shares vested was $13,857,000 and $36,232,000 for the nine months ended September 30, 2013 and 2012, respectively.

Total employee stock-based compensation cost recognized in income was $16,768,000 and $8,394,000 for the nine months ended September 30, 2013 and 2012, respectively, and total capitalized stock-based compensation cost was $5,911,000 and $3,877,000 for the nine months ended September 30, 2013 and 2012, respectively. At September 30, 2013, there was a total of $3,421,000 and $9,451,000 in unrecognized compensation cost for unvested stock options and unvested restricted stock, respectively, which does not include estimated forfeitures. The unrecognized compensation cost for unvested stock options and restricted stock is expected to be recognized over a weighted average period of 2.00 years and 2.62 years, respectively.

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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 earned fees of $3,014,000 and $2,533,000 in the three months ended September 30, 2013 and 2012, respectively, and $8,198,000 and $7,852,000 for the nine months ended September 30, 2013 and 2012, respectively. These fees are included in management, development and other fees on the accompanying Condensed Consolidated Statements of Comprehensive Income. In addition, the Company has outstanding receivables associated with its management role of $3,670,000 and $3,484,000 as of September 30, 2013 and December 31, 2012, respectively.

The Company is currently acting as the general contractor for redevelopment activity in the Archstone U.S. Fund, in which the Company has a 28.6% interest, and has outstanding receivables associated with the redevelopment activity of $12,629,000 as of September 30, 2013.

Director Compensation

The Company recorded non-employee director compensation expense relating to restricted stock grants and deferred stock awards in the amount of $250,000 and $240,000, in the three months ended September 30, 2013 and 2012, respectively, and $743,000 and $669,000 for the nine months ended September 30, 2013 and 2012, respectively, as a component of general and administrative expense. Deferred compensation relating to restricted stock grants and deferred stock awards to non-employee directors was $666,000 and $364,000 on September 30, 2013 and December 31, 2012, respectively.

11. Fair Value

Financial Instruments Carried at Fair Value

Derivative Financial Instruments

Currently, the Company uses interest rate cap agreements to manage its interest rate risk. These instruments are carried at fair value in the Companys financial statements. In adjusting the fair value of its derivative contracts for the effect of counterparty nonperformance risk, the Company has considered the impact of its net position with a given counterparty, as well as any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. 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 & Poors 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 nonperformance is remote. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives use Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. As of September 30, 2013, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined it is not significant. As a result, the Company has determined that its derivative valuations are classified in Level 2 of the fair value hierarchy.

Hedge ineffectiveness 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 following table summarizes the consolidated Hedging Derivatives at September 30, 2013, excluding derivatives executed to hedge debt on communities classified as held for sale (dollars in thousands):

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	Non-
	designated			Cash Flow
	Hedges			Hedges
	Interest			Interest
	Rate Caps			Rate Caps

Notional balance	$	612,089		$	134,315
Weighted average interest rate (1)	2.6		%	2.5		%
Weighted average capped interest rate	5.9		%	4.9		%
Earliest maturity date	Mar-14			Apr-15
Latest maturity date	Aug-18			Jun-15

(1)This represents the weighted average interest rate on the debt.

Excluding derivatives executed to hedge secured debt on communities classified as held for sale, the Company had three derivatives designated as cash flow hedges and 14 derivatives not designated as hedges at September 30, 2013. Other than the fair value change associated with the forward interest rate protection agreement discussed below, fair value changes for derivatives not in qualifying hedge relationships for the three and nine months ended at September 30, 2013 and 2012, were not material. To adjust the Hedging Derivatives in qualifying cash flow hedges to their fair value and recognize the impact of hedge accounting, the Company recorded an increase in other comprehensive loss of $23,767,000 during the nine months ended September 30, 2012. The Company reclassified $54,948,000 and $57,913,000 of deferred losses from accumulated other comprehensive income as a change to earnings, for the three and nine months ended September 30, 2013 primarily associated with the forward interest rate protection agreement discussed below. The Company anticipates reclassifying approximately $5,493,000 of hedging losses from accumulated other comprehensive income into earnings within the next 12 months to offset the variability of cash flows of the hedged item during this period. The Company did not have any derivatives designated as fair value hedges as of September 30, 2013 or December 31, 2012.

The Company was party to a $215,000,000 forward interest rate protection agreement, which was entered into in 2011 to reduce the impact of variability in interest rates on a portion of its expected debt issuance activity in 2013. The Company settled this position at its maturity in May 2013 with a payment to the counterparty of $51,000,000, the fair value at the time of settlement. Based on changes in the Companys capital markets outlook for the year, the Company deemed it was probable that it would not issue the anticipated debt for which this interest rate protection agreement was transacted. During the three months ended September 30, 2013, the Company recognized the deferred loss of $53,484,000 for the forward interest rate protection agreement in Loss on interest rate contract on the accompanying Condensed Consolidated Statements of Comprehensive Income.

Redeemable Noncontrolling Interests

The Company provided redemption options (the Puts) that allow joint venture partners of the Company to require the Company to purchase their interests in the investment at a guaranteed minimum amount related to three ventures, two of which were acquired as part of the Archstone Acquisition. The Puts are payable in cash. The Company determines the fair value of the Puts based on unobservable inputs considering the assumptions that market participants would make in pricing the obligations, applying a guaranteed rate of return to the joint venture partners net capital contribution balances as of period end. Given the significance of the unobservable inputs, the valuations are classified in Level 3 of the fair value hierarchy.

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

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Financial Instruments Not Carried at Fair Value

Cash and Cash Equivalents

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

Other Financial Instruments

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

The Company values its unsecured notes using quoted market prices, a Level 1 price within the fair value hierarchy. The Company values its notes payable and outstanding amounts under the Credit Facility using a discounted cash flow analysis on the expected cash flows of each instrument. This analysis reflects the contractual terms of the instrument, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The process also considers credit valuation adjustments to appropriately reflect the Companys nonperformance risk. The Company has concluded that the value of its notes payable and amounts outstanding under its credit facility are Level 2 prices as the majority of the inputs used to value its positions fall within Level 2 of the fair value hierarchy.

Financial Instruments Measured/Disclosed at Fair Value on a Recurring Basis

The following table summarizes the classification between the three levels of the fair value hierarchy of the Companys financial instruments measured/disclosed at fair value on a recurring basis (dollars in thousands):

				Quoted Prices			Significant
				in Active			Other			Significant
				Markets for			Observable			Unobservable
	Total Fair Value			Identical Assets			Inputs			Inputs
Description	9/30/2013			(Level 1)			(Level 2)			(Level 3)

Interest Rate Caps	$	118		$			$	118		$
Puts	(16,866		)							(16,866		)
DownREIT units	(953		)	(953		)
Indebtedness	(6,018,766		)	(2,317,364		)	(3,701,402		)
Total	$	(6,036,467	)	$	(2,318,317	)	$	(3,701,284	)	$	(16,866	)

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12. Subsequent Events

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

In October 2013, the Company sold Archstone Vanoni Ranch, located in Ventura, CA. Archstone Vanoni Ranch contains 316 homes and was sold for $82,000,000.

Also in October 2013, Fund I sold Avalon Sunset, located in Los Angeles, CA. Avalon Sunset contains 82 homes and was sold for $25,800,000.

In November 2013, the Company sold Avalon on the Sound East, located in New Rochelle, NY. Avalon on the Sound East contains 588 homes and was sold for $210,000,000.

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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help provide an understanding of our business and results of operations. This MD&A should be read in conjunction with our Condensed Consolidated Financial Statements and the accompanying Notes to Condensed Consolidated Financial Statements included elsewhere in this report. This report, including the following MD&A, contains forward-looking statements regarding future events or trends as described more fully under Forward-Looking Statements included in this report. Actual results or developments could differ materially from those projected in such statements as a result of the factors described under Forward-Looking Statements below and the risk factors described in Item 1a, Risk Factors, of our Form 10-K for the year ended December 31, 2012 (the Form 10-K).

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

Executive Overview

Business Description

We are primarily engaged in developing, acquiring, owning and operating apartment communities in high barrier to entry markets of the United States. We believe that apartment communities are an attractive long-term investment opportunity compared to other real estate investments because a broad potential resident base should help reduce demand volatility over a real estate cycle. We seek to create long-term shareholder value by accessing capital on cost effective terms; deploying that capital to develop, redevelop and acquire apartment communities in high barrier to entry markets; operating apartment communities; and selling communities when they no longer meet our long-term investment strategy or when pricing is attractive. Barriers to entry in our markets generally include a difficult and lengthy entitlement process with local jurisdictions and dense urban or suburban areas where zoned and entitled land is in limited supply.

Our strategy is to be leaders in market research and capital allocation, delivering a range of multifamily offerings tailored to serve the needs of the most attractive customer segments in the best-performing submarkets of the United States. Our communities are predominately upscale, which generally command among the highest rents in their markets. However, we also pursue the ownership and operation of apartment communities that target a variety of customer segments and price points, consistent with our goal of offering a broad range of products and services.

We regularly evaluate the allocation of our investments by the amount of invested capital and by product type within our individual markets, which are primarily located in New England, the New York/New Jersey metro area, the Mid-Atlantic, the Pacific Northwest, and the Northern and Southern California regions of the United States.

Third Quarter 2013 Highlights

While we recognized a net loss due primarily to increased depreciation expense and nonrecurring charges, we experienced strong operating performance in the third quarter of 2013.

· Net loss attributable to common stockholders for the quarter ended September 30, 2013 was $10,715,000, a decrease of $97,559,000 or 112.3% from the prior year period. The decrease is attributable primarily to an increase in depreciation expense and expensed transaction costs associated with the Archstone Acquisition, coupled with the recognition of a loss associated with an interest rate protection agreement. The decrease was partially offset by an increase in NOI from our communities.

· For the quarter ended September 30, 2013, Established Communities NOI increased by $5,998,000 or 4.2% over the prior year period. This year-over-year increase was driven by an increase in rental revenue of 3.9%, partially offset by an increase in operating expenses of 3.3% as compared to the prior year period.

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Our portfolio results for the quarter ended September 30, 2013 include operations from the communities acquired as part of the Archstone Acquisition, and reflect year-over-year revenue growth, as well as continued sequential rental revenue growth. The overall increase in revenues was driven by our portfolio growth, leasing activity for new development, and an increase in rental rates for our Established Communities. We expect year-over-year revenue growth to continue for the balance of 2013 at a moderating rate, supported by the newly acquired Archstone communities as well as our Established Communities.

During the quarter ended September 30, 2013, we completed the construction of two communities with an aggregate of 476 apartment homes for a total capitalized cost of $93,900,000. We also started construction of four communities expected to contain 1,241 apartment homes with an expected aggregate total capitalized cost of $592,800,000. At September 30, 2013, 29 communities were under construction with a projected total capitalized cost of approximately $2,711,000,000, with $1,169,726,000 remaining to be invested.

During the three months ended September 30, 2013, we started the redevelopment of one community containing 294 apartment homes, which is expected to be redeveloped for a total capital cost of $11,900,000, excluding costs incurred prior to redevelopment. At September 30, 2013, there were five communities under redevelopment, with an expected investment of approximately $58,700,000, excluding costs incurred prior to the start of redevelopment, with $32,447,000 remaining to be invested.

We believe that our balance sheet, as measured by our current level of indebtedness, our current ability to service interest and other fixed charges and our current moderate use of financial encumbrances (such as secured financing), provides adequate access to liquidity from the capital markets through the issuance of corporate securities (which could include unsecured debt and/or common and preferred equity) and secured debt, as well as from other sources of liquidity such as from joint ventures or from our operating cash flows, to meet our reasonably foreseeable liquidity needs as they arise. See the discussion under Liquidity and Capital Resources.

We established Fund I and Fund II (collectively the Funds) to engage in real estate acquisition programs through discretionary investment funds. We believe this investment format provides the following attributes: (i) third-party joint venture equity as an additional source of financing to expand and diversify our portfolio; (ii) additional sources of income in the form of property management and asset management fees and, potentially, incentive distributions if the performance of the Funds exceeds certain thresholds; and (iii) additional visibility into the transactions occurring in multi-family assets that helps us with other investment decisions related to our wholly-owned portfolio.

Fund I has nine institutional investors, including us. One of our wholly owned subsidiaries is the general partner of Fund I and, excluding costs incurred in excess of our equity in the underlying net assets of Fund I, we have made an equity investment of approximately $7,788,000 in Fund I (net of distributions and excluding the purchase by us of a mortgage note secured by a Fund I community), representing a 15.2% combined general partner and limited partner equity interest. Fund I was our principal vehicle for acquiring apartment communities from its formation in March 2005 through the close of its investment period in March 2008. Fund I has a term that expired in March 2013, plus two one-year extension options. We have executed the first one-year extension.

Fund II has six institutional investors, including us. One of our wholly owned subsidiaries is the general partner of Fund II and, excluding costs incurred in excess of our equity in the underlying net assets of Fund II, we have made an equity investment of $96,688,000 (net of distributions), representing a 31.3% combined general partner and limited partner equity interest. Fund II served as the exclusive vehicle through which we acquired investment interests in apartment communities from its formation in 2008 through the close of its investment period in August 2011. Fund II has a term that expires in August 2018, subject to two, one-year extension options.

During the three months ended September 30, 2013, Fund I sold Avalon at Cedar Place, located in Columbia, MD. Avalon at Cedar Place, containing 156 homes, was sold for $26,000,000. Our proportionate share of the gain in accordance with GAAP for the disposition was $688,000.

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In connection with the Archstone Acquisition, we assumed Archstones position in the Archstone U.S. Fund as the General Partner, a Limited Partner through which we hold a 28.6% equity interest, and a Class A partner, through which we hold a promote interest. The Archstone U.S. Fund was formed in July 2011 as a discretionary real estate investment vehicle and is fully invested. The Archstone U.S. Fund has a term expiring in 2021, subject to two, one-year extensions if necessary for the orderly dissolution of the Archstone U.S. Fund. The Archstone U.S. Fund will not impact the Companys development activities or investments acquired in operating communities acquired from unrelated third parties.

We also acquired interests in other joint venture entities as part of the Archstone Acquisition as described elsewhere in this report.

Communities Overview

Our real estate investments consist primarily of current operating apartment communities, communities in various stages of development (Development Communities) and Development Rights, as defined below. Our current operating communities are further distinguished as Established Communities, Other Stabilized Communities, Lease-Up Communities and Redevelopment Communities. While we establish the classification of communities on an annual basis, we may update the classification of communities during the calendar year to the extent that our plans with regard to the disposition or redevelopment of a community change during the year. The following is a description of each category:

Current Communities are categorized as Established, Other Stabilized, Lease-Up, or Redevelopment according to the following attributes:

· Established Communities (also known as same store communities) are consolidated communities where a comparison of operating results from the prior year to the current year is meaningful, as these communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior year. For the period ended September 30, 2013, the Established Communities are communities that are consolidated for financial reporting purposes, had stabilized occupancy and operating expenses as of January 1, 2012, are not conducting or planning to conduct substantial redevelopment activities and are not held for sale or planned for disposition within the current year. A community is considered to have stabilized occupancy at the earlier of (i) attainment of 95% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment.

· Other Stabilized Communities are all other completed communities that we own or have a direct or indirect ownership interest in, and that have stabilized occupancy, as defined above. Other Stabilized Communities do not include communities that are conducting or planning to conduct substantial redevelopment activities within the current year.

· Lease-Up Communities are communities where construction has been complete for less than one year and where physical occupancy has not reached 95%.

· Redevelopment Communities are communities where substantial redevelopment is in progress or is planned to begin during the current year. Redevelopment is considered substantial when capital invested during the reconstruction effort is expected to exceed either $5,000,000 or 10% of the communitys pre-redevelopment basis and is expected to have a material impact on the operations of the community, including occupancy levels and future rental rates.

Development Communities are communities that are under construction and for which a final certificate of occupancy has not been received. These communities may be partially complete and operating.

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Development Rights are development opportunities in the early phase of the development process for which we either have an option to acquire land or enter into a leasehold interest, for which we are the buyer under a long-term conditional contract to purchase land or where we control the land through a ground lease or own land to develop a new community. We capitalize related pre-development costs incurred in pursuit of new developments for which we currently believe future development is probable.

We currently lease our corporate headquarters located in Arlington, Virginia under an operating lease. The lease term ends in 2020, subject to two five year renewal options. All other regional and administrative offices are leased under operating leases.

As of September 30, 2013, communities that we owned or held a direct or indirect interest in were classified as follows:

	Number of	Number of
	communities	apartment homes

Current Communities

Established Communities:
New England	30	7,490
Metro NY/NJ	25	8,416
Mid-Atlantic	11	4,443
Pacific Northwest	10	2,387
Northern California	19	5,680
Southern California	22	5,827
Total Established	117	34,243

Other Stabilized Communities:
New England	15	3,183
Metro NY/NJ	20	6,408
Mid-Atlantic	26	8,705
Pacific Northwest	5	1,142
Northern California	16	5,154
Southern California	34	10,780
Non-Core	3	1,030
Total Other Stabilized	119	36,402

Lease-Up Communities	6	1,527

Redevelopment Communities	5	1,712

Total Current Communities	247	73,884

Development Communities	29	8,692

Development Rights	45	13,089

Results of Operations

Our year-over-year operating performance is primarily affected by both national and individual geographic market conditions and apartment fundamentals and is reflected in changes in NOI of our Established Communities; NOI derived from acquisitions and development completions; the loss of NOI related to disposed communities; and capital market and financing activity. A comparison of our operating results for the three and nine months ended September 30, 2013 and 2012 follows (unaudited, dollars in thousands):

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	For the three months ended									For the nine months ended
	9-30-13			9-30-12		$ Change		% Change		9-30-13			9-30-12		$ Change		% Change

Revenue:
Rental and other income	$	390,113		258,788		131,325		50.7	%	$	1,072,273		742,254		330,019		44.5	%
Management, development and other fees	3,014			2,533		481		19.0	%	8,198			7,852		346		4.4	%
Total revenue	393,127			261,321		131,806		50.4	%	1,080,471			750,106		330,365		44.0	%

Expenses:
Direct property operating expenses, excluding property taxes	82,797			55,954		26,843		48.0	%	216,546			159,882		56,664		35.4	%
Property taxes	42,678			25,475		17,203		67.5	%	116,515			73,171		43,344		59.2	%
Total community operating expenses	125,475			81,429		44,046		54.1	%	333,061			233,053		100,008		42.9	%

Corporate-level property management and other indirect operating expenses	13,810			9,935		3,875		39.0	%	38,905			31,917		6,988		21.9	%
Investments and investment management expense	1,043			1,582		(539	)	(34.1	)%	3,154			4,526		(1,372	)	(30.3	)%
Expensed acquisition, development and other pursuit costs	2,176			608		1,568		257.9	%	46,041			1,749		44,292		2,532.4	%
Interest expense, net	43,945			33,985		9,960		29.3	%	127,772			100,804		26,968		26.8	%
Loss on interest rate contract	53,484					53,484		100.0	%	51,000					51,000		100.0	%
Loss on extinguishment of debt, net													1,179		(1,179	)	(100.0	)%
Depreciation expense	160,682			62,750		97,932		156.1	%	457,837			183,688		274,149		149.2	%
General and administrative expense	9,878			8,372		1,506		18.0	%	31,262			26,398		4,864		18.4	%
Gain on sale of land										(240		)	(280	)	40		(14.3	)%
Gain on acquisition of unconsolidated real estate entities				(14,194	)	14,194		(100.0	)%				(14,194	)	14,194		(100.0	)%
Total other expenses	285,018			103,038		181,980		176.6	%	755,731			335,787		419,944		125.1	%

Equity in income (loss) of unconsolidated entities	3,260			5,553		(2,293	)	(41.3	)%	(16,244		)	9,801		(26,045	)	(265.7	)%

(Loss) income from continuing operations	(14,106		)	82,407		(96,513	)	(117.1	)%	(24,565		)	191,067		(215,632	)	(112.9	)%

Discontinued operations:
Income from discontinued operations	3,221			4,340		(1,119	)	(25.8	)%	7,073			15,062		(7,989	)	(53.0	)%
Gain on sale of communities										118,173			95,049		23,124		24.3	%
Total discontinued operations	3,221			4,340		(1,119	)	(25.8	)%	125,246			110,111		15,135		13.7	%

Net (loss) income	(10,885		)	86,747		(97,632	)	(112.5	)%	100,681			301,178		(200,497	)	(66.6	)%

Net loss attributable to noncontrolling interests	170			97		73		75.3	%	248			334		(86	)	(25.7	)%

Net (loss) income attributable to common stockholders	$	(10,715	)	86,844		(97,559	)	(112.3	)%	$	100,929		301,512		(200,583	)	(66.5	)%

Net (loss) income attributable to common stockholders decreased $97,559,000 or 112.3%, to a loss of $10,715,000 for the three months ended September 30, 2013 and $200,583,000 or 66.5% to income of $100,929,000 for the nine months ended September 30, 2013 from the prior year periods. The decreases for the three and nine months ended September 30, 2013 are due primarily to an increase in depreciation expense and expensed transaction costs associated with the Archstone Acquisition, coupled with the recognition of a loss associated with an interest rate protection agreement. The decreases in the three and nine months ended September 30, 2013 are partially offset by an increase in NOI from communities acquired in the Archstone Acquisition and our existing and newly developed communities.

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NOI is considered by management to be an important and appropriate supplemental performance measure to net income because it helps both investors and management to understand the core operations of a community or communities prior to the allocation of any corporate-level or financing-related costs. NOI reflects the operating performance of a community and allows for an easy comparison of the operating performance of individual assets or groups of assets. In addition, because prospective buyers of real estate have different financing and overhead structures, with varying marginal impacts to overhead by acquiring real estate, NOI is considered by many in the real estate industry to be a useful measure for determining the value of a real estate asset or group of assets. We define NOI as total property revenue less direct property operating expenses, including property taxes, and excluding corporate-level income (including management, development and other fees), corporate-level property management and other indirect operating expenses, investments and investment management expenses, expensed acquisition, development and other pursuit costs, net interest expense, gain (loss) on extinguishment of debt, general and administrative expense, joint venture income (loss), depreciation expense, impairment loss on land holdings, gain on sale of real estate assets and income from discontinued operations.

NOI does not represent cash generated from operating activities in accordance with GAAP. Therefore, NOI should not be considered an alternative to net income as an indication of our performance. NOI should also not be considered an alternative to net cash flow from operating activities, as determined by GAAP, as a measure of liquidity, nor is NOI indicative of cash available to fund cash needs. Reconciliations of NOI for the three and nine months ended September 30, 2013 and 2012 to net income for each period are as follows (unaudited, dollars in thousands):

	For the three months ended						For the nine months ended
	9-30-13			9-30-12			9-30-13			9-30-12

Net (loss) income	$	(10,885	)	$	86,747		$	100,681		$	301,178
Indirect operating expenses, net of corporate income	10,780			7,396			30,673			24,049
Investments and investment management expense	1,043			1,582			3,154			4,526
Expensed acquisition, development and other pursuit costs	2,176			608			46,041			1,749
Interest expense, net	43,945			33,985			127,772			100,804
Loss on interest rate contract	53,484						51,000
Loss on extinguishment of debt, net										1,179
General and administrative expense	9,878			8,372			31,262			26,398
Equity in (income) loss of unconsolidated entities	(3,260		)	(5,553		)	16,244			(9,801		)
Depreciation expense	160,682			62,750			457,837			183,688
Gain on sale of real estate assets							(118,413		)	(95,329		)
Income from discontinued operations	(3,221		)	(4,340		)	(7,073		)	(15,062		)
Gain on acquisition of unconsolidated entity				(14,194		)				(14,194		)
Net operating income	$	264,622		$	177,353		$	739,178		$	509,185

The NOI changes for the three and nine months ended September 30, 2013, as compared to the prior year periods, consist of changes in the following categories (unaudited, dollars in thousands):

	For the three months ended		For the nine months ended
	9-30-13		9-30-13

Established Communities	$	5,998	$	22,831

Other Stabilized Communities (1)	70,899		184,826

Development and Redevelopment Communities	10,372		22,336

Total	$	87,269	$	229,993

(1) Includes operating communities acquired as part of the Archstone Acquisition.

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The increase in our Established Communities NOI for the three months ended September 30, 2013 is due to increased rental rates, partially offset by decreased occupancy and increased operating expenses. The increase in our Established Communities NOI for the nine months ended September 30, 2013 is due to a combination of increased rental rates and increased occupancy, partially offset by increased operating expenses. For the balance of 2013, we expect continued rental revenue growth over the prior year, offset partially by an expected increase in operating expenses.

Rental and other income increased in the three and nine months ended September 30, 2013 as compared to the prior year periods due to additional rental income generated from newly developed and acquired communities, including those acquired in the Archstone Acquisition, and increases in rental rates at our Established Communities.

Overall Portfolio The weighted average number of occupied apartment homes for consolidated communities increased to 57,670 apartment homes for the nine months ended September 30, 2013, which includes the impact of communities acquired in the Archstone Acquisition, as compared to 43,597 homes for the prior year period. The weighted average monthly revenue per occupied apartment home increased to $2,110 for the nine months ended September 30, 2013 as compared to $1,983 in the prior year period.

Established Communities Rental revenue increased $8,093,000, or 3.9% and $28,260,000, or 4.7%, for the three and nine months ended September 30, 2013, respectively, over the prior year periods. The increase for the three months ended September 30, 2013 is due to an increase in rental rates of 4.4%, partially offset by a decrease in economic occupancy of 0.5% to 95.8%. The increase for the nine months ended September 30, 2013 is due to an increase in rental rates of 4.5% and economic occupancy of 0.2% to 96.2%. Economic occupancy takes into account the fact that apartment homes of different sizes and locations within a community have different economic impacts on a communitys gross revenue. Economic occupancy is defined as gross potential revenue less vacancy loss, as a percentage of gross potential revenue. Gross potential revenue is determined by valuing occupied homes at leased rates and vacant homes at market rents. We experienced increases in rental revenue from Established Communities in all six of our regions for the nine months ended September 30, 2013 over the prior year period. In some regions, we expect that increases in the supply of new apartment homes may slow revenue growth in future periods. Information for each of our regions is discussed in more detail below.

The Metro New York/New Jersey region, which accounted for 29.4% of Established Community rental revenue for the nine months ended September 30, 2013, experienced an increase in rental revenue of 4.7% as compared to the prior year period. Average rental rates increased 4.7% to $2,556, and economic occupancy remained constant at 96.5% for the nine months ended September 30, 2013. On a sequential basis, Metro New York/New Jersey reported rental revenue growth of 0.9% during the third quarter of 2013. Apartment demand in the Metro New York/New Jersey region is being driven by job growth across a diverse group of industries including healthcare, professional business services, other than financial services, technology, retail, hospitality and education. The region also continues to experience increased construction related employment growth related to Hurricane Sandy recovery efforts.

The New England region accounted for 21.5% of Established Community rental revenue for the nine months ended September 30, 2013 and experienced a rental revenue increase of 3.2% over the prior year period. Average rental rates increased 2.7% to $2,110 and economic occupancy increased 0.5% to 96.0% for the nine months ended September 30, 2013, as compared to the prior year period. Sequential revenue increased over the prior quarter by 1.7% during the three months ended September 30, 2013. The New England regions favorable results are driven by employment growth in the medical, education and technology fields in the Boston metro area. The region has seen an in-migration related to the strength in the employment markets. The Boston metro area has also begun to see a recovery in for-sale housing ahead of most other regions, resulting in an increase in recent move outs for home purchases. The Fairfield market continues to experience slower growth as it largely tracks the financial services sector.

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Northern California accounted for 17.7% of the Established Community rental revenue for the nine months ended September 30, 2013 and experienced a rental revenue increase of 8.4% over the prior year period. Average rental rates increased 8.1% to $2,285, and economic occupancy increased 0.3% to 96.3% for the nine months ended September 30, 2013 as compared to the prior year period. The Northern California region also saw the strongest sequential rental revenue growth in our markets, increasing 2.7% over the second quarter of 2013. While the expected new supply of apartment homes may slow revenue growth in future periods, the current strength of the technology sector continues to fuel demand for apartment homes.

The Mid-Atlantic region, which represented 11.9% of Established Community rental revenue for the nine months ended September 30, 2013, experienced an increase in rental revenue of 1.1% over the prior year period. Average rental rates increased by 1.3% to $1,971 over the prior year period, while economic occupancy decreased by 0.2% to 95.9%, for the nine months ended September 30, 2013. The Mid-Atlantic region experienced a sequential quarterly rental revenue decrease of 0.2%. The recent decline in revenue growth in the region is being driven by an increase in the supply of apartment homes in conjunction with the impacts of the decline in federal government spending due to sequestration and continuing fiscal constraints.

Southern California accounted for 14.0% of the Established Community rental revenue for the nine months ended September 30, 2013. The region experienced a rental revenue increase of 4.2% over the prior year period driven by an increase in average rental rates of 3.8% to $1,759 and an increase in economic occupancy of 0.4% to 96.3% for the nine months ended September 30, 2013. Sequentially, the Southern California region saw a 1.5% increase in rental revenue in the third quarter of 2013. Southern California has seen steady job growth and limited new apartment supply which we expect will continue to support favorable operating results.

The Pacific Northwest region accounted for 5.5% of the Established Community rental revenue for the nine months ended September 30, 2013 and experienced a rental revenue increase of 7.9% over the prior year period. Average rental rates increased 8.2% to $1,684, while economic occupancy decreased 0.3% to 95.9% for the nine months ended September 30, 2013 as compared to the prior year period. The Pacific Northwest showed sequential rental revenue growth of 1.4%. The regions innovative on-line retail, technology, and manufacturing sectors continue to support growth in the economy and improvement in apartment fundamentals. Apartment demand may be tempered in the near term due to the increased supply of apartment homes, which may affect our future revenue growth in this region.

In accordance with GAAP, cash concessions are amortized as an offset to rental revenue over the approximate lease term, which is generally one year. As a supplemental measure, we also present rental revenue with concessions stated on a cash basis to help investors evaluate the impact of both current and historical concessions on GAAP based rental revenue and to more readily enable comparisons to revenue as reported by other companies. Rental revenue with concessions stated on a cash basis also allows investors to understand historical trends in cash concessions, as well as current rental market conditions.

The following table reconciles total rental revenue in conformity with GAAP to total rental revenue adjusted to state concessions on a cash basis for our Established Communities for the three and nine months ended September 30, 2013 and 2012 (unaudited, dollars in thousands):

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	For the three months ended						For the nine months ended
	9-30-13			9-30-12			9-30-13			9-30-12

Rental revenue (GAAP basis)	$	214,840		$	206,747		$	634,944		$	606,684
Concessions amortized	71			136			170			736
Concessions granted	(325		)	(61		)	(395		)	(250		)

Rental revenue adjusted to state concessions on a cash basis	$	214,586		$	206,822		$	634,719		$	607,170

Year-over-year % change GAAP revenue				3.9		%				4.7		%

Year-over-year % change cash concession based revenue				3.8		%				4.5		%

Management, development and other fees increased $481,000, or 19.0%, and $346,000, or 4.4%, for the three and nine months ended September 30, 2013, respectively, as compared to the prior year periods. The increases for the three and nine months ended September 30, 2013 were primarily due to management fees related to the Archstone U.S. Fund and the AC JV, partially offset by lower property management and other management fees earned related to dispositions from Fund I and Fund II.

Direct property operating expenses, excluding property taxes increased $26,843,000, or 48.0%, for the three months ended September 30, 2013 and $56,664,000, or 35.4%, for the nine months ended September 30, 2013 as compared to the prior year periods, primarily due to the addition of newly developed and acquired apartment homes, including the communities acquired as part of the Archstone Acquisition.

For Established Communities, direct property operating expenses, excluding property taxes, increased $1,896,000, or 4.3%, for three months ended September 30, 2013, and $2,309,000, or 1.8%, for the nine months ended September 30, 2013 over the prior year period. The increase for the three and nine months ended September 30, 2013 was primarily due increases in repairs and maintenance, insurance, and office operations costs.

Property taxes increased $17,203,000, or 67.5%, and $43,344,000, or 59.2%, for the three and nine months ended September 30, 2013, respectively, over the prior year periods, due to the addition of newly developed and acquired apartment homes, including communities acquired as part of the Archstone Acquisition, coupled with increased tax rates and assessments across our portfolio.

For Established Communities, property taxes increased by $226,000, or 1.1%, and $3,160,000, or 5.2%, for the three and nine months ended September 30, 2013, respectively, over the prior year periods due to higher assessments and rate increases. The increase for the three and nine months ended September 30, 2013 was partially offset by higher successful appeals and refunds received in 2013, as compared to the prior year period. We expect property taxes to continue to increase for the balance of 2013 over 2012. For communities in California, property tax changes are determined by the change in the California Consumer Price Index, with increases limited by law (Proposition 13). Massachusetts also has laws in place to limit property tax increases. We evaluate property tax increases internally and also engage third-party consultants to assist in our evaluations. We appeal property tax increases when appropriate.

Corporate-level property management and other indirect operating expenses increased by $3,875,000, or 39.0%, and $6,988,000, or 21.9%, for the three and nine months ended September 30, 2013, respectively, over the prior year periods, primarily due to compensation related costs.

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Investments and investment management expense decreased by $539,000, or 34.1%, and $1,372,000, or 30.3%, for the three and nine months ended September 30, 2013, respectively, from the prior year periods, primarily due to decreased compensation related costs related to our investment management fund platform.

Expensed acquisition, development and other pursuit costs primarily reflect the costs incurred related to our asset investment activity, abandoned pursuit costs, which include costs incurred for development pursuits not yet considered probable for development, as well as the abandonment of Development Rights, acquisition pursuits and disposition pursuits. These costs can be volatile, particularly in periods of increased acquisition activity, periods of economic downturn or when there is limited access to capital, and the costs may vary significantly from period to period. These costs increased in the three and nine months ended September 30, 2013, due primarily to costs associated with the Archstone Acquisition.

Interest expense, net increased $9,960,000, or 29.3%, and $26,968,000, or 26.8%, for the three and nine months ended September 30, 2013, respectively, over the prior year periods. This category includes interest costs offset by capitalized interest pertaining to development activity, amortization of the mark to market adjustment on debt assumed as part of the Archstone Acquisition, and interest income. The increases for the three and nine months ended September 30, 2013 are due primarily to net interest costs on debt assumed in the Archstone Acquisition, partially offset by increased capitalized interest as compared to the prior year periods.

Loss on interest rate contract reflects the loss recorded by the Company related to the forward interest rate protection agreement that matured in May 2013. Based on changes in the Companys capital markets outlook for the year at September 30, 2013, the Company deemed it was probable that it would not issue the anticipated debt for which the interest rate protection agreement was transacted.

Loss on the extinguishment of debt, net reflects prepayment penalties, the expensing of deferred financing costs from our debt repurchase and retirement activity, or payments to acquire our outstanding debt at amounts above or below the carrying basis of the debt acquired, excluding costs related to debt secured by assets sold or held for sale, which is included in discontinued operations, below.

Depreciation expense increased $97,932,000, or 156.1%, and $274,149,000, or 149.2%, in the three and nine months ended September 30, 2013, respectively, over the prior year periods. The increase is primarily due to additional depreciation expense from the Archstone Acquisition, consisting largely of the depreciation of in-place lease intangibles, which are being depreciated over a six month period.

General and administrative expense (G&A) increased $1,506,000, or 18.0%, and $4,864,000, or 18.4%, for the three and nine months ended September 30, 2013, respectively, over the prior year period due primarily to increased compensation costs, including costs related to the Archstone Acquisition.

Gain on acquisition of unconsolidated real estate entities for the three and nine months ended September 30, 2012, represents the amount by which the fair value of our prior ownership interest in the venture that owned Avalon Del Rey exceeded our carrying value.

Equity in income (loss) of unconsolidated entities decreased $2,293,000, or 41.3%, and $26,045,000, or 265.7%, for the three and nine months ended September 30, 2013, respectively, as compared to the prior year periods. Costs of approximately $2,743,000 and $37,295,000 associated with the Archstone Acquisition were incurred through the unconsolidated joint venture entities owned with Equity Residential during the three and nine months ended September 30, 2013, respectively.

Income from discontinued operations represents the net income generated by real estate sold or qualifying as discontinued operations during the period from January 1, 2012 through September 30, 2013. This decrease for the three and nine months ended September 30, 2013 was due to the number and size of communities sold or held for sale during each period.

Gain on sale of communities increased for the nine months ended September 30, 2013. The amount of gain realized upon disposition of a community depends on many factors, including the number of communities sold, the size and carrying value of those communities and the market conditions in the local area.

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Net loss attributable to noncontrolling interests for the three and nine months ended September 30, 2013 resulted in an allocation of loss of $170,000 and $248,000, respectively, as compared to an allocation of loss of $97,000 and $334,000 for the three and nine months ended September 30, 2012, respectively.

Funds from Operations Attributable to Common Stockholders (FFO)

FFO is considered by management to be an appropriate supplemental measure of our operating and financial performance. In calculating FFO, we exclude gains or losses related to dispositions of previously depreciated property and exclude real estate depreciation, which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates. FFO can help one compare the operating performance of a real estate company between periods or as compared to different companies. We believe that in order to understand our operating results, FFO should be examined with net income as presented in our Condensed Consolidated Financial Statements included elsewhere in this report.

Consistent with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trustsâ(NAREIT), we calculate FFO as net income or loss computed in accordance with GAAP, adjusted for:

· gains or losses on sales of previously depreciated operating communities;

· extraordinary gains or losses (as defined by GAAP);

· cumulative effect of change in accounting principle;

· impairment write-downs of depreciable real estate assets;

· write-downs of investments in affiliates due to a decrease in the value of depreciable real estate assets held by those affiliates;

· depreciation of real estate assets; and

· adjustments for unconsolidated partnerships and joint ventures.

FFO does not represent net income attributable to common stockholders in accordance with GAAP, and therefore it should not be considered an alternative to net income, which remains the primary measure of performance. In addition, FFO as calculated by other REITs may not be comparable to our calculation of FFO.

The following is a reconciliation of net income attributable to common stockholders to FFO (unaudited, dollars in thousands, except per share data):

	For the three months ended						For the nine months ended
	9-30-13			9-30-12			9-30-13			9-30-12

Net (loss) income attributable to common stockholders	$	(10,715	)	$	86,844		$	100,929		$	301,512
Depreciation - real estate assets, including discontinued operations and joint venture adjustments	164,756			67,590			476,202			199,593
Distributions to noncontrolling interests, including discontinued operations	8			7			24			21
Gain on sale of unconsolidated entities holding previously depreciated real estate assets	(688		)				(11,512		)	(1,471		)
Gain on sale of previously depreciated real estate assets							(118,173		)	(95,049		)
Gain on acquisition of unconsolidated real estate entity				(14,194		)				(14,194		)
FFO attributable to common stockholders	$	153,361		$	140,247		$	447,470		$	390,412

Weighted average common shares outstanding - diluted	129,620,138			97,546,569			126,477,114			96,401,558
EPS per common share - diluted (1)	$	(0.08	)	$	0.89		$	0.80		$	3.13
FFO per common share - diluted	$	1.18		$	1.44		$	3.54		$	4.05

(1) EPS for the three months ended September 30, 2013 computed using weighted average basic shares and participating units outstanding of 129,401,567.

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FFO also does not represent cash generated from operating activities in accordance with GAAP, and therefore should not be considered an alternative to net cash flows from operating activities, as determined by GAAP, as a measure of liquidity. Additionally, it is not necessarily indicative of cash available to fund cash needs.

A presentation of GAAP based cash flow metrics is as follows (unaudited, dollars in thousands) and a discussion of Liquidity and Capital Resources can be found later in this report:

	For the three months ended						For the nine months ended
	9-30-13			9-30-12			9-30-13			9-30-12
Net cash provided by operating activities	$	202,712		$	152,705		$	469,923		$	375,173
Net cash used in investing activities	$	(310,661	)	$	(289,981	)	$	(1,195,011	)	$	(482,732	)
Net cash (used in) provided by financing activities	$	109,712		$	443,146		$	(1,895,620	)	$	154,839

Liquidity and Capital Resources

We believe our principal short-term liquidity needs are to fund:

· any additional costs associated with the Archstone Acquisition as well as the integration of the acquired Archstone communities into our business;

· development and redevelopment activity in which we are currently engaged;

· the minimum dividend payments on our common stock required to maintain our REIT qualification under the Code;

· debt service and principal payments either at maturity or opportunistically before maturity; and

· normal recurring operating expenses.

Factors affecting our liquidity and capital resources are our cash flows from operations, financing activities and investing activities (including dispositions) as well as general economic and market conditions. Operating cash flows has historically been determined by: (i) the number of apartment homes currently owned, (ii) rental rates, (iii) occupancy levels and (iv) operating expenses with respect to apartment homes. The timing and type of capital markets activity in which we engage, as well as our plans for development, redevelopment, acquisition and disposition activity, are affected by changes in the capital markets environment, such as changes in interest rates or the availability of cost-effective capital. We regularly review our liquidity needs, the adequacy of cash flows from operations and other expected liquidity sources to meet these needs.

For the balance of 2013, we expect to meet our liquidity needs from a variety of internal and external sources, which may include cash balances on hand, borrowing capacity under our Credit Facility, secured and unsecured debt financings, and other public or private sources of liquidity including common and preferred equity, amounts issued under our CEP III discussed below, real estate dispositions, as well as cash generated from our operating activities. Our ability to obtain additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to the real estate industry, our credit ratings and credit capacity, as well as the perception of lenders regarding our long or short-term financial prospects.

At September 30, 2013, we had unrestricted cash, cash equivalents and cash in escrow of $211,339,000 available for both current liquidity needs and development activities.

Unrestricted cash and cash equivalents totaled $112,910,000 at September 30, 2013, a decrease of $2,620,708,000 from $2,733,618,000 at December 31, 2012. The following discussion relates to changes in cash due to operating, investing and financing activities, which are presented in our Condensed Consolidated Statements of Cash Flows included elsewhere in this report.

Operating Activities Net cash provided by operating activities increased to $469,923,000 for the nine months ended September 30, 2013 from $375,173,000 for the nine months ended September 30, 2012. The change was driven primarily by increased NOI from our communities and the timing of payments of corporate obligations.

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Investing Activities Net cash used in investing activities of $1,195,011,000 for the nine months ended September 30, 2013 related to investments in assets primarily through acquisitions, development and redevelopment. During the nine months ended September 30, 2013, we invested $1,675,303,000 in the following:

· we invested $749,275,000 in the acquisition of real estate related to the Archstone Acquisition;

· we invested approximately $908,215,000 in the development and redevelopment of communities; and

· we had capital expenditures of $17,813,000 for real estate and non-real estate assets.

Financing Activities Net cash used in financing activities totaled $1,895,620,000 for the nine months ended September 30, 2013. The net cash used is due to the repayment of $1,789,399,000 in secured notes and prepayment penalties, primarily in conjunction with the Archstone Acquisition, payment of cash dividends in the amount of $387,658,000, and the repayment of $100,000,000 in unsecured notes, partially offset by the issuance of $400,000,000 aggregate principal amount of unsecured notes.

Variable Rate Unsecured Credit Facility

The Company has a $1,300,000,000 revolving variable rate unsecured credit facility with a syndicate of banks (the Credit Facility) which matures in April 2017. We may extend the maturity for up to one year through the exercise of two, six month extension options for total extension fees of $1,950,000. The Credit Facility bears interest at varying levels based on the London Interbank Offered Rate (LIBOR), rating levels achieved on our unsecured notes and on a maturity schedule selected by us. The current stated pricing is LIBOR plus 1.05% (1.22% at October 31, 2013 assuming a one month borrowing rate). The annual facility fee is 0.15% (or approximately $1,950,000 annually based on the $1,300,000,000 facility size and based on our current credit rating).

We had outstanding borrowings of $20,000,000 under the Credit Facility and had $64,490,000 outstanding in letters of credit that reduced our borrowing capacity as of October 31, 2013.

Financial Covenants

We are subject to financial and other covenants contained in the Credit Facility and the indenture under which our unsecured notes were issued. The financial covenants include the following:

· limitations on the amount of total and secured debt in relation to our overall capital structure;

· limitations on the amount of our unsecured debt relative to the undepreciated basis of real estate assets that are not encumbered by property-specific financing; and

· minimum levels of debt service coverage.

We were in compliance with these covenants at September 30, 2013.

In addition, our secured borrowings may include yield maintenance, defeasance, or prepayment penalty provisions, which would result in us incurring an additional charge in the event of a full or partial prepayment of outstanding principal before the scheduled maturity. These provisions in our secured borrowings are generally consistent with other similar types of debt instruments issued during the same time period in which our borrowings were secured.

Continuous Equity Program (CEP)

In August 2012, we commenced a third continuous equity program (CEP III), under which we are authorized to sell up to $750,000,000 of shares of our common stock from time to time during a 36-month period. We did not sell any shares under CEP III during the nine months ended September 30, 2013. We have $646,274,000 of our common stock available to be issued under CEP III at September 30, 2013.

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Future Financing and Capital Needs Debt Maturities

One of our principal long-term liquidity needs is the repayment of long-term debt at the time that such debt matures. For both our unsecured and secured notes, a portion of the principal of these notes may be repaid prior to maturity. Early retirement of our secured or unsecured notes could result in gains or losses on extinguishment. If we do not have funds on hand sufficient to repay our indebtedness as it becomes due, it will be necessary for us to refinance or repay the debt. This refinancing or repayment may be accomplished by uncollateralized private or public debt offerings, equity issuances, additional debt financing that is secured by mortgages on individual communities or groups of communities or borrowings under our Credit Facility. Although we believe we will have the capacity to meet our currently anticipated liquidity needs, we cannot assure you that additional debt financing or debt or equity offerings will be available or, if available, that they will be on terms we consider satisfactory.

The following additional financing activity occurred in 2013 through October 31, 2013:

· In connection with the Archstone Acquisition, we assumed $2,034,482,000 net principal amount of Archstones existing secured indebtedness, detailed in the following table.

· In March 2013, we repaid $100,000,000 principal amount of 4.95% unsecured notes pursuant to their scheduled maturity.

· In April 2013, we obtained a 3.06% fixed rate secured mortgage loan in the amount of $15,000,000 that matures in April 2018.

· In April 2013, we repaid a 4.69% fixed rate secured mortgage note in the amount of $170,125,000 pursuant to its scheduled maturity date.

· In May 2013, we repaid a $5,393,000 fixed rate secured mortgage note with an interest rate of 5.55% at par and without penalty in advance of its July 2028 scheduled maturity date.

· In May 2013, we obtained a 3.08% fixed rate secured mortgage loan that matures in May 2020 in the amount of $56,210,000, in association with the refinancing of an existing $47,000,000 variable rate secured mortgage note.

· In May 2013, we repaid a $52,806,000 fixed rate secured mortgage note with an interest rate of 5.24% pursuant to its scheduled maturity date.

· In September 2013, we issued $400,000,000 principal amount of unsecured notes in a public offering under our existing shelf registration statement for net proceeds of approximately $396,212,000. The notes mature in October 2020 and were issued at a 3.63% interest rate. The notes have an effective interest rate of 3.79% including the effect of offering costs.

The following table details our consolidated debt maturities for the next five years, excluding our Credit Facility and amounts outstanding related to communities classified as held for sale, for debt outstanding at September 30, 2013 (dollars in thousands). We are not directly or indirectly (as borrower or guarantor) obligated in any material respect to pay principal or interest on the indebtedness of any unconsolidated entities in which we have an equity or other interest.

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	All-In		Principal
	interest		maturity	Balance Outstanding
Community	rate (1)		date	12-31-12		9-30-13			2013		2014		2015		2016		2017		Thereafter
Tax-exempt bonds
Fixed rate (4)
Eaves Washingtonian Center I	7.82	%	May-2027	$	8,764	$	8,494		$	93	$	390	$	419	$	449	$	482	$	6,661
Avalon Oaks	7.50	%	Feb-2041	16,288		16,144			47		207		222		238		255		15,175
Avalon Oaks West	7.54	%	Apr-2043	16,205		16,076			44		185		198		211		225		15,213
Avalon at Chestnut Hill	6.15	%	Oct-2047	40,390		40,084			105		434		457		482		509		38,097
Archstone Meadowbrook Crossing	4.61	%	Nov-2036			62,200		(7)											62,200
				81,647		142,998			289		1,216		1,296		1,380		1,471		137,346

Variable rate (2) (4)
Avalon at Mountain View	0.98	%	Feb-2017	18,300		18,300		(3)									18,300
Avalon at Mission Viejo	1.24	%	Jun-2025	7,635		7,635		(3)											7,635
AVA Nob Hill	1.16	%	Jun-2025	20,800		20,800		(3)											20,800
Avalon Campbell	1.48	%	Jun-2025	38,800		38,800		(3)											38,800
Avalon Pacifica	1.49	%	Jun-2025	17,600		17,600		(3)											17,600
Avalon Bowery Place I	3.02	%	Nov-2037	93,800		93,800		(3)											93,800
Avalon Acton	1.56	%	Jul-2040	45,000		45,000		(3)											45,000
Avalon Walnut Creek	1.48	%	Mar-2046	116,000		116,000		(9)											116,000
Avalon Walnut Creek	1.44	%	Mar-2046	10,000		10,000		(9)											10,000
Avalon Morningside Park	1.59	%	May-2046	100,000		100,000		(5)											100,000
Archstone Clinton North	3.28	%	May-2038			147,000		(7)(3)											147,000
Archstone Clinton South	3.28	%	May-2038			121,500		(7)(3)											121,500
Archstone Midtown West	2.57	%	May-2029			100,500		(7)(3)											100,500
Archstone San Bruno	2.63	%	Dec-2037			64,450		(7)(3)											64,450
Archstone Calabasas	2.65	%	Apr-2028			44,410		(7)(3)											44,410
				467,935		945,795											18,300		927,495

Conventional loans (4)
Fixed rate
$100 Million unsecured notes			Mar-2013	100,000
$150 Million unsecured notes	5.52	%	Apr-2014	150,000		150,000					150,000
$250 Million unsecured notes	5.89	%	Sep-2016	250,000		250,000									250,000
$250 Million unsecured notes	5.82	%	Mar-2017	250,000		250,000											250,000
$250 Million unsecured notes	6.19	%	Mar-2020	250,000		250,000													250,000
$250 Million unsecured notes	4.04	%	Jan-2021	250,000		250,000													250,000
$450 Million unsecured notes	4.30	%	Sep-2022	450,000		450,000													450,000
$250 Million unsecured notes	3.00	%	Mar-2023	250,000		250,000													250,000
$400 Million unsecured notes	3.79	%	Oct-2020			400,000													400,000
Avalon at Tysons West			Jul-2028	5,465				(8)
Avalon Orchards	7.78	%	Jul-2033	17,939		17,635			105		438		470		503		539		15,580
Avalon at Arlington Square			Apr-2013	170,125				(6)
Avalon Crescent	5.48	%	May-2015	110,600		110,600							110,600
Avalon at Silicon Valley	5.66	%	Jul-2015	150,000		150,000							150,000
Avalon Darien	6.22	%	Nov-2015	49,221		48,674			192		785		47,697
Avalon Greyrock Place	6.13	%	Nov-2015	59,292		58,619			234		962		57,423
Avalon Walnut Creek	4.40	%	Jul-2066	2,500		2,500													2,500
Avalon Shrewsbury	5.92	%	May-2019	20,737		20,534			71		289		307		323		346		19,198
Eaves Trumbull	5.93	%	May-2019	40,552		40,156			138		566		601		631		676		37,544
Avalon at Stamford Harbor	5.92	%	May-2019	64,472		63,843			219		900		955		1,003		1,075		59,691
Avalon Freehold	5.94	%	May-2019	35,948		35,598			122		502		532		559		599		33,284
Avalon Run East	5.94	%	May-2019	38,519		38,144			131		538		571		599		642		35,663
Eaves Nanuet	6.06	%	May-2019	65,004		64,370			221		907		963		1,011		1,083		60,185
Avalon at Edgewater	5.94	%	May-2019	77,103		76,351			262		1,076		1,142		1,199		1,285		71,387
Avalon Foxhall	6.05	%	May-2019	57,912		57,347			197		808		858		901		965		53,618
Avalon at Gallery Place	6.05	%	May-2019	44,997		44,558			153		628		667		700		750		41,660
Avalon at Traville	5.91	%	May-2019	76,254		75,510			259		1,065		1,130		1,186		1,271		70,599
Avalon Bellevue	5.91	%	May-2019	26,201		25,946			89		366		388		408		437		24,258
Avalon on The Alameda	5.90	%	May-2019	52,975		52,459			180		740		785		824		883		49,047
Avalon at Mission Bay North	5.90	%	May-2019	71,905		71,204			245		1,004		1,065		1,118		1,198		66,574
Fairfax Towers	4.37	%	Aug-2015	42,459		41,700			261		1,070		40,369
Eaves Phillips Ranch			Jun-2013	53,348				(6)
The Mark Pasadena	4.05	%	Jun-2018	11,958		11,915			45		186		195		202		213		11,074
Archstone Seal Beach	3.12	%	Nov-2015			86,167		(7)					86,167
Oakwood Toluca Hills	3.12	%	Nov-2015			167,595		(7)					167,595
Mountain View at Middlefield	3.12	%	Nov-2015			72,374		(7)					72,374
Tunlaw Gardens	3.12	%	Nov-2015			28,844		(7)					28,844
Archstone Glover Park	3.12	%	Nov-2015			23,858		(7)					23,858
Oakwood Philadelphia	3.12	%	Nov-2015			10,427		(7)					10,427
Oakwood Arlington	3.12	%	Nov-2015			42,703		(7)					42,703
Archstone Quincy	3.12	%	Nov-2015			37,212		(7)					37,212
Archstone Thousand Oaks Plaza	3.12	%	Nov-2015			28,742		(7)					28,742
Archstone La Jolla Colony	3.36	%	Nov-2017			27,176		(7)									27,176
Archstone Old Town Pasadena	3.36	%	Nov-2017			15,669		(7)									15,669
Archstone Thousand Oaks	3.36	%	Nov-2017			27,411		(7)									27,411
Archstone Walnut Ridge	3.36	%	Nov-2017			20,754		(7)									20,754
Archstone Los Feliz	3.36	%	Nov-2017			43,258		(7)									43,258
Archstone Oak Creek	3.36	%	Nov-2017			85,288		(7)									85,288
Archstone Del Mar Station	3.36	%	Nov-2017			76,471		(7)									76,471
Archstone Courthouse Place	3.36	%	Nov-2017			140,332		(7)									140,332
Archstone Pasadena	3.36	%	Nov-2017			28,079		(7)									28,079
Archstone West Valley	3.36	%	Nov-2017			83,087		(7)									83,087
Archstone Woodland Hills	3.36	%	Nov-2017			104,694		(7)									104,694
Archstone Russett	3.36	%	Nov-2017			39,972		(7)									39,972
Archstone First + M	4.97	%	May-2053			128,826		(7)	224		901		954		987		1,067		124,693
Archstone San Bruno II	3.85	%	Apr-2021			31,503		(7)	105		430		454		475		506		29,533
Archstone Meadowbrook Crossing	4.81	%	Nov-2036			21,620		(7)	270		1,095		1,155		1,315		1,275		16,510
Archstone Lexington	3.32	%	Mar-2016			16,842		(7)	62		255		270		16,255
Avalon Andover	3.30	%	Apr-2018			14,898			76		309		319		328		339		13,527
Archstone San Bruno III	4.92	%	May-2020			56,210							561		1,147		1,188		53,314
				3,295,486		4,817,675			3,861		165,820		918,353		281,674		958,528		2,489,439

Variable rate (2) (4) (5)
Avalon Walnut Creek	1.73	%	Mar-2046	9,000		8,500		(9)											8,500
Archstone Calabasas	2.49	%	Aug-2018			57,314		(7)(3)	245		1,020		1,084		1,152		1,225		52,588
				9,000		65,814			245		1,020		1,084		1,152		1,225		61,088

Total indebtedness-excluding unsecured credit facility				$	3,854,068	$	5,972,282		$	4,395	$	168,056	$	920,733	$	284,206	$	979,524	$	3,615,368

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(1) Includes credit enhancement fees, facility fees, trustees fees, the impact of interest rate hedges, offering costs, mark to market amortization and other fees.

(2) Variable rates are given as of September 30, 2013.

(3) Financed by variable rate debt, but interest rate is capped through an interest rate protection agreement.

(4) Balances outstanding represent total amounts due at maturity, and do not reflect $4,809 and $4,202 of debt discount associated with the unsecured notes, net as of September 30, 2013 and December 31, 2012, respectively, and $130,159 and $1,167 premium associated with secured notes as of September 30, 2013 and December 31, 2012, respectively, as reflected on our Condensed Consolidated Balance Sheets included elsewhere in this report.

(5) In July 2012 we remarketed the bonds converting them to a variable rate through July 2017.

(6) Borrowing was repaid in accordance with its scheduled maturity.

(7) Borrowing was assumed as part of the Archstone Acquisition.

(8) Borrowing was repaid in May 2013 at par in advance of its scheduled maturity in July 2028.

(9) In July 2013 we remarketed the bonds converting them to variable rate through July 2018.

Future Financing and Capital Needs Portfolio and Other Activity

As of September 30, 2013, we had 29 communities under construction, including one being constructed in a joint venture in which we own a 20% interest, for which a total estimated cost of approximately $1,169,726,000 remained to be invested. We also had five wholly-owned communities under reconstruction, for which a total estimated cost of approximately $32,447,000 remained to be invested. Substantially all of the capital expenditures necessary to complete the communities currently under construction and reconstruction, and to fund development costs related to pursuing Development Rights, will be funded from:

· our $1,300,000,000 Credit Facility until it expires in 2018, assuming we exercise the two extension options;

· cash currently on hand, invested in highly liquid overnight money market funds and repurchase agreements, and short-term investment vehicles;

· retained operating cash;

· the net proceeds from sales of existing communities;

· the issuance of debt or equity securities; and/or

· private equity funding, including joint venture activity.

Before planned construction or reconstruction activity, including activity related to communities owned by unconsolidated joint ventures begins, we intend to arrange adequate financing to complete these undertakings, although we cannot assure you that we will be able to obtain such financing. In the event that financing cannot be obtained, we may have to abandon Development Rights, write off associated pre-development costs that were capitalized and/or forego reconstruction activity. In such instances, we will not realize the increased revenues and earnings that we expected from such Development Rights or reconstruction activity and significant losses could be incurred.

From time to time we use joint ventures to hold or develop individual real estate assets. We generally employ joint ventures primarily to mitigate asset concentration or market risk and secondarily as a source of liquidity. We may also use joint ventures related to mixed-use land development opportunities where our partners bring development and operational expertise to the venture. Each joint venture or partnership agreement has been individually negotiated, and our ability to operate and/or dispose of a community in our sole discretion may be limited to varying degrees depending on the terms of the joint venture or partnership agreement. We cannot assure you that we will achieve our objectives through joint ventures.

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In evaluating our allocation of capital within our markets, we sell assets that do not meet our long-term investment criteria or when capital and real estate markets allow us to realize a portion of the value created over the past business cycle and redeploy the proceeds from those sales to develop and redevelop communities. Because the proceeds from the sale of communities may not be immediately redeployed into revenue generating assets, the immediate effect of a sale of a community for a gain is to increase net income, but reduce future total revenues, total expenses and NOI. However, we believe that the absence of future cash flows from communities sold will have a minimal impact on our ability to fund future liquidity and capital resource needs.

Unconsolidated Real Estate Investments and Off-Balance Sheet Arrangements

As of September 30, 2013, excluding our interest in the Residual JV discussed further below, we had investments in the following unconsolidated real estate entities with ownership interest percentages ranging from 15.2% to 31.3%. We account for these investments in unconsolidated real estate entities under the equity method of accounting. Refer to Note 5, Archstone Acquisition, and Note 6, Investments in Real Estate Entities, of the Condensed Consolidated Financial Statements located elsewhere in this report, which includes information on the aggregate assets, liabilities and equity, as well as operating results, and our proportionate share of their operating results. The following table excludes our interest in the Residual JV, discussed further below.

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	Company		# of	Total		Debt (2)
	ownership		Apartment	capitalized					Interest		Maturity
Unconsolidated Real Estate Investments	percentage		homes	cost (1)		Amount		Type	rate (3)		date

Fund I
1. Avalon Sunset - Los Angeles, CA (4)			82	$	21,017	$	12,750	Fixed	5.41	%	Mar 2014
2. The Springs - Corona, CA (5)			320	30,042		22,489		Fixed	6.06	%	Oct 2014
3. Avalon Centerpoint - Baltimore, MD (6)			392	80,307		45,000		Fixed	5.74	%	Dec 2014
4. Middlesex Crossing - Billerica, MA			252	38,655		24,100		Fixed	5.49	%	Dec 2014
5. Avalon Crystal Hill - Ponoma, NY			168	38,888		24,500		Fixed	5.43	%	Dec 2014
6. Avalon Rutherford Station - East Rutherford, NJ			108	36,849		18,841		Fixed	6.13	%	Sep 2016
7. South Hills Apartments - West Covina, CA			85	24,907		11,762		Fixed	5.92	%	Oct 2014
8. Weymouth Place - Weymouth, MA			211	25,499		13,455		Fixed	5.12	%	Mar 2015
Total Fund I	15.2	%	1,618	$	296,164	$	172,897		5.69	%

Fund II
1. Avalon Bellevue Park - Bellevue, WA			220	$	34,053	$	21,515	Fixed	5.52	%	Jun 2019
2. Avalon Fair Oaks - Fairfax, VA			491	72,461		42,422		Fixed	5.26	%	May 2017
3. The Apartments at Briarwood - Owings Mills, MD			348	45,644		26,850		Fixed	3.64	%	Nov 2017
4. Eaves Gaithersburg - Gaithersburg, MD (7)			684	102,349		63,200		Fixed	5.42	%	Jan 2018
5. Eaves Tustin - Tustin, CA			628	100,501		59,100		Fixed	3.81	%	Oct 2017
6. Eaves Los Alisos - Lake Forest, CA			140	27,466				N/A	N/A		N/A
7. Eaves Plainsboro - Plainsboro, NJ (7)			776	90,989		52,417		Fixed	4.56	%	Nov 2014
8. Eaves Carlsbad - Carlsbad, CA			448	79,797		46,141		Fixed	4.68	%	Feb 2018
9. Eaves Rockville - Rockville, MD			210	51,535		31,020		Fixed	4.26	%	Aug 2019
10. Captain Parker Arms - Lexington, MA			94	22,026		13,500		Fixed	3.90	%	Sep 2019
11. Eaves Rancho San Diego - San Diego, CA			676	126,230		71,794		Fixed	3.45	%	Nov 2018
12. Avalon Watchung - Watchung, NJ			334	65,872		40,950		Fixed	3.37	%	Apr 2019
Total Fund II	31.3	%	5,049	$	818,923	$	468,909		4.34	%

Archstone U.S. Fund
1. Archstone Sunnyvale (Parkside) - Sunnyvale, CA			192	$	66,833	$	36,149	Fixed	5.44	%	Nov 2019
2. Archstone Studio 4041 - Studio City, CA			149	56,564		30,150		Fixed	3.34	%	Nov 2022
3. Marina Bay - Marina del Rey, CA (8)			205	63,750				N/A	N/A		N/A
4. Avalon Venice on Rose - Venice, CA			70	57,199		31,901		Fixed	3.31	%	Jun 2020
5. Archstone Boca Town Center - Boca Raton, FL (9)			252	45,207		25,000		Fixed	3.71	%	Feb 2019
6. Avalon Station 250 - Dedham, MA			285	94,673		60,000		Fixed	3.73	%	Sep 2022
7. Archstone Grosvenor Tower - Bethesda, MD			236	76,539		46,500		Fixed	3.74	%	Sep 2022
8. Archstone Kips Bay - New York, NY			209	133,530		70,000		Fixed	4.25	%	Jan 2019
9. Avalon Kirkland at Carillon - Kirkland, WA			130	49,311		30,615		Fixed	3.75	%	Feb 2019
Total Archstone U.S. Fund	28.6	%	1,728	$	643,606	$	330,315		3.95	%

AC JV (10)
1. Archstone North Point - Cambridge, MA (11)			426	$	186,377	$	111,653	Fixed	6.00	%	July 2021
2. Archstone Woodland Park - Herndon, VA (11)			392	84,718		50,647		Fixed	6.00	%	July 2021
Total Archstone AC JV	20.0	%	818	$	271,095	$	162,300		6.00	%

Other Operating Joint Ventures
1. Avalon Chrystie Place I - New York, NY (12)	20.0	%	361	$	138,386	$	117,000	Variable	0.64	%	Nov 2036
2. Avalon at Mission Bay North II - San Francisco, CA (12)	25.0	%	313	124,337		105,000		Fixed	6.02	%	Dec 2015
3. Archstone Brandywine - Washington, DC	28.7	%	305	17,290		24,960		Fixed	4.30	%	Jun 2028
Total Other Joint Ventures			979	$	280,013	$	246,960		3.30	%

Total Unconsolidated Investments			10,192	$	2,309,801	$	1,381,381		4.42	%

(1) Represents total capitalized cost as of September 30, 2013.

(2) We have not guaranteed the debt of unconsolidated investees and bear no responsibility for the repayment.

(3) Represents weighted average rate on outstanding debt as of September 30, 2013.

(4) Fund I sold Avalon Sunset in October 2013 for $25,800,000.

(5) Beginning in the third quarter of 2010, we consolidated the net assets and results of operations of The Springs.

(6) Borrowing on this community is comprised of three mortgage loans.

(7) Borrowing on this community is comprised of two mortgage loans.

(8) This community is currently under redevelopment for which the venture is expecting to invest $32.9 million. Currently approximately one half of the apartment homes are not in service due to the redevelopment. This community is owned through a leasehold interest.

(9) The debt secured by this community is a variable rate note converted to an effective fixed rate borrowing with an interest rate swap.

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(10) As discussed in this Form 10-Q, the venture commenced the construction of a third operating community in Cambridge, MA that, when completed, is expected to contain 103 apartments homes for a total capitalized cost of $28,000,000.

(11) Borrowing is comprised of four mortgage loans made by the equity investors in the venture in proportion to their equity interests.

(12) After the venture makes certain threshold distributions to the third-party partner, we will generally receive 50% of all further distributions.

Off-Balance Sheet Arrangements

In addition to our investment interests in consolidated and unconsolidated real estate entities, we have certain off-balance sheet arrangements with the entities in which we invest. Additional discussion of these entities can be found in Note 6, Investments in Real Estate Entities, of our Condensed Consolidated Financial Statements located elsewhere in this report.

· Subsidiaries of Fund I have 10 loans secured by individual assets with amounts outstanding in the aggregate of $172,897,000, including $22,489,000 for the mortgage note of a Fund I subsidiary that we purchased during 2010. Fund I subsidiary loans have varying maturity dates (and, in some cases, dates after which the loans can be prepaid without penalty), ranging from March 2014 to September 2016. These mortgage loans are secured by the underlying real estate. The mortgage loans are payable by the subsidiaries of Fund I with operating cash flow or disposition proceeds from the underlying real estate. We have not guaranteed the debt of Fund I, nor do we have any obligation to fund this debt should Fund I be unable to do so.

In addition, as part of the formation of Fund I, we have provided to one of the limited partners a guarantee. The guarantee provides that if, upon final liquidation of Fund I, the total amount of all distributions to that partner during the life of Fund I (whether from operating cash flow or property sales) does not equal a minimum of the total capital contributions made by that partner, then we 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 $7,500,000 as of September 30, 2013). As of September 30, 2013, the expected realizable value of the real estate assets owned by Fund I is considered adequate to cover such potential payment to that partner under the expected Fund I liquidation scenario. The estimated fair value of, and our obligation under this guarantee, both at inception and as of September 30, 2013, was not significant and therefore we have not recorded any obligation for this guarantee as of September 30, 2013.

· As of September 30, 2013, subsidiaries of Fund II have 13 loans secured by individual assets with amounts outstanding in the aggregate of $468,909,000 with varying maturity dates (and, in some cases, dates after which the loans can be prepaid without penalty), ranging from November 2014 to September 2019. The mortgage loans are payable by the subsidiaries of Fund II with operating cash flow or disposition proceeds from the underlying real estate. We have not guaranteed the debt of Fund II, nor do we have any obligation to fund this debt should Fund II be unable to do so.

In addition, as part of the formation of Fund II, we have provided to one of the limited partners a guarantee. The guarantee provides that if, upon final liquidation of Fund II, the total amount of all distributions to that partner during the life of Fund II (whether from operating cash flow or property sales) does not equal a minimum of the total capital contributions made by that partner, then we 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 $8,910,000 as of September 30, 2013). As of September 30, 2013, the expected realizable value of the real estate assets owned by Fund II is considered adequate to cover such potential payment to that partner under the expected Fund II liquidation scenario. The estimated fair value of, and our obligation under this guarantee, both at inception and as of September 30, 2013, was not significant and therefore we have not recorded any obligation for this guarantee as of September 30, 2013.

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· Each individual mortgage loan of Fund I or Fund II was made to a special purpose, single asset subsidiary of the Funds. Each mortgage loan provides that it is the obligation of the respective subsidiary only, except under exceptional circumstances (such as fraud or misapplication of funds) in which case the respective Fund could also have obligations with respect to the mortgage loan. In no event do the mortgage loans provide for recourse against investors in the Funds, including against us or our wholly-owned subsidiaries that invest in the Funds. A default by a Fund or a Fund subsidiary on any loan to it would not constitute a default under any of our loans or any loans of our other non-Fund subsidiaries or affiliates. If either the Funds or a subsidiary of one of the Funds were unable to meet its obligations under a loan, the value of our investment in that Fund would likely decline and we might also be more likely to be obligated under the guarantee we provided to one of the Fund partners in each Fund as described above. If either of the Funds or a subsidiary of one of the Funds were unable to meet its obligations under a loan, we and/or the other investors might evaluate whether it was in our respective interests to voluntarily support the Fund through additional equity contributions and/or take other actions to avoid a default under a loan or the consequences of a default (such as foreclosure of a Fund asset).

In the future, in the event either of the Funds were unable to meet their obligations under a loan, we cannot predict at this time whether we would provide any voluntary support, or take any other action, as any such action would depend on a variety of factors, including the amount of support required and the possibility that such support could enhance the return of either of the Funds and/or our returns by providing time for performance to improve.

· CVP I, LLC, the entity that owns Avalon Chrystie Place I, has outstanding tax-exempt, variable rate bonds maturating in November 2036 in the amount of $117,000,000, which have permanent credit enhancement. We have not guaranteed the debt of CVP I, LLC, nor do we have any obligation to fund this debt should CVP I, LLC be unable to do so.

· MVP I, LLC, the entity that owns Avalon at Mission Bay North II, has a loan secured by the underlying real estate assets of the community for $105,000,000. The loan is a fixed rate, interest-only note bearing interest at 6.02%, maturing in December 2015. We have not guaranteed the debt of MVP I, LLC, nor do we have any obligation to fund this debt should MVP I, LLC be unable to do so.

In conjunction with the Archstone Acquisition, the Company acquired interests in the following entities:

· Archstone Multifamily Partners AC LP (the Archstone U.S. Fund) The Archstone U.S. Fund was formed in July 2011 and is fully invested. As of September 30, 2013, the Archstone U.S. Fund owns nine communities containing 1,728 apartment homes, one of which includes a marina containing 229 boat slips. Through subsidiaries we own the general partner of the fund and hold a 28.6% interest in the fund.

Subsidiaries of the Archstone U.S. Fund have eight loans secured by individual assets with amounts outstanding in the aggregate of $330,315,000 with varying maturity dates, ranging from January 2019 to November 2022. The mortgage loans are payable by the subsidiaries of the Archstone U.S. Fund with operating cash flow or disposition proceeds from the underlying real estate. We have not guaranteed the debt of the Archstone U.S. Fund, nor do we have any obligation to fund this debt should the Archstone U.S. Fund be unable to do so.

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· Archstone Multifamily Partners AC JV LP (the AC JV) is a joint venture in which we assumed Archstones 20% ownership interest. The AC JV was formed in 2011 and as of September 30, 2013 owned two apartment communities containing 818 apartment homes in Cambridge, MA and Herndon, VA. The AC JV partnership agreement contains provisions that require the Company to provide a right of first offer (ROFO) to the AC JV in connection with additional opportunities to acquire or develop additional interests in multifamily real estate assets within a specified geographic radius of the two existing assets, generally one mile or less. During the three months ended September 30, 2013, the Company provided the AC JV with the opportunity to acquire a parcel of land owned by the Company as required in the right of first offer provisions for the joint venture. The AC JV exercised its right to acquire the land parcel for development and commenced construction of an additional apartment community located in Cambridge, MA, which is expected to contain 103 apartment homes and be completed for a total capitalized cost of $28,000,000. The Company sold the parcel of land to the AC JV in exchange for a cash payment and a capital account credit, and is overseeing the development in exchange for a developer fee. The Company owns one additional land parcel for the development of 301 apartment homes, classified as a Development Right in Cambridge, MA, acquired as part of the Archstone Acquisition that is subject to ROFO restrictions. The ROFO restriction expires in 2019.

As of September 30, 2013, subsidiaries of the AC JV have eight unsecured loans outstanding in the aggregate of $162,300,000 which mature in July 2021, and which were made by the investors in the venture, including us, in proportion to the investors respective equity ownership interest. The unsecured loans are payable by the subsidiaries of the AC JV with operating cash flow from the venture. We have not guaranteed the debt of the AC JV, nor do we have any obligation to fund this debt should the AC JV be unable to do so.

· Brandywine Apartments of Maryland, LLC (Brandywine)  Brandywine owns a 305 apartment home community located in Washington, DC. The community is managed by a third party. Brandywine is comprised of five members who hold various interests in the joint venture. In conjunction with the Archstone Acquisition, we assumed a 26.1% equity interest in the venture, and subsequently purchased an additional 2.6% interest, and as of September 30, 2013, hold a 28.7% equity interest in the venture.

Brandywine has an outstanding $24,960,000 fixed rate mortgage loan that is payable by the venture. We have not guaranteed the debt of Brandywine, nor do we have any obligation to fund this debt should Brandywine be unable to do so.

· Additionally, through subsidiaries we and Equity entered into three limited liability company agreements (collectively, the Residual JV) through which we and Equity acquired (i) certain assets of Archstone that we and Equity plan to divest (to third parties or to us or Equity) over time (the Residual Assets), and (ii) various liabilities of Archstone that we and Equity agreed to assume in conjunction with the Archstone Acquisition (the Residual Liabilities). The Residual Assets include interests in apartment communities in Germany (including through a fund which Archstone managed), a 20.0% interest in a joint venture which owns and manages six apartment communities with 1,902 apartment homes in the United States, two land parcels, and various licenses, insurance policies, contracts, office leases and other miscellaneous assets. The Residual Liabilities include most existing or future litigation and claims related to Archstones operations for periods before the close of the Archstone Acquisition, except for (i) claims that principally relate to the physical condition of the assets acquired directly by us or Equity, which generally remain the sole responsibility of us or Equity, as applicable, and (ii) certain tax and other litigation between Archstone and various equity holders in Archstone related to periods before the close of the Archstone Acquisition, and claims which may arise due to changes in the capital structure of Archstone that occurred prior to closing, for which Lehman has agreed to indemnify us and Equity. We and Equity jointly control the Residual JV and we hold a 40% economic interest in the assets and liabilities of the Residual JV.

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There are no other lines of credit, side agreements, financial guarantees or any other derivative financial instruments related to or between our unconsolidated real estate entities and us. In evaluating our capital structure and overall leverage, management takes into consideration our proportionate share of this unconsolidated debt.

Contractual Obligations

We currently have contractual obligations consisting primarily of long-term debt obligations, including the net indebtedness assumed as part of the Archstone Acquisition as disclosed in our Form 10-Q filed on May 10, 2013, and lease obligations for certain land parcels and regional and administrative office space. As of September 30, 2013, there have been no other material changes in our scheduled contractual obligations as disclosed in our Form 10-K.

Development Communities

As of September 30, 2013, we had 29 Development Communities under construction. We expect these Development Communities, when completed, to add a total of 8,692 apartment homes to our portfolio for a total capitalized cost, including land acquisition costs, of approximately $2,711,000,000. We cannot assure you that we will meet our schedule for construction completion or that we will meet our budgeted costs, either individually or in the aggregate. You should carefully review Item 1a., Risk Factors, of our Form 10-K for a discussion of the risks associated with development activity.

The following table presents a summary of the Development Communities. We hold a direct or indirect fee simple ownership interest in these communities.

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Number of

Total capitalized

apartment

cost (1)

Construction

Initial

Estimated

homes

($ millions)

start

occupancy (2)

completion

stabilization (3)

Avalon Somerset

384

77.5

Q4 2011

Q3 2012

Q4 2013

Q2 2014

Somerset, NJ

Archstone Toscano

474

90.2

Q2 2011

Q1 2013

Q1 2014

Q3 2014

Houston, TX

Avalon Natick

407

81.8

Q4 2011

Q1 2013

Q4 2013

Q2 2014

Natick, MA

Avalon East Norwalk

240

46.3

Q2 2012

Q2 2013

Q4 2013

Q3 2014

Norwalk, CT

Avalon Bloomingdale

174

32.2

Q3 2012

Q3 2013

Q1 2014

Q3 2014

Bloomingdale, NJ

Eaves West Valley II (4)

19.4

Q4 2012

Q3 2013

Q1 2014

Q3 2014

San Jose, CA

AVA University District

283

75.7

Q2 2012

Q3 2013

Q3 2014

Q1 2015

Seattle, WA

Avalon Mosaic

531

120.9

Q1 2012

Q3 2013

Q3 2014

Q1 2015

Tysons Corner, VA

Avalon/AVA Assembly Row

445

113.5

Q2 2012

Q4 2013

Q3 2014

Q1 2015

Somerville, MA

10.

Avalon West Chelsea/AVA High Line

710

276.1

Q4 2011

Q4 2013

Q1 2015

Q3 2015

New York, NY

11.

Avalon Exeter

187

120.0

Q2 2011

Q1 2014

Q2 2014

Q4 2014

Boston, MA

12.

Avalon Dublin Station II

253

76.0

Q2 2012

Q4 2013

Q2 2014

Q4 2014

Dublin, CA

13.

Avalon Arlington North (4)

228

87.2

Q2 2012

Q4 2013

Q3 2014

Q1 2015

Arlington, VA

14.

Avalon Morrison Park

250

79.7

Q3 2012

Q4 2013

Q3 2014

Q1 2015

San Jose, CA

15.

Archstone Memorial Heights Phase I

318

54.9

Q3 2012

Q1 2014

Q3 2014

Q1 2015

Houston, TX

16.

AVA 55 Ninth

273

123.3

Q3 2012

Q2 2014

Q4 2014

Q2 2015

San Francisco, CA

17.

Avalon Berkeley (4)

30.2

Q3 2012

Q2 2014

Q3 2014

Q4 2014

Berkeley, CA

18.

Avalon Ossining

168

37.4

Q4 2012

Q2 2014

Q3 2014

Q1 2015

Ossining, NY

19.

AVA Little Tokyo

280

109.8

Q4 2012

Q3 2014

Q2 2015

Q4 2015

Los Angeles, CA

20.

Avalon Wharton

248

55.6

Q4 2012

Q1 2015

Q3 2015

Q1 2016

Wharton, NJ

21.

Avalon Huntington Station

303

83.3

Q1 2013

Q2 2014

Q1 2015

Q3 2015

Huntington Station, NY

22.

AVA Stuart Street

398

175.7

Q1 2013

Q1 2015

Q3 2015

Q1 2016

Boston, MA

23.

Avalon Canton

196

40.9

Q2 2013

Q2 2014

Q4 2014

Q2 2015

Canton, MA

24.

Avalon Alderwood I

367

69.2

Q2 2013

Q3 2014

Q2 2015

Q4 2015

Lynnwood, WA

25.

Avalon San Dimas

156

41.4

Q2 2013

Q4 2014

Q1 2015

Q3 2015

San Dimas, CA

26.

Maple Leaf (5)

103

28.0

Q3 2013

Q3 2014

Q4 2014

Q1 2015

Cambridge, MA

27.

Avalon at Stratford

130

29.7

Q3 2013

Q3 2014

Q4 2014

Q2 2015

Stratford, CT

28.

Avalon Hayes Valley

182

90.2

Q3 2013

Q1 2015

Q2 2015

Q4 2015

San Francisco, CA

29.

Avalon Willoughby Square/AVA DoBro

826

444.9

Q3 2013

Q3 2015

Q4 2016

Q2 2017

Brooklyn, NY

Total

8,692

2,711.0

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(1) Total capitalized cost includes all capitalized costs projected to be or actually incurred to develop the respective Development Community, determined in accordance with GAAP, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees. Total capitalized cost for communities identified as having joint venture ownership, either during construction or upon construction completion, represents the total projected joint venture contribution amount.

(2) Future initial occupancy dates are estimates. There can be no assurance that we will pursue to completion any or all of these proposed developments.

(3) Stabilized operations is defined as the earlier of (i) attainment of 95% or greater physical occupancy or (ii) the one-year anniversary of completion of development.

(4) Eaves West Valley II, Avalon North Arlington, and Avalon Berkeley were formerly Archstone branded developments.

(5) The Company has a 20% ownership interest in this community through the AC JV LP.

The Company anticipates commencing the construction of five apartment communities during the balance of 2013, which, if completed as expected, will contain 1,515 apartment homes and be constructed for a total capitalized cost of $426,300,000.

Redevelopment Communities

As of September 30, 2013, there were five communities under redevelopment. We expect the total capitalized cost to redevelop these communities to be $58,700,000 excluding costs prior to redevelopment. We have found that the cost to redevelop an existing apartment community is more difficult to budget and estimate than the cost to develop a new community. Accordingly, we expect that actual costs may vary from our budget by a wider percentage than for a new development community. We cannot assure you that we will meet our schedule for reconstruction completion or increasing operations, or that we will meet our budgeted costs, either individually or in the aggregate. We anticipate maintaining or increasing our current level of redevelopment activity related to communities in our current operating portfolio for the remainder of 2013. You should carefully review Item 1a., Risk Factors, of our Form 10-K for a discussion of the risks associated with redevelopment activity.

The following presents a summary of these Redevelopment Communities:

Number of

Total capitalized

Estimated

apartment

cost (1)

Reconstruction

reconstruction

restabilized

homes

($ millions)

Start

completion

operations (2)

AVA Burbank

748

19.3

Q4 2012

Q4 2014

Q1 2015

Burbank, CA

Avalon Campbell

348

12.4

Q4 2012

Q2 2014

Q3 2014

Campbell, CA

Eaves Stamford

238

9.5

Q1 2013

Q1 2014

Q3 2014

Stamford, CT

AVA Pasadena

5.6

Q2 2013

Q3 2014

Q1 2015

Pasadena, CA

Eaves Downtown Mountain View

294

11.9

Q3 2013

Q4 2014

Q2 2015

Mountain View, CA

Total (3) (4)

1,712

58.7

(1) Total capitalized cost does not include capitalized costs incurred prior to redevelopment.

(2) Restabilized operations is defined as the earlier of (i) attainment of 95% or greater physical occupancy or (ii) the one-year anniversary of completion of redevelopment.

(3) The Company commenced the redevelopment of AVA Back Bay in Boston, MA during the first quarter of 2013 for an estimated total capitalized cost of $16.9 million. The redevelopment of this community is primarily focused on the exterior and/or common area and is not expected to have a material impact on community operations. This community is therefore included in the Established Community portfolio and not classified as a Redevelopment Community.

(4) The Company assumed responsibility for the redevelopment of Marina Bay, comprised of 205 apartment homes and 229 boat slips, in conjunction with the Archstone Acquisition. Marina Bay, located in Marina del Rey, CA is owned by the Archstone U.S. Fund, in which the Company holds a 28.6% interest, and is being redeveloped for an estimated total capitalized cost of $32.9 million. All capital necessary for the redevelopment of Marina Bay was contributed to the venture prior to the Company acquiring an interest in the venture.

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Development Rights

At September 30, 2013, we had $282,285,000 in acquisition and related capitalized costs for land parcels we own for development, and $33,799,000 in capitalized costs (including legal fees, design fees and related overhead costs) related to Development Rights for which we control the land parcel, typically through an option to purchase or lease the land. Collectively, the land held for development and associated costs for deferred development rights relate to 45 Development Rights for which we expect to develop new apartment communities in the future. The cumulative capitalized costs for land held for development as of September 30, 2013 includes $237,927,000 in original land acquisition costs. The Development Rights range from those beginning design and architectural planning to those that have completed site plans and drawings and can begin construction almost immediately. We estimate that the successful completion of all of these communities would ultimately add approximately 13,089 apartment homes to our portfolio. Substantially all of these apartment homes will offer features like those offered by the communities we currently own.

For 31 of the Development Rights, we control the land through an option to purchase or lease the parcel. While we generally prefer to hold Development Rights through options to acquire land, for the remaining 14 Development Rights we either currently own the land or have executed a long term land lease for the parcel of land on which a community would be built if we proceeded with development.

The properties comprising the Development Rights are in different stages of the due diligence and regulatory approval process. The decisions as to which of the Development Rights to invest in, if any, or to continue to pursue once an investment in a Development Right is made, are business judgments that we make after we perform financial, demographic and other analyses. In the event that we do not proceed with a Development Right, we generally would not recover any of the capitalized costs incurred in the pursuit of those communities, unless we were to recover amounts in connection with the sale of land; however, we cannot guarantee a recovery. 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 no longer probable, any capitalized pre-development costs are charged to expense.

You should carefully review Section 1a., Risk Factors, of our Form 10-K for a discussion of the risks associated with Development Rights.

The following presents a summary of these Development Rights:

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			Total
		Estimated	capitalized
	Number	number	cost
Market	of rights	of homes	($ millions) (1)

Boston, MA	6	2,033	$	635

Fairfield-New Haven, CT	1	160	38

New York Suburban	4	864	276

New Jersey	12	3,127	715

Baltimore, MD	1	343	75

Washington, DC Metro	7	2,370	633

Seattle, WA	5	1,635	429

Oakland-East Bay, CA	2	486	173

San Francisco, CA	1	330	163

Orange County, CA	3	970	298

Los Angeles, CA	2	550	226

San Diego, CA	1	221	55

Total	45	13,089	$	3,716

(1) Total capitalized cost includes all capitalized costs incurred to date (if any) and projected to be incurred to develop the respective community, determined in accordance with GAAP, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees.

Land Acquisitions

During the third quarter of 2013, we acquired land parcels related to the development of three apartment communities for an aggregate purchase price of $48,780,000. We have started or expect to commence construction on these land parcels in the next 12 months.

Other Land and Real Estate Assets

We own land parcels with a carrying value of approximately $26,274,000 that we do not currently plan to develop. These parcels consist of land that we (i) originally planned to develop and (ii) ancillary parcels acquired in connection with Development Rights that we had not planned to develop. We believe that the current carrying value for all of these land parcels is such that there is no indication of impaired value, or further need to record a charge for impairment in the case of assets previously impaired. However, we may be subject to the recognition of further charges for impairment in the event that there are indicators of such impairment and we determine that the carrying value of the assets is greater than the current fair value, less costs to dispose.

Insurance and Risk of Uninsured Losses

We carry commercial general liability insurance and property insurance with respect to all of our communities. These policies, and other insurance policies we carry, have policy specifications, insured limits, deductibles and self insured retentions that we consider commercially reasonable. There are, however, certain types of losses (such as losses arising from acts of war) that are not insured, in full or in part, because they are either uninsurable or the cost of insurance makes it, in managements view, economically impractical. You should carefully review the discussion under Item 1a., Risk Factors, of our Form 10-K for a discussion of risks associated with an uninsured property or liability loss.

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Many of our West Coast communities are located in the general vicinity of active earthquake faults. Many of our communities are near, and thus susceptible to, the major fault lines in California, including the San Andreas Fault and the Hayward Fault. We cannot assure you that an earthquake would not cause damage or losses greater than insured levels. We have in place with respect to communities located in California and Washington, for any single occurrence and in the aggregate, $150,000,000 of coverage. Earthquake coverage outside of California and Washington is subject to a $175,000,000 limit for each occurrence and in the aggregate. In California the deductible for each occurrence is five percent of the insured value of each damaged building. Our earthquake insurance outside of California provides for a $100,000 deductible per occurrence except that the next $350,000 of loss per occurrence outside California will be treated as an additional self-insured retention until the total incurred self-insured retention exceeds $1,500,000.

Just as with office buildings, transportation systems and government buildings, there have been reports that apartment communities could become targets of terrorism. In December 2007, Congress passed the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) which is designed to make terrorism insurance available through a federal back-stop program until 2014. In connection with TRIPRA, we have purchased insurance for property damage due to terrorism up to $250,000,000. Additionally, we have purchased insurance for certain terrorist acts, not covered under TRIPRA, such as domestic-based terrorism. This insurance, often referred to as non-certified terrorism insurance, is subject to deductibles, limits and exclusions. Our general liability policy provides TRIPRA coverage (subject to deductibles and insured limits) for liability to third parties that result from terrorist acts at our communities.

Inflation and Deflation

Substantially all of our apartment leases are for a term of one year or less. In an inflationary environment, this may allow us to realize increased rents upon renewal of existing leases or the beginning of new leases. Short-term leases generally minimize our risk from the adverse effects of inflation, although these leases generally permit residents to leave at the end of the lease term and therefore expose us to the effect of a decline in market rents. Similarly, in a deflationary rent environment, we may be exposed to declining rents more quickly under these shorter-term leases.

Forward-Looking Statements

This Form 10-Q contains forward-looking statements as that term is defined under the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by our use of the words believe, expect, anticipate, intend, estimate, assume, project, plan, may, shall, will and other similar expressions in this Form 10-Q, that predict or indicate future events and trends and that do not report historical matters. These statements include, among other things, statements regarding our intent, belief or expectations with respect to:

· our potential development, redevelopment, acquisition or disposition of communities;

· the timing and cost of completion of apartment communities under construction, reconstruction, development or redevelopment;

· the timing of lease-up, occupancy and stabilization of apartment communities;

· the pursuit of land on which we are considering future development;

· the anticipated operating performance of our communities;

· cost, yield, revenue, NOI and earnings estimates;

· our declaration or payment of distributions;

· our joint venture and discretionary fund activities;

· our policies regarding investments, indebtedness, acquisitions, dispositions, financings and other matters;

· our qualification as a REIT under the Internal Revenue Code;

· the real estate markets in Northern and Southern California and markets in selected states in the Mid-Atlantic, New England, Metro New York/New Jersey and Pacific Northwest regions of the United States and in general;

· the availability of debt and equity financing;

· interest rates;

· general economic conditions including the potential impacts from the current economic conditions; and

· trends affecting our financial condition or results of operations.

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We cannot assure the future results or outcome of the matters described in these statements; rather, these statements merely reflect our current expectations of the approximate outcomes of the matters discussed. We do not undertake a duty to update these forward-looking statements, and therefore they may not represent our estimates and assumptions after the date of this report. You should not rely on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. These risks, uncertainties and other factors may cause our actual results, performance or achievements to differ materially from the anticipated future results, performance or achievements expressed or implied by these forward-looking statements. You should carefully review the discussion under Item 1a., Risk Factors, in this report, for a discussion of risks associated with forward-looking statements.

Some of the factors that could cause our actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements include, but are not limited to, the following:

· we may fail to secure development opportunities due to an inability to reach agreements with third-parties to obtain land at attractive prices or to obtain desired zoning and other local approvals;

· we may abandon or defer development opportunities for a number of reasons, including changes in local market conditions which make development less desirable, increases in costs of development, increases in the cost of capital or lack of capital availability, resulting in losses;

· construction costs of a community may exceed our original estimates;

· we may not complete construction and lease-up of communities under development or redevelopment on schedule, resulting in increased interest costs and construction costs and a decrease in our expected rental revenues;

· occupancy rates and market rents may be adversely affected by competition and local economic and market conditions which are beyond our control;

· financing may not be available on favorable terms or at all, and our cash flows from operations and access to cost effective capital may be insufficient for the development of our pipeline which could limit our pursuit of opportunities;

· our cash flows may be insufficient to meet required payments of principal and interest, and we may be unable to refinance existing indebtedness or the terms of such refinancing may not be as favorable as the terms of existing indebtedness;

· we may be unsuccessful in our management of Fund I, Fund II, the Archstone U.S. Fund, the AC JV or the REIT vehicles that are used with each respective fund; and

· we may be unsuccessful in managing changes in our portfolio composition, including operating outside of our core markets as a result of the Archstone Acquisition.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, or different assumptions were made, it is possible that different accounting policies would have been applied, resulting in different financial results or a different presentation of our financial statements. Our critical accounting policies consist primarily of the following: (i) principles of consolidation, (ii) cost capitalization, (iii) asset impairment evaluation and (iv) REIT status. Our critical accounting policies and estimates have not changed materially from the discussion of our significant accounting policies found in Managements Discussion and Analysis and Results of Operations in our Form 10-K.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks from our financial instruments primarily from changes in market interest rates. We do not have exposure to any other significant market risk. We monitor interest rate risk as an integral part of our overall risk management, which recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effect on our results of operations. Our operating results are affected by changes in interest rates, primarily in short-term LIBOR and the SIFMA index as a result of borrowings under our Credit Facility and outstanding bonds with variable interest rates. In addition, the fair value of our fixed rate unsecured and secured notes are impacted by changes in market interest rates. The effect of interest rate fluctuations on our results of operations historically has been small relative to other factors affecting operating results, such as rental rates and occupancy.

In conjunction with the Archstone Acquisition, we assumed approximately $2,034,482,000 secured fixed and floating rate indebtedness, which impacted the Companys overall exposure to interest rate risk. We had $1,011,609,000 and $476,935,000 in variable rate debt outstanding, with no amounts outstanding under our Credit Facility, as of September 30, 2013 and December 31, 2012, respectively. In May 2013, a $215,000,000 forward interest rate protection agreement matured, resulting in a payment to the counterparty of $51,000,000, the fair value at time of settlement.

In addition, changes in interest rates affect the fair value of our fixed rate debt, computed using quoted market prices for our unsecured notes or a discounted cash flow model for our secured notes, considering our current market yields, which impacts the fair value of our aggregate indebtedness. Debt securities and notes payable (including amounts outstanding under our Credit Facility) with an aggregate carrying value of $5,972,282,000 at September 30, 2013 had an estimated aggregate fair value of $6,018,766,000 at September 30, 2013. Contractual fixed rate debt represented $5,258,708,000 of the fair value at September 30, 2013. If interest rates had been 100 basis points higher as of September 30, 2013, the fair value of this fixed rate debt would have decreased by approximately $345,546,000.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

The Company carried out an evaluation under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures as of September 30, 2013. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms.

We continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

(b) Changes in internal controls over financial reporting.

None.

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Part II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1a. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the risk factors which could materially affect our business, financial condition or future results discussed in our Form 10-K in Part I, Item 1a. Risk Factors. The risks described in our Form 10-K are not the only risks that could affect the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results in the future. Except as noted under Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations - Federal Income Tax Changes and Updates for the Archstone Acquisition in our Form 10-Q filed on August 2, 2013, there have been no material changes to our risk factors since December 31, 2012.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Issuer Purchases of Equity Securities

Period	(a) Total Number of Shares Purchased (1)	(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Dollar Amount that May Yet be Purchased Under the Plans or Programs (in thousands) (2)
July 1- July 31, 2013	130	$	140.45		200,000
August 1- August 30, 2013	398	$	123.90		200,000
September 1- September 30, 2013					200,000

(1) Reflects shares surrendered to the Company in connection with exercise of stock options as payment of exercise price, as well as for taxes associated with the vesting of restricted share grants.

(2) As disclosed in our Form 10-Q for the quarter ended March 31, 2008, represents amounts outstanding under the Companys $500,000,000 Stock Repurchase Program. There is no scheduled expiration date to this program.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable

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Item 5. Other Information

None.

Item 6. Exhibits

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Exhibit No.				Description

3(i).1				Articles of Amendment and Restatement of Articles of Incorporation of AvalonBay Communities (the Company), dated as of June 4, 1998. (Incorporated by reference to Exhibit 3(i).1 to Form 10-K of the Company filed on March 1, 2007.)

3(i).2				Articles of Amendment, dated as of October 2, 1998. (Incorporated by reference to Exhibit 3(i).2 to Form 10-K of the Company filed on March 1, 2007.)

3(i).3				Articles of Amendment, dated as of May 22, 2013. (Incorporated by reference to Exhibit 3(i).3 to Form 8-K of the Company filed on May 22, 2013.)

3(ii).1				Amended and Restated Bylaws of the Company, as adopted by the Board of Directors on May 21, 2009. (Incorporated by reference to Exhibit 3(ii).1 to Form 10-Q of the Company filed November 2, 2012.)

3(ii).2				Amendment to Amended and Restated Bylaws of the Company, dated February 10, 2010. (Incorporated by reference to Exhibit 3(ii).2 to Form 10-Q of the Company filed November 2, 2012.)

3(ii).3				Amendment to Amended and Restated Bylaws of the Company, dated September 19, 2012. (Incorporated by reference to Exhibit 3.2 to Form 8-K of the Company filed September 20, 2012.)

4.1				Indenture for Senior Debt Securities, dated as of January 16, 1998, between the Company and State Street Bank and Trust Company, as Trustee. (Incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-3 of the Company (File No. 333-139839), filed January 8, 2007.)

4.2				First Supplemental Indenture, dated as of January 20, 1998, between the Company and the State Street Bank and Trust Company as Trustee. (Incorporated by reference to Exhibit 4.2 to Registration Statement on Form S-3 of the Company (File No. 333-139839), filed January 8, 2007.)

4.3				Second Supplemental Indenture, dated as of July 7, 1998, between the Company and State Street Bank and Trust Company as Trustee. (Incorporated by reference to Exhibit 4.3 to Registration Statement on Form S-3 of the Company (File No. 333-139839), filed January 8, 2007.)

4.4				Amended and Restated Third Supplemental Indenture, dated as of July 10, 2000 between the Company and State Street Bank and Trust Company as Trustee. (Incorporated by reference to Exhibit 4.4 to Registration Statement on Form S-3 of the Company (File No. 333-139839), filed January 8, 2007.)

4.5				Fourth Supplemental Indenture, dated as of September 18, 2006 between the Company and U.S. Bank National Association as Trustee. (Incorporated by reference to Exhibit 4.5 to Registration Statement on Form S-3 of the Company (File No. 333-139839), filed January 8, 2007.)

4.6				Dividend Reinvestment and Stock Purchase Plan of the Company. (Incorporated by reference to Exhibit 8.1 to Registration Statement on Form S-3 of the Company (File No. 333-87063), filed September 14, 1999.)

4.7				Amendment to the Companys Dividend Reinvestment and Stock Purchase Plan filed on December 17, 1999. (Incorporated by reference to the Prospectus Supplement filed pursuant to Rule 424(b)(2) of the Securities Act of 1933 on December 17, 1999.)

4.8				Amendment to the Companys Dividend Reinvestment and Stock Purchase Plan filed on March 26, 2004. (Incorporated by reference to the Prospectus Supplement filed pursuant to Rule 424(b)(3) of the Securities Act of 1933 on March 26, 2004.)

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4.9				Amendment to the Companys Dividend Reinvestment and Stock Purchase Plan filed on May 15, 2006. (Incorporated by references to the Prospectus Supplement filed pursuant to Rule 424(b)(3) of the Securities Act of 1933 on May 15, 2006.)

12.1				Statements re: Computation of Ratios. (Filed herewith.)

31.1				Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer). (Filed herewith.)

31.2				Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer). (Filed herewith.)

32				Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer and Chief Financial Officer). (Furnished herewith.)

101				XBRL (Extensible Business Reporting Language). The following materials from AvalonBay Communities, Inc.s Quarterly Report on form 10-Q for the period ended September 30, 2013, formatted in XBRL: (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of comprehensive income, (iii) condensed consolidated statements of cash flows, and (iv) notes to condensed consolidated financial statements.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

AVALONBAY COMMUNITIES, INC.

Date: November 5, 2013	/s/ Timothy J. Naughton
	Timothy J. Naughton
	Chairman and Chief Executive Officer
	(Principal Executive Officer)

Date: November 5, 2013	/s/ Thomas J. Sargeant
	Thomas J. Sargeant
	Chief Financial Officer
	(Principal Financial Officer)

Form: 10-Q

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