Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

August 1, 2011

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

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

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

Ballston Tower

671 N. Glebe Rd, Suite 800

Arlington, Virginia 22203

(Address of principal executive offices, including zip code)

(703) 329-6300

(Registrant’s telephone number, including area code)

 

(Former name, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days.    Yes  x    No  ¨

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  ¨

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   ¨
Non-accelerated filer   (Do not check if a smaller reporting company)  ¨    Smaller reporting company   ¨

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

APPLICABLE ONLY TO CORPORATE ISSUERS

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

88,942,331 shares of common stock, par value $0.01 per share, were outstanding as of July 29, 2011

 

 

 


Table of Contents

AVALONBAY COMMUNITIES, INC.

FORM 10-Q

INDEX

PART I - FINANCIAL INFORMATION

 

         Page  

Item 1.

 

Condensed Consolidated Financial Statements

  
 

Condensed Consolidated Balance Sheets as of June 30, 2011 (unaudited) and December 31, 2010

     1   
 

Condensed Consolidated Statements of Operations and Other Comprehensive Income (unaudited) for the three and six months ended June 30, 2011 and 2010

     2   
 

Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June  30, 2011 and 2010

     3-5   
 

Notes to Condensed Consolidated Financial Statements (unaudited)

     6-21   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     22-44   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     45   

Item 4.

 

Controls and Procedures

     45   
  PART II - OTHER INFORMATION   

Item 1.

 

Legal Proceedings

     45   

Item 1a.

 

Risk Factors

     45   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     45-46   

Item 3.

 

Defaults Upon Senior Securities

     46   

Item 4.

 

(Removed and Reserved)

     46   

Item 5.

 

Other Information

     46   

Item 6.

 

Exhibits

     46-48   

Signatures

     49   


Table of Contents

AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

     6-30-11     12-31-10  
     (unaudited)        

ASSETS

    

Real estate:

    

Land

   $ 1,348,767      $ 1,331,775   

Buildings and improvements

     6,761,517        6,613,865   

Furniture, fixtures and equipment

     220,753        203,299   
                
     8,331,037        8,148,939   

Less accumulated depreciation

     (1,787,021     (1,705,410
                

Net operating real estate

     6,544,016        6,443,529   

Construction in progress, including land

     399,313        309,704   

Land held for development

     225,896        184,150   

Operating real estate assets held for sale, net

     18,207        18,262   
                

Total real estate, net

     7,187,432        6,955,645   

Cash and cash equivalents

     290,104        306,426   

Cash in escrow

     70,130        173,343   

Resident security deposits

     24,326        22,289   

Investments in unconsolidated real estate entities

     118,627        121,537   

Deferred financing costs, net

     31,308        33,284   

Deferred development costs

     79,186        77,253   

Prepaid expenses and other assets

     141,629        131,711   
                

Total assets

   $ 7,942,742      $ 7,821,488   
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Unsecured notes, net

   $ 1,819,478      $ 1,820,141   

Variable rate unsecured credit facility

     —          —     

Mortgage notes payable

     2,166,679        2,247,516   

Dividends payable

     79,157        76,676   

Payables for construction

     33,821        34,433   

Accrued expenses and other liabilities

     282,880        246,591   

Accrued interest payable

     37,423        32,248   

Resident security deposits

     37,289        34,030   
                

Total liabilities

     4,456,727        4,491,635   
                

Redeemable noncontrolling interests

     6,852        14,262   

Stockholders’ equity:

    

Preferred stock, $0.01 par value; $25 liquidation preference; 50,000,000 shares authorized at both June 30, 2011 and December 31, 2010; zero shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively

     —          —     

Common stock, $0.01 par value; 140,000,000 shares authorized at both June 30, 2011 and December 31, 2010; 88,678,968 and 85,899,080 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively

     887        859   

Additional paid-in capital

     3,863,220        3,593,677   

Accumulated earnings less dividends

     (368,412     (282,743

Accumulated other comprehensive loss

     (20,595     (1,175
                

Total stockholders’ equity

     3,475,100        3,310,618   
                

Noncontrolling interest

     4,063        4,973   
                

Total equity

     3,479,163        3,315,591   
                

Total liabilities and stockholders’ equity

   $ 7,942,742      $ 7,821,488   
                

See accompanying notes to Condensed Consolidated Financial Statements.

 

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AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND OTHER COMPREHENSIVE INCOME

(unaudited)

(Dollars in thousands, except per share data)

 

     For the three months ended     For the six months ended  
     6-30-11     6-30-10     6-30-11     6-30-10  

Revenue:

        

Rental and other income

   $ 242,527      $ 218,658      $ 476,014      $ 432,257   

Management, development and other fees

     2,332        1,684        4,652        3,533   
                                

Total revenue

     244,859        220,342        480,666        435,790   
                                

Expenses:

        

Operating expenses, excluding property taxes

     68,600        65,804        136,657        130,724   

Property taxes

     24,152        23,083        48,940        46,171   

Interest expense, net

     45,855        41,458        90,126        83,999   

Depreciation expense

     62,894        57,317        124,154        113,250   

General and administrative expense

     8,145        4,041        15,437        12,936   
                                

Total expenses

     209,646        191,703        415,314        387,080   
                                

Equity in income of unconsolidated entities

     395        463        898        689   
                                

Income from continuing operations

     35,608        29,102        66,250        49,399   
                                

Discontinued operations:

        

Income (loss) from discontinued operations

     (91     35        (197     1,813   

Gain on sale of real estate assets

     7,675        21,929        7,675        72,220   
                                

Total discontinued operations

     7,584        21,964        7,478        74,033   
                                

Net income

     43,192        51,066        73,728        123,432   

Net (income) loss attributable to noncontrolling interests

     181        59        (15     216   
                                

Net income attributable to common stockholders

   $ 43,373      $ 51,125      $ 73,713      $ 123,648   
                                

Other comprehensive income:

        

Unrealized loss on cash flow hedges

     (19,336     (677     (19,420     (135
                                

Comprehensive income

   $ 24,037      $ 50,448      $ 54,293      $ 123,513   
                                

Earnings per common share - basic:

        

Income from continuing operations attributable to common stockholders

   $ 0.41      $ 0.35      $ 0.76      $ 0.60   

Discontinued operations attributable to common stockholders

     0.09        0.26        0.09        0.89   
                                

Net income attributable to common stockholders

   $ 0.50      $ 0.61      $ 0.85      $ 1.49   
                                

Earnings per common share - diluted:

        

Income from continuing operations attributable to common stockholders

   $ 0.40      $ 0.35      $ 0.75      $ 0.60   

Discontinued operations attributable to common stockholders

     0.09        0.26        0.09        0.89   
                                

Net income attributable to common stockholders

   $ 0.49      $ 0.61      $ 0.84      $ 1.49   
                                

Dividends per common share:

   $ 0.8925      $ 0.8925      $ 1.7850      $ 1.7850   
                                

See accompanying notes to Condensed Consolidated Financial Statements.

 

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AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(Dollars in thousands)

 

     For the six months ended  
     6-30-11     6-30-10  

Net income

   $ 73,728      $ 123,432   

Adjustments to reconcile net income to cash provided by operating activities:

    

Depreciation expense

     124,154        113,250   

Depreciation expense from discontinued operations

     65        324   

Amortization of deferred financing costs and debt premium/discount

     3,485        3,908   

Amortization of stock-based compensation

     3,262        3,409   

Equity in (income) loss of unconsolidated entities and noncontrolling interests, net of eliminations

     421        120   

Gain on sale of real estate assets

     (7,675     (72,220

Expensed acquisition costs

     958        —     

(Increase) decrease in cash in operating escrows

     (1,144     1,185   

(Increase) decrease in resident security deposits, prepaid expenses and other assets

     (9,943     3,009   

Increase (decrease) in accrued expenses, other liabilities and accrued interest payable

     18,568        (4,693
                

Net cash provided by operating activities

     205,879        171,724   
                

Cash flows from investing activities:

    

Development/redevelopment of real estate assets including land acquisitions and deferred development costs

     (266,374     (233,994

Acquisition of real estate assets

     (46,275     —     

Capital expenditures - existing real estate assets

     (7,765     (4,872

Capital expenditures - non-real estate assets

     (7,748     (524

Proceeds from exchange/sale of real estate, net of selling costs

     22,371        187,587   

Decrease in payables for construction

     (612     (6,180

Decrease in cash in construction escrows

     10,917        21,224   

Decrease in investments in unconsolidated real estate entities

     2,458        2,781   
                

Net cash used in investing activities

     (293,028     (33,978
                

Cash flows from financing activities:

    

Issuance of common stock

     264,134        306,817   

Dividends paid

     (154,382     (146,258

Repayments of mortgage notes payable

     (31,963     (27,930

Payment of deferred financing costs

     (252     (2,218

Acquisition of joint venture partner equity interest

     (6,570     —     

Distributions to DownREIT partnership unitholders

     (13     (27

Distributions to joint venture and profit-sharing partners

     (127     (100
                

Net cash provided by financing activities

     70,827        130,284   
                

Net (decrease) increase in cash and cash equivalents

     (16,322     268,030   

Cash and cash equivalents, beginning of period

     306,426        105,691   
                

Cash and cash equivalents, end of period

   $ 290,104      $ 373,721   
                

Cash paid during the period for interest, net of amount capitalized

   $ 76,315      $ 78,009   
                

See accompanying notes to Condensed Consolidated Financial Statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

 

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

During the six months ended June 30, 2011:

 

  •  

As described in Note 4, “Stockholders’ Equity,” 498,810 shares of common stock valued at $63,061,000 were issued in connection with stock grants primarily associated with the Company’s 2008 deferred stock performance plan, as discussed in Note 9, “Stock Based Compensation Plans”; 1,809 shares valued at $212,000 were issued through the Company’s dividend reinvestment plan; 126,928 shares valued at $14,825,000 were withheld to satisfy employees’ tax withholding and other liabilities; and 505 shares valued at $16,000 were forfeited. In addition, the Company granted 144,827 options for common stock at a value of $4,258,000.

 

  •  

7,500 units of limited partnership, valued at $365,000, were presented for redemption to the DownREIT partnerships that issued such units and were acquired by the Company in exchange for an equal number of shares of the Company’s common stock.

 

  •  

The Company recorded an increase to other liabilities and a corresponding decrease to other comprehensive income of $19,420,000; and recorded a decrease to prepaid expenses and other assets of $863,000, with a corresponding offset to the basis of unsecured notes, net to record the impact of the Company’s hedge accounting activity (as described in Note 5, “Derivative Instruments and Hedging Activities”).

 

  •  

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

 

  •  

The Company recorded an increase of $1,218,000 in redeemable noncontrolling interests with a corresponding decrease to accumulated earnings less dividends to adjust the redemption value associated with the put options held by joint venture partners and DownREIT partnership units. For further discussion of the nature and valuation of these items, see Note 11, “Fair Value”.

 

  •  

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

 

  •  

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

 

  •  

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

During the six months ended June 30, 2010:

 

  •  

102,984 shares of common stock valued at $7,777,000 were issued in connection with stock grants; 3,609 shares valued at $308,000 were issued through the Company’s dividend reinvestment plan; 45,165 shares valued at $3,812,000 were withheld to satisfy employees’ tax withholding and other liabilities; 1,300 shares valued at $38,000 were forfeited; and 61,055 shares valued at $3,322,000 were issued to members of the board of directors in fulfillment of deferred stock awards for a net value of $7,556,000. In addition, the Company granted 126,484 options for common stock at a value of $2,460,000.

 

  •  

The Company recorded an increase to other liabilities and a corresponding decrease to other comprehensive income of $135,000 and recorded an increase to prepaid expenses and other assets of $1,412,000, with a corresponding offset to the basis of unsecured notes, net to record the impact of the Company’s hedge accounting activity.

 

  •  

Common dividends declared but not paid totaled $75,944,000.

 

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  •  

The Company recorded an increase of $3,928,000 in redeemable noncontrolling interests with a corresponding decrease to accumulated earnings less dividends to adjust the redemption value associated with the put options held by joint venture partners and DownREIT partnership units.

 

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AVALONBAY COMMUNITIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Organization, Basis of Presentation and Significant Accounting Policies

Organization and Basis of Presentation

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

At June 30, 2011, the Company owned or held a direct or indirect ownership interest in 182 operating apartment communities containing 53,655 apartment homes in ten states and the District of Columbia, of which eight communities containing 2,724 apartment homes were under reconstruction. In addition, the Company owned or held a direct or indirect ownership interest in 13 communities under construction that are expected to contain an aggregate of 2,861 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 32 communities that, if developed as expected, will contain an estimated 9,407 apartment homes.

The interim unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements required by GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited financial statements should be read in conjunction with the financial statements and notes included in the Company’s 2010 Annual Report on Form 10-K. The results of operations for the three and six months ended June 30, 2011 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.

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

 

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Earnings per Common Share

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

 

    For the three months ended     For the six months ended  
    6-30-11     6-30-10     6-30-11     6-30-10  

Basic and diluted shares outstanding

       

Weighted average common shares - basic

    87,317,602        83,517,908        86,746,992        82,583,638   

Weighted average DownREIT units outstanding

    7,707        15,351        8,992        15,351   

Effect of dilutive securities

    871,129        711,846        841,997        649,006   
                               

Weighted average common shares - diluted

    88,196,438        84,245,105        87,597,981        83,247,995   
                               

Calculation of Earnings per Share - basic

       

Net income attributable to common stockholders

  $ 43,373      $ 51,125      $ 73,713      $ 123,648   

Net income allocated to unvested restricted shares

    (123     (143     (206     (368
                               

Net income attributable to common stockholders, adjusted

  $ 43,250      $ 50,982      $ 73,507      $ 123,280   
                               

Weighted average common shares - basic

    87,317,602        83,517,908        86,746,992        82,583,638   
                               

Earnings per common share - basic

  $ 0.50      $ 0.61      $ 0.85      $ 1.49   
                               

Calculation of Earnings per Share - diluted

       

Net income attributable to common stockholders

  $ 43,373      $ 51,125      $ 73,713      $ 123,648   

Add: noncontrolling interests of DownREIT unitholders in consolidated partnerships, including discontinued operations

    7        14        13        27   
                               

Adjusted net income attributable to common stockholders

  $ 43,380      $ 51,139      $ 73,726      $ 123,675   
                               

Weighted average common shares - diluted

    88,196,438        84,245,105        87,597,981        83,247,995   
                               

Earnings per common share - diluted

  $ 0.49      $ 0.61      $ 0.84      $ 1.49   
                               

Certain options to purchase shares of common stock in the amounts of 320,698 and 1,176,293 were outstanding at June 30, 2011 and 2010, respectively, but were not included in the computation of diluted earnings per share because such options were anti-dilutive.

The Company is required to estimate the forfeiture of stock options and recognize compensation cost net of the estimated forfeitures. The estimated forfeitures included in compensation cost are adjusted to reflect actual forfeitures at the end of the vesting period. The forfeiture rate at June 30, 2011 is based on the average forfeiture activity over a period equal to the estimated life of the stock options, and was 0.9%. The application of estimated forfeitures did not materially impact compensation expense for the three and six months ended June 30, 2011 or 2010.

Abandoned 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 abandoned pursuits, which includes the abandonment of Development Rights as well as costs incurred in pursuing the

 

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disposition of assets for which the disposition did not occur, in the amounts of $395,000 and $443,000 for the three months ended June 30, 2011 and 2010, respectively, and $1,045,000 and $947,000 for the six months ended June 30, 2011 and 2010, respectively. These costs are included in operating expenses, excluding property taxes on the accompanying Condensed Consolidated Statements of Operations and Other Comprehensive Income. Abandoned pursuit costs can vary greatly, and the costs incurred in any given period may be significantly different in future 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 six months ended June 30, 2011 and 2010.

Legal and Other Contingencies

The Company accounts for recoveries from legal matters as a reduction in the legal and related costs incurred associated with the matter, with recoveries in excess of these costs reported as a gain or, where appropriate, a reduction in the basis of a community to which the suit related. During the second quarter of 2010, the Company recognized receipt of settlement proceeds of $3,300,000 related to environmental contamination matters pursued by the Company. The Company reported $1,200,000 of these recoveries as a reduction in the legal and professional fees related to costs incurred in pursuit of the matters during 2010 and years prior as a component of general and administrative expense, with the remainder of the recovery reported as a reduction in the associated capitalized basis of the related communities. The Company did not have any material recoveries from legal matters in 2011.

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

Use of Estimates

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

Reclassifications

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

2. Interest Capitalized

The Company capitalizes interest during the development and redevelopment of real estate assets. Capitalized interest associated with the Company’s development or redevelopment activities totaled $7,673,000 and $9,655,000 for the three months ended June 30, 2011 and 2010, respectively, and $14,016,000 and $19,491,000 for the six months ended June 30, 2011 and 2010, respectively.

3. Notes Payable, Unsecured Notes and Credit Facility

The Company’s mortgage notes payable, unsecured notes and Credit Facility, as defined below, as of June 30, 2011 and December 31, 2010, are summarized below (dollars in thousands). The following amounts and discussion do not include the mortgage notes related to the communities classified as held for sale, if any, as of June 30, 2011 and December 31, 2010, as shown in the Condensed Consolidated Balance Sheets (see Note 7, “Real Estate Disposition Activities”).

 

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    6-30-11     12-31-10  

Fixed rate unsecured notes (1)

  $ 1,595,901      $ 1,595,901   

Variable rate unsecured notes (1)

    225,000        225,000   

Fixed rate mortgage notes payable - conventional and tax-exempt (2)

    1,691,894        1,651,135   

Variable rate mortgage notes payable - conventional and tax-exempt

    473,621        596,381   
               

Total notes payable and unsecured notes

    3,986,416        4,068,417   

Credit Facility

    —          —     
               

Total mortgage notes payable, unsecured notes and Credit Facility

  $ 3,986,416      $ 4,068,417   
               

 

(1) Balances at June 30, 2011 and December 31, 2010 exclude $2,069 and $2,269, respectively, of debt discount, and $646 and $1,509, respectively, for basis adjustments, as reflected in unsecured notes, net on the Company’s Condensed Consolidated Balance Sheets.
(2) Balance at June 30, 2011 excludes $1,164 of debt premium as reflected in mortgage notes payable on the Company’s Condensed Consolidated Balance Sheet.

The following debt activity occurred during the six months ended June 30, 2011:

 

  •  

In March 2011, the Company repaid a variable rate secured mortgage note in the amount of $28,785,000 in accordance with its scheduled maturity date.

 

  •  

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

 

  •  

In conjunction with the acquisition of Fairfax Towers in April 2011, the Company assumed a $44,044,000 principal balance, 4.75% fixed-rate mortgage loan that matures in August 2015.

 

  •  

In April 2011, the Company repaid $93,440,000 in variable rate tax-exempt borrowings related to a Development Right. The bonds were repaid using the original issue proceeds, which were held in escrow.

In the aggregate, secured notes payable mature at various dates from October 2011 through July 2066, and are secured by certain apartment communities and improved land parcels (with a net carrying value of $1,740,964,000 as of June 30, 2011).

As of June 30, 2011, the Company has guaranteed approximately $273,264,000 of mortgage notes payable held by wholly owned subsidiaries; all such mortgage notes payable are consolidated for financial reporting purposes. The weighted average interest rate of the Company’s fixed rate mortgage notes payable (conventional and tax-exempt) was 5.7% at both June 30, 2011 and December 31, 2010. The weighted average interest rate of the Company’s variable rate mortgage notes payable and its Credit Facility, including the effect of certain financing related fees, was 2.4% at June 30, 2011 and 2.2% at December 31, 2010.

 

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Scheduled payments and maturities of mortgage notes payable and unsecured notes outstanding at June 30, 2011 are as follows (dollars in thousands):

 

Year

   Secured
notes
payments (1)
     Secured
notes
maturities
     Unsecured
notes
maturities
     Stated
interest rate
of unsecured
notes
 
2011    $ 7,356       $ 7,213       $ 39,900         6.625
           150,000         5.687 %(2) 
2012      15,508         14,661         104,400         5.500
           201,601         6.125
           75,000         4.352 %(2) 
2013      15,134         318,045         100,000         4.950
2014      16,031         33,100         150,000         5.375
2015      13,867         405,613         —           —     
2016      14,690         —           250,000         5.750
2017      15,568         18,300         250,000         5.700
2018      16,498         —           —           —     
2019      2,588         651,973         —           —     
2020      2,761         —           250,000         6.100
Thereafter      357,974         238,635         250,000         3.950
                                   
   $ 477,975       $ 1,687,540       $ 1,820,901      
                             

 

(1) Secured note payments are comprised of the principal pay downs for amortizing mortgage notes.
(2) The weighted average interest rate for the swapped unsecured notes as of June 30, 2011.

The Company has a variable rate unsecured credit facility (the “Credit Facility”) in the amount of $1,000,000,000 with a syndicate of commercial banks, to whom the Company pays an annual facility fee of approximately $1,250,000. The Company did not have any amounts outstanding under the Credit Facility and had $51,593,000 outstanding in letters of credit as of June 30, 2011. At December 31, 2010, there were no amounts outstanding under the Credit Facility and $44,105,000 outstanding in letters of credit. The Credit Facility bears interest at varying levels based on the London Interbank Offered Rate (“LIBOR”), rating levels achieved on the Company’s unsecured notes and on a maturity schedule selected by the Company. The current stated pricing is LIBOR plus 0.40% per annum (0.59% at June 30, 2011).

The Company expects to enter into a new unsecured credit facility in the third quarter of 2011 to replace its existing unsecured credit facility, which is scheduled to expire in November 2011. The new unsecured credit facility is expected to have a capacity of approximately $750,000,000. The Company expects that the interest rate, upfront fees and recurring fees for the new unsecured credit facility will be higher than the expiring facility, consistent with current market terms for similar unsecured credit facilities.

The Company was in compliance at June 30, 2011 with certain customary financial and other covenants under the Credit Facility and the Company’s unsecured notes.

 

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4. Stockholders’ Equity

The following summarizes the changes in stockholders’ equity for the six months ended June 30, 2011 (dollars in thousands):

 

    Common
stock
    Additional
paid-in
capital
    Accumulated
earnings less
dividends
    Accumulated
other
comprehensive
loss
    Total
AvalonBay
stockholders’
equity
    Noncontrolling
interests
    Total equity  

Balance at December 31, 2010

  $ 859      $ 3,593,677      $ (282,743   $ (1,175   $ 3,310,618      $ 4,973      $ 3,315,591   

Net income attributable to common stockholders

    —          —          73,713        —          73,713        —          73,713   

Unrealized loss on cash flow hedges

    —          —          —          (19,420     (19,420     —          (19,420

Change in redemption value of redeemable noncontrolling interest

    —          —          (1,218     —          (1,218     —          (1,218

Noncontrolling interests (a)

    —          —          —          —          —          (910     (910

Dividends declared to common stockholders

    —          —          (157,075     —          (157,075     —          (157,075

Issuance of common stock, net of withholdings

    28        251,060        (1,089     —          249,999        —          249,999   

Amortization of deferred compensation

    —          18,483        —          —          18,483        —          18,483   
                                                       

Balance at June 30, 2011

  $ 887      $ 3,863,220      $ (368,412   $ (20,595   $ 3,475,100      $ 4,063      $ 3,479,163   
                                                       

 

(a) Represents the impact of consolidating a Fund I subsidiary. See Note 6, “Investments in Real Estate Entities.”

During the six months ended June 30, 2011, the Company:

 

  (i) issued 1,801,766 shares of common stock through public offerings;

 

  (ii) issued 597,436 shares of common stock in connection with stock options exercised;

 

  (iii) issued 1,809 common shares through the Company’s dividend reinvestment plan;

 

  (iv) issued 498,810 common shares in connection with stock grants;

 

  (v) issued 7,500 common shares for Down REIT OP units conversion;

 

  (vi) withheld 126,928 common shares to satisfy employees’ tax withholding and other liabilities; and

 

  (vii) redeemed 505 shares of restricted common stock upon forfeiture.

In addition, the Company granted 144,827 options for common stock to employees. Any deferred compensation related to the Company’s stock option and restricted stock grants during the six months ended June 30, 2011 is not reflected on the Company’s Condensed Consolidated Balance Sheet as of June 30, 2011, and will not be reflected until earned as compensation cost.

In November 2010, the Company commenced a second continuous equity program (“CEP II”), under which the Company may sell up to $500,000,000 of its common stock from time to time during a 36-month period. During the three months ended June 30, 2011, the Company sold 553,856 shares at an average sales price of $130.56 per share, for net proceeds of $71,225,000. During the six months ended June 30, 2011, the Company sold 1,801,766 shares at an average sales price of $120.47 per share, for aggregate net proceeds of $213,794,000. From program inception in November 2010 through the end of the second quarter of 2011, the Company sold 2,234,598 shares at an average price of $118.91 per share for aggregate net proceeds of $261,729,000.

5. 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. In April 2011, the Company entered into $430,000,000 of forward starting interest rate swaps where the Company has agreed to pay a fixed rate of interest in exchange for a floating rate of interest at a future date. These swaps were transacted to reduce the Company’s exposure to fluctuations in interest rates on future debt issuances, and are not expected to impact the Company’s 2011 operating results.

 

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The following table summarizes the consolidated Hedging Derivatives at June 30, 2011, excluding derivatives executed to hedge debt on communities classified as held for sale (dollars in thousands):

 

      Non-
designated
Hedges
    Cash Flow
Hedges
    Cash Flow
Hedges
    Fair Value
Hedges
 
     Interest
Rate Caps
    Interest
Rate Caps
    Interest
Rate Swaps
    Interest
Rate Swaps
 

Notional balance

   $ 75,847      $ 195,799      $ 430,000      $ 225,000   

Weighted average interest rate (1)

     1.1     2.3     4.5     5.2

Weighted average capped interest rate

     7.1     5.3     N/A        N/A   

Earliest maturity date

     Aug-12        Jun-12        Sep-12        Sep-11   

Latest maturity date

     Mar-14        Jun-15        May-13        Jan-12   

Estimated fair value, asset/(liability)

   $ 6      $ 278      $ (19,145   $ 646   

 

(1) 

For interest rate caps, this represents the weighted average interest rate on the debt.

Excluding derivatives executed to hedge debt on communities classified as held for sale, the Company had seven derivatives designated as cash flow hedges, three derivatives designated as fair value hedges and four derivatives not designated as hedges at June 30, 2011. Fair value changes for derivatives that are not in qualifying hedge relationships are reported as a component of general and administrative expenses on the accompanying Condensed Consolidated Statements of Operations and Other Comprehensive Income. Fair value changes for derivatives not in qualifying hedge relationships for the six months ended June 30, 2011, were not material. 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. To adjust the Hedging Derivatives in qualifying cash flow hedges to their fair value and recognize the impact of hedge accounting, the Company recorded a decrease in other comprehensive income of $19,420,000 and $135,000 during the six months ended June 30, 2011 and 2010, respectively. The amount reclassified into earnings for the six months ended June 30, 2011, as well as the estimated amount included in accumulated other comprehensive income as of June 30, 2011, expected to be reclassified into earnings within the next twelve months to offset the variability of cash flows of the hedged items during this period are not material. For the derivative positions that the Company has determined qualify as effective fair value hedges, the Company has recorded a decrease in the fair value of $863,000 and an increase of $1,412,000 for the six months ended June 30, 2011 and 2010, respectively. The derivatives fair value is reported as a component of prepaid expenses and other assets, with the associated gain as an adjustment to the carrying amount of the corresponding debt being hedged on the accompanying Condensed Consolidated Balance Sheets as of June 30, 2011.

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

Derivative financial instruments expose the Company to credit risk in the event of nonperformance by the counterparties under the terms of the Hedging Derivatives. The Company minimizes its credit risk on these transactions by dealing with major, creditworthy financial institutions which have an A+ or better credit rating by the Standard & Poor’s Ratings Group. As part of its on-going control procedures, the Company monitors the credit ratings of counterparties and the exposure of the Company to any single entity, thus minimizing credit risk concentration. The Company believes the likelihood of realizing losses from counterparty non-performance is remote. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements of its derivative financial instruments. Refer to Note 11, “Fair Value,” for further discussion.

 

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6. Investments in Real Estate Entities

Investments in consolidated entities

During the three months ended June 30, 2011, the Company completed an exchange of assets with UDR, Inc. (“UDR”). The transaction included exchanging a portfolio of three communities and a parcel of land owned by the Company for a portfolio of six UDR communities and $26,000,000 in cash. The Company’s portfolio consisted of two properties and a small land parcel located in metropolitan Boston and one property located in San Francisco. The UDR portfolio is located in Southern California (Los Angeles, Orange County and San Diego). The Company accounted for the exchange as a non-monetary transaction based on the carrying value of the assets relinquished by the Company. The Company recognized a partial gain of $7,675,000, related to the monetary consideration received, representing the proportionate share of the assets sold. In addition, the Company assumed a $55,400,000 5.24% fixed-rate mortgage loan that matures in June 2013. In exchange, the Company relinquished a $55,800,000 5.86% fixed-rate mortgage loan that matures in May 2019.

In addition, in April 2011, the Company acquired Fairfax Towers, located in Falls Church, Virginia. Fairfax Towers contains 415 apartment homes and was acquired for a purchase price of $89,200,000. In conjunction with this acquisition, the Company assumed the existing 4.75% fixed-rate mortgage loan with an outstanding principal amount of $44,044,000 which matures in August 2015.

The Company accounted for the acquisition of Fairfax Towers as a business combination and allocated the purchase price to the acquired assets and assumed liabilities, including identifiable intangibles, based on their fair values. The Company looked to third party pricing for the value of the land, and an internal model to determine the fair value of the real estate assets, in place leases and mortgage loan. Given the heterogeneous nature of multi-family real estate, the fair values for the land, real estate assets and in place leases incorporated significant unobservable inputs and therefore are considered to be Level 3 prices within the fair value hierarchy. The Company used a discounted cash flow analysis on the expected cash flows of the mortgage note to determine its fair value, considering the contractual terms of the instrument and observable market-based inputs. The fair value of the mortgage loan is considered a Level 2 price as the majority of the inputs used fall within Level 2 of the fair value hierarchy.

Transaction costs for the asset exchange and acquisition of Fairfax Towers were $958,000. These costs are included in operating expenses, excluding property taxes on the accompanying Condensed Consolidated Statements of Operations and Other Comprehensive Income.

Investments in unconsolidated entities

As of June 30, 2011, the Company had investments in six unconsolidated real estate entities with ownership interest percentages ranging from 15.2% to 50%. The Company accounts for its investments in unconsolidated real estate entities under the equity method of accounting, except as otherwise noted below. The significant accounting policies of the Company’s unconsolidated real estate entities are consistent with those of the Company in all material respects.

During the three months ended June 30, 2011, AvalonBay Value Added Fund II, LP (“Fund II”) acquired Yale Village Townhomes, located in Rockville, MD. The community contains 210 townhomes and was acquired for a purchase price of $49,500,000.

There were no other changes in the Company’s ownership interest in, or presentation of, its investments in unconsolidated real estate entities during the three months ended June 30, 2011.

 

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Detail of the real estate and associated funding underlying the Company’s unconsolidated investments is presented in the following table (unaudited, dollars in thousands):

 

    Company     # of     Total     Debt
    Ownership     Apartment     Capitalized               Interest     Maturity

Unconsolidated Real Estate Investments

  Percentage     Homes     Cost (1)     Amount (2)     Type   Rate (3)    

Date

Fund I

             

1. Avalon at Redondo Beach - Los Angeles, CA

      105      $ 24,624      $ 21,033      Fixed     4.87   Oct 2011

2. Avalon Lakeside - Chicago, IL

      204        18,491        12,056      Fixed     5.74   Mar 2012

3. Avalon Columbia - Baltimore, MD

      170        29,410        22,275      Fixed     5.48   Apr 2013

4. Avalon Sunset - Los Angeles, CA

      82        20,903        12,750      Fixed     5.41   Mar 2014

5. Avalon at Poplar Creek - Chicago, IL

      196        28,097        16,500      Fixed     4.83   Oct 2013

6. Avalon at Civic Center - Norwalk, CA

      192        42,756        27,001      Fixed     5.38   Aug 2013

7. Avalon Paseo Place - Fremont, CA

      134        25,078        11,800      Fixed     5.74   Nov 2014

8. Avalon at Yerba Buena - San Francisco, CA

      160        66,813        41,500      Fixed     5.88   Mar 2014

9. Avalon at Aberdeen Station - Aberdeen, NJ

      290        58,587        39,842      Fixed     5.64   Sep 2013

10. The Springs - Corona, CA (4)

      320        29,875        23,717      Fixed     6.06   Oct 2014

11. Avalon Lombard - Lombard, IL

      256        35,323        17,243      Fixed     5.43   Jan 2014

12. Avalon Cedar Place - Columbia, MD

      156        24,505        12,000      Fixed     5.68   Feb 2015

13. Avalon Centerpoint - Baltimore, MD (5)

      392        80,259        45,000      Fixed     5.74   Dec 2014

14. Middlesex Crossing - Billerica, MA

      252        38,386        24,100      Fixed     5.49   Dec 2014

15. Avalon Crystal Hill - Ponoma, NY

      168        38,645        24,500      Fixed     5.43   Dec 2014

16. Avalon Skyway - San Jose, CA

      348        78,251        37,500      Fixed     6.11   Mar 2014

17. Avalon Rutherford Station - East Rutherford, NJ

      108        36,821        19,627      Fixed     6.13   Sep 2016

18. South Hills Apartments - West Covina, CA

      85        24,756        11,761      Fixed     5.92   Oct 2014

19. Weymouth Place - Weymouth, MA

      211        25,298        13,455      Fixed     5.12   Mar 2015
                                           

Total Fund I

    15.2     3,829      $ 726,878      $ 433,660          5.6  
                                           

Fund II

             

1. Avalon Bellevue Park - Bellevue, WA

      220      $ 33,993      $ 21,515      Fixed     5.52   Jun 2019

2. Avalon Fair Oaks - Fairfax, VA

      491        72,100        42,600      Fixed     5.26   May 2017

3. Avalon Rothbury - Gaithersburg, MD

      203        31,481        18,750      Variable     2.78   Jun 2017

4. The Apartments at Briarwood - Owings Mills, MD

      348        45,125        26,850      Fixed     3.64   Nov 2017

5. Grove Park Apartments - Gaithersburg, MD

      684        101,899        63,200      Fixed     5.42   Jan 2018

6. Creekside Meadows - Tustin, CA

      628        99,793        59,100      Fixed     3.81   Oct 2017

7. Canyonwoods - Lake Forest, CA

      140        25,316        —        N/A     N/A      N/A

8. Fox Run Apartments - Plainsboro, NJ (6)

      776        86,727        54,509      Fixed     4.56   Nov 2014

9. Waterstone Carlsbad - Carlsbad, CA

      448        78,509        46,141      Fixed     4.68   Feb 2018

10. Yale Village - Rockville, MD

      210        49,500        —        N/A     N/A      N/A

Fund II corporate debt

      N/A        N/A        61,500      Variable     2.69   Dec 2011
                                           

Total Fund II

    31.3     4,148      $ 624,443      $ 394,165          4.3  
                                           

Other Operating Joint Ventures

             

1. Avalon Chrystie Place I - New York, NY (7)

    20.0     361      $ 136,544      $ 117,000      Variable     0.81   Nov 2036

2. Avalon at Mission Bay North II - San Francisco, CA (8)

    25.0     313        124,031        105,000      Fixed     6.02   Dec 2015

3. Avalon Del Rey - Los Angeles, CA

    30.0     309        70,053        44,692      Variable     3.53   Apr 2016

Other Development Joint Ventures

             

1. Aria at Hathorne - Danvers, MA (8) (9) (10)

    50.0     64        N/A        1,860      Variable     7.98   Jun 2010
                                     

Total Other Joint Ventures

      1,047      $ 330,628      $ 268,552          3.3  
                                     

Total Unconsolidated Investments

      9,024      $ 1,681,949      $ 1,096,377          4.6  
                                     

 

(1) Represents total capitalized cost as of June 30, 2011.
(2) The Company has not guaranteed the debt of its unconsolidated investees and bears no responsibility for the repayment, other than the construction and completion and related financing guarantee for Avalon Chrystie Place I associated with the construction completion and occupancy certificate.
(3) Represents weighted average rate on outstanding debt as of June 30, 2011.
(4) Beginning in the third quarter of 2010, the Company consolidated the net assets and results of operations of The Springs.
(5) Borrowing on this community is comprised of three mortgage loans.
(6) Borrowing on this community is comprised of two mortgage loans.
(7) After the venture makes certain threshold distributions to the third-party partner, the Company generally receives 50% of all further distributions.
(8) The Company has contributed land, receiving capital credit for the fair value upon contribution, as its only capital contribution to this development.
(9) After the venture makes certain threshold distributions to the Company, the Company receives 50% of all further distributions.
(10)

The loan for this venture matured in June 2010. As of June 30, 2011, the amounts under this borrowing have not been repaid, and the venture is

 

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  negotiating an extension or refinancing of the amounts outstanding. As of June 30, 2011, the lender has declared an event of default with respect to the note and required the venture to pay a default rate of interest, the impact of which is not material to the Company. Although the Company has not guaranteed the debt of Aria at Hathorne nor does it have any obligation to fund the debt should the venture be unable to do so, the Company has the right to cure any event of default by the venture.

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

 

     6-30-11      12-31-10  
     (unaudited)      (unaudited)  

Assets:

     

Real estate, net

   $ 1,503,160       $ 1,393,274   

Other assets

     52,622         67,278   
                 

Total assets

   $ 1,555,782       $ 1,460,552   
                 

Liabilities and partners’ capital:

     

Mortgage notes payable and credit facility

   $ 1,072,660       $ 965,931   

Other liabilities

     26,901         24,835   

Partners’ capital

     456,221         469,786   
                 

Total liabilities and partners’ capital

   $ 1,555,782       $ 1,460,552   
                 

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

 

     For the three months ended     For the six months ended  
     (unaudited)     (unaudited)  
     6-30-11     6-30-10     6-30-11     6-30-10  
     (unaudited)     (unaudited)     (unaudited)     (unaudited)  

Rental and other income

   $ 38,632      $ 26,652      $ 76,454      $ 52,830   

Operating and other expenses

     (17,090     (11,862     (34,644     (24,802

Interest expense, net

     (12,478     (9,498     (24,779     (18,591

Depreciation expense

     (11,737     (8,605     (23,339     (17,252
                                

Net loss

   $ (2,673   $ (3,313   $ (6,308   $ (7,815
                                

In conjunction with the formation of Fund I and Fund II, as well as the acquisition and development of certain other investments in unconsolidated entities, the Company incurred costs in excess of its equity in the underlying net assets of the respective investments. These costs represent $10,443,000 at June 30, 2011 and $10,644,000 at December 31, 2010 of the respective investment balances.

As part of the formation of Fund I and Fund II, the Company provided separate and distinct guarantees to one of the limited partners in each of the ventures. These guarantees are specific to the respective fund and any impacts or obligation of the Company to perform under one of the guarantees has no impact on the Company’s obligations with respect to the other guarantee. The guarantees provide that, if, upon final liquidation of Fund I or Fund II, the total amount of all distributions to the guaranteed partner during the life of the respective fund (whether from operating cash flow or property sales) does not equal the total capital contributions made by that partner, then the Company will pay 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 $5,843,000 for Fund II as of June 30, 2011). As of June 30, 2011, 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 Company’s obligation under these guarantees, both at inception and as of June 30, 2011, was not significant and therefore the Company has not recorded any obligation for either of these guarantees as of June 30, 2011.

 

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7. Real Estate Disposition Activities

The Company did not sell any communities during the three months ended June 30, 2011. As of June 30, 2011, the Company had two real estate assets, improved land parcels, that qualified as held for sale.

The operations for any real estate assets sold from January 1, 2010 through June 30, 2011 have been presented as income from discontinued operations in the accompanying Condensed Consolidated Statements of Operations and Other 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 six months ended  
     6-30-11     6-30-10     6-30-11     6-30-10  
     (unaudited)     (unaudited)     (unaudited)     (unaudited)  

Rental income

   $ —        $ 674      $ —        $ 4,015   

Operating and other expenses

     (65     (477     (132     (1,878

Depreciation expense

     (26     (162     (65     (324
                                

Income (loss) from discontinued operations

   $ (91   $ 35      $ (197   $ 1,813   
                                

8. Segment Reporting

The Company’s 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 maintains that classification, unless disposition plans regarding a community change, 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 Company’s segment disclosures present the measure(s) used by the chief operating decision maker for purposes of assessing each segments’ performance. The Company’s chief operating decision maker is comprised of several members of its executive management team who use net operating income (“NOI”) as the primary financial measure for Established Communities and Other Stabilized Communities. NOI is defined by the Company as total revenue less direct property operating expenses. Although the Company considers NOI a useful measure of a community’s or communities’ operating performance, NOI should not be considered an alternative to net income or net cash flow from operating activities, as determined in accordance with GAAP. NOI excludes a number of income and expense categories as detailed in the reconciliation of NOI to net income.

 

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A reconciliation of NOI to net income for the three and six months ended June 30, 2011 and 2010 is as follows (dollars in thousands):

 

     For the three months ended     For the six months ended  
     6-30-11     6-30-10     6-30-11     6-30-10  

Net income

   $ 43,192      $ 51,066      $ 73,728      $ 123,432   

Indirect operating expenses, net of corporate income

     7,701        7,849        14,729        15,080   

Investments and investment management expense

     1,341        1,047        2,532        2,086   

Expensed acquisition, development and other pursuit costs

     1,353        443        2,004        947   

Interest expense, net

     45,855        41,458        90,126        83,999   

General and administrative expense

     8,145        4,041        15,437        12,936   

Equity in (income) loss of unconsolidated entities

     (395     (463     (898     (689

Depreciation expense

     62,894        57,317        124,154        113,250   

Gain on sale of real estate assets

     (7,675     (21,929     (7,675     (72,220

(Income) loss from discontinued operations

     91        (35     197        (1,813
                                

Net operating income

   $ 162,502      $ 140,794      $ 314,334      $ 277,008   
                                

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 Company’s segment information as of the dates specified (dollars in thousands). The segments are classified based on the individual community’s status as of the beginning of the given calendar year. Therefore, each year the composition of communities within each business segment is adjusted. Accordingly, the amounts between years are not directly comparable. Segment information for the three and six months ended June 30, 2011 and 2010 have been adjusted for the real estate assets that were sold from January 1, 2010 through June 30, 2011, or otherwise qualify as discontinued operations as of June 30, 2011, as described in Note 7, “Real Estate Disposition Activities.”

 

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

For the period ended June 30, 2011

             

Established

             

New England

  $ 42,083      $ 27,006        10.5   $ 83,110      $ 52,488        8.6   $ 1,297,280   

Metro NY/NJ

    48,501        33,153        6.4     96,191        64,712        5.9     1,530,426   

Mid-Atlantic/Midwest

    30,892        22,404        6.1     61,100        44,047        7.1     726,241   

Pacific Northwest

    9,346        6,349        6.4     18,475        12,489        3.6     360,995   

Northern California

    25,338        18,182        10.3     50,045        35,568        8.4     929,886   

Southern California

    18,568        12,393        8.7     36,962        24,348        5.2     695,220   
                                                       

Total Established

    174,728        119,487        8.0     345,883        233,652        6.9     5,540,048   
                                                       

Other Stabilized

    36,560        21,133        N/A        70,171        39,910        N/A        1,661,506   

Development / Redevelopment

    31,239        21,882        N/A        59,960        40,772        N/A        1,459,969   

Land Held for Future Development

    N/A        N/A        N/A        N/A        N/A        N/A        225,896   

Non-allocated (2)

    2,332        N/A        N/A        4,652        N/A        N/A        68,827   
                                                       

Total

  $ 244,859      $ 162,502        14.3   $ 480,666      $ 314,334        12.4   $ 8,956,246   
                                                       

For the period ended June 30, 2010

             

Established

             

New England

  $ 35,654      $ 22,300        (2.3 )%    $ 70,847      $ 43,944        (3.4 )%    $ 1,094,054   

Metro NY/NJ

    45,287        30,589        (4.5 )%      89,677        60,096        (4.0 )%      1,389,706   

Mid-Atlantic/Midwest

    29,931        18,665        0.7     59,322        36,211        (2.4 )%      751,070   

Pacific Northwest

    6,614        4,249        (14.1 )%      13,231        8,675        (14.5 )%      239,836   

Northern California

    29,537        20,245        (7.2 )%      58,952        40,403        (11.0 )%      1,109,337   

Southern California

    14,686        9,431        (7.8 )%      29,459        19,137        (8.8 )%      467,668   
                                                       

Total Established

    161,709        105,479        (4.4 )%      321,488        208,466        (6.0 )%      5,051,671   
                                                       

Other Stabilized

    29,880        18,193        N/A        58,659        35,117        N/A        1,539,112   

Development / Redevelopment

    27,069        17,122        N/A        52,110        33,425        N/A        1,497,779   

Land Held for Future Development

    N/A        N/A        N/A        N/A        N/A        N/A        237,529   

Non-allocated (2)

    1,684        N/A        N/A        3,533        N/A        N/A        78,339   
                                                       

Total

  $ 220,342      $ 140,794        2.8   $ 435,790      $ 277,008        1.2   $ 8,404,430   
                                                       

 

(1) Does not include gross real estate assets held for sale of $18,429 and $28,329 as of June 30, 2011 and 2010, respectively.
(2) Revenue represents third party management, asset management and developer fees and miscellaneous income which are not allocated to a reportable segment.

 

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9. Stock-Based Compensation Plans

Information with respect to stock options granted under the Company’s 1994 Stock Option and Incentive Plan (the “1994 Plan”) and under the AvalonBay Communities, Inc. 2009 Stock Option and Incentive Plan (the “2009 Plan”) are as follows (dollars in thousands, other than per share amounts):

 

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

Options Outstanding, December 31, 2010

     126,484      $ 74.20         2,072,217      $ 88.50   

Exercised

     (11,287     74.20         (586,149     86.79   

Granted

     144,827        115.83         —          —     

Forfeited

     —          —           (21,653     43.29   
                                 

Options Outstanding, June 30, 2011

     260,024      $ 97.39         1,464,415      $ 89.85   
                                 

Options Exercisable June 30, 2011

     33,338      $ 74.20         1,357,452      $ 93.10   
                                 

The weighted average fair value of the options granted under the 2009 Plan during the six months ended June 30, 2011 is estimated at $ 29.40 per share on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield of 4.0% over the expected life of the option, volatility of 35.00%, risk-free interest rate of 3.0% and an expected life of approximately seven years.

At June 30, 2011, the Company had 421,737 outstanding unvested shares granted under restricted stock awards including activity under the 2008 Plan discussed below. Restricted stock vesting during the six months ended June 30, 2011 totaled 305,396 shares and had fair values at the grant date ranging from $48.60 to $147.75 per share. The total grant date fair value of shares vested was $34,882,000 and $9,467,000 for the six months ended June 30, 2011 and 2010, respectively.

Total employee stock-based compensation cost recognized in income was $5,575,000 and $5,166,000 for the six months ended June 30, 2011 and 2010, respectively, and total capitalized stock-based compensation cost was $2,907,000 and $2,592,000 for the six months ended June 30, 2011 and 2010, respectively. At June 30, 2011, there was a total of $3,152,000 and $8,948,000 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 2.28 years and 2.76 years, respectively.

Deferred Stock Performance Plan

On June 1, 2011, the measurement period for the Company’s 2008 deferred stock performance plan (the “2008 Plan”) ended with the maximum award achieved thereunder. This resulted in the Company issuing 397,370 shares of restricted and unrestricted stock valued at $51,153,000. The total cost recognized in earnings in connection with the 2008 Plan was $742,000 and $853,000 for the six months ended June 30, 2011 and 2010, respectively, and total capitalized stock-based compensation cost was $416,000 and $466,000 for the six months ended June 30, 2011 and 2010, respectively.

10. Related Party Arrangements

Unconsolidated Entities

The Company manages unconsolidated real estate entities for which it receives asset management, property management, development and redevelopment fee revenue. From these entities, the Company received fees of $2,332,000 and $1,684,000 in the three months ended June 30, 2011 and 2010, respectively, and $4,652,000 and $3,533,000 for the six months ended June 30, 2011 and 2010, respectively. These fees are included in management, development and other fees on the accompanying Condensed Consolidated Statements of Operations and Other Comprehensive Income. In addition, the Company has outstanding receivables associated with its management role of $ 4,231,000 and $2,558,000 as of June 30, 2011 and 2010, respectively.

 

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Director Compensation

The Company recorded non-employee director compensation expense relating to restricted stock grants and deferred stock awards in the amount of $187,000 and $375,000 for the three and six months ended June 30, 2011 as a component of general and administrative expense. Deferred compensation relating to these restricted stock grants and deferred stock awards were $687,000 and $146,000 on June 30, 2011 and December 31, 2010, respectively.

11. Fair Value

Financial Instruments Carried at Fair Value

Derivative Financial Instruments

Currently, the Company uses interest rate swap and interest rate cap agreements to manage its interest rate risk. These instruments are carried at fair value in the Company’s financial statements. See Note 5, “Derivative Instruments and Hedging Activities,” for derivative values at June 30, 2011 and a description of where these amounts are recorded in the 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. 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 June 30, 2011, 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.

Redeemable Noncontrolling Interests

 

  •  

Puts – The Company provided redemption options (the “Puts”) that allow two of the Company’s joint venture partners to require the Company to purchase their interests in the investments at the future fair market value. In March 2011, the Company acquired the noncontrolling interest associated with a consolidated community for $6,570,000 satisfying its obligation under one of the Puts. The remaining Put is payable in cash or, at the Company’s option, common stock of the Company. The Company determines the fair value of the Put based on unobservable inputs considering the assumptions that market participants would make in pricing the obligations. The Company applies discount factors to the estimated future cash flows of the asset underlying the associated joint venture, which in the case of the Put is the NOI from an apartment community, as well as potential disposition proceeds utilizing market capitalization rates, to derive the fair value of the position. Given the significance of the unobservable inputs, the valuations are classified in Level 3 of the fair value hierarchy. At December 31, 2010, the Puts’ aggregate fair value was $12,106,000. At June 30, 2011, the aggregate fair value of the remaining outstanding Put was $5,427,000.

 

  •  

DownREIT units – 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 a cash amount as determined by the applicable partnership agreement. Under the DownREIT agreements, for each limited partnership unit, the limited partner is entitled to receive cash in the amount equal to the fair value of the Company’s 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 Company’s common stock. The limited partnership units in DownREITs are valued using the market price of the Company’s common stock, a Level 1 price under the fair value hierarchy. At December 31, 2010, the fair value of the DownREIT units was $1,721,000. At June 30, 2011, the fair value of the DownREIT units was $990,000.

 

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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 bond indebtedness, 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 Company’s nonperformance risk. The Company has concluded that the value of its bond indebtedness and 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. Bond indebtedness, notes payable and outstanding amounts under the Credit Facility (as applicable) with an aggregate outstanding par amount of approximately $3,986,416,000 and $4,068,417,000 had an estimated aggregate fair value of $4,151,240,000 and $4,236,216,000 at June 30, 2011 and December 31, 2010, respectively.

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 following for disclosure.

In July 2011, the Company issued an additional 256,167 shares under CEP II at an average price of $127.90 per share for aggregate net proceeds of $32,271,000.

Also in July 2011, Fund II acquired Captain Parker Arms, a garden-style community consisting of 94 apartment homes located in Lexington, MA. The community was acquired for a purchase price of $20,850,000.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s 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, 2010 (our “Form 10-K”).

All capitalized terms have the meaning 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 at 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.

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

Second Quarter 2011 Highlights

 

  •  

Net income attributable to common stockholders for the quarter ended June 30, 2011 was $43,373,000, a decrease of $7,752,000 or 15.2% from the prior year period. The decrease is attributable primarily to a decrease in disposition activity and related gains in 2011 as compared to the prior year period, partially offset by an increase in NOI from our communities.

 

  •  

For the quarter ended June 30, 2011, Established Communities NOI increased by $8,888,000 or 8.0% over the prior year period. This year-over-year increase was driven by an increase in rental revenue of 4.5% and a decrease in operating expenses of 2.5% as compared to the prior year period.

Financial Outlook

Our portfolio results for the quarter ended June 30, 2011 reflect both year-over-year revenue growth, as well as continued sequential rental revenue growth. The increase in revenues was driven by our portfolio growth and leasing activity for new development as well as an increase in rental rates, partially offset by a decrease in occupancy for our Established Communities. We expect year-over-year revenue growth to continue for the balance of 2011. We believe that the improvement in fundamentals in the multifamily sector is supported by a combination of a decline in the homeownership rate, disproportionately greater employment growth in the population segments with the highest propensity to rent, and limited supply of new multifamily rental product. We expect further improvement in revenue growth and operating fundamentals will continue to be driven by home ownership trends,

 

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demographic trends, as well as the timing and magnitude of employment growth. We believe continued favorable apartment fundamentals, combined with a capital markets environment that provides for cost effective access to capital, supports our expanded investment activity as further discussed below.

During the quarter ended June 30, 2011, we started construction of three communities containing 506 apartment homes at an aggregate total capitalized cost of $205,400,000. At June 30, 2011, 13 communities were under construction with a total projected capitalized cost of approximately $829,300,000. As of June 30, 2011, approximately $360,800,000 of the capital for this development was invested, with $468,500,000 remaining to invest. At June 30, 2011 our combined development under way and in planning currently is $3,543,300,000, providing us the ability to deliver assets into expected favorable market conditions in 2012 and 2013. In addition, during the second quarter of 2011, we acquired two land parcels for development, for an aggregate purchase price of approximately $33,276,000, representing 808 future apartment homes. In July 2011, we acquired two additional land parcels for an aggregate purchase price of approximately $22,600,000, representing 658 future apartment homes.

During the three months ended June 30, 2011, we started the redevelopment of Avalon at Nob Hill, located in San Francisco, CA. Avalon at Nob Hill contains 185 apartment homes and is expected to be redeveloped for a total capitalized cost of $5,800,000, excluding costs incurred prior to redevelopment. At June 30, 2011, there were eight communities under redevelopment, with an expected investment of approximately $101,700,000, excluding costs incurred prior to the start of redevelopment, with $41,400,000 remaining to be invested.

We expect to maintain our current level of redevelopment activity through the end of 2011 and into 2012, taking the opportunity to reinvest and reposition our assets to meet the needs of our residents and to try to position our assets to outperform as the economy fully recovers.

At present, cash on hand and available capital from our Credit Facility, which we expect to replace in the third quarter of 2011 as discussed further below, are sufficient to provide the capital necessary to fund our development and redevelopment activities for the balance of 2011. We believe that the strength of our balance sheet, as measured by our current level of indebtedness, our current ability to service interest and other fixed charges and our current limited 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 other sources of liquidity such as from joint ventures or from our retained cash, to meet any reasonably foreseeable liquidity needs as they arise. See the discussion under Liquidity and Capital Resources.

While we continue to grow principally through our demonstrated core competency of developing wholly owned assets, we also acquire interests in additional operating assets, either directly by us or through our investment in Fund II, a discretionary real estate investment fund.

During the three months ended June 30, 2011, we completed an exchange of assets with UDR, Inc. (“UDR”). The transaction included exchanging a portfolio of three communities and a parcel of land we owned for a portfolio of six UDR communities and $26,000,000 in cash. Our portfolio consisted of two properties and a small land parcel located in metropolitan Boston and one property located in San Francisco. The UDR portfolio is located in Southern California (Los Angeles, Orange County and San Diego). We accounted for the exchange as a non-monetary transaction based on the carrying value of the assets we relinquished. We recognized a partial gain of $7,675,000, related to the monetary consideration received, representing the proportionate share of the assets sold. In addition, we assumed a $55,400,000 5.24% fixed-rate mortgage loan that matures in June 2013. In exchange, we relinquished a $55,800,000 5.86% fixed-rate mortgage loan that matures in May 2019.

 

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During the three months ended June 30, 2011, we also acquired Fairfax Towers, located in Falls Church, Virginia. Fairfax Towers contains 415 apartment homes and was acquired for a purchase price of $89,200,000. In conjunction with this acquisition, we assumed the existing 4.75% fixed-rate mortgage loan with an outstanding principal balance of $44,044,000 which matures in August 2015.

We established Fund I and Fund II (collectively “the Funds”) to engage in 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) 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 we have made an equity investment of approximately $44,000,000 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 through the close of its investment period in March 2008. Subsidiaries of Fund I have 21 loans, including one held by us, as discussed elsewhere in this Form 10-Q, secured by individual assets with amounts outstanding in the aggregate of $433,660,000 with varying maturity dates (or dates after which the loans can be prepaid without penalty), ranging from October 2011 to September 2016. These mortgage loans are secured by the underlying real estate.

Fund II has six institutional investors, including us. One of our wholly owned subsidiaries is the general partner of Fund II and we have total equity commitments of $125,000,000, representing a 31.3% combined general partner and limited partner equity interest. Fund II had invested $624,443,000 as of June 30, 2011. Fund II has a term that expires in August 2018, plus two one-year extension options. Fund II serves as the exclusive vehicle, with some exceptions, through which we will acquire investment interests in apartment communities until August 2011. Fund II does not include or involve our development activities. We will receive, in addition to any returns on our invested equity, asset management fees, property management fees and redevelopment fees. We will also receive a promoted interest if certain return thresholds are met. During the three months ended June 30, 2011, a subsidiary of Fund II acquired Yale Village Townhomes, a community consisting of 210 townhomes located in Rockville, MD, for a purchase price of $49,500,000. In July 2011, a subsidiary of Fund II acquired Captain Parker Arms, a garden-style community consisting of 94 apartment homes located in Lexington, MA. Captain Parker Arms was acquired for a purchase price of $20,850,000.

Subsidiaries of Fund II have nine loans secured by individual assets with amounts outstanding in the aggregate of $332,665,000 with varying maturity dates (or dates after which the loans can be prepaid without penalty), ranging from November 2014 to June 2019. These mortgage loans are secured by the underlying real estate. In addition, Fund II has $61,500,000 outstanding under a credit facility that matures in December 2011.

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. 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 June 30, 2011, the Established Communities are communities that are consolidated for financial reporting purposes, had stabilized occupancy and operating expenses as of January 1, 2010, are not conducting or planning to conduct substantial redevelopment activities and are not held for sale or planned for

 

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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 community’s 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 certificate of occupancy has not been received. These communities may be partially or fully complete and operating.

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.

 

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As of June 30, 2011, 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         7,315   

Metro NY/NJ

     22         6,981   

Mid-Atlantic/Midwest

     16         5,950   

Pacific Northwest

     10         2,533   

Northern California

     15         4,829   

Southern California

     15         4,003   
                 

Total Established

     108         31,611   
                 

Other Stabilized Communities:

     

New England

     5         1,203   

Metro NY/NJ

     8         2,941   

Mid-Atlantic/Midwest

     15         5,019   

Pacific Northwest

     2         431   

Northern California

     12         2,966   

Southern California

     19         5,363   
                 

Total Other Stabilized

     61         17,923   
                 

Lease-Up Communities

     5         1,397   

Redevelopment Communities

     8         2,724   
                 

Total Current Communities

     182         53,655   
                 

Development Communities

     13         2,861   
                 

Development Rights

     32         9,407   
                 

 

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Results of Operations

Our year-over-year operating performance is primarily affected by both overall 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 six months ended June 30, 2011 and 2010 follows (dollars in thousands):

 

    For the three months ended     For the six months ended  
    6-30-11     6-30-10     $ Change     % Change     6-30-11     6-30-10     $ Change     % Change  

Revenue:

               

Rental and other income

  $ 242,527      $ 218,658      $ 23,869        10.9   $ 476,014      $ 432,257      $ 43,757        10.1

Management, development and other fees

    2,332        1,684        648        38.5     4,652        3,533        1,119        31.7
                                                               

Total revenue

    244,859        220,342        24,517        11.1     480,666        435,790        44,876        10.3
                                                               

Expenses:

               

Direct property operating expenses, excluding property taxes

    55,865        55,052        813        1.5     112,730        109,375        3,355        3.1

Property taxes

    24,152        23,083        1,069        4.6     48,940        46,171        2,769        6.0
                                                               

Total community operating expenses

    80,017        78,135        1,882        2.4     161,670        155,546        6,124        3.9
                                                               

Corporate-level property management and other indirect operating expenses

    10,041        9,262        779        8.4     19,391        18,316        1,075        5.9

Investments and investment management expense

    1,341        1,047        294        28.1     2,532        2,086        446        21.4

Expensed acquisition, development and other pursuit costs

    1,353        443        910        205.4     2,004        947        1,057        111.6

Interest expense, net

    45,855        41,458        4,397        10.6     90,126        83,999        6,127        7.3

Depreciation expense

    62,894        57,317        5,577        9.7     124,154        113,250        10,904        9.6

General and administrative expense

    8,145        4,041        4,104        101.6     15,437        12,936        2,501        19.3
                                                               

Total other expenses

    129,629        113,568        16,061        14.1     253,644        231,534        22,110        9.5
                                                               

Equity in income (loss) of unconsolidated entities

    395        463        (68     (14.7 )%      898        689        209        30.3
                                                               

Income from continuing operations

    35,608        29,102        6,506        22.4     66,250        49,399        16,851        34.1

Discontinued operations:

               

Income (loss) from discontinued operations

    (91     35        (126     (360.0 )%      (197     1,813        (2,010     (110.9 )% 

Gain on sale of communities

    7,675        21,929        (14,254     (65.0 )%      7,675        72,220        (64,545     (89.4 )% 
                                                               

Total discontinued operations

    7,584        21,964        (14,380     (65.5 )%      7,478        74,033        (66,555     (89.9 )% 
                                                               

Net income

    43,192        51,066        (7,874     (15.4 )%      73,728        123,432        (49,704     (40.3 )% 

Net (income) loss attributable to noncontrolling interests

    181        59        122        207     (15     216        (231     (106.9 )% 
                                                               

Net income attributable to common stockholders

  $ 43,373      $ 51,125      $ (7,752     (15.2 )%    $ 73,713      $ 123,648      $ (49,935     (40.4 )% 
                                                               

Net income attributable to common stockholders decreased $7,752,000 or 15.2%, to $43,373,000 for the three months ended June 30, 2011 and decreased $49,935,000 or 40.4% to $73,713,000 for the six months ended June 30, 2011. The decreases for the three and six months ended June 30, 2011 are due primarily to a decrease in asset sales and associated gains in 2011 as compared to the prior year period, offset partially by an increase in NOI.

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 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.

 

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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 six months ended June 30, 2011 and 2010 to net income for each period are as follows (dollars in thousands):

 

     For the three months ended     For the six months ended  
     6-30-11     6-30-10     6-30-11     6-30-10  

Net income

   $ 43,192      $ 51,066      $ 73,728      $ 123,432   

Indirect operating expenses, net of corporate income

     7,701        7,849        14,729        15,080   

Investments and investment management expense

     1,341        1,047        2,532        2,086   

Expensed acquisition, development and other pursuit costs

     1,353        443        2,004        947   

Interest expense, net

     45,855        41,458        90,126        83,999   

General and administrative expense

     8,145        4,041        15,437        12,936   

Equity in (income) loss of unconsolidated entities

     (395     (463     (898     (689

Depreciation expenses

     62,894        57,317        124,154        113,250   

Gain on sale of real estate assets

     (7,675     (21,929     (7,675     (72,220

(Income) loss from discontinued operations

     91        (35     197        (1,813
                                

Net operating income

   $ 162,502      $ 140,794      $ 314,334      $ 277,008   
                                

The NOI changes for the three and six months ended June 30, 2011, as compared to the prior year period, consist of changes in the following categories (dollars in thousands):

 

    For the three months ended     For the six months ended  
    6-30-11     6-30-11  

Established Communities

  $ 8,888      $ 15,118   

Other Stabilized Communities

    6,289        12,106   

Development and Redevelopment Communities

    6,531        10,102   
               

Total

  $ 21,708      $ 37,326   
               

The increases in our Established Communities’ NOI for the three and six months ended June 30, 2011 are due to a combination of increased rental revenues and decreased operating expenses. For the balance of 2011, we expect rental revenue growth will continue to improve due to continued improvement in rental rates while maintaining occupancy near current occupancy levels at our Established Communities.

Rental and other income increased in the three and six months ended June 30, 2011 as compared to the prior year period due to additional rental income generated from newly developed communities and increases in rental rates at our Established Communities.

Overall Portfolio – The weighted average number of occupied apartment homes increased to 42,293 apartment homes for the six months ended June 30, 2011 as compared to 40,002 homes for the prior year period. This increase is primarily due to new homes from increased development activity. The weighted average monthly revenue per occupied apartment home increased to $1,873 for the six months ended June 30, 2011 as compared to $1,799 in the prior year period.

Established Communities – Rental revenue increased $7,493,000, or 4.5%, for the three months ended June 30, 2011 from the prior year period. Rental revenue increased $13,673,000, or 4.1%, for the six months ended June 30, 2011 from the prior year period. The increases are due to an increase in rental rates of 4.8% and 4.3%, respectively, partially offset by decreases in economic occupancy of 0.3% and 0.2% for the three and six months ended June 30, 2011. Economic occupancy takes into account the fact that apartment homes of different sizes and locations within a community have different economic impacts on a community’s 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 six months ended June 30, 2011. In the discussion below, sequential revenue growth represents growth between the first and second quarter of 2011. Information for each of our regions is discussed in more detail below.

 

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The Metro New York/New Jersey region, which accounted for 27.8% of Established Community rental revenue for the six months ended June 30, 2011, experienced an increase in rental revenue of 3.8% as compared to the prior year period. Average rental rates increased 4.0% to $2,384, offset partially by a decrease in economic occupancy of 0.2% to 96.2% for the six months ended June 30, 2011. On a sequential basis, Metro New York/New Jersey reported rental revenue growth of 1.8% during the second quarter of 2011. Our Metro New York/New Jersey portfolio is comprised of three submarkets, New York City, Westchester County and Rockland County. Rental revenue growth was the strongest in our New York City and Rockland County portfolios, while the Westchester County communities experienced less growth due to pockets of new supply. For the overall region, concerns about the potential impact of new regulations on the area’s financial services industry could moderate the current pace of rental revenue growth.

The New England region accounted for 24.0% of the Established Community rental revenue for the six months ended June 30, 2011 and experienced a rental revenue increase of 4.7% over the prior year period. Average rental rates increased 4.8% to $1,969, offset partially by a decrease in economic occupancy of 0.1% to 96.2% for the six months ended June 30, 2011, as compared to the prior year period. Sequential revenue growth over the prior quarter was 2.6% during the three months ended June 30, 2011. Growth in this region is supported by an improving high-tech sector and a relatively large share of stable industry sectors in the region’s employment base, with Fairfield-New Haven more dependent on the Metro New York economy.

The Mid-Atlantic/Midwest region, which represented 17.7% of Established Community rental revenue for the six months ended June 30, 2011, experienced an increase in rental revenue of 4.6% over the prior year period. Average rental rates increased by 5.5% to $1,794, while economic occupancy decreased 0.9% to 95.4% for the six months ended June 30, 2011 as compared to the prior year period. The Mid-Atlantic/Midwest region also experienced sequential quarterly rental revenue growth of 2.2%. The level of permits and construction starts is increasing in the DC Metro area. While we expect continued strong operating performance near-term, the impact of reduced federal spending combined with an increase in new rental deliveries may slow growth in rental revenue relative to performance in other regions.

Northern California accounted for 14.5% of the Established Community rental revenue for the six months ended June 30, 2011 and experienced a rental revenue increase of 5.1% over the prior year period. Average rental rates increased 4.9% to $1,789, and economic occupancy increased 0.2% to 96.5 % for the six months ended June 30, 2011 as compared to the prior year period. The Northern California region generated strong sequential revenue, with rental revenue increasing 2.5% over the first quarter of 2011, driven by increased hiring in the technology sector. We expect continued improvement in the technology sector to support renter demand in the near-term at a faster pace than our other markets, but the impact is expected to be uneven among the Company’s markets in this region.

Southern California accounted for 10.7% of the Established Community rental revenue for the six months ended June 30, 2011 and experienced a rental revenue increase of 2.2% over the prior year period. Average rental rates increased 1.5% to $ 1,600, and economic occupancy increased 0.7% to 96.2% for the six months ended June 30, 2011. We expect this region’s economy will recover in-line with growth in the national economy but at a somewhat slower pace than our other regions, improving at an increasing rate for the balance of 2011. The Southern California region showed sequential rental revenue growth of 0.9% over the first quarter of 2011.

The Pacific Northwest region accounted for 5.3% of the Established Community rental revenue for the six months ended June 30, 2011 and experienced a rental revenue increase of 3.0% over the prior year period. Average rental rates increased 3.9% to $1,277, partially offset by a decrease in economic occupancy of 0.9% to 95.2% for the six months ended June 30, 2011. The Pacific Northwest showed sequential quarterly growth of 2.4%, led by an improving employment situation, however the region’s improvement in apartment fundamentals remains challenged by the slow absorption of new supply in certain submarkets.

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.

 

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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 six months ended June 30, 2011 and 2010 (dollars in thousands):

 

    For the three months ended     For the six months ended  
    6-30-11     6-30-10     6-30-11     6-30-10  

Rental revenue (GAAP basis)

  $ 174,651      $ 167,158      $ 345,669      $ 331,996   

Concessions amortized

    414        1,552        987        3,682   

Concessions granted

    (188     (804     (317     (1,710
                               

Rental revenue adjusted to state concessions on a cash basis

  $ 174,877      $ 167,906      $ 346,339      $ 333,968   
                               

Year-over-year % change — GAAP revenue

      4.5       4.1

Year-over-year % change — cash concession based revenue

      4.2       3.7

Direct property operating expenses, excluding property taxes increased $813,000, or 1.5% for the three months ended June 30, 2011 and $3,355,000, or 3.1% for the six months ended June 30, 2011 as compared to the prior year periods, primarily due to the addition of recently developed apartment homes.

For Established Communities, direct property operating expenses, excluding property taxes, decreased $1,523,000 or 3.9% and $1,517,000 or 1.9% for the three and six months ended June 30, 2011, respectively, from the prior year periods. These decreases were driven by a continued reduction in bad debt expense due to the economic improvement and lower utility expenses. These decreases were partially offset by increased payroll and property level performance bonuses.

Property taxes increased $1,069,000, or 4.6% and $2,769,000, or 6.0% for the three and six months ended June 30, 2011 over the prior year periods, due to the addition of newly developed and redeveloped apartment homes. Changes in reported property tax expenses are often impacted by the size and timing of successful tax appeals.

For Established Communities, property taxes increased by $105,000, or 0.6%, and $47,000, or 0.1%, for the three and six months ended June 30, 2011 over the prior year periods. We expect property taxes to increase for the balance of 2011 over 2010. 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). 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 $779,000, or 8.4% and $1,075,000 or 5.9% for the three and six months ended June 30, 2011 from the prior year periods. These increases are due primarily to compensation related costs coupled with corporate leadership events.

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 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.

Interest expense, net increased $4,397,000, or 10.6% and $6,127,000, or 7.3% for the three and six months ended June 30, 2011 over the prior year periods. This category includes interest costs offset by interest capitalized and interest income. The increase for the three and six months ended June 30, 2011 is due primarily to a decrease in the amount of capitalized interest in 2011 compared to the prior year. The decrease in capitalized interest from the prior year was driven primarily by the lower capitalized basis of communities under construction or being actively pursued for development in 2011 compared to 2010. The year-over-year increase was offset somewhat by an increase in interest income associated with escrow accounts for certain tax exempt secured borrowings.

 

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Depreciation expense increased $5,577,000, or 9.7% and $10,904,000, or 9.6% in the three and six months ended June 30, 2011 primarily due to the net increase in assets from the completion of development and redevelopment activities.

General and administrative expense (“G&A”) increased $4,104,000, or 101.6% and $2,501,000, or 19.3% for the three and six months ended June 30, 2011 as compared to the prior year period. The increase is due primarily to legal recoveries in 2010 that were not present in 2011, a decrease in the reversal of severance costs in 2011 as compared to 2010, and increased compensation costs in 2011.

Income from discontinued operations represents the net income generated by real estate sold or qualifying as discontinued operations during the period from January 1, 2010 through June 30, 2011. This income decreased for the three and six months ended June 30, 2011 as we did not have any operating communities classified as held for sale subsequent to June 30, 2010.

Gain on sale of communities decreased for the three and six months ended June 30, 2011 due to a decrease in the volume of community disposition activity and associated gains in 2011 as compared to the prior year period. 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.

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 Trusts® (“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);

 

  •  

depreciation of real estate assets; and

 

  •  

adjustments for unconsolidated partnerships and joint ventures.

FFO does not represent net income attributable to common stockholders of the Company 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.

 

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

 

    For the three months ended     For the six months ended  
    6-30-11     6-30-10     6-30-11     6-30-10  

Net income attributable to common stockholders

  $ 43,373      $ 51,125      $ 73,713      $ 123,648   

Depreciation - real estate assets, including discontinued operations and joint venture adjustments

    64,240        58,593        127,434        115,605   

Distributions to noncontrolling interests, including discontinued operations

    7        14        13        27   

Gain on sale of operating communities depreciated real estate assets

    (7,675     (21,929     (7,675     (72,220
                               

FFO attributable to common stockholders

  $ 99,945      $ 87,803      $ 193,485      $ 167,060   
                               

Weighted average common shares outstanding - diluted

    88,196,438        84,245,105        87,597,981        83,247,995   

EPS per common share - diluted

  $ 0.49      $ 0.61      $ 0.84      $ 1.49   
                               

FFO per common share - diluted

  $ 1.13      $ 1.04      $ 2.21      $ 2.01   
                               

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 (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 six months ended  
     6-30-11     6-30-10      6-30-11     6-30-10  

Net cash provided by operating activities

   $ 132,664      $ 102,841       $ 205,879      $ 171,724   
                                 

Net cash provided by (used in) investing activities

   $ (168,345   $ 2,065       $ (293,028   $ (33,978
                                 

Net cash provided by financing activities

   $ 33,985      $ 145,518       $ 70,827      $ 130,284   
                                 

Liquidity and Capital Resources

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

 

  •  

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;

 

  •  

normal recurring operating expenses; and

 

  •  

capital calls for Fund II, as required.

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 flow 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 2011, 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 until it expires in November 2011,

 

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and the borrowing capacity under a new unsecured credit facility we expect to obtain prior to the expiration of the Credit Facility, secured and unsecured debt financings, and other public or private sources of liquidity including common and preferred equity, amounts issued under the CEP II discussed below, as well as 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 June 30, 2011, we have unrestricted cash, cash equivalents and cash in escrow of $360,234,000 available for both current liquidity needs as well as development activities.

Unrestricted cash and cash equivalents totaled $290,104,000 at June 30, 2011, a decrease of $16,322,000 from $306,426,000 at December 31, 2010. 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 $205,879,000 for the six months ended June 30, 2011 from $171,724,000 for the six months ended June 30, 2010. The change was driven primarily by increased NOI from our communities and the timing of payments of corporate obligations.

Investing Activities – Net cash used in investing activities of $293,028,000 for the six months ended June 30, 2011 related to investments in assets primarily through development and redevelopment. During the six months ended June 30, 2011, we invested $281,887,000 in the development of the following real estate and capital expenditures:

 

  •  

we invested approximately $266,374,000 in the development of communities;

 

  •  

we invested $46,275,000 in the acquisition of an apartment community; and

 

  •  

we had capital expenditures of $15,513,000 for real estate and non-real estate assets.

These expenditures were offset by net proceeds of $22,371,000 from an asset exchange.

Financing Activities – Net cash provided by financing activities totaled $70,827,000 for the three months ended June 30, 2011. The net cash provided is due to $264,134,000 received from the issuance of common stock, primarily through the CEP II we initiated in November 2010, and associate stock option exercises, partially offset by the payment of cash dividends in the amount of $154,382,000 and repayment of $31,963,000 for mortgage notes payable.

Variable Rate Unsecured Credit Facility

We currently have a $1,000,000,000 revolving variable rate Credit Facility with a syndicate of commercial banks that matures in November 2011. We pay an annual facility fee of approximately $1,250,000. The Credit Facility bears interest at varying levels based on LIBOR, our credit rating and on a maturity schedule selected by us. The current stated pricing is LIBOR plus 0.40% per annum (0.59% on July 29, 2011). At July 29, 2011, there were no amounts outstanding on the Credit Facility, $53,673,000 was used to provide letters of credit, and $946,327,000 was available for borrowing under the Credit Facility.

We expect to enter into on a new unsecured credit facility in the third quarter of 2011 to replace our existing unsecured credit facility which is scheduled to expire in November 2011. The new unsecured credit facility is expected to have a capacity of approximately $750,000,000. We expect that the interest rate, upfront fees and recurring fees for the new unsecured credit facility will be higher than the expiring facility consistent with current market terms for similar unsecured credit facilities.

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.

 

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We were in compliance with these covenants at June 30, 2011.

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 November 2010, we commenced our second continuous equity program (“CEP II”), under which we may sell up to $500,000,000 of our common stock from time to time during a 36-month period. Actual sales will depend on a variety of factors to be determined by us, including market conditions, the trading price of our common stock and determinations of the appropriate sources of funding. In conjunction with CEP II, we engaged sales agents who receive compensation of approximately 1.5% of the gross sales price for shares sold. During the three and six months ended June 30, 2011 we sold 553,856 and 1,801,766 shares respectively under CEP II at an average sales price of $130.56 and $120.47 per share, for aggregate net proceeds of $71,225,000 and $213,794,000. From program inception in November 2010 through June 30, 2011, we sold 2,234,598 shares at an average price of $118.91 per share, for aggregate net proceeds of $261,729,000. In July 2011 we issued an additional 256,167 shares at an average price of $127.90 per share, for aggregate net proceeds of $32,271,000.

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 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 the debt. This refinancing may be accomplished by uncollateralized private or public debt offerings, additional debt financing that is secured by mortgages on individual communities or groups of communities or draws on 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.

In addition to the proceeds received under CEP II discussed above, the following financing activity occurred through July 2011:

 

  •  

In March 2011, we repaid a variable rate secured mortgage note in the amount of $28,785,000 in accordance with its scheduled maturity date.

 

  •  

In April 2011, we entered into $430,000,000 of forward starting interest rate swaps agreeing to pay a fixed rate of interest in exchange for a floating rate of interest at a future date. These swaps were transacted to reduce our exposure to fluctuations in interest rates on future debt issuances.

 

  •  

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

 

  •  

In conjunction with the acquisition of Fairfax Towers in April 2011, we assumed a 4.75% fixed-rate mortgage loan with an outstanding principal balance of $44,044,000 that matures in August 2015.

 

  •  

In April 2011, we repaid all amounts due under a $93,440,000 variable-rate, tax-exempt bond financing using the original issue proceeds, which were held in escrow.

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 June 30, 2011 (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     12-31-10     6-30-11     2011     2012     2013     2014     2015     Thereafter  

Tax-exempt bonds

                   

Fixed rate

                   

Avalon Fields

    7.80     May-2027      $ 9,419      $ 9,264      $ 161      $ 339      $ 364      $ 390      $ 419      $ 7,591   

Avalon Oaks

    7.49     Feb-2041        16,637        16,554        86        180        193        207        222        15,666   

Avalon Oaks West

    7.54     Apr-2043        16,519        16,444        77        162        173        185        198        15,649   

Avalon at Chestnut Hill

    6.15     Oct-2047        41,150        40,968        186        388        409        432        455        39,098   

Morningside Park

    4.08     May-2046        100,000        100,000 (7)      —            —          —          —          100,000   
                                                                   
        183,725        183,230        510        1,069        1,139        1,214        1,294        178,004   

Variable rate (2)

                   

Waterford

    0.97     Jul-2014        33,100        33,100 (3)      —          —          —          33,100        —          —     

Avalon at Mountain View

    1.02     Feb-2017        18,300        18,300 (3)      —          —          —          —          —          18,300   

Avalon at Mission Viejo

    1.23     Jun-2025        7,635        7,635 (3)      —          —          —          —          —          7,635   

Avalon at Nob Hill

    1.19     Jun-2025        20,800        20,800 (3)      —          —          —          —          —          20,800   

Avalon Campbell

    1.53     Jun-2025        38,800        38,800        —          —          —          —          —          38,800   

Avalon Pacifica

    1.55     Jun-2025        17,600        17,600        —          —          —          —          —          17,600   

Bowery Place I

    3.03     Nov-2037        93,800        93,800 (3)      —          —          —          —          —          93,800   

Bowery Place II

    4.26     Nov-2039        48,500        48,500 (4)      —          —          —          —          —          48,500   

Avalon Acton

    1.63     Jul-2040        45,000        45,000 (3)      —          —          —          —          —          45,000   

West Chelsea

    —          May-2012        93,440        —   (8)      —          —          —          —          —          —     

Avalon Walnut Creek

    2.83     Mar-2046        116,000        116,000 (4)      —          —          —          —          —          116,000   

Avalon Walnut Creek

    2.79     Mar-2046        10,000        10,000 (4)      —          —          —          —          —          10,000   
                                                                   
      $ 542,975      $ 449,535      $ —        $ —        $ —        $ 33,100      $        $ 416,435   
                                                                   

Conventional loans (5) 

                   

Fixed rate

                   

$300 Million unsecured notes

    6.79     Sep-2011        39,900        39,900        39,900        —          —          —          —          —     

$250 Million unsecured notes

    5.74     Jan-2012        104,400        104,400        —          104,400        —          —          —          —     

$250 Million unsecured notes

    6.26     Nov-2012        201,601        201,601        —          201,601        —          —          —          —     

$100 Million unsecured notes

    5.11     Mar-2013        100,000        100,000        —          —          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   

Avalon at Twinbrook

    7.25     Oct-2011        7,339        7,213        7,213        —          —          —          —          —     

Avalon at Tysons West

    5.55     Jul-2028        5,862        5,766        98        238        250        263        276        4,641   

Avalon Orchards

    7.78     Jul-2033        18,678        18,503        181        382        409        438        470        16,623   

Avalon at Arlington Square

    4.81     Apr-2013        170,125        170,125        —          —          170,125        —          —          —     

Avalon at Cameron Court

    5.07     Apr-2013        94,572        94,572        —          —          94,572        —          —          —     

Avalon Crescent

    5.59     May-2015        110,600        110,600        —          —          —          —          110,600        —     

Avalon at Silicon Valley

    5.74     Jul-2015        150,000        150,000        —          —          —          —          150,000        —     

Avalon Darien

    6.22     Nov-2015        50,559        50,234        372        746        793        843        47,480        —     

Avalon Greyrock Place

    6.12     Nov-2015        60,935        60,535        455        914        971        1,031        57,164        —     

Avalon Commons

    6.10     Jan-2019        55,100        54,816        408        734        779        826        875        51,194   

Avalon Walnut Creek

    4.00     Jul-2066        2,500        2,500        —          —          —          —          —          2,500   

Avalon Shrewsbury

    5.92     May-2019        21,130        21,112        119        285        301        319        338        19,750   

Avalon Gates

    5.92     May-2019        41,321        41,285        232        557        589        624        660        38,623   

Avalon at Stamford Harbor

    5.92     May-2019        65,695        65,639        370        885        937        992        1,050        61,405   

Avalon Freehold

    5.94     May-2019        36,630        36,599        206        493        522        553        585        34,240   

Avalon Run East II

    5.94     May-2019        39,250        39,216        220        529        560        592        627        36,688   

Avalon Gardens

    6.05     May-2019        66,237        66,180        372        892        945        1,000        1,058        61,913   

Avalon Edgewater

    5.94     May-2019        78,565        78,497        441        1,058        1,120        1,186        1,255        73,437   

Avalon Foxhall

    6.05     May-2019        59,010        58,959        331        795        841        891        943        55,158   

Avalon Gallery Place I

    6.05     May-2019        45,850        45,811        258        618        654        692        733        42,856   

Avalon Traville

    5.91     May-2019        77,700        77,633        437