1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 Commission file number 1-12672 AVALONBAY COMMUNITIES, INC. (Exact name of registrant as specified in its charter) -------------------- Maryland 77-0404318 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2900 Eisenhower Avenue, Suite 300 Alexandria, Virginia 22314 (Address of principal executive office, including zip code) (703) 329-6300 (Registrant's telephone number, including area code) -------------------- Securities registered pursuant to Section 12(b) of the Act: <TABLE> <S> <C> Common Stock, par value $.01 per share New York Stock Exchange, Pacific Exchange Preferred Stock Purchase Rights New York Stock Exchange, Pacific Exchange 8.50% Series C Cumulative Redeemable Preferred Stock, New York Stock Exchange, Pacific Exchange par value $.01 per share 8.00% Series D Cumulative Redeemable Preferred Stock, New York Stock Exchange, Pacific Exchange par value $.01 per share 9.00% Series F Cumulative Redeemable Preferred Stock, New York Stock Exchange, Pacific Exchange par value $.01 per share 8.96% Series G Cumulative Redeemable Preferred Stock, New York Stock Exchange, Pacific Exchange par value $.01 per share 8.70% Series H Cumulative Redeemable Preferred Stock, New York Stock Exchange, Pacific Exchange par value $.01 per share (Title of each class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None </TABLE> 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 [Y] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by nonaffiliates of the Registrant, as of March 1, 2000 was $2,256,084,969. The number of shares of the Registrant's Common Stock, par value $.01 per share, outstanding as of March 1, 2000 was 65,871,094. Documents Incorporated by Reference ----------------------------------- Portions of AvalonBay Communities, Inc.'s Proxy Statement for the 2000 annual meeting of stockholders, a definitive copy of which will be filed with the SEC within 120 days after the year end of the year covered by this Form 10-K, are incorporated by reference herein as portions of Part III of this Form 10-K. ================================================================================
2 TABLE OF CONTENTS PAGE ---- PART I ITEM 1. BUSINESS.........................................................1 ITEM 2. COMMUNITIES......................................................6 ITEM 3. LEGAL PROCEEDINGS...............................................30 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS.................31 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................................32 ITEM 6. SELECTED FINANCIAL DATA.........................................33 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................36 ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................56 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................57 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.....................57 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT..................57 ITEM 11. EXECUTIVE COMPENSATION..........................................57 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............................................57 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................57 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K........................................58 SIGNATURES ................................................................65
3 PART I This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Our actual results could differ materially from those set forth in each forward-looking statement. Certain factors that might cause such a difference are discussed in this report, including in the section entitled "Forward-Looking Statements" on page 36 of this Form 10-K. ITEM 1. BUSINESS General AvalonBay Communities, Inc. is a Maryland corporation that has elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended. We focus on the ownership and operation of upscale apartment communities in high barrier-to-entry markets of the United States. These markets include Northern and Southern California and selected states in the Mid-Atlantic, Northeast, Midwest and Pacific Northwest regions of the country. AvalonBay is the surviving corporation from the merger of Avalon Properties, Inc. with and into Bay Apartment Communities, Inc. In connection with the merger, Avalon Properties, Inc. ceased to exist and we changed our name from Bay Apartment Communities, Inc. to AvalonBay Communities, Inc. As of March 1, 2000, we owned or held a direct or indirect ownership interest in 121 operating apartment communities containing 35,648 apartment homes in eleven states and the District of Columbia, of which four communities containing 1,455 apartment homes were under redevelopment. In addition to these operating communities, we also owned 12 communities under construction that will contain 3,173 apartment homes and rights to develop ("Development Rights") an additional 30 communities that, if developed as expected, will contain an estimated 8,624 apartment homes. We generally obtain ownership in an apartment community by developing vacant land into a new community or by acquiring and either repositioning or redeveloping an existing community. In selecting sites for development, redevelopment or acquisition, we favor locations that are near expanding employment centers and convenient to recreation areas, entertainment, shopping and dining. Our principal operating objectives are to increase operating cash flow and Funds from Operations, or FFO, and, as a result, long-term stockholder value. For a description of the meaning of FFO and its use and limitation as an operating measure, see the discussion titled "Funds from Operations" in Item 7 of this report. Our strategies and goals to achieve these objectives include: - generating consistent, sustained earnings growth at each community through increased revenue, by balancing high occupancy with premium pricing, and increased operating margins from aggressive operating expense management; - investing selectively in new development, redevelopment and acquisition communities in markets with growing demand and high barriers-to-entry; - disposing of communities in markets where we have limited market presence; and - maintaining a conservative capital structure to provide continued access to capital markets at a cost that is low enough in relation to the expected yields on our developments and redevelopments that financing of new undertakings is desirable. We believe that we can generally implement these strategies best by building, rebuilding, acquiring and managing upscale assets in supply-constrained markets while maintaining the financial discipline to ensure balance sheet flexibility. We believe that we can achieve high occupancy levels, increased rental rates and growth in cash flow, although we cannot provide assurance that these results will be achieved. Development Strategy. We carefully select land for development and follow established procedures that we believe minimize both the cost and the risks of development. As one of the largest developers of multifamily apartment communities in high barrier-to-entry markets of the United States, we identify development opportunities through local market presence and access to local market information achieved through our regional offices. In addition to our principal executive offices in Alexandria, Virginia, we also maintain regional offices and administrative or specialty offices in or near the following cities: 1
4 - San Jose, California; - Wilton, Connecticut; - Boston, Massachusetts; - Chicago, Illinois; - Los Angeles, California; - Minneapolis, Minnesota; - Newport Beach, California; - New York, New York; - Princeton, New Jersey; and - Seattle, Washington. After selecting a target site, we negotiate for the right to acquire the site either through an option or a long-term conditional contract. After we acquire land, we generally shift our focus to construction. Except for certain mid-rise and high-rise apartment communities where we have historically used third-party general contractors, we act as our own general contractor. We believe this enables us to achieve higher quality, greater control over schedules and significant cost savings. Our development and property management teams monitor construction progress to ensure high quality workmanship and a smooth and timely transition into the leasing and operational phase. Redevelopment Strategy. We selectively seek existing under-managed apartment communities in fully-developed neighborhoods and create value by substantially rebuilding these communities. When we undertake the redevelopment of a community, our goal is to rebuild the community so that our total investment is significantly below replacement cost and the community is the highest quality apartment community or best rental value for an upscale apartment community in its local area. We have established procedures to minimize both the cost and risks of redevelopment. Our redevelopment teams, which include key redevelopment, construction and property management personnel, monitor redevelopment progress. We believe we achieve significant cost savings by acting as our own general contractor. More importantly, this helps to ensure high quality design and workmanship and a smooth and timely transition into the lease-up and restabilization phase. Disposition Strategy. During 1998, we determined that we would pursue a disposition strategy for certain assets in markets that did not meet our long-term strategic direction. This disposition strategy also acts as a source of capital because we are able to redeploy the net proceeds from our dispositions in lieu of raising that amount of capital externally. Under this program, we solicit competing bids from unrelated parties for these individual assets, and consider the sales price and tax ramifications of each proposal. In connection with this disposition program, we have disposed of a total of 24 communities and a participating mortgage note since September 1998. The net proceeds from the sale of these assets were approximately $384,143,000. We intend to actively seek buyers for the remaining communities held for sale. We anticipate reinvesting capital obtained from dispositions of these assets into development of new communities and redevelopment of existing communities that offer greater investment returns and long-term growth potential than those communities identified for disposition. However, we cannot provide assurance that we will be able to complete our disposition strategy or that assets identified for sale can be sold on terms that are satisfactory to us. Acquisition Strategy. We have observed and been impacted by a reduction in the availability of cost effective capital beginning in the third quarter of 1998. As a result, we limited our acquisition activity in 1999 to the purchase of one community that we acquired on a presale basis in connection with a forward purchase agreement signed in 1997 with an unaffiliated party. The forward purchase agreement provided for the purchase of ten communities, primarily in the Pacific Northwest and Midwest regions of the country, to be developed. The remaining nine presale acquisitions are expected to close during the next 31 months for an estimated aggregate purchase price of $347.1 million. Together, these communities are expected to contain 2,753 apartment homes when completed. We will manage these communities after acquiring ownership. This expansion is consistent with our strategy to achieve long term earnings growth by providing a high quality platform for expansion while also providing additional economic and geographic diversity. We believe that the acquisition of these presale communities will enable us to achieve rapid penetration into supply-constrained markets. We believe that we have now targeted and penetrated substantially all of the high barrier-to-entry markets of the United States. 2
5 Property Management Strategy. We intend to increase earnings through innovative, proactive property management that will result in higher revenue from communities. Our principle strategies for maximizing revenue include: - intense focus on resident satisfaction; - increasing rents as market conditions permit; and - managing community occupancy for optimal rental revenue levels. Generally, lease terms are staggered based on vacancy exposure by apartment type, so that lease expirations are better matched to each community's traffic patterns. On-site property management teams receive bonuses based largely upon the net operating income produced at their respective communities. We are also pursuing ancillary services which could provide additional revenue sources. Controlling operating expenses is another way in which we intend to increase earnings growth. An increase in growth in our portfolio and the resulting increase in revenue allows for fixed operating costs to be spread over a larger volume of revenue, thereby increasing operating margins. We also aggressively pursue real estate tax appeals and scrutinize other operating costs. To control operating expenses we: - record invoices on-site to ensure careful monitoring of budgeted versus actual expenses; - purchase supplies in bulk where possible; - bid on third-party contracts on a volume basis; - perform turnover work in-house or hire third-parties generally depending upon the least costly alternative; and - undertake preventive maintenance regularly to maximize resident satisfaction and property and equipment life. In addition, we strive to retain residents through high levels of service in order to eliminate the cost of preparing an apartment home for a new resident and to reduce marketing and utility costs. On a limited basis, we also manage properties for third parties, believing that doing so will provide information about new markets or provide an acquisition opportunity, thereby enhancing opportunities for growth. Technology Strategy. We believe that an innovative management information systems infrastructure will be an important element in managing our future growth. This is because timely and accurate collection of financial and resident profile data will enable us to maximize revenue through careful leasing decisions and financial management. We currently employ a proprietary company-wide intranet using a digital network with high-speed digital lines. This network connects all of our communities and offices to central servers in Alexandria, Virginia, providing access to our associates and to AvalonBay's corporate information throughout the country from all locations. We are currently engaged in the development of an innovative on-site property management system and a leasing automation system to enable management to capture, review and analyze data to a greater extent than is possible using existing commercial software. We have entered into a formal joint venture agreement, in the form of a limited liability company agreement, with United Dominion Realty Trust, Inc., another public multifamily real estate company, to continue development of these systems and system software, which are collectively referred to in this discussion as the "system." The system development process is currently managed by our employees, who have significant related project management experience, and the employees of the joint venturer. The actual programming and documentation of the system is being conducted by our employees, the employees of our joint venturer and third party consultants under the supervision of these experienced project managers. We currently expect that the total development costs over a three-year period will be approximately $7.5 million including hardware costs and expenses, the costs of employees and related overhead, and the costs of engaging third party consultants. These development costs will be shared on an equal basis by us and our joint venturer. Once developed, we intend to use the property management system in place of current property management information software for which we pay a license fee to third parties, and we intend to use the leasing automation system to make 3
6 the lease application process easier for residents and more efficient for us to manage. We currently project that the property management system will undergo an on-site test (i.e., a "beta test") during the third quarter of 2000 and that the system will be functional and implemented during 2001. The leasing automation system is currently in beta testing at two communities. We believe that when implemented the system will result in cost savings due to increased data reliability and efficiencies in management time and overhead, and that these savings will largely offset the expense associated with amortizing the system development costs and maintaining the software. We also believe that it is possible that other real estate companies may desire to use the system concept and system software that we are developing and that therefore there may be an opportunity to recover, in the future, a portion of our investment by licensing the system to others. However, at the present time these potential cost savings and ancillary revenue are speculative, and we cannot assure that the system will provide sufficient benefits to offset the cost of development and maintenance. We have never before engaged in the development of systems or system software on this scale and have never licensed a system concept or system software to others. There are a variety of risks associated with the development of the system, both for internal use and for potential sale or licensing to third parties. Among the principal risks associated with this undertaking are the following: - we may not be able to maintain the schedule or budget that we have projected for the development and implementation of the system; - we may be unable to implement the system with the functionality and efficiencies we desire on commercially reasonable terms; - we may decide not to endeavor to license the system to other enterprises, the system may not be attractive to other enterprises, and we may not be able to effectively manage the licensing of the system to other enterprises; and - the system may not provide AvalonBay with meaningful cost savings or a meaningful source of ancillary revenues. The occurrence of any of the events described above could prevent us from achieving increased efficiencies, realizing revenue growth produced by ancillary revenues or recovering our initial investment. Financing Strategy. We have consistently maintained, and intend to continue to maintain, a conservative capital structure, largely comprised of common equity. At December 31, 1999, debt-to-total market capitalization was 36.6%, and permanent long-term floating rate debt, not including borrowings under the unsecured facility, was only 1.6% of total market capitalization. We currently intend to limit long-term floating rate debt to less than 10% of total market capitalization, although that policy may change from time to time. We have observed and been impacted by a reduction in the availability of cost effective capital beginning in the third quarter of 1998. We cannot assure you that cost effective capital will be available to meet future expenditures required to begin planned reconstruction activity or the construction of the Development Rights. Before planned reconstruction activity or the construction of a Development Right begins, we intend to arrange adequate capital sources to complete such undertakings, although we cannot assure you that we will be able to obtain such financing. In the event that financing cannot be obtained, we may have to abandon Development Rights, write-off associated pursuit costs and forego reconstruction activity which we believe would have increased revenues and earnings. We estimate that a significant portion of our liquidity needs will be met from retained operating cash and borrowings under our $600,000,000 variable rate unsecured credit facility. At March 1, 2000, $203,500,000 was outstanding, $75,481,000 was used to provide letters of credit and $321,019,000 was available for borrowing under the unsecured facility. If required, to meet the balance of our liquidity needs we will need to arrange additional capacity under our existing unsecured facility, sell additional existing communities and/or issue additional debt or equity securities. While we believe we have the financial position to expand our short term credit capacity and support our capital markets activity, we cannot assure you that we will be successful in completing these arrangements, sales or offerings. The failure to complete these transactions on a cost-effective basis could have a 4
7 material adverse impact on our operating results and financial condition, including the abandonment of deferred development costs and a resultant charge to earnings. For the year ended December 31, 1999, FFO increased to $212,840,000 from $148,487,000 for the year ended December 31, 1998. FFO for the year ended December 31, 1998 reflects the operating results for Avalon through June 4, 1998 and for the combined company after that date. Inflation and Tax Matters Substantially all of our leases are for a term of one year or less, which may enable us to realize increased rents upon renewal of existing leases or the beginning of new leases. Such short-term leases generally minimize the risk to us of the adverse effects of inflation, although as a general rule these leases permit residents to leave at the end of the lease term without penalty. Our current policy is generally to permit residents to terminate leases upon an agreed advanced written notice and payment of a certain number of months rent, as stated in the resident's lease, as compensation for early termination. Short-term leases combined with relatively consistent demand allow rents, and therefore cash flow from the portfolio to provide an attractive inflation hedge. We filed an election with our initial federal income tax return to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, and intend to maintain our qualification as a REIT in the future. As a qualified REIT, with limited exceptions, we will not be taxed under federal and certain state income tax laws at the corporate level on our net income to the extent net income is distributed to our stockholders. We expect to distribute all of our taxable income and therefore generally avoid income tax at the corporate level. Environmental Matters Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real estate may be required, in many instances regardless of knowledge or responsibility, to investigate and remediate the effects of hazardous or toxic substances or petroleum product releases at such property. The owner or operator may be held liable to a governmental entity or to third parties for property damage and for investigation and remediation costs incurred by such parties in connection with the contamination, which may be substantial. The presence of such substances, or the failure to properly remediate the contamination, may adversely affect the owner's ability to borrow against, sell or rent such property. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. 5
8 Certain federal, state and local laws, regulations and ordinances govern the removal, encapsulation or disturbance of asbestos-containing materials, or ACMs, when such materials are in poor condition or in the event of construction, remodeling, renovation or demolition of a building. Such laws may impose liability for release of ACMs and may provide for third parties to seek recovery from owners or operators of real properties for personal injury associated with ACMs. In connection with our ownership and operation of apartment communities, we potentially may be liable for such costs. We are not aware that any ACMs were used in connection with the construction of the communities developed by us. However, we are aware that ACMs were used in connection with the construction of certain communities acquired by us. We do not anticipate that we will incur any material liabilities in connection with the presence of ACMs at these communities. We currently have or intend to implement an operations and maintenance program for ACMs at each of the communities at which ACMs have been detected. All of our stabilized operating communities, and all of the communities that we are currently developing or redeveloping, have been subjected to a Phase I or similar environmental assessment which generally does not involve invasive techniques such as soil or ground water sampling. These assessments have not revealed any environmental conditions that we believe will have a material adverse effect on our business, assets, financial condition or results of operations. We are not aware of any other environmental conditions which would have such a material adverse effect. However, we are aware that the migration of contamination from an upgradient landowner near Toscana, a community owned by us, has affected the groundwater there. The upgradient landowner is undertaking remedial response actions and as of December 31, 1999, a ground water treatment system had been installed. We expect that the upgradient landowner will take all necessary remediation actions and ensure the ongoing operation and maintenance of the ground water treatment system. The upgradient landowner has also provided an indemnity that runs to current and future owners of the Toscana property and upon which we may be able to rely if it incurs environmental liability arising from the groundwater contamination. We are also aware that certain communities have lead paint and we are undertaking or intend to undertake appropriate remediation. Additionally, prior to 1994, we had been occasionally involved in developing, managing, leasing and operating various properties for third parties. Consequently, we may be considered to have been an operator of such properties and, therefore, potentially liable for removal or remediation costs or other potential costs which could relate to hazardous or toxic substances. We are not aware of any material environmental liabilities with respect to properties that we managed or developed for such third parties. We cannot provide assurance that: - the environmental assessments identified all potential environmental liabilities; - no prior owner created any material environmental condition not known to us or the consultants who prepared the assessments; - no environmental liabilities developed since such environmental assessments were prepared; - the condition of land or operations in the vicinity of our communities, such as the presence of underground storage tanks, will not affect the environmental condition of such communities; or - future uses or conditions, including, without limitation, changes in applicable environmental laws and regulations, will not result in the imposition of environmental liability. ITEM 2. COMMUNITIES Our real estate investments as of March 1, 2000 consist primarily of stabilized operating apartment communities, communities in various stages of the development and redevelopment cycle and land or land options held for development. We classify these investments into the following categories: 6
9 <TABLE> <CAPTION> Number of Number of communities apartment homes ----------- --------------- <S> <C> <C> Current Communities 121 35,648 - -------------------- Stabilized Communities 117 34,193 Established Communities: 63 17,706 Northern California 25 6,461 Southern California 3 600 Mid-Atlantic 18 5,259 Northeast 16 4,888 Midwest 1 498 Other Stabilized Communities: 54 16,487 Northern California 10 2,988 Southern California 13 4,476 Mid-Atlantic 4 1,240 Northeast 16 5,111 Midwest 7 1,717 Pacific Northwest 4 955 Lease-Up Communities - - Redevelopment Communities 4 1,455 Development Communities 12 3,173 - ----------------------- Development Rights 30 8,624 (*) - ------------------ </TABLE> (*) Represents an estimate Current Communities are apartment communities that have been completed and have reached occupancy of at least 95%, have been complete for one year, are in the initial lease-up process or are under redevelopment. Current Communities consist of the following: Stabilized Communities. Represents all Current Communities that have completed initial lease-up by attaining physical occupancy levels of at least 95% or have been completed for one year, whichever occurs earlier. Stabilized Communities are categorized as either Established Communities or Other Stabilized Communities. - Established Communities. Represents all Stabilized Communities owned by Avalon and, on a pro forma basis, those owned by Bay as of January 1, 1998, with stabilized operating costs as of January 1, 1998 such that a comparison of 1998 operating results to 1999 operating results is meaningful. Each of the Established Communities falls into one of six geographic areas including Northern California, Southern California, Mid-Atlantic, Northeast, Midwest, and Pacific Northwest regions. At December 31, 1999, there were no Established Communities in the Pacific Northwest. - Other Stabilized Communities. Represents Stabilized Communities as defined above, but which became stabilized or were acquired after January 1, 1998. Lease-Up Communities. Represents all communities where construction has been complete for less than one year and where occupancy has not reached at least 95%. 7
10 Redevelopment Communities. Represents all communities where substantial redevelopment has begun. Redevelopment is considered substantial when capital invested during the reconstruction effort exceeds the lesser of $5 million or 10% of the community's acquisition cost. Development Communities are communities that are under construction and for which a final certificate of occupancy has not been received. These communities may be partially complete and operating. Development Rights are development opportunities in the early phase of the development process for which we have an option to acquire land, that we are the buyer under a long-term conditional contract to purchase land, or with respect to which we own land on which we might in the future develop a new community. We capitalize all related pre-development costs incurred in pursuit of these new developments. Our holdings under each of the above categories are discussed on the following pages. Current Communities The Current Communities are primarily garden-style apartment communities consisting of two and three-story buildings in landscaped settings. The Current Communities, as of March 1, 2000, include 102 garden-style, 14 high-rise and 5 mid-rise apartment communities. The Current Communities offer many attractive amenities including some or all of the following: - vaulted ceilings; - lofts; - fireplaces; - patios/decks; and - modern appliances. Other features at various communities may include: - swimming pools; - fitness centers; - tennis courts; and - business centers. We also have an extensive and ongoing maintenance program to keep all communities and apartment homes free of deferred maintenance and, where vacant, available for immediate occupancy. We believe that excellent design and service oriented property management focused on the specific needs of residents enhances market appeal to discriminating residents. We believe this will ultimately achieve higher rental rates and occupancy levels while minimizing resident turnover and operating expenses. These Current Communities are upscale multifamily apartment communities located in the following six geographic markets: 8
11 <TABLE> <CAPTION> Number of Number of apartment Percentage of total communities at homes at apartment homes at ------------------------ ------------------------- ----------------------- 1-1-99 3-1-00 1-1-99 3-1-00 1-1-99 3-1-00 ------ ------ ------ ------ ------ ------ <S> <C> <C> <C> <C> <C> <C> NORTHERN CALIFORNIA 35 36 9,538 9,743 25.2% 27.3% Alameda County, CA 9 8 2,523 2,278 6.7% 6.4% Sacramento, CA 3 1 850 302 2.2% 0.8% San Francisco, CA 5 6 1,062 1,288 2.8% 3.6% San Mateo County, CA 3 3 703 703 1.9% 2.0% Santa Clara County, CA 15 18 4,400 5,172 11.6% 14.5% SOUTHERN CALIFORNIA 18 18 5,818 5,816 15.3% 16.3% Los Angeles, CA 6 6 2,563 2,561 6.8% 7.2% Orange County, CA 8 8 2,022 2,022 5.3% 5.7% San Diego, CA 4 4 1,233 1,233 3.2% 3.4% PACIFIC NORTHWEST 5 5 1,375 1,376 3.6% 3.9% Portland, OR 1 1 279 279 0.7% 0.8% Seattle, WA 4 4 1,096 1,097 2.9% 3.1% NORTHEAST 27 32 9,021 9,999 23.8% 28.0% Boston, MA 8 9 2,375 2,580 6.3% 7.2% Fairfield County, CT 7 9 2,234 2,637 5.9% 7.4% Hartford, CT 1 1 932 932 2.4% 2.6% Long Island, NY 3 3 575 575 1.5% 1.6% Northern New Jersey 5 6 2,008 2,268 5.3% 6.4% Westchester, NY 3 4 897 1,007 2.4% 2.8% MID-ATLANTIC 30 22 8,825 6,499 23.3% 18.3% Baltimore, MD 4 4 1,052 1,052 2.8% 3.0% Norfolk, VA 4 2 904 486 2.4% 1.4% Northern Virginia 10 8 3,711 2,847 9.8% 8.0% Richmond, VA 4 1 1,103 268 2.9% 0.7% Southern Maryland 7 6 1,747 1,538 4.6% 4.3% Washington, DC 1 1 308 308 0.8% 0.9% MIDWEST 12 8 3,334 2,215 8.8% 6.2% Chicago, IL 3 3 887 887 2.3% 2.5% Cincinnati, OH 1 -- 264 -- 0.7% -- Detroit, MI 1 -- 225 -- 0.6% -- Indianapolis, IN 2 -- 376 -- 1.0% -- Minneapolis, MN 4 5 1,102 1,328 2.9% 3.7% St. Louis, MO 1 -- 480 -- 1.3% -- ------ ------ -------- -------- -------- -------- 127 121 37,911 35,648 100.0% 100.0% ====== ====== ======== ======== ======== ======== </TABLE> We manage and operate all of the Current Communities. During the year ended December 31, 1999, we completed construction of 2,335 apartment homes in ten communities for a total cost of $391.6 million. The average age of the Current Communities, on a weighted average basis according to number of apartment homes, is approximately ten years. Of the Current Communities as of March 1, 2000 we own: - a fee simple, or absolute, ownership interest in 106 operating communities, one of which is on land subject to a 149 year land lease; - a general partnership interest in five partnerships that in the aggregate hold a fee simple interest in five other operating communities; - a general partnership interest in four partnerships structured as DownREITs, as described more fully below, that own an aggregate of nine communities; and - a 100% interest in a senior participating mortgage note secured by one community, which allows us to share in part of the rental income or resale proceeds of the community. 9
12 We also hold a fee simple ownership interest in 11 of the Development Communities and a membership interest in a limited liability company that holds a fee simple interest in one Development Community. In each of the four partnerships structured as DownREITs, either AvalonBay or one of our wholly-owned subsidiaries is the general partner, and there are one or more limited partners whose interest in the partnership is represented by units of limited partnership interest. For each DownREIT partnership, limited partners are entitled to receive distributions before any distribution is made to the general partner. Although the partnership agreements for each of the DownREITs are different, generally the distributions paid to the holders of units of limited partnership interests approximate the current AvalonBay common stock dividend rate. Each DownREIT partnership has been structured so that it is unlikely the limited partners will be entitled to a distribution greater than the initial distribution provided for in the partnership agreement. The holders of units of limited partnership interest have the right to present each unit of limited partnership interest for redemption for cash equal to the fair market value of a share of AvalonBay common stock on the date of redemption. In lieu of a cash redemption of a unit, we may elect to acquire any unit presented for redemption for one share of common stock. As of March 1, 2000, there were 966,822 units outstanding. The DownREIT partnerships are consolidated for financial reporting purposes. 10
13 PROFILE OF CURRENT AND DEVELOPMENT COMMUNITIES (DOLLARS IN THOUSANDS, EXCEPT PER APARTMENT HOME DATA) <TABLE> <CAPTION> Approx. Year rentable built Average Number of area or size City and state homes (Sq. Ft.) Acres acquired (Sq. Ft.) - ------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> CURRENT COMMUNITIES (3) NORTHERN CALIFORNIA ALAMEDA COUNTY, CA Waterford Hayward, CA 544 451,937 11.1 1985/86 831 Hampton Place Fremont, CA 308 316,072 14.3 1992/94 1,026 Hacienda Gardens Pleasanton, CA 456 377,438 14.7 1988/94 828 Amador Oaks Dublin, CA 204 179,004 13.0 1989/97 877 Willow Creek Fremont, CA 235 197,575 3.5 1985/94 841 Alicante Fremont, CA 135 130,350 8.0 1992/94 966 Barrington Hills Hayward, CA 188 168,513 3.0 1986/94 896 Parc Centre at Union Square Union City, CA 208 150,140 8.5 1973/96 722 SACRAMENTO, CA Governor's Square Sacramento, CA 302 292,138 8.1 1976/97 967 SAN FRANCISCO, CA Crowne Ridge San Rafael, CA 254 221,525 21.9 1973/96 872 Sunset Towers San Francisco, CA 243 175,511 16.0 1961/96 722 City Heights San Francisco, CA 185 109,238 1.4 1990/95 590 Village Square San Francisco, CA 154 123,080 2.6 1972/94 799 Avalon Towers by the Bay San Francisco, CA 226 243,033 1.0 1999 1,075 Crossbrook Rohnert Park, CA 226 164,219 9.0 1986/94 727 SAN MATEO, CA Cedar Ridge Daly City, CA 195 141,411 8.0 1975/97 725 Regatta Bay Foster City, CA 288 222,276 11.0 1973/94 772 Sea Ridge Pacifica, CA 220 186,785 7.7 1971/95 849 SANTA CLARA COUNTY, CA Toscana Sunnyvale, CA 710 658,591 13.6 1997 928 Carriage Square San Jose, CA 324 322,207 7.5 1995 994 Canyon Creek Campbell, CA 348 326,796 8.0 1995 939 CountryBrook San Jose, CA 360 323,012 14.0 1985/96 897 The Arbors Campbell, CA 252 197,000 8.5 1966/97 782 Avalon at Creekside Mountain View, CA 294 215,680 13.0 1962/97 734 The Fountains at River Oaks San Jose, CA 226 210,050 4.0 1990/96 929 Parkside Commons Sunnyvale, CA 192 199,353 8.0 1991/96 1,038 Villa Mariposa Mountain View, CA 248 211,552 4.0 1986 853 San Marino San Jose, CA 248 209,465 11.5 1984/88 845 The Promenade Sunnyvale, CA 220 159,653 5.0 1987/95 726 Foxchase I & II San Jose, CA 396 335,212 12.0 1986/87 844 Glen Creek Morgan Hill, CA 138 112,987 6.0 1989 819 Fairway Glen San Jose, CA 144 119,492 6.0 1986 830 Centremark Cupertino, CA 311 293,328 8.0 1999 943 Avalon on the Alameda San Jose, CA 305 299,722 8.9 1999 983 Rosewalk at Waterford Park I San Jose, CA 300 297,696 10.8 1997 992 Rosewalk at Waterford Park II San Jose, CA 156 152,556 5.8 1999 978 <CAPTION> Average economic Average occupancy rental rate (1) Physical -------------------------------------------------- Financial occupancy at $ per $ per reporting 12/31/99 1999 1998 Apt Sq. Ft. cost (2) - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> CURRENT COMMUNITIES (3) NORTHERN CALIFORNIA ALAMEDA COUNTY, CA Waterford 96.9% 96.0% 97.3% 1,017 1.17 $57,777 Hampton Place 97.1% 95.1% 95.4% 1,459 1.35 $54,589 Hacienda Gardens 96.7% 95.4% 96.6% 1,181 1.36 $58,962 Amador Oaks 97.1% 95.1% 96.8% 1,279 1.39 $26,715 Willow Creek 96.6% 96.2% 96.4% 1,268 1.45 $33,644 Alicante 95.6% 96.2% 94.8% 1,382 1.38 $22,009 Barrington Hills 97.3% 97.6% 98.2% 1,095 1.19 $18,358 Parc Centre at Union Square 97.6% 97.4% 97.6% 1,035 1.40 $21,558 SACRAMENTO, CA Governor's Square 88.4% 87.5% Redev. 922 0.83 $20,991 SAN FRANCISCO, CA Crowne Ridge 94.1% 95.2% 96.7% 1,273 1.39 $30,439 Sunset Towers 96.7% 97.8% Redev. 1,363 1.85 $28,090 City Heights 95.7% 96.7% 98.5% 1,400 2.29 $27,392 Village Square 100.0% 98.5% 98.7% 1,406 1.73 $24,052 Avalon Towers by the Bay 99.1% 67.7% N/A 1,435 0.90 $65,863 Crossbrook 96.9% 97.7% 98.6% 880 1.18 $18,985 SAN MATEO, CA Cedar Ridge 98.5% 96.4% Redev. 1,327 1.76 $25,525 Regatta Bay 91.0% 92.7% 96.6% 1,313 1.58 $40,694 Sea Ridge 99.1% 97.5% 97.7% 1,306 1.50 $30,981 SANTA CLARA COUNTY, CA Toscana 98.0% 94.9% Lease-Up 1,827 1.87 $120,138 Carriage Square 97.5% 94.9% 96.4% 1,489 1.42 $60,652 Canyon Creek 98.3% 96.4% 97.0% 1,418 1.46 $59,829 CountryBrook 97.2% 96.2% 95.9% 1,245 1.34 $47,521 The Arbors 95.6% 91.3% Redev. 1,179 1.38 $31,562 Avalon at Creekside 91.5% Redev. Redev. 1,132 1.41 $37,778 The Fountains at River Oaks 98.7% 97.1% 96.7% 1,549 1.62 $45,570 Parkside Commons 97.4% 96.7% 96.3% 1,638 1.52 $37,371 Villa Mariposa 94.8% 95.5% 96.9% 1,583 1.77 $49,381 San Marino 98.8% 96.6% 97.3% 1,228 1.40 $33,486 The Promenade 97.3% 97.7% 95.8% 1,286 1.73 $34,341 Foxchase I & II 98.0% 96.8% 94.8% 1,167 1.33 $57,656 Glen Creek 87.7% 92.7% 95.0% 1,227 1.39 $18,337 Fairway Glen 97.9% 96.8% 94.1% 1,133 1.32 $17,047 Centremark 98.7% 88.7% N/A 1,743 1.64 $48,847 Avalon on the Alameda 96.4% 57.8% N/A 1,757 1.03 $55,809 Rosewalk at Waterford Park I 95.7% 95.6% 96.7% 1,529 1.47 $56,240 Rosewalk at Waterford Park II 98.7% 76.8% N/A 1,446 1.13 $21,621 </TABLE> 11
14 PROFILE OF CURRENT AND DEVELOPMENT COMMUNITIES (DOLLARS IN THOUSANDS, EXCEPT PER APARTMENT HOME DATA) <TABLE> <CAPTION> Approx. Year rentable built Average Number of area or size City and state homes (Sq. Ft.) Acres acquired (Sq. Ft,) - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> SOUTHERN CALIFORNIA LOS ANGELES, CA ViewPointe Woodland Hills, CA 663 592,683 18.2 1989/97 894 Lakeside Burbank, CA 748 530,114 14.7 1969/97 709 Avalon Westside Terrace Los Angeles, CA 363 229,296 4.8 1966/97 632 Arbor Heights Hacienda Heights, CA 351 277,220 20.0 1970/97 790 Warner Oaks Woodland Hills, CA 227 191,629 6.8 1979/98 844 TimberWood West Covina, CA 209 190,200 8.4 1972/97 910 ORANGE COUNTY, CA SunScape Huntington Beach, CA 400 353,192 16.4 1972/97 883 Avalon at Pacific Bay Huntington Beach, CA 304 268,000 9.7 1971/97 882 Mill Creek Costa Mesa, CA 258 208,890 8.9 1973/96 810 Villa Serena Rancho Santa Margarita, CA 301 229,593 20.0 1990/97 763 Amberway Anaheim, CA 272 205,572 9.9 1983/98 756 Laguna Brisas Laguna Niguel, CA 176 174,848 10.0 1988/98 993 Lafayette Place Costa Mesa, CA 145 120,690 6.6 1956/96 832 Larkspur Canyon Mission Viejo, CA 166 124,600 7.8 1984/96 751 SAN DIEGO, CA Avalon at Mission Bay San Diego, CA 564 402,327 5.7 1969/97 713 Gateway Tower San Diego, CA 293 224,840 1.2 1973/98 767 Mission Woods San Diego, CA 200 208,100 4.0 1960/97 1,041 SummerWalk San Diego, CA 176 141,120 8.8 1982/97 802 PACIFIC NORTHWEST PORTLAND, OR Waterhouse Place Beaverton, OR 279 261,464 12.0 1990/97 937 SEATTLE, WA The Verandas at Bear Creek Redmond, WA 264 288,250 22.0 1998 1,092 Gallery Place Redmond, WA 222 206,004 22.0 1991/97 928 Avalon Ridge Renton, WA 421 382,382 20.0 1987/88 908 Avalon Westhaven Seattle, WA 190 149,700 9.0 1989/97 788 NORTHEAST BOSTON, MA Avalon at Prudential Center Boston, MA 781 747,954 1.0 1998 958 Longwood Towers Brookline, MA 334 315,802 4.2 1993 946 Avalon at Center Place Providence, RI 225 231,671 1.2 1997 1,030 Avalon Summit Quincy, MA 245 203,848 9.1 1996 832 Avalon at Lexington Lexington, MA 198 231,182 18.0 1994 1,168 Avalon at Faxon Park Quincy, MA 171 175,494 8.3 1998 1,026 Avalon West Westborough, MA 120 147,472 10.1 1996 1,229 Avalon Oaks Wilmington, MA 204 229,748 22.5 1999 1,023 <CAPTION> Average economic Average occupancy rental rate (1) Physical -------------------------------------------------- Financial occupancy at $ per $ per reporting 12/31/99 1999 1998 Apt Sq. Ft. cost (2) - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> SOUTHERN CALIFORNIA LOS ANGELES, CA ViewPointe 96.4% 94.4% Redev. 1,070 1.13 $70,829 Lakeside 95.2% 95.8% Redev. 829 1.12 $55,746 Avalon Westside Terrace 94.2% 85.8% Redev. 1,131 1.54 $36,807 Arbor Heights 94.3% 80.0% Redev. 793 0.80 $29,458 Warner Oaks 96.9% 82.4% Redev. 1,070 1.05 $26,068 TimberWood 96.7% 96.2% Redev. 963 1.02 $14,736 ORANGE COUNTY, CA SunScape 96.5% 95.0% Redev. 1,056 1.14 $36,985 Avalon at Pacific Bay 98.7% 82.3% Redev. 929 0.87 $31,692 Mill Creek 96.9% 93.8% 95.3% 1,009 1.17 $24,134 Villa Serena 98.0% 97.2% Redev. 937 1.20 $23,541 Amberway 96.7% 89.1% Redev. 807 0.95 $20,989 Laguna Brisas 99.4% Redev. 91.5% 954 0.92 $18,620 Lafayette Place 94.5% 94.3% Redev. 1,180 1.34 $10,089 Larkspur Canyon 97.6% 94.7% 95.0% 944 1.19 $12,854 SAN DIEGO, CA Avalon at Mission Bay 84.0% Redev. Redev. 966 1.15 $60,556 Gateway Tower 98.0% 97.3% 94.7% 935 1.19 $24,326 Mission Woods 97.0% 98.2% Redev. 1,097 1.03 $21,544 SummerWalk 96.6% 97.2% 96.4% 895 1.09 $14,097 PACIFIC NORTHWEST PORTLAND, OR Waterhouse Place 95.0% 88.2% Redev. 704 0.66 $20,671 SEATTLE, WA The Verandas at Bear Creek 94.7% 88.5% 86.0% 1,173 0.95 $34,382 Gallery Place 92.8% 91.4% Redev. 1,058 1.04 $25,934 Avalon Ridge 93.8% Redev. Redev. 662 0.63 $28,592 Avalon Westhaven 94.7% 86.7% Redev. 750 0.83 $12,519 NORTHEAST BOSTON, MA Avalon at Prudential Center 98.7% 98.4% 98.1% 2,047 2.10 $131,937 Longwood Towers 98.8% 98.3% 95.3% 1,704 1.77 $41,805 Avalon at Center Place 94.8% 96.1% 94.5% 1,912 1.78 $26,995 Avalon Summit 97.6% 96.3% 96.4% 1,092 1.26 $16,468 Avalon at Lexington 99.0% 96.5% 94.5% 1,681 1.39 $14,912 Avalon at Faxon Park 97.1% 96.5% 74.0% 1,519 1.43 $15,231 Avalon West 99.2% 96.7% 97.5% 1,444 1.14 $10,824 Avalon Oaks 96.6% 64.5% N/A 1,423 0.81 $20,574 </TABLE> 12
15 PROFILE OF CURRENT AND DEVELOPMENT COMMUNITIES (DOLLARS IN THOUSANDS, EXCEPT PER APARTMENT HOME DATA) <TABLE> <CAPTION> Approx. Year rentable built Number of area or City and state homes (Sq. Ft.) Acres acquired - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> FAIRFIELD COUNTY, CT Avalon Walk I & II Hamden, CT 764 761,441 38.4 1992/94 Avalon Glen Stamford, CT 238 221,828 4.1 1991 Avalon Gates Trumbull, CT 340 381,322 37.0 1997 Hanover Hall Stamford, CT 388 328,002 4.6 1961/98 Avalon Springs Wilton, CT 102 158,259 12.0 1996 Avalon Valley Danbury,CT 268 297,479 17.1 1999 Avalon Lake Danbury,CT 135 166,231 32.0 1999 HARTFORD, CT Avalon Pavilions Manchester, CT 932 849,680 46.3 1990/92 LONG ISLAND, NY Avalon Commons Smithtown, NY 312 363,049 20.6 1997 Avalon Towers Long Beach, NY 109 124,836 1.3 1995 Avalon Court Melville, NY 154 193,464 10.8 1997 NORTHERN NEW JERSEY Avalon Cove Jersey City, NJ 504 574,675 11.1 1997 The Tower at Avalon Cove Jersey City, NJ 269 241,825 2.8 1999 Avalon Watch West Windsor, NJ 512 485,871 64.0 1988 Avalon Crest Fort Lee, NJ 351 371,411 13.1 1999 Avalon Run East Lawrenceville, NJ 206 265,198 27.0 1996 WESTCHESTER, NY Avalon Gardens Nanuet, NY 504 638,439 55.0 1998 Avalon View Wappingers Falls, NY 288 335,088 41.0 1993 Avalon Green Elmsford, NY 105 113,538 16.9 1995 The Avalon Bronxville, NY 110 119,186 1.5 1999 MID-ATLANTIC BALTIMORE, MD Avalon at Fairway Hills I & II Columbia, MD 720 724,253 42.1 1987/96 Avalon at Symphony Glen Columbia, MD 174 178,267 10.0 1986 Avalon Landing Annapolis, MD 158 117,033 13.8 1995 NORFOLK, VA Avalon Birches Chesapeake, VA 312 283,920 20.9 1995 Avalon Pines Virginia Beach, VA 174 142,800 9.7 1996 NORTHERN VIRGINIA Avalon at Ballston - Vermont & Quincy Towers Arlington, VA 454 420,242 2.3 1997 Avalon Crescent McLean, VA 558 613,426 19.1 1996 Avalon at Ballston - Washington Towers Arlington, VA 344 294,786 4.1 1990 Avalon at Cameron Court Alexandria, VA 460 467,292 16.0 1998 AuturimWoods Fairfax, VA 420 355,228 24.2 1996 Avalon at Fair Lakes Fairfax, VA 234 285,822 10.0 1998 Avalon at Dulles Sterling, VA 236 232,632 15.7 1986 Avalon at Providence Park Fairfax, VA 141 148,211 4.0 1997 <CAPTION> Average economic Average occupancy rental rate (1) Average Physical ------------------------------------- Financial size occupancy at $ per $ per reporting (Sq. Ft.) 12/31/99 1999 1998 Apt Sq. Ft. cost (2) - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> FAIRFIELD COUNTY, CT Avalon Walk I & II 996 98.6% 97.3% 97.2% 1,090 1.06 $58,634 Avalon Glen 932 93.3% 96.0% 97.7% 1,755 1.81 $30,723 Avalon Gates 1,122 95.3% 96.8% 98.4% 1,365 1.18 $35,765 Hanover Hall 845 95.9% 96.9% 90.9% 1,112 1.27 $38,895 Avalon Springs 1,552 99.0% 99.2% 99.3% 2,302 1.47 $16,629 Avalon Valley 1,070 99.6% 58.2% N/A 1,366 0.72 $25,195 Avalon Lake 1,184 99.3% 60.3% N/A 1,453 0.71 $16,680 HARTFORD, CT Avalon Pavilions 912 98.1% 97.0% 96.4% 908 0.97 $57,508 LONG ISLAND, NY Avalon Commons 1,164 97.8% 98.1% 98.8% 1,541 1.30 $33,255 Avalon Towers 1,145 98.2% 98.5% 96.7% 2,435 2.09 $16,434 Avalon Court 1,256 98.7% 98.2% 98.8% 1,772 1.39 $18,954 NORTHERN NEW JERSEY Avalon Cove 1,140 98.2% 95.3% 96.9% 2,470 2.06 $91,156 The Tower at Avalon Cove 905 98.1% 58.4% N/A 2,262 1.47 $47,144 Avalon Watch 949 99.0% 97.7% 97.5% 1,147 1.18 $28,738 Avalon Crest 1,058 95.7% 41.9% N/A 2,025 0.80 $54,893 Avalon Run East 1,287 96.6% 98.0% 97.3% 1,396 1.06 $16,247 WESTCHESTER, NY Avalon Gardens 1,267 99.6% 98.5% 81.1% 1,595 1.24 $54,138 Avalon View 1,164 100.0% 98.7% 97.9% 1,064 0.90 $17,931 Avalon Green 1,081 100.0% 99.3% 97.5% 2,001 1.84 $12,532 The Avalon 1,085 98.2% 63.3% N/A 1,550 0.90 $28,128 MID-ATLANTIC BALTIMORE, MD Avalon at Fairway Hills I & II 1,005 97.6% 97.5% 95.1% 914 0.89 $43,783 Avalon at Symphony Glen 1,025 94.8% 97.3% 96.9% 903 0.86 $8,506 Avalon Landing 741 98.1% 97.5% 97.8% 840 1.11 $9,425 NORFOLK, VA Avalon Birches 910 93.3% 93.9% 95.9% 754 0.78 $13,801 Avalon Pines 821 97.1% 96.4% 93.2% 699 0.82 $8,793 NORTHERN VIRGINIA Avalon at Ballston - Vermont & Quincy Towers 926 99.6% 97.5% 97.2% 1,178 1.24 $46,873 Avalon Crescent 1,099 98.0% 97.3% 97.3% 1,434 1.27 $57,252 Avalon at Ballston - Washington Towers 857 98.3% 97.7% 96.9% 1,214 1.38 $37,008 Avalon at Cameron Court 1,016 97.6% 97.4% 55.0% 1,335 1.28 $43,223 AuturimWoods 846 98.6% 98.0% 97.0% 957 1.11 $30,790 Avalon at Fair Lakes 1,221 98.3% 97.0% 72.9% 1,277 1.01 $23,461 Avalon at Dulles 986 99.2% 98.2% 97.7% 928 0.92 $11,744 Avalon at Providence Park 1,051 100.0% 98.1% 97.2% 1,039 0.97 $11,151 </TABLE> 13
16 PROFILE OF CURRENT AND DEVELOPMENT COMMUNITIES (DOLLARS IN THOUSANDS, EXCEPT PER APARTMENT HOME DATA) <TABLE> <CAPTION> Approx. Year rentable built Average Number of area or size City and state homes (Sq. Ft.) Acres acquired (Sq. Ft,) - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> RICHMOND, VA Avalon Woods Richmond, VA 268 158,618 18.5 1994 592 SOUTHERN MARYLAND Avalon at Decoverly Rockville, MD 368 368,446 25.0 1995 1,001 Avalon Knoll Germantown, MD 300 290,365 26.7 1985 968 Avalon Fields I & II Gaithersburg, MD 288 292,282 9.2 1998 1,050 Avalon Crossing Rockville, MD 132 147,690 5.0 1996 1,119 WASHINGTON, D.C. 4100 Massachusetts Avenue Washington, D.C. 308 298,725 2.7 1982 970 MIDWEST CHICAGO, IL Avalon at Danada Farms Wheaton, IL 295 350,606 19.2 1997 1,188 Avalon at West Grove Westmont, IL 400 388,500 17.4 1967 971 Avalon at Stratford Green Bloomingdale, IL 192 237,204 12.7 1997 1,235 MINNEAPOLIS, MN Avalon at Devonshire Bloomington, MI 498 470,762 42.0 1988 945 Avalon at Edinburgh Brooklyn Park, MN 198 222,130 11.3 1992 1,122 Avalon at Town Centre Eagan, MN 248 235,518 18.7 1986 950 Avalon at Town Square Plymouth, MN 160 144,026 8.3 1986 900 Avalon at Woodbury Woodbury, MN 224 287,975 15.0 1999 1,286 DEVELOPMENT COMMUNITIES Avalon Corners Stamford, CT 195 192,174 3.2 N/A 986 Avalon Court North Melville, NY 340 403,640 24.6 N/A 1,187 Avalon Willow Mamaroneck, NY 227 199,945 4.0 N/A 881 Avalon at Fox Mill Herndon, VA 165 219,360 12.8 N/A 1,329 Avalon Essex Peabody, MA 154 173,520 11.1 N/A 1,127 Avalon Haven North Haven, CT 128 140,544 10.6 N/A 1,098 Avalon at Florham Park Florham Park, NJ 270 331,560 41.9 N/A 1,228 Avalon River Mews Edgewater, NJ 408 405,144 7.1 N/A 993 Avalon Bellevue Bellevue, WA 202 164,226 1.7 N/A 813 Avalon at Arlington Square I Arlington, VA 510 583,950 14.2 N/A 1,145 Avalon on the Sound New Rochelle, NY 412 372,860 2.4 N/A 905 Avalon Estates Hull, MA 162 182,736 55.6 N/A 1,128 <CAPTION> Average economic Average occupancy rental rate (1) Physical ---------------------------------------------- Financial occupancy at $ per $ per reporting 12/31/99 1999 1998 Apt Sq. Ft. cost (2) - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> RICHMOND, VA Avalon Woods 95.9% 93.7% 95.3% 591 0.94 $8,661 SOUTHERN MARYLAND Avalon at Decoverly 96.2% 96.2% 96.8% 1,115 1.07 $31,258 Avalon Knoll 97.0% 96.5% 97.1% 871 0.87 $8,173 Avalon Fields I & II 96.5% 97.2% 89.4% 1,108 1.06 $22,664 Avalon Crossing 96.2% 97.2% 98.1% 1,472 1.28 $13,890 WASHINGTON, D.C. 4100 Massachusetts Avenue 95.5% 96.9% 97.9% 1,511 1.51 $35,143 MIDWEST CHICAGO, IL Avalon at Danada Farms 96.6% 93.8% 92.6% 1,373 1.08 $38,068 Avalon at West Grove 87.5% 91.1% 95.3% 844 0.79 $29,159 Avalon at Stratford Green 99.0% 97.4% 96.3% 1,277 1.01 $21,908 MINNEAPOLIS, MN Avalon at Devonshire 97.2% 97.2% 97.1% 915 0.94 $36,912 Avalon at Edinburgh 99.0% 96.2% 95.3% 1,023 0.88 $18,435 Avalon at Town Centre 95.6% 97.8% 98.5% 907 0.93 $17,936 Avalon at Town Square 98.8% 98.5% 97.5% 906 0.99 $10,753 Avalon at Woodbury 84.4% 84.6% N/A 1,210 0.80 $25,508 DEVELOPMENT COMMUNITIES Avalon Corners N/A N/A N/A N/A N/A $30,177 Avalon Court North N/A N/A N/A N/A N/A $38,511 Avalon Willow N/A N/A N/A N/A N/A $39,102 Avalon at Fox Mill N/A N/A N/A N/A N/A $18,883 Avalon Essex N/A N/A N/A N/A N/A $14,727 Avalon Haven N/A N/A N/A N/A N/A $3,033 Avalon at Florham Park N/A N/A N/A N/A N/A $16,880 Avalon River Mews N/A N/A N/A N/A N/A $20,747 Avalon Bellevue N/A N/A N/A N/A N/A $9,543 Avalon at Arlington Square I N/A N/A N/A N/A N/A $25,859 Avalon on the Sound N/A N/A N/A N/A N/A $4,022 Avalon Estates N/A N/A N/A N/A N/A $2,623 </TABLE> 14
17 FEATURES AND RECREATIONAL AMENITIES - CURRENT AND DEVELOPMENT COMMUNITIES <TABLE> <CAPTION> 1 BR 2BR 3BR -------------------------------------------------------------------------------------- 1/1.5 BA 1/1.5 BA 2/2.5/3 BA 2/2.5 BA 3BA - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> CURRENT COMMUNITIES (3) NORTHERN CALIFORNIA Alameda County, CA Waterford 208 - 336 - - Hampton Place 88 - 176 - 44 Hacienda Gardens 238 - 218 - - Amador Oaks 72 8 60 48 - Willow Creek 99 - 136 - - Alicante 42 81 - - 12 Barrington Hills 48 - 140 - - Parc Centre at Union Square 124 84 - - - Central Valley, CA Governor's Square 93 63 68 30 - San Francisco, CA Crown Ridge 158 68 24 - - Sunset Towers 183 20 20 - - City Heights 114 - 25 - - Village Square 90 - 49 15 - Avalon Towers by the Bay 103 - 120 - 3 Crossbrook 88 30 108 - - San Mateo, CA Cedar Ridge 117 33 24 - - Regatta Bay 124 123 1 - - Sea Ridge 58 106 56 - - Santa Clara County, CA Toscana 338 - 336 18 15 Carriage Square 90 - 210 - 24 Canyon Creek 156 - 180 - 12 CountryBrook 108 - 252 - - The Arbors 212 40 - - - Avalon at Creekside 158 128 - - - The Fountains at River Oaks 100 - 126 - - Parkside Commons 60 - 96 36 - Villa Mariposa 108 - 88 52 - San Marino 103 - 145 - - The Promenade 112 10 54 - - Foxchase I and II 168 - 228 - - Glen Creek 58 - 79 - 1 Fairway Glen 60 - 84 - - CentreMark 145 - 152 - 14 Avalon on the Alameda 113 - 164 - 28 Rosewalk at Waterford Park I 96 - 192 - 12 Rosewalk at Waterford Park II 72 - 72 - 12 <CAPTION> Studios / Washer & dryer Vaulted efficiencies Other Total Parking spaces hook-ups or units ceilings - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> CURRENT COMMUNITIES (3) NORTHERN CALIFORNIA Alameda County, CA Waterford - - 544 876 Some Some Hampton Place - - 308 570 All Most Hacienda Gardens - - 456 856 All Some Amador Oaks - 16 204 427 Most Some Willow Creek - - 235 240 All None Alicante - - 135 260 All Some Barrington Hills - - 188 320 All Half Parc Centre at Union Square - - 208 210 None None Central Valley, CA Governor's Square 48 - 302 332 Some Half San Francisco, CA Crown Ridge 4 - 254 377 Some Some Sunset Towers 20 - 243 244 None None City Heights 46 - 185 104 None None Village Square - - 154 155 None Some Avalon Towers by the Bay - - 226 235 All Some Crossbrook - - 226 343 None Half San Mateo, CA Cedar Ridge 21 - 195 258 None None Regatta Bay 40 - 288 490 None None Sea Ridge - - 220 299 None None Santa Clara County, CA Toscana 3 - 710 1,400 All Some Carriage Square - - 324 562 All Some Canyon Creek - - 348 588 All Some CountryBrook - - 360 694 All Some The Arbors - - 252 395 All None Avalon at Creekside 8 - 294 376 None None The Fountains at River Oaks - - 226 354 All None Parkside Commons - - 192 192 All Some Villa Mariposa - - 248 421 All Some San Marino - - 248 436 All Some The Promenade 44 - 220 394 Some None Foxchase I and II - - 396 719 All Some Glen Creek - - 138 228 All Half Fairway Glen - - 144 226 All Some CentreMark - - 311 526 All Some Avalon on the Alameda - - 305 558 All Some Rosewalk at Waterford Park I - - 300 420 All Some Rosewalk at Waterford Park II - - 156 228 All Some <CAPTION> Large storage Balcony patio Lofts Fireplaces or walk-in closet deck or sunroom Built-in bookcases - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> CURRENT COMMUNITIES (3) NORTHERN CALIFORNIA Alameda County, CA Waterford None None All All None Hampton Place None Half Most All None Hacienda Gardens None Most None All None Amador Oaks None Most All All None Willow Creek None None All All None Alicante None Some All All None Barrington Hills None None All All Some Parc Centre at Union Square None Most All All None Central Valley, CA Governor's Square None Most Some All Some San Francisco, CA Crown Ridge None Some None All None Sunset Towers None None None Some None City Heights None None None Some Most Village Square None None All All None Avalon Towers by the Bay None Some Half Most None Crossbrook None Some None All None San Mateo, CA Cedar Ridge Some None Some All None Regatta Bay None None Most Most None Sea Ridge None Some Some All None Santa Clara County, CA Toscana Some Some Most All Some Carriage Square None None Most All None Canyon Creek None None All All None CountryBrook None All None All None The Arbors None None None Half None Avalon at Creekside None Some None Most None The Fountains at River Oaks None Most All All None Parkside Commons None Half All All Some Villa Mariposa None None Some All None San Marino None None Most All None The Promenade None None All All None Foxchase I and II None None Some All None Glen Creek None None All All None Fairway Glen None None None All None CentreMark None Some Some All Some Avalon on the Alameda None Some All All None Rosewalk at Waterford Park I None Some Some All Most Rosewalk at Waterford Park II None Some Most All Most <CAPTION> Non-direct Direct Homes w/ pre-wired Carports access garages access garages security systems - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> CURRENT COMMUNITIES (3) NORTHERN CALIFORNIA Alameda County, CA Waterford Yes No No None Hampton Place Yes Yes No All Hacienda Gardens Yes Yes Yes None Amador Oaks No Yes No None Willow Creek Yes No No None Alicante Yes No No All Barrington Hills Yes No No None Parc Centre at Union Square Yes No No None Central Valley, CA Governor's Square No Yes Yes None San Francisco, CA Crown Ridge Yes No Yes None Sunset Towers Yes No Yes None City Heights Yes Yes No None Village Square No Yes No None Avalon Towers by the Bay No No Yes All Crossbrook Yes No Yes None San Mateo, CA Cedar Ridge Yes No Yes None Regatta Bay Yes No No None Sea Ridge Yes Yes No None Santa Clara County, CA Toscana No Yes No All Carriage Square Yes Yes No All Canyon Creek Yes Yes No All CountryBrook Yes Yes No None The Arbors Yes Yes No None Avalon at Creekside Yes No No None The Fountains at River Oaks No No Yes None Parkside Commons Yes Yes No None Villa Mariposa Yes No No None San Marino Yes No No None The Promenade No No Yes None Foxchase I and II Yes No No None Glen Creek Yes No No None Fairway Glen Yes No No Some CentreMark No Yes Yes None Avalon on the Alameda No Yes No All Rosewalk at Waterford Park I Yes Yes No All Rosewalk at Waterford Park II Yes Yes No All </TABLE> 15
18 FEATURES AND RECREATIONAL AMENITIES - CURRENT AND DEVELOPMENT COMMUNITIES <TABLE> <CAPTION> 1 BR 2BR 3BR ----------------------------------------------------------------------------------------- 1/1.5 BA 1/1.5 BA 2/2.5/3 BA 2/2.5 BA 3BA - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> SOUTHERN CALIFORNIA Los Angeles, CA ViewPointe 222 - 441 - - Lakeside 296 138 81 12 - Avalon Westside Terrace 126 - 102 - - Arbor Heights 213 - 134 2 - Warner Oaks 89 54 64 20 - TimberWood 32 50 63 64 - Orange County, CA SunScape - 36 324 40 - Avalon at Pacific Bay 144 56 104 - - Mill Creek 124 - 86 - - Villa Serena 160 75 66 - - Amberway 114 48 48 - - Laguna Brisas - - 176 - - Lafayette Place 44 54 - 35 - Larkspur Canyon 32 28 44 - - San Diego, CA Avalon at Mission Bay 270 9 165 - - Gateway Tower 113 - 83 - - Mission Woods 18 1 98 83 - SummerWalk 48 48 80 - - PACIFIC NORTHWEST Portland, OR Waterhouse Place 99 38 138 4 - Seattle, WA The Verandas at Bear Creek 55 40 110 59 - Gallery Place 76 44 67 35 - Avalon Ridge 16 19 217 169 - Avalon Westhaven 94 82 6 8 - NORTHEAST Boston, MA Avalon at Prudential Center 361 - 237 - 23 Longwood Towers 145 52 23 25 - Avalon at Center Place 103 - 111 5 - Avalon Summit 154 61 28 2 - Avalon at Lexington 28 24 90 56 - Avalon at Faxon Park 68 - 75 28 - Avalon West 40 - 55 25 - Avalon Oaks 60 24 96 24 - <CAPTION> Studios/ Washer & dryer Vaulted efficiencies Other Total Parking spaces hook-ups or units ceilings - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> SOUTHERN CALIFORNIA Los Angeles, CA ViewPointe - - 663 1,300 Some None Lakeside 221 - 748 909 Some None Avalon Westside Terrace 135 - 363 484 None None Arbor Heights 2 - 351 940 All None Warner Oaks - - 227 252 All Some TimberWood - - 209 400 Most Half Orange County, CA SunScape - - 400 790 None None Avalon at Pacific Bay - - 304 478 All None Mill Creek 48 258 300 Some Half Villa Serena - - 301 523 All None Amberway 62 - 272 454 None Some Laguna Brisas - - 176 335 None Some Lafayette Place 12 - 145 235 Most Some Larkspur Canyon - 62 166 166 None None San Diego, CA Avalon at Mission Bay 120 - 564 695 None None Gateway Tower 97 - 293 292 None None Mission Woods - - 200 384 Most None SummerWalk - - 176 176 All None PACIFIC NORTHWEST Portland, OR Waterhouse Place - - 279 445 All None Seattle, WA The Verandas at Bear Creek - - 264 470 All All Gallery Place - - 222 384 All Some Avalon Ridge - - 421 731 All Some Avalon Westhaven - - 190 198 Most None NORTHEAST Boston, MA Avalon at Prudential Center 148 12 781 142 None None Longwood Towers 81 8 334 210 Some None Avalon at Center Place 6 - 225 345 All None Avalon Summit - - 245 328 None None Avalon at Lexington - - 198 323 All Some Avalon at Faxon Park - - 171 287 All Some Avalon West - - 120 145 All Some Avalon Oaks - - 204 355 All Some <CAPTION> Large storage Balcony patio Lofts Fireplaces or walk-in closet deck or sunroom Built-in bookcases ------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> SOUTHERN CALIFORNIA Los Angeles, CA ViewPointe Some None Most All None Lakeside None Some Some Some None Avalon Westside Terrace None None None All Some Arbor Heights None None None Half None Warner Oaks None Some Some All None TimberWood None None All All None Orange County, CA SunScape None None Most Most None Avalon at Pacific Bay None None Half All None Mill Creek None None Half All None Villa Serena None None None All None Amberway None None None All None Laguna Brisas None All None Most None Lafayette Place None Some Most Most Some Larkspur Canyon None None None All None San Diego, CA Avalon at Mission Bay None None Some All None Gateway Tower None None None All None Mission Woods None Most Most Most None SummerWalk None All Some All All PACIFIC NORTHWEST Portland, OR Waterhouse Place None Most Some All None Seattle, WA The Verandas at Bear Creek None Most All All Some Gallery Place None Most All All None Avalon Ridge None Most All All Some Avalon Westhaven None All None All None NORTHEAST Boston, MA Avalon at Prudential Center None None Most Some None Longwood Towers None Some Most Some Some Avalon at Center Place None None Half Some None Avalon Summit None None None All None Avalon at Lexington Some Some Most All None Avalon at Faxon Park Some Some All All None Avalon West Some Some All Half None Avalon Oaks Some Some All All None <CAPTION> Non-direct Direct Homes w/ pre-wired Carports access garages access garages security systems - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> SOUTHERN CALIFORNIA Los Angeles, CA ViewPointe No No No None Lakeside Yes Yes No None Avalon Westside Terrace No No No None Arbor Heights Yes Yes No None Warner Oaks Yes No No None TimberWood Yes No No None Orange County, CA SunScape Yes Yes No None Avalon at Pacific Bay Yes Yes No None Mill Creek Yes Yes Yes None Villa Serena Yes Yes No None Amberway Yes Yes No None Laguna Brisas Yes No No None Lafayette Place Yes Yes No None Larkspur Canyon Yes Yes No None San Diego, CA Avalon at Mission Bay No Yes No None Gateway Tower No No Yes None Mission Woods No Yes No None SummerWalk Yes No No None PACIFIC NORTHWEST Portland, OR Waterhouse Place Yes Yes No None Seattle, WA The Verandas at Bear Creek Yes Yes Yes All Gallery Place Yes Yes No None Avalon Ridge Yes No No None Avalon Westhaven Yes No No None NORTHEAST Boston, MA Avalon at Prudential Center No No No None Longwood Towers No No No Some Avalon at Center Place No No No None Avalon Summit No Yes No None Avalon at Lexington Yes Yes No All Avalon at Faxon Park No Yes No All Avalon West No Yes Yes All Avalon Oaks No Yes No All </TABLE> 16
19 FEATURES AND RECREATIONAL AMENITIES-CURRENT AND DEVELOPMENT COMMUNITIES <TABLE> <CAPTION> 1 BR 2BR 3BR ----------------------------------------------------------------------------------------- 1/1.5 BA 1/1.5 BA 2/2.5/3 BA 2/2.5 BA 3BA - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Fairfield County, CT Avalon Walk I & II 272 116 122 74 - Avalon Glen 124 - 114 - - Avalon Gates 122 - 168 50 - Hanover Hall 68 146 - 70 - Avalon Springs - - 70 32 - Avalon Valley 106 - 134 28 - Avalon Lake 36 - 46 - - Hartford, CT Avalon Pavilions 472 168 220 72 - Long Island, NY Avalon Commons 128 40 112 32 - Avalon Towers - - 37 1 3 Avalon Court 34 - 76 44 - Northern New Jersey Avalon Cove 190 - 190 46 2 The Tower at Avalon Cove 147 24 74 24 - Avalon Watch 252 36 142 40 - Avalon Crest 96 - 131 67 - Avalon Run East 64 - 106 36 - Westchester, NY Avalon Gardens 208 48 144 104 - Avalon View 115 47 62 64 - Avalon Green 25 24 56 - - The Avalon 55 2 43 10 - MID-ATLANTIC Baltimore, MD Avalon at Fairway Hills I & II 269 237 154 24 36 Avalon at Symphony Glen 86 14 54 20 - Avalon Landing 65 18 57 - - Norfolk, VA Avalon Birches 120 - 192 - - Avalon Pines 90 24 60 - - Northern Virginia Avalon at Ballston - Vermont & Quincey Towers 333 37 84 - - Avalon Crescent 186 26 346 - - Avalon at Ballston - Washington Towers 205 28 111 - - Avalon at Cameron Court 208 - 168 - - AutumnWoods 220 72 96 - - Avalon at Fair Lakes 45 12 125 26 26 Avalon at Dulles 104 40 76 - 16 Avalon at Providence Park 19 - 112 4 - </TABLE> <TABLE> <CAPTION> Studios/ Washer & dryer efficiencies Other Total Parking spaces hook-ups or units Vaulted ceilingsge - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Fairfield County, CT Avalon Walk I & II - 180 764 1,528 All Some Avalon Glen - - 238 400 Most Some Avalon Gates - - 340 580 All Some Hanover Hall 104 - 388 405 None None Avalon Springs - - 102 153 All Half Avalon Valley - - 268 626 All Some Avalon Lake 24 29 135 382 All Some Hartford, CT Avalon Pavilions - - 932 1,631 All Some Long Island, NY Avalon Commons - - 312 538 All Some Avalon Towers 1 67 109 198 All None Avalon Court - - 154 292 All Some Northern New Jersey Avalon Cove - 76 504 460 All Some The Tower at Avalon Cove - - 269 299 All None Avalon Watch - 42 512 768 All Some Avalon Crest - 57 351 325 All Some Avalon Run East - - 206 345 All Some Westchester, NY Avalon Gardens - - 504 1,008 All Half Avalon View - - 288 576 All Some Avalon Green - - 105 179 All Some The Avalon - - 110 167 All Some MID-ATLANTIC Baltimore, MD Avalon at Fairway Hills I & II - - 720 1,137 All Some Avalon at Symphony Glen - - 174 266 All Some Avalon Landing - 18 158 257 All None Norfolk, VA Avalon Birches - - 312 562 All Some Avalon Pines - - 174 308 All Some Northern Virginia Avalon at Ballston - Vermont & Quinc - - 454 498 All None Avalon Crescent - - 558 662 All Some Avalon at Ballston - Washington Tower - - 344 415 All None Avalon at Cameron Court - 84 460 736 All Some AutumnWoods - 32 420 727 All Some Avalon at Fair Lakes - - 234 505 All Half Avalon at Dulles - - 236 493 All Some Avalon at Providence Park - 6 141 287 All None </TABLE> <TABLE> <CAPTION> Large storage Balcony patio Built-in Lofts Fireplaces or walk-in closet deck or sunroom bookcases Carports - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Fairfield County, CT Avalon Walk I & II Some Half All All Some Yes Avalon Glen Some Some Half Most None Yes Avalon Gates Some None All All None Yes Hanover Hall None None Some All None No Avalon Springs Half Half All All None No Avalon Valley Some Some All All None Yes Avalon Lake Some Some All All None No Hartford, CT Avalon Pavilions Some Some Most All None Yes Long Island, NY Avalon Commons Some Some All All None No Avalon Towers None None All Most None No Avalon Court Some Some All All None No Northern New Jersey Avalon Cove Some Some All Most None No The Tower at Avalon Cove None None Half Some None No Avalon Watch None None All All None No Avalon Crest Some Some All All None No Avalon Run East Some Some All Most None Yes Westchester, NY Avalon Gardens Half Some All Most None Yes Avalon View Some Some Most All None Yes Avalon Green Half Some All All None Yes The Avalon Some Some Most Half None No MID-ATLANTIC Baltimore, MD Avalon at Fairway Hills I & II None Some Some All Some No Avalon at Symphony Glen None Most All All Half No Avalon Landing None Most Most All None Yes Norfolk, VA Avalon Birches None All All All None No Avalon Pines None All All All None No Northern Virginia Avalon at Ballston - Vermont & Quinc None None Most All None No Avalon Crescent Some Half Most All Some No Avalon at Ballston - Washington Towe None Some Most All None No Avalon at Cameron Court Some Some All Most None No AutumnWoods None Some All All Some Yes Avalon at Fair Lakes None Half All Most None No Avalon at Dulles None Some All All Some No Avalon at Providence Park None Most All All None No </TABLE> <TABLE> <CAPTION> Non-direct Direct Homes w/ pre-wired access garages access garages security systems - ------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Fairfield County, CT Avalon Walk I & II No No Half Avalon Glen Yes No None Avalon Gates Yes No All Hanover Hall Yes No None Avalon Springs No Yes All Avalon Valley Yes No All Avalon Lake Yes No All Hartford, CT Avalon Pavilions No No None Long Island, NY Avalon Commons Yes No All Avalon Towers No Yes All Avalon Court No Yes All Northern New Jersey Avalon Cove Yes No Some The Tower at Avalon Cove Yes No All Avalon Watch Yes No None Avalon Crest Yes Yes All Avalon Run East Yes Yes All Westchester, NY Avalon Gardens Yes Yes All Avalon View No No None Avalon Green No No All The Avalon Yes No All MID-ATLANTIC Baltimore, MD Avalon at Fairway Hills I & II No No None Avalon at Symphony Glen No No None Avalon Landing No No None Norfolk, VA Avalon Birches No No None Avalon Pines No Yes None Northern Virginia Avalon at Ballston - Vermont & Quincey Towers No Yes None Avalon Crescent Yes Yes All Avalon at Ballston - Washington Towers No Yes None Avalon at Cameron Court Yes Yes All AutumnWoods No No None Avalon at Fair Lakes Yes Yes None Avalon at Dulles No No None Avalon at Providence Park No No None </TABLE> 17
20 FEATURES AND RECREATIONAL AMENITIES - CURRENT AND DEVELOPEMENT COMMUNITIES <TABLE> <CAPTION> 1 BR 2BR 3BR ----------------------------------------------------------------------------------------- 1/1.5 BA 1/1.5 BA 2/2.5/3 BA 2/2.5 BA 3BA - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Richmond, VA Avalon Woods 200 - 48 - - Southern Maryland Avalon at Decoverly 156 - 104 64 44 Avalon Knoll 136 55 81 28 - Avalon Fields I & II 74 32 84 32 - Avalon Crossing - 27 105 - - Washington, D.C. 4100 Massachusetts Avenue 160 70 - 3 - MIDWEST Chicago, IL Avalon at Danada Farms 80 - 134 - - Avalon at West Grove 200 200 - - - Avalon at Stratford Green 45 9 108 21 - Minneapolis, MN Avalon at Devonshire 194 - 304 - - Avalon at Edinburg 56 - 114 26 - Avalon at Town Centre 104 - 111 33 - Avalon at Town Square 76 - 68 12 - Avalon at Woodbury 41 - 147 36 - DEVELOPMENT COMMUNITIES Avalon Corners 118 - 77 - - Avalon Court North 138 54 118 - 30 Avalon Willow 150 77 - - - Avalon at Fox Mill - - 92 73 - Avalon Essex 50 - 62 - - Avalon Haven 44 60 - 24 - Avalon at Florham Park 46 - 107 117 - Avalon River Mews 158 - 190 60 - Avalon Bellevue 110 - 67 - - Avalon at Arlington Square I 211 20 226 53 - Avalon on the Sound 143 - 184 22 20 Avalon Estates 66 16 80 - - <CAPTION> Studios/ Washer & dryer Vaulted efficiencies Other Total Parking spaces hook-ups or units ceilings - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Richmond, VA Avalon Woods 20 - 268 400 All Half Southern Maryland Avalon at Decoverly - - 368 584 All Some Avalon Knoll - - 300 482 All Some Avalon Fields I & II - 66 288 443 All Some Avalon Crossing - - 132 224 All Some Washington, D.C. 4100 Massachusetts Avenue 27 48 308 330 All None MIDWEST Chicago, IL Avalon at Danada Farms - 81 295 714 All None Avalon at West Grove - - 400 860 None None Avalon at Stratford Green - 9 192 437 All None Minneapolis, MN Avalon at Devonshire - - 498 498 Most Some Avalon at Edinburg 2 - 198 210 All None Avalon at Town Centre - - 248 250 All Some Avalon at Town Square - 4 160 162 All Some Avalon at Woodbury - - 224 513 All None DEVELOPMENT COMMUNITIES Avalon Corners - - 195 273 All Some Avalon Court North - - 340 818 All Some Avalon Willow - - 227 379 All Some Avalon at Fox Mill - - 165 343 All Most Avalon Essex - 42 154 259 All None Avalon Haven - - 128 256 All None Avalon at Florham Park - - 270 611 All Most Avalon River Mews - - 408 872 All None Avalon Bellevue 25 - 202 304 All None Avalon at Arlington Square I - - 510 949 All None Avalon on the Sound 43 412 645 Most None Avalon Estates - - 162 347 Most None <CAPTION> Large storage Balcony patio Lofts Fireplaces or walk-in closet deck or sunroom Built-in bookcases - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Richmond, VA Avalon Woods None Some Some None None Southern Maryland Avalon at Decoverly Some Most Most All None Avalon Knoll None Half All All Some Avalon Fields I & II Some Half All Most None Avalon Crossing Some Half All All Some Washington, D.C. 4100 Massachusetts Avenue None Some Most All Some MIDWEST Chicago, IL Avalon at Danada Farms None Some All Some Some Avalon at West Grove None None None All None Avalon at Stratford Green None Some Most Some Some Minneapolis, MN Avalon at Devonshire None Some Most Most Some Avalon at Edinburg None Some Some All None Avalon at Town Centre None Some Some All None Avalon at Town Square None Some Some All None Avalon at Woodbury None Some Some Some None DEVELOPMENT COMMUNITIES Avalon Corners Some Some All All None Avalon Court North Most Some All All None Avalon Willow Some None Most All None Avalon at Fox Mill None Most All All None Avalon Essex Some Some All All None Avalon Haven Some Some All All None Avalon at Florham Park None Some All Some None Avalon River Mews Some Some All All None Avalon Bellevue Some Some All All None Avalon at Arlington Square I Some Some All All None Avalon on the Sound Some None Most All None Avalon Estates Half Some All All None <CAPTION> Non-direct Direct Homes w/ pre-wired Carports access garages access garages security systems - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Richmond, VA Avalon Woods No No No None Southern Maryland Avalon at Decoverly No No No None Avalon Knoll No No No None Avalon Fields I & II No Yes No All Avalon Crossing No Yes Yes All Washington, D.C. 4100 Massachusetts Avenue No Yes No None MIDWEST Chicago, IL Avalon at Danada Farms No No Yes None Avalon at West Grove Yes No No None Avalon at Stratford Green No Yes Yes None Minneapolis, MN Avalon at Devonshire No No Yes None Avalon at Edinburg No No No None Avalon at Town Centre No No Yes None Avalon at Town Square No No Yes None Avalon at Woodbury No No Yes None DEVELOPMENT COMMUNITIES Avalon Corners No Yes No All Avalon Court North No Yes Yes All Avalon Willow No Yes Yes All Avalon at Fox Mill No No Yes All Avalon Essex No Yes Yes All Avalon Haven Yes Yes No All Avalon at Florham Park No No Yes All Avalon River Mews No No Yes Some Avalon Bellevue No No No None Avalon at Arlington Square I No No Yes All Avalon on the Sound No Yes No Some Avalon Estates No Yes Yes All </TABLE> 18
21 <TABLE> <CAPTION> Buildings w/ Community entrance Building entrance Under- Aerobics security systems controlled access controlled access ground parking dance studio - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> CURRENT COMMUNITIES (3) NORTHERN CALIFORNIA Alameda County, CA Waterford Some Yes No No No Hampton Place All No No No Yes Hacienda Gardens Some No No No No Amador Oaks None No No No No Willow Creek Some Yes No No No Alicante All No No Yes Yes Barrington Hills None Yes Yes No No Parc Centre at Union Square None Yes No No No Central Valley, CA Governor's Square None No No Yes No San Francisco, CA Crown Ridge None No No Yes No Sunset Towers All Yes Yes Yes No City Heights None Yes Yes Yes No Village Square None No Yes Yes No Avalon Towers by the Bay None Yes Yes Yes No Crossbrook None No No No No San Mateo, CA Cedar Ridge None No No No No Regatta Bay Some No No No No Sea Ridge None No No No No Santa Clara County, CA Toscana Some Yes Yes Yes Yes Carriage Square None Yes Yes No No Canyon Creek Some Yes Yes Yes Yes CountryBrook None Yes No No No The Arbors None No No No No Avalon at Creekside Some No No No No The Fountains at River Oaks None No No No No Parkside Commons None No No Yes No Villa Mariposa None No No Yes No San Marino None Yes No No No The Promenade None No No Yes Yes Foxchase I and II None No No Yes No Glen Creek None No No No No Fairway Glen Some No No No No CentreMark None Yes No Yes No Avalon on the Alameda None Yes Yes Yes No Rosewalk at Waterford Park I None Yes No No Yes Rosewalk at Waterford Park II None Yes No No Yes <CAPTION> Car wash Picnic area Walking / jogging Pool Sauna / whirlpool - --------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> CURRENT COMMUNITIES (3) NORTHERN CALIFORNIA Alameda County, CA Waterford Yes No No Yes Yes Hampton Place Yes No No Yes Yes Hacienda Gardens Yes No No Yes Yes Amador Oaks Yes Yes No Yes Yes Willow Creek Yes Yes No Yes Yes Alicante Yes No No Yes Yes Barrington Hills No No No Yes Yes Parc Centre at Union Square No No No Yes No Central Valley, CA Governor's Square No No No Yes Yes San Francisco, CA Crown Ridge No No Yes Yes Yes Sunset Towers No Yes No No No City Heights No Yes No No No Village Square No No No Yes Yes Avalon Towers by the Bay No No No No Yes Crossbrook No Yes Yes Yes Yes San Mateo, CA Cedar Ridge No No No Yes Yes Regatta Bay Yes No Yes Yes No Sea Ridge No No No Yes No Santa Clara County, CA Toscana No Yes No Yes Yes Carriage Square Yes No No Yes Yes Canyon Creek No Yes Yes Yes Yes CountryBrook Yes No No Yes Yes The Arbors No Yes No Yes Yes Avalon at Creekside No Yes Yes Yes No The Fountains at River Oaks No Yes No Yes Yes Parkside Commons No Yes No Yes Yes Villa Mariposa Yes Yes No Yes Yes San Marino Yes No No Yes Yes The Promenade Yes Yes No Yes Yes Foxchase I and II Yes No No Yes Yes Glen Creek Yes No No Yes Yes Fairway Glen Yes Yes No Yes Yes CentreMark No No No Yes Yes Avalon on the Alameda No No No Yes No Rosewalk at Waterford Park I No Yes Yes Yes Yes Rosewalk at Waterford Park II No Yes Yes Yes Yes <CAPTION> Indoor Tennis court Racquetball Fitness center Sand volleyball outdoor basketball - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> CURRENT COMMUNITIES (3) NORTHERN CALIFORNIA Alameda County, CA Waterford No No Yes No Yes Hampton Place No No Yes No No Hacienda Gardens No No Yes No Yes Amador Oaks No No Yes Yes Yes Willow Creek No No Yes No No Alicante No No Yes No No Barrington Hills No Yes No No No Parc Centre at Union Square No No Yes No No Central Valley, CA Governor's Square No No Yes No No San Francisco, CA Crown Ridge No No Yes No No Sunset Towers No No No No No City Heights No No No No No Village Square No No Yes No No Avalon Towers by the Bay No No Yes No No Crossbrook No No Yes No No San Mateo, CA Cedar Ridge No No Yes No No Regatta Bay No No No No No Sea Ridge No No Yes No No Santa Clara County, CA Toscana No No Yes No Yes Carriage Square No No Yes No No Canyon Creek No No Yes Yes No CountryBrook No No Yes No No The Arbors No No Yes Yes Yes Avalon at Creekside Yes No Yes Yes Yes The Fountains at River Oaks No No Yes No No Parkside Commons No No Yes No Yes Villa Mariposa No No Yes Yes No San Marino No No Yes No No The Promenade No No Yes No No Foxchase I and II No No Yes No No Glen Creek No No Yes No No Fairway Glen No No Yes No No CentreMark No No Yes No No Avalon on the Alameda No No Yes No No Rosewalk at Waterford Park I No No Yes No No Rosewalk at Waterford Park II No No No No No <CAPTION> Clubhouse / clubroom Business center Totlot Concierge - ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> CURRENT COMMUNITIES (3) NORTHERN CALIFORNIA Alameda County, CA Waterford No No Yes No Hampton Place Yes No No No Hacienda Gardens No Yes Yes No Amador Oaks No Yes No No Willow Creek No No No No Alicante Yes No No No Barrington Hills Yes No No No Parc Centre at Union Square No No No No Central Valley, CA Governor's Square No No No No San Francisco, CA Crown Ridge No Yes No No Sunset Towers No No No No City Heights No No No Yes Village Square Yes No Yes No Avalon Towers by the Bay Yes Yes No Yes Crossbrook No No Yes No San Mateo, CA Cedar Ridge Yes No No No Regatta Bay Yes No Yes No Sea Ridge No No No No Santa Clara County, CA Toscana Yes Yes Yes Yes Carriage Square No Yes No No Canyon Creek No Yes Yes No CountryBrook No No No No The Arbors No Yes No No Avalon at Creekside Yes Yes No No The Fountains at River Oaks No Yes No No Parkside Commons Yes Yes Yes No Villa Mariposa No Yes Yes No San Marino No No Yes No The Promenade No Yes Yes No Foxchase I and II No No No No Glen Creek No No No No Fairway Glen No No Yes No CentreMark No Yes No No Avalon on the Alameda No No No Yes Rosewalk at Waterford Park I No Yes No No Rosewalk at Waterford Park II No No No No </TABLE> 19
22 FEATURES AND RECREATIONAL AMENITIES - CURRENT AND DEVELOPMENT COMMUNITIES (CONTINUED) <TABLE> <CAPTION> Buildings w/ Community entrance Building entrance Under- Aerobics security systems controlled access controlled access ground parking dance studio - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> SOUTHERN CALIFORNIA Los Angeles, CA ViewPointe None Yes No Yes No Lakeside None No Yes No No Avalon Westside Terrace None Yes Yes Yes No Arbor Heights None Yes No No No Warner Oaks None Yes Yes No No TimberWood Some Yes No No No Orange County, CA SunScape None Yes No No No Avalon at Pacific Bay None Yes No No No Mill Creek None Yes No No No Villa Serena None No No No No Amberway None Yes No No No Laguna Brisas None No No Yes No Lafayette Place None No No No No Larkspur Canyon None Yes No No No San Diego, CA Avalon at Mission Bay None Yes Yes Yes Yes Gateway Tower All Yes Yes No No Mission Woods Some No No No No SummerWalk None No No No No PACIFIC NORTHWEST Portland, OR Waterhouse Place None No No No No Seattle, WA The Verandas at Bear Creek All Yes No No No Gallery Place None No No No No Avalon Ridge None No Yes No No Avalon Westhaven None No No No No NORTHEAST Boston, MA Avalon at Prudential Center None No Yes Yes No Longwood Towers None No Yes Yes Yes Avalon at Center Place None Yes Yes Yes No Avalon Summit None No Yes No No Avalon at Lexington None No Yes No No Avalon at Faxon Park None No Yes No No Avalon West None No Yes No No Avalon Oaks None No Yes No No <CAPTION> Car wash Picnic area Walking / jogging Pool Sauna / whirlpool - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> SOUTHERN CALIFORNIA Los Angeles, CA ViewPointe No No No Yes Yes Lakeside No Yes No Yes No Avalon Westside Terrace No No No Yes Yes Arbor Heights No No No Yes Yes Warner Oaks No No No Yes Yes TimberWood No No No Yes No Orange County, CA SunScape No Yes No Yes Yes Avalon at Pacific Bay No No No Yes Yes Mill Creek Yes No No Yes Yes Villa Serena Yes Yes No Yes Yes Amberway Yes No No Yes Yes Laguna Brisas No No No Yes Yes Lafayette Place Yes No No Yes Yes Larkspur Canyon No No Yes Yes Yes San Diego, CA Avalon at Mission Bay Yes No No Yes Yes Gateway Tower No No Yes Yes Yes Mission Woods No Yes No Yes Yes SummerWalk No Yes Yes Yes Yes PACIFIC NORTHWEST Portland, OR Waterhouse Place No Yes Yes Yes Yes Seattle, WA The Verandas at Bear Creek No Yes Yes Yes Yes Gallery Place Yes No Yes Yes Yes Avalon Ridge No Yes No Yes Yes Avalon Westhaven No Yes No Yes Yes NORTHEAST Boston, MA Avalon at Prudential Center No Yes No No No Longwood Towers Yes Yes No No No Avalon at Center Place Yes Yes No Yes No Avalon Summit No Yes No Yes No Avalon at Lexington No Yes No Yes No Avalon at Faxon Park No Yes No Yes Yes Avalon West No Yes No Yes No Avalon Oaks No Yes No Yes Yes <CAPTION> Indoor Tennis court Racquetball Fitness center Sand volleyball outdoor basketball - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> SOUTHERN CALIFORNIA Los Angeles, CA ViewPointe No No Yes No No Lakeside No No Yes No No Avalon Westside Terrace Yes No Yes No Yes Arbor Heights No No Yes No No Warner Oaks Yes No Yes No No TimberWood No No Yes No No Orange County, CA SunScape No No Yes No No Avalon at Pacific Bay No No Yes No No Mill Creek Yes No Yes Yes No Villa Serena No No Yes No No Amberway No No No No No Laguna Brisas No No No No No Lafayette Place No No Yes No No Larkspur Canyon No No Yes No No San Diego, CA Avalon at Mission Bay Yes No Yes Yes Yes Gateway Tower Yes No Yes No No Mission Woods No No Yes No No SummerWalk Yes Yes Yes Yes No PACIFIC NORTHWEST Portland, OR Waterhouse Place No No Yes No No Seattle, WA The Verandas at Bear Creek No No Yes No No Gallery Place No No Yes No No Avalon Ridge No No Yes No Yes Avalon Westhaven No No Yes No No NORTHEAST Boston, MA Avalon at Prudential Center No No No No No Longwood Towers No No Yes No No Avalon at Center Place No No Yes No No Avalon Summit No No Yes No No Avalon at Lexington No No Yes No Yes Avalon at Faxon Park No No Yes No No Avalon West No No No No Yes Avalon Oaks No No Yes No No <CAPTION> Clubhouse / clubroom Business center Totlot Concierge - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> SOUTHERN CALIFORNIA Los Angeles, CA ViewPointe No Yes No No Lakeside No Yes No No Avalon Westside Terrace Yes Yes Yes No Arbor Heights No No Yes No Warner Oaks No Yes No No TimberWood No No Yes No Orange County, CA SunScape Yes Yes Yes No Avalon at Pacific Bay Yes Yes Yes No Mill Creek Yes Yes No No Villa Serena No No No No Amberway No No Yes No Laguna Brisas No Yes No No Lafayette Place No No No No Larkspur Canyon No Yes No No San Diego, CA Avalon at Mission Bay Yes Yes No No Gateway Tower Yes Yes No No Mission Woods No No Yes No SummerWalk No Yes Yes No PACIFIC NORTHWEST Portland, OR Waterhouse Place Yes No Yes No Seattle, WA The Verandas at Bear Creek Yes Yes Yes No Gallery Place Yes No Yes No Avalon Ridge Yes No Yes No Avalon Westhaven Yes Yes Yes No NORTHEAST Boston, MA Avalon at Prudential Center Yes No No Yes Longwood Towers Yes No Yes Yes Avalon at Center Place Yes No No Yes Avalon Summit No No No No Avalon at Lexington Yes No Yes No Avalon at Faxon Park Yes No Yes No Avalon West Yes No Yes No Avalon Oaks Yes No Yes No </TABLE> 20
23 FEATURES AND RECREATION AMENITIES - CURRENT AND DEVELOPMENT COMMUNITIES (CONTINUED) <TABLE> <CAPTION> Buildings w/ Community entrance Building entrance Under- security systems controlled access controlled access ground parking - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Fairfield County, CT Avalon Walk I & II None No No No Avalon Glen None No Yes Yes Avalon Gates None Yes No No Hanover Hall None Yes Yes Yes Avalon Springs All No No No Avalon Valley None No No No Avalon Lake None No No No Hartford, CT Avalon Pavilions None No No No Long Island, NY Avalon Commons All No Yes No Avalon Towers All No No Yes Avalon Court All Yes Yes No Northern New Jersey Avalon Cove All Yes Yes No The Tower at Avalon Cove All Yes Yes No Avalon Watch Some No Yes No Avalon Crest All Yes Yes No Avalon Run East None No No No Westchester, NY Avalon Gardens All No No No Avalon View None No No No Avalon Green All No No No The Avalon All No Yes Yes MID-ATLANTIC Baltimore, MD Avalon at Fairway Hills I & II None No No No Avalon at Symphony Glen None No No No Avalon Landing None No No No Norfolk, VA Avalon Birches None No No No Avalon Pines None No No No Northern Virginia Avalon at Ballston - Vermont & Quincy Towers None Yes Yes Yes Avalon Crescent None Yes No No Avalon at Ballston - Washington Towers None Yes Yes Yes Avalon at Cameron Court All Yes No No AutumnWoods None No No No Avalon at Fair Lakes None Yes No No Avalon at Dulles None No No No Avalon at Providence Park None No No No <CAPTION> Aerobics dance studio Car wash Picninc area Walking / jogging - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Fairfield County, CT Avalon Walk I & II Yes Yes Yes Yes Avalon Glen No No No No Avalon Gates No No Yes No Hanover Hall No No No No Avalon Springs No No Yes Yes Avalon Valley No No Yes No Avalon Lake No No Yes No Hartford, CT Avalon Pavilions Yes No Yes No Long Island, NY Avalon Commons No No Yes No Avalon Towers No Yes No No Avalon Court No No Yes No Northern New Jersey Avalon Cove Yes No Yes Yes The Tower at Avalon Cove Yes No Yes Yes Avalon Watch No No Yes No Avalon Crest Yes No No No Avalon Run East No No Yes Yes Westchester, NY Avalon Gardens No No Yes No Avalon View No No Yes No Avalon Green No No No No The Avalon No No No No MID-ATLANTIC Baltimore, MD Avalon at Fairway Hills I & II No Yes Yes No Avalon at Symphony Glen No Yes Yes Yes Avalon Landing No Yes Yes Yes Norfolk, VA Avalon Birches No Yes Yes Yes Avalon Pines No Yes Yes Yes Northern Virginia Avalon at Ballston - Vermont & Quincy Towers No No Yes No Avalon Crescent Yes Yes Yes Yes Avalon at Ballston - Washington Towers No No Yes No Avalon at Cameron Court Yes Yes Yes No AutumnWoods No Yes Yes Yes Avalon at Fair Lakes No Yes Yes No Avalon at Dulles No Yes No Yes Avalon at Providence Park No Yes No No <CAPTION> Pool Sauna / whirlpool Tennis court Racquetball Fitness center - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Fairfield County, CT Avalon Walk I & II Yes No Yes Yes Yes Avalon Glen Yes No No Yes Yes Avalon Gates Yes No No Yes Yes Hanover Hall Yes No No No No Avalon Springs Yes No No No Yes Avalon Valley Yes No No No Yes Avalon Lake Yes No No No Yes Hartford, CT Avalon Pavilions Yes No Yes Yes Yes Long Island, NY Avalon Commons Yes No No No Yes Avalon Towers Yes No No No Yes Avalon Court Yes No No No Yes Northern New Jersey Avalon Cove Yes No Yes Yes Yes The Tower at Avalon Cove Yes No Yes Yes Yes Avalon Watch Yes No Yes Yes Yes Avalon Crest Yes No No No Yes Avalon Run East Yes No No No Yes Westchester, NY Avalon Gardens Yes No Yes Yes Yes Avalon View Yes No Yes No Yes Avalon Green Yes No No No No The Avalon No No No No Yes MID-ATLANTIC Baltimore, MD Avalon at Fairway Hills I & II Yes No Yes Yes Yes Avalon at Symphony Glen Yes No No No No Avalon Landing Yes No No No Yes Norfolk, VA Avalon Birches Yes Yes Yes No Yes Avalon Pines Yes Yes No Yes Yes Northern Virginia Avalon at Ballston - Vermont & Quincy Towers Yes Yes No No Yes Avalon Crescent Yes No No No Yes Avalon at Ballston - Washington Towers Yes No Yes No Yes Avalon at Cameron Court Yes Yes No No Yes AutumnWoods Yes No Yes No Yes Avalon at Fair Lakes Yes No Yes No Yes Avalon at Dulles Yes Yes Yes No Yes Avalon at Providence Park Yes No No No Yes <CAPTION> Indoor Clubhouse / Sand volleyball outdoor basketball clubroom Business center - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Fairfield County, CT Avalon Walk I & II No Yes Yes No Avalon Glen No No Yes No Avalon Gates Yes Yes Yes No Hanover Hall No No No No Avalon Springs No No Yes No Avalon Valley No Yes Yes No Avalon Lake No No No No Hartford, CT Avalon Pavilions Yes Yes Yes No Long Island, NY Avalon Commons No Yes Yes Yes Avalon Towers No No Yes No Avalon Court No No Yes No Northern New Jersey Avalon Cove No Yes Yes Yes The Tower at Avalon Cove No Yes Yes Yes Avalon Watch No Yes Yes No Avalon Crest No Yes Yes Yes Avalon Run East No No Yes No Westchester, NY Avalon Gardens Yes Yes Yes Yes Avalon View No Yes Yes No Avalon Green Yes No Yes No The Avalon No No Yes Yes MID-ATLANTIC Baltimore, MD Avalon at Fairway Hills I & II No No Yes Yes Avalon at Symphony Glen No No Yes No Avalon Landing No No Yes No Norfolk, VA Avalon Birches Yes No Yes No Avalon Pines No Yes Yes No Northern Virginia Avalon at Ballston - Vermont & Quincy Towers No No Yes No Avalon Crescent No No Yes Yes Avalon at Ballston - Washington Towers No No Yes No Avalon at Cameron Court Yes Yes Yes Yes AutumnWoods Yes Yes Yes No Avalon at Fair Lakes No No Yes Yes Avalon at Dulles No No Yes No Avalon at Providence Park No No Yes Yes <CAPTION> Totlot Concierge - ------------------------------------------------------------------------------ <S> <C> <C> Fairfield County, CT Avalon Walk I & II Yes No Avalon Glen No No Avalon Gates Yes No Hanover Hall No No Avalon Springs No No Avalon Valley Yes No Avalon Lake No No Hartford, CT Avalon Pavilions Yes No Long Island, NY Avalon Commons Yes No Avalon Towers No Yes Avalon Court Yes No Northern New Jersey Avalon Cove Yes Yes The Tower at Avalon Cove Yes Yes Avalon Watch Yes No Avalon Crest No No Avalon Run East Yes No Westchester, NY Avalon Gardens Yes Yes Avalon View Yes No Avalon Green No No The Avalon No Yes MID-ATLANTIC Baltimore, MD Avalon at Fairway Hills I & II Yes No Avalon at Symphony Glen Yes No Avalon Landing No No Norfolk, VA Avalon Birches Yes No Avalon Pines No No Northern Virginia Avalon at Ballston - Vermont & Quincy Towers No No Avalon Crescent Yes Yes Avalon at Ballston - Washington Towers No Yes Avalon at Cameron Court No No AutumnWoods Yes No Avalon at Fair Lakes No No Avalon at Dulles No No Avalon at Providence Park No No </TABLE> 21
24 FEATURES AND RECREATIONAL AMENITIES - CURRENT AND DEVELOPMENT COMMUNITIES (CONTINUED) <TABLE> <CAPTION> Buildings w/ Community entrance Building entrance Under- Aerobics security systems controlled access controlled access ground parking dance studio - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Richmond, VA Avalon Woods None No No No No Southern Maryland Avalon at Decoverly None No No No No Avalon Knoll None No Yes No No Avalon Fields I & II All No No No No Avalon Crossing None Yes No No No Washington, D.C. 4100 Massachusetts Avenue None Yes Yes Yes No MIDWEST Chicago, IL Avalon at Danada Farms None No No No No Avalon at West Grove None No Yes No No Avalon at Stratford Green None No No No No Minneapolis, MN Avalon at Devonshire None No Yes Yes No Avalon at Edinburg None No Yes Yes No Avalon at Town Centre None No Yes Yes No Avalon at Town Square None No Yes Yes No Avalon at Woodbury None No No No No DEVELOPMENT COMMUNITIES Avalon Corners All Yes Yes Yes No Avalon Court North All No Yes No No Avalon Willow All Yes Yes Yes No Avalon at Fox Mill None No No No No Avalon Essex None No Yes No No Avalon Haven None No No No No Avalon at Florham Park None No No No No Avalon River Mews All Yes Yes Yes No Avalon Bellevue None No Yes Yes No Avalon at Arlington Square I None No Yes No No Avalon on the Sound None No No No No Avalon Estates None No No No No <CAPTION> Car wash Picnic area Walking / jogging Pool Sauna / whirlpool - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Richmond, VA Avalon Woods Yes Yes No Yes Yes Southern Maryland Avalon at Decoverly Yes Yes Yes Yes Yes Avalon Knoll Yes Yes Yes Yes Yes Avalon Fields I & II Yes Yes No Yes No Avalon Crossing Yes Yes No Yes No Washington, D.C. 4100 Massachusetts Avenue No No Yes Yes No MIDWEST Chicago, IL Avalon at Danada Farms No No No Yes No Avalon at West Grove No Yes No Yes Yes Avalon at Stratford Green Yes Yes Yes Yes No Minneapolis, MN Avalon at Devonshire Yes Yes Yes Yes No Avalon at Edinburg Yes Yes Yes Yes Yes Avalon at Town Centre Yes Yes No Yes Yes Avalon at Town Square Yes Yes Yes Yes Yes Avalon at Woodbury No No Yes Yes No DEVELOPMENT COMMUNITIES Avalon Corners No Yes No Yes No Avalon Court North Yes Yes Yes Yes No Avalon Willow No Yes No Yes No Avalon at Fox Mill Yes Yes No Yes No Avalon Essex No Yes No Yes Yes Avalon Haven No Yes No Yes No Avalon at Florham Park No No No Yes No Avalon River Mews No No No Yes No Avalon Bellevue No No No No No Avalon at Arlington Square I No Yes No Yes No Avalon on the Sound No Yes Yes Yes No Avalon Estates No Yes No Yes Yes <CAPTION> Indoor Tennis court Racquetball Fitness center Sand volleyball outdoor basketball - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Richmond, VA Avalon Woods Yes Yes Yes Yes No Southern Maryland Avalon at Decoverly Yes Yes Yes No Yes Avalon Knoll Yes No Yes No Yes Avalon Fields I & II No No Yes No No Avalon Crossing No No Yes No No Washington, D.C. 4100 Massachusetts Avenue No No Yes No No MIDWEST Chicago, IL Avalon at Danada Farms No No Yes No No Avalon at West Grove No Yes Yes No No Avalon at Stratford Green No No No No No Minneapolis, MN Avalon at Devonshire Yes No Yes No No Avalon at Edinburg No No Yes No No Avalon at Town Centre Yes No Yes Yes No Avalon at Town Square Yes No Yes Yes No Avalon at Woodbury No No Yes No No DEVELOPMENT COMMUNITIES Avalon Corners No No Yes No No Avalon Court North No Yes Yes No Yes Avalon Willow No Yes Yes No No Avalon at Fox Mill No No Yes No No Avalon Essex No No Yes No No Avalon Haven No No Yes No No Avalon at Florham Park No No Yes No No Avalon River Mews No No Yes No No Avalon Bellevue No No Yes No No Avalon at Arlington Square I No No Yes No Yes Avalon on the Sound No No Yes No Yes Avalon Estates No No Yes No No <CAPTION> Clubhouse / clubroom Business center Totlot Concierge - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Richmond, VA Avalon Woods Yes No No No Southern Maryland Avalon at Decoverly Yes No Yes No Avalon Knoll Yes No Yes No Avalon Fields I & II Yes No Yes No Avalon Crossing Yes No Yes No Washington, D.C. 4100 Massachusetts Avenue Yes No No No MIDWEST Chicago, IL Avalon at Danada Farms Yes Yes No Yes Avalon at West Grove Yes Yes Yes No Avalon at Stratford Green Yes No No Yes Minneapolis, MN Avalon at Devonshire Yes No No No Avalon at Edinburg Yes No No No Avalon at Town Centre Yes No Yes No Avalon at Town Square Yes No Yes No Avalon at Woodbury No No No No DEVELOPMENT COMMUNITIES Avalon Corners Yes Yes No Yes Avalon Court North Yes Yes Yes No Avalon Willow Yes Yes No Yes Avalon at Fox Mill Yes No Yes No Avalon Essex Yes No No No Avalon Haven Yes No Yes No Avalon at Florham Park Yes No No No Avalon River Mews Yes Yes No Yes Avalon Bellevue Yes Yes No Yes Avalon at Arlington Square I Yes Yes Yes No Avalon on the Sound Yes No No Yes Avalon Estates Yes No Yes No </TABLE> 22
25 Notes to Community Information tables on pages 11 through 22 (1) Represents the average rental revenue per occupied apartment home. (2) Costs are presented in accordance with generally accepted accounting principles. For Development Communities, cost represents total costs incurred through December 31, 1999. (3) For purposes of these tables, Current Communities include only communities for which we held fee simple ownership interests or which we held through DownREIT partnerships. 23
26 Development Communities As of March 1, 2000, we had 12 Development Communities under construction. We expect these Development Communities, when completed, to add a total of 3,173 apartment homes to our portfolio for a total capitalized cost, including land acquisition costs, of approximately $505.9 million. Statements regarding the future development or performance of the Development Communities are forward-looking statements. We cannot assure you that: - we will complete the Development Communities; - our budgeted costs or estimates of occupancy rates will be realized; - our schedule of leasing start dates or construction completion dates will be achieved; or - future developments will realize returns comparable to our past developments. You should carefully review the discussion under "Risks of Development and Redevelopment" below. We hold a fee simple ownership interest in 11 of the Development Communities and a membership interest in a limited liability company that holds a fee simple interest in one Development Community. The following table presents a summary of the Development Communities: <TABLE> <CAPTION> Number of Budgeted Estimated Estimated apartment cost (1) Construction Initial completion stabilization homes ($ millions) start occupancy (2) date date (3) --------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> 1. Avalon Willow Mamaroneck, NY 227 $46.8 Q2 1997 Q1 1999 Q2 2000 Q3 2000 2. Avalon Corners Stamford, CT 195 $32.5 Q3 1998 Q3 1999 Q1 2000 Q3 2000 3. Avalon Fox Mill Herndon, VA 165 $20.1 Q4 1998 Q3 1999 Q1 2000 Q2 2000 4. Avalon Court North Melville, NY 340 $40.4 Q4 1998 Q3 1999 Q1 2000 Q3 2000 5. Avalon Essex Peabody, MA 154 $21.4 Q2 1999 Q2 2000 Q4 2000 Q1 2001 6. Avalon at Florham Park Florham Park, NJ 270 $41.3 Q2 1999 Q1 2000 Q2 2001 Q4 2001 7. Avalon River Mews Edgewater, NJ 408 $75.6 Q3 1999 Q1 2001 Q3 2001 Q1 2002 8. Avalon Haven North Haven, CT 128 $14.4 Q3 1999 Q2 2000 Q4 2000 Q1 2001 9. Avalon Bellevue Bellevue, WA 202 $29.9 Q4 1999 Q1 2001 Q2 2001 Q3 2001 10. Avalon at Arlington Square I Arlington, VA 510 $69.9 Q4 1999 Q4 2000 Q4 2001 Q3 2002 11. Avalon on the Sound (4) New Rochelle, NY 412 $93.3 Q4 1999 Q3 2001 Q4 2001 Q3 2002 12. Avalon Estates Hull, MA 162 $20.3 Q4 1999 Q4 2000 Q2 2001 Q4 2001 -------------------- Total 3,173 $505.9 ==================== </TABLE> (1) Total budgeted cost includes all capitalized costs projected to be incurred to develop the respective Development Community, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees determined in accordance with generally accepted accounting principles. (2) Future initial occupancy dates are estimates. (3) Stabilized operations is defined as the first full quarter of 95% or greater occupancy after completion of construction. (4) This community will be developed under a joint venture structure and the joint venture entity (a limited liability company) will obtain third party debt financing which initially will be guaranteed by AvalonBay. AvalonBay's equity funding of the budgeted cost is expected to be $13.8 million. 24
27 Redevelopment Communities As of March 1, 2000, we had four communities under redevelopment. We expect the total budgeted cost to complete these Redevelopment Communities, including the cost of acquisition and redevelopment, to be approximately $154.0 million, of which approximately $38.7 million is the additional capital invested or expected to be invested above the original purchase cost. Statements regarding the future redevelopment or performance of the Redevelopment Communities are forward-looking statements. We have found that the cost to redevelop an existing apartment community is more difficult to budget and estimate than the cost to develop a new community. Accordingly, we expect that actual costs may vary over a wider range than for a new development community. We cannot assure you that we will meet our schedules for reconstruction completion, or that we will meet our budgeted costs, either individually or in the aggregate. See the discussion under "Risks of Development and Redevelopment" below. The following presents a summary of Redevelopment Communities: <TABLE> <CAPTION> Budgeted Cost ($ millions) Number of --------------------------- Estimated apartment Acquisition Total Reconstruction Reconstruction restabilized homes cost cost (1) start completion (2) operations (3) --------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> 1. Avalon Ridge Renton, WA 421 $25.3 $35.7 Q3 1998 Q2 2000 Q2 2000 2. Avalon at Mission Bay San Diego, CA 564 $43.8 $57.3 Q3 1998 Q2 2000 Q3 2000 3. Avalon at Creekside Mountain View, CA 294 $29.0 $39.8 Q2 1999 Q3 2000 Q4 2000 4. Laguna Brisas Laguna Niguel, CA 176 $17.2 $21.2 Q3 1999 Q2 2000 Q4 2000 ---------------------------------------- Total 1,455 $115.3 $154.0 ======================================== </TABLE> (1) Total budgeted cost includes all capitalized costs projected to be incurred to redevelop the respective Redevelopment Community, including costs to acquire the community, reconstruction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated redevelopment overhead and other regulatory fees determined in accordance with generally accepted accounting principles. (2) Reconstruction completion dates are estimates. (3) Restabilized operations is defined as the first full quarter of 95% or greater occupancy after completion of reconstruction. Development Rights As of March 1, 2000, we are considering the development of 30 new apartment communities. These Development Rights range from land owned or under contract for which design and architectural planning has just begun to land under contract or owned by us with completed site plans and drawings where construction can begin almost immediately. We estimate that the successful completion of all of these communities would ultimately add 8,624 upscale apartment homes to our portfolio. At December 31, 1999, the cumulative capitalized costs incurred in pursuit of the 30 Development Rights, including the cost of land acquired in connection with six of the Development Rights, was approximately $64.8 million, of which $40.5 was land. Substantially all of these apartment homes will offer features like those offered by the communities we currently own. We generally hold Development Rights through options to acquire land, although one Development Right located in New Canaan, CT is controlled through a joint venture partnership that owns the land. The properties comprising the Development Rights are in different stages of the due diligence and regulatory approval process. The decisions as to which of the Development Rights to pursue, if any, or to continue to pursue once an investment in a Development Right is made are business judgments that we make after we perform financial, demographic and other analysis. Finally, we currently intend to limit the percentage of debt used to finance new developments in order to maintain our general historical practice with respect to the proportion of debt in our capital structure. Therefore, other financing alternatives may be required to finance the development of those Development Rights scheduled to start construction after January 1, 2000. Although the development of any particular Development Right cannot be 25
28 assured, we believe that the Development Rights, in the aggregate, present attractive potential opportunities for future development and growth of our FFO. Statements regarding the future development of the Development Rights are forward-looking statements. We cannot assure you that: - we will succeed in obtaining zoning and other necessary governmental approvals or the financing required to develop these communities, or that we will decide to develop any particular community; or - if we undertake construction of any particular community, that we will complete construction at the total budgeted cost assumed in the financial projections below. The following presents a summary of the 30 Development Rights we are currently pursuing: <TABLE> <CAPTION> Total Estimated budgeted number costs Location of homes ($ millions) --------------------- ------------- ---------------- <S> <C> <C> <C> 1. Mountain View, CA (1) 211 59.7 2. San Jose, CA (1) 221 41.6 3. Stamford, CT 327 59.7 4. Freehold, NJ 296 31.0 5. Orange, CT (1) 168 18.2 6. New Canaan, CT (1) (2) 104 26.4 7. Darien, CT 189 34.2 8. Yonkers, NY 256 35.2 9. Greenburgh - II, NY 500 84.3 10. Greenburgh - III, NY 266 44.4 11. Arlington II, VA (1) 332 39.9 12. Hopewell, NJ 280 34.0 13. Providence, RI 243 35.2 14. Port Jefferson, NY 232 27.6 15. Yorktown, NY 396 47.2 16. Marlboro, MA 228 25.1 17. Newtown, CT 304 34.3 18. Wilton, CT 115 21.1 19. North Potomac, MD 564 64.1 20. Los Angeles, CA 272 46.0 21. Weymouth, MA 300 31.7 22. San Diego, CA (1) 378 53.5 23. Long Island City, NY 361 90.3 24. Coram, NY 450 60.6 25. Westborough, MA 423 47.8 26. Lawrence, NJ 342 37.7 27. Salem, MA 176 19.9 28. Wilmington, MA 128 16.6 29. North Bethesda, MD 312 30.0 30. San Francisco, CA 250 69.6 ---------- ------------ Totals 8,624 $1,266.9 ========== ============ </TABLE> (1) AvalonBay owns land, but construction has not yet begun. (2) The land currently is owned by a limited partnership in which AvalonBay is a majority partner. It is currently anticipated that the land seller will retain a minority limited partner interest. 26
29 Risks of Development and Redevelopment We intend to continue to pursue the development and redevelopment of apartment home communities. Our development and redevelopment activities may be exposed to the following industry risks: - we may abandon opportunities we have already begun to explore based on further review of, or changes in, financial, demographic, environmental or other factors; - we may encounter liquidity constraints, including the unavailability of financing on favorable terms for the development or redevelopment of a community; - we may be unable to obtain, or we may experience delays in obtaining, all necessary zoning, land-use, building, occupancy, and other required governmental permits and authorizations; - we may incur construction or reconstruction costs for a community that exceed our original estimates due to increased materials, labor or other expenses, which could make completion or redevelopment of the community uneconomical; - occupancy rates and rents at a newly completed or redevelopment community may fluctuate depending on a number of factors, including market and general economic conditions, and may not be sufficient to make the community profitable; and - we may be unable to complete construction and lease-up on schedule, resulting in increased debt service expense and construction costs. The occurrence of any of the events described above could adversely affect our ability to achieve our projected yields on communities under development or redevelopment and could affect our payment of distributions to our stockholders. Construction costs are projected by us based on market conditions prevailing in the community's market at the time our budgets are prepared and reflect changes to those market conditions that we anticipated at that time. Although we attempt to anticipate changes in market conditions, we cannot predict with certainty what those changes will be. Construction costs have been increasing and, for some of our Development Communities, the total construction costs have been or are expected to be higher than the original budget. Total budgeted cost includes all capitalized costs projected to be incurred to develop the respective Development or Redevelopment Community, including: - land and/or property acquisition costs; - construction costs; - real estate taxes; - capitalized interest; - loan fees; - permits; - professional fees; - allocated development overhead; and - other regulatory fees determined in accordance with generally accepted accounting principles. Nonetheless, because of increases in prevailing market rents we believe that, in the aggregate, we will still achieve our targeted projected yield (i.e., return on invested capital) for those communities experiencing costs in excess of the original budget. We believe that we could experience similar increases in construction costs and market rents with respect to other development communities resulting in total construction costs that exceed original budgets. Likewise, costs to redevelop communities that have been acquired have, in some cases, exceeded our original estimates and similar increases in costs may be experienced in the future. We cannot assure that market rents in effect at the time new development communities or repositioned communities complete lease-up will be sufficient to fully offset the effects of any increased construction or reconstruction costs. 27
30 Capitalized Interest In accordance with generally accepted accounting principles, we capitalize interest expense during construction or reconstruction until a building obtains a certificate of occupancy. Thereafter, the interest allocated to that completed building within the community is expensed. Capitalized interest during the years ended December 31, 1999, 1998 and 1997 totaled $21,888,000, $14,724,000 and $9,024,000, respectively. Acquisition Activities and Other Recent Developments Acquisitions of Existing Communities. On July 12, 1999 we acquired Avalon at Woodbury through a DownREIT partnership for approximately $25,750,000 (including 117,178 units of limited partnership in the DownREIT partnership valued at $4,614,000) pursuant to a presale agreement signed in 1997 with an unaffiliated company. The community contains 224 apartment homes, and is located in the Minneapolis, Minnesota area. Sales of Existing Communities. During 1998, we completed a strategic planning effort that resulted in our decision to increase our geographical concentration in selected high barrier-to-entry markets where we believe we can: - apply sufficient market and management presence to enhance revenue growth; - reduce operating expenses; and - leverage management talent. To effect this increased concentration, we adopted an aggressive capital redeployment strategy and are selling assets in markets where our current presence is limited. In connection with this capital redeployment strategy, since January 1, 1999 we sold 17 communities, totaling 4,824 apartment homes, and a participating mortgage note secured by a community for a gross sales price of $346,212,000. Net proceeds from the sale of these assets totaled $310,243,000. Land Acquisitions and Leases for New Developments. We carefully select land for development and follow established procedures that we believe minimize both the cost and the risks of development. During 1999, we acquired the following land parcels for future development: 28
31 <TABLE> <CAPTION> Estimated Number Budgeted Gross of apartment cost (1) Date Construction Construction acres homes ($ millions) Acquired start (2) completion (2) ----------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> 1. Avalon River Mews 7.1 408 $75.6 March 1999 Q3 1999 Q3 2001 Edgewater, NJ 2. Avalon Bellevue 1.7 202 $29.9 March 1999 Q4 1999 Q2 2001 Bellevue, WA 3. Avalon Essex 11.1 154 $21.4 May 1999 Q2 1999 Q4 2000 Peabody, MA 4. Avalon at Florham Park 41.9 270 $41.3 June 1999 Q2 1999 Q2 2001 Florham Park, NJ 5. Avalon on the Sound (3) 2.4 412 $93.3 June 1999 Q4 1999 Q4 2001 New Rochelle, NY 6. Avalon Haven 10.6 128 $14.4 October 1999 Q3 1999 Q4 2000 North Haven, CT 7. Avalon at Scripps Ranch 19.0 378 $53.5 October 1999 Q3 2000 Q1 2002 San Diego, CA 8. Avalon Hill 9.6 168 $17.9 October 1999 Q3 2000 Q4 2001 Orange, CT 9. Avalon at Arlington Square I 14.2 510 $69.9 November 1999 Q4 1999 Q4 2001 Arlington, VA 10. Avalon at Arlington Square II 6.1 332 $39.9 November 1999 Q3 2001 Q1 2003 Arlington, VA 11. Avalon Estates 55.6 162 $20.3 December 1999 Q4 1999 Q2 2001 Hull, MA ---------------------------------------- Total 179.3 3,124 $477.4 ======================================== </TABLE> (1) Total budgeted cost includes all capitalized costs projected to be incurred to develop the respective Development Community, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees determined in accordance with generally accepted accounting principles. (2) Future construction start and completion dates are estimates. (3) This community will be developed on land being leased from an unrelated third party. Natural Disasters Many of our West Coast communities are located in the general vicinity of active earthquake faults. In July 1998, we obtained a seismic risk analysis from an engineering firm which estimated the probable maximum damage for each of the 60 West Coast communities that we owned at that time and for each of the five West Coast communities under development at that time. The seismic risk analysis was obtained for each individual community and for all of those communities combined. To establish a probable maximum damage, the engineers first define a severe earthquake event for the applicable geographic area, which is an earthquake that has only a 10% likelihood of occurring over a 50-year period. The probable maximum damage is determined as the structural and architectural damage and business interruption loss that is estimated to have only a 10% probability of being exceeded in the event of such an earthquake. Because a significant number of our communities are located in the San Francisco Bay Area, the engineers' analysis defined an earthquake on the Hayward Fault with a Richter Scale magnitude of 7.1 as a severe earthquake with a 10% probability of occurring within a 50-year period. The engineers then established an aggregate probable maximum damage at that time of $113 million for the 60 West Coast communities that we owned at that time and the five West Coast communities under development. The $113 million probable maximum damage for those communities was a probable maximum level that the engineers expected to be exceeded only 10% of the time in the event of such a severe earthquake. The actual aggregate probable maximum damage could be higher or lower as a result of variations in soil classifications and structural vulnerabilities. For each community, the engineers' analysis calculated an individual probable maximum damage as a percentage of the community's replacement cost and projected revenues. We cannot assure you that: 29
32 - an earthquake would not cause damage or losses greater than the probable maximum damage assessments indicate; - future probable maximum damage levels will not be higher than the current probable maximum damage levels described above for our communities located on the West Coast; or - acquisitions or developments after July 1998 will not have probable maximum damage assessments indicating the possibility of greater damage or losses than currently indicated. In August 1999, we renewed our earthquake insurance, both for physical damage and lost revenue, with respect to all communities we owned at that time and all of the communities under development. For any single occurrence, we have in place $75,000,000 of coverage with a five percent deductible. The five percent deductible is subject to a minimum of $100,000 and a maximum of $25,000,000 per occurrence. In addition, our general liability and property insurance program provides coverage for public liability and fire damage. In the event an uninsured disaster or a loss in excess of insured limits were to occur, we could lose our capital invested in the affected community, as well as anticipated future revenue from that community. We would also continue to be obligated to repay any mortgage indebtedness or other obligations related to the community. Any such loss could materially and adversely affect our business and our financial condition and results of operations. Americans with Disabilities Act The apartment communities we own and any apartment communities that we acquire must comply with Title III of the Americans with Disabilities Act to the extent that such properties are "public accommodations" and/or "commercial facilities" as defined by the Americans with Disabilities Act. Compliance with the Americans with Disabilities Act requirements could require removal of structural barriers to handicapped access in certain public areas of our properties where such removal is readily achievable. The Americans with Disabilities Act does not, however, consider residential properties, such as apartment communities, to be public accommodations or commercial facilities, except to the extent portions of such facilities, such as leasing offices, are open to the public. We believe our properties comply in all material respects with all present requirements under the Americans with Disabilities Act and applicable state laws. Noncompliance could result in imposition of fines or an award of damages to private litigants. ITEM 3. LEGAL PROCEEDINGS The Company is from time to time subject to claims and administrative proceedings arising in the ordinary course of business. Some of these claims and proceedings are expected to be covered by liability insurance. The following matter, for which the Company believes it has meritorious defenses and is therefore vigorously defending against, is not covered by liability insurance. However, outstanding litigation matters, individually or in the aggregate, including the matter described below, are not expected to have a material adverse effect on the business or financial condition of the Company. AvalonBay is currently involved in litigation with York Hunter Construction, Inc. and National Union Fire Insurance Company. The litigation involves construction work at AvalonBay's Avalon Willow community in Mamaroneck, New York. York Hunter initiated the litigation in October 1999, when it filed a complaint against AvalonBay and other defendants, claiming more than $15 million in damages. AvalonBay has filed counterclaims against York Hunter for more than $6 million in damages, and has also filed a claim against National Union Fire Insurance, which furnished construction and performance bonds to AvalonBay on behalf of York Hunter. AvalonBay believes that it has meritorious defenses against all of York Hunter's claims and is vigorously contesting those claims. AvalonBay also intends to pursue its counterclaims against York Hunter and National Union Fire Insurance aggressively. The action arises from AvalonBay's October 8, 1999 termination of York Hunter as construction manager under a contract relating to construction of the Avalon Willow community because of alleged failures and deficiencies by York Hunter and its subcontractors in performing under the contract. On or about October 19, 1999, York Hunter filed a Summons with Notice in the Supreme Court of the State of New York, County of Westchester. In addition to AvalonBay, the Summons named The State of New York, The Village of Mamaroneck, and tenants of the Avalon 30
33 Willow Community as defendants. In its Summons, and in a Verified Complaint filed on December 17, 1999, in the United States District Court for the Southern District of New York, York Hunter alleged that AvalonBay breached and wrongfully terminated the construction management contract, among other claims. The complaint also seeks foreclosure upon York Hunter's mechanic's lien. On November 24, 1999, AvalonBay removed the litigation from the state court to the United States District Court for the Southern District of New York, and moved to dismiss the other defendants from the action. York Hunter filed a motion to have the action remanded to state court. On February 14, 2000, the District Court granted AvalonBay's motion and denied York Hunter's motion to remand. On January 6, 2000, AvalonBay filed its Answer and Counterclaims. The Answer denies York Hunter's allegations. It also states eight causes of action against York Hunter, including breach of contract and contract damages related to AvalonBay's termination of the contract for cause. AvalonBay has also joined National Union Fire Insurance Company as a counter-defendant in the action, seeking recovery on the payment and performance bonds. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS No matter was submitted to a vote of our security holders during the fourth quarter of 1999. 31
34 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is traded on the New York Stock Exchange (NYSE) and the Pacific Stock Exchange (PCX) under the ticker symbol AVB. The following table sets forth the quarterly high and low sales prices per share of our common stock on the NYSE for the years ended December 31, 1999 and 1998, as reported by the NYSE. On March 1, 2000, there were 928 holders of record of an aggregate of 65,871,094 shares of our outstanding common stock. <TABLE> <CAPTION> 1999 1998, post merger ----------------------------------------- ---------------------------------------- Sales Price Sales Price ------------------------ Dividends ---------------------------- Dividends High Low Declared High Low Declared ----------- --------- --------------- ------------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> Quarter ended March 31 $34.313 $30.813 $0.51 N/A N/A N/A Quarter ended June 30 $37.000 $31.000 $0.51 N/A N/A N/A Period June 4 through June 30 N/A N/A N/A $37.750 $35.000 $ 0.51 Quarter ended September 30 $35.875 $32.563 $0.52 $38.438 $30.500 $ 0.51 Quarter ended December 31 $35.000 $30.875 $0.52 $34.313 $31.125 $ 0.51 </TABLE> <TABLE> <CAPTION> 1998, Avalon prior to merger 1998, Bay prior to merger ----------------------------------------- ---------------------------------------- Sales Price Sales Price ------------------------ Dividends ---------------------------- Dividends Quarter Ended High Low Declared High Low Declared - ------------- ----------- --------- --------------- ------------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> Quarter ended March 31 $30.938 $27.125 $0.39 $39.250 $36.313 $0.42 Period April 1 through June 3 $29.250 $27.375 N/A $37.875 $36.000 N/A </TABLE> We expect to continue our policy of paying regular quarterly cash dividends. However, dividend distributions will be declared at the discretion of the Board of Directors and will depend on actual funds from operations, our financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code and other factors as the Board of Directors may consider relevant. The Board of Directors may modify our dividend policy from time to time. We have an optional Dividend Reinvestment and Stock Purchase Plan (DRIP) which provides a simple and convenient method for stockholders to invest cash dividends and optional cash payments in shares of our common stock. All holders of capital stock are eligible to participate in the DRIP, including stockholders whose shares are held in the name of a nominee or broker. These participants in the DRIP may purchase additional shares of common stock by: - having the cash dividends on all or part of their shares of common stock and preferred stock automatically reinvested; - receiving directly, as usual, their cash dividends, if and when declared, on their shares of capital stock and investing in the DRIP by making cash payments of not less than $100 or more than $100,000, or such larger amount as we may approve, per quarter; and/or - investing both their cash dividends and such optional cash payments in shares of common stock. Common stock acquired pursuant to the DRIP with reinvested dividends may be purchased at a price per share equal to 97% of the closing price on the NYSE for such shares of common stock on the applicable investment date. Common stock purchased with optional cash payments of up to $100,000 per calendar quarter may be purchased at a price per share equal to 100% of the last reported sale price for a share of common stock as reported by the NYSE on the applicable investment date. In addition, common stock purchased with optional cash payments in excess of $100,000 per calendar quarter pursuant to a Request for Waiver may be purchased at a price per share equal to 100% of the average of the daily high and low sales prices of our common stock on the NYSE for the ten trading days immediately preceding the applicable investment date. Generally, no brokerage commissions, fees or service charges are paid by participants in connection with purchases under the DRIP. Stockholders who do not participate in the DRIP continue to receive cash dividends as declared. 32
35 ITEM 6. SELECTED FINANCIAL DATA The following table provides historical consolidated financial, operating and other data for AvalonBay Communities, Inc. You should read the table with our consolidated financial statements and the notes included in this report. <TABLE> <CAPTION> Company (1) ---------------------------------------------------------------------- Years ended ---------------------------------------------------------------------- 12-31-99 12-31-98 12-31-97 12-31-96 12-31-95 -------------- ------------- ------------ ------------ ------------ (Dollars in thousands, except per share information) <S> <C> <C> <C> <C> <C> OPERATING INFORMATION: Revenue: Rental income $ 503,132 $ 369,945 $ 169,442 $ 123,354 $ 94,821 Management fees 1,176 1,377 1,029 1,439 1,926 Other income 236 81 633 420 466 ----------- ----------- ----------- ----------- ------------ Total revenue 504,544 371,403 171,104 125,213 97,213 ----------- ----------- ----------- ----------- ------------ Expenses: Operating expenses, excluding property taxes 134,172 104,346 47,279 36,491 27,963 Property taxes 42,701 31,775 14,429 10,583 8,035 Interest expense 74,699 54,650 16,977 9,545 11,056 Depreciation and amortization 109,759 77,374 29,113 20,956 16,558 General and administrative 9,502 9,124 5,093 3,438 3,132 Development costs write-off -- -- -- 450 400 Non-recurring items 16,782 -- -- -- -- ----------- ----------- ----------- ----------- ------------ Total expenses 387,615 277,269 112,891 81,463 67,144 ----------- ----------- ----------- ----------- ------------ Equity in income of unconsolidated joint ventures 2,867 2,638 5,689 1,025 440 Interest income 7,362 3,508 1,346 887 953 Minority interest in unconsolidated partnerships (1,975) (1,770) 174 495 633 ----------- ----------- ----------- ----------- ------------ Income before gain on sale of communities and extraordinary item 125,183 98,510 65,422 46,157 32,095 Gain on sale of communities 47,093 25,270 677 7,850 -- ----------- ----------- ----------- ----------- ------------ Income before extraordinary item 172,276 123,780 66,099 54,007 32,095 Extraordinary item -- (245) (1,183) (2,356) (1,158) ----------- ----------- ----------- ----------- ------------ Net income 172,276 123,535 64,916 51,651 30,937 Dividends attributable to preferred stock (39,779) (28,132) (19,656) (10,422) -- ----------- ----------- ----------- ----------- ------------ Net income available to common stockholders $ 132,497 $ 95,403 $ 45,260 $ 41,229 $ 30,937 =========== =========== =========== =========== ============ PER COMMON SHARE AND SHARE INFORMATION: Income before extraordinary item- basic $ 2.02 $ 1.87 $ 1.64 $ 1.85 $ 1.47 Income before extraordinary item- diluted $ 2.00 $ 1.84 $ 1.63 $ 1.84 $ 1.47 Extraordinary item $ -- $ (0.00) $ (0.04) $ (0.10) $ (0.05) Net income- basic $ 2.02 $ 1.87 $ 1.60 $ 1.75 $ 1.42 Net income- diluted $ 2.00 $ 1.84 $ 1.59 $ 1.74 $ 1.42 Cash dividends declared $ 2.06 $ 2.04 $ 2.00 $ 1.94 $ 1.90 Weighted average common shares and units outstanding- basic 65,657,921 51,113,206 28,245,314 23,617,161 21,793,158 Weighted average common shares and units outstanding- diluted 66,110,664 51,771,247 28,431,823 23,691,447 21,828,020 </TABLE> 33
36 <TABLE> <CAPTION> Company (1) ----------------------------------------------------------------- Years ended ----------------------------------------------------------------- 12-31-99 12-31-98 12-31-97 12-31-96 12-31-95 ----------- ------------ ------------ ------------ ----------- (Dollars in thousands) <S> <C> <C> <C> <C> <C> OTHER INFORMATION: Net income $ 172,276 $ 123,535 $ 64,916 $ 51,651 $ 30,937 Depreciation and amortization 109,759 77,374 29,113 20,956 16,558 Interest expense 74,699 54,650 16,977 9,545 11,056 Interest income (7,362) (3,508) (1,346) (887) (953) Non-recurring items 16,782 -- -- -- -- Gain on sale of communities (47,093) (25,270) (677) (7,850) -- Extraordinary item -- 245 1,183 2,356 1,158 ----------- ----------- ----------- ----------- --------- Gross EBITDA (2) $ 319,061 $ 227,026 $ 110,166 $ 75,771 $ 58,756 =========== =========== =========== =========== ========= Funds from Operations (3) $ 212,840 $ 148,487 $ 73,525 $ 54,622 $ 46,879 Stabilized apartment communities (4) 118 113 64 45 38 BALANCE SHEET INFORMATION: Real estate, before accumulated depreciation $4,266,426 $4,006,456 $1,534,986 $1,081,906 $ 782,433 Total assets $4,154,662 $4,005,013 $1,529,703 $1,082,771 $ 786,711 Notes payable and Unsecured Facilities $1,593,647 $1,484,371 $ 506,129 $ 310,606 $ 340,686 CASH FLOW INFORMATION: Net cash flows provided by operating activities $ 250,066 $ 193,478 $ 93,649 $ 65,841 $ 56,314 Net cash flows used in investing activities $ (264,619) $ (617,685) $ (421,420) $ (261,033) $(189,582) Net cash flows provided by financing activities $ 13,284 $ 426,375 $ 320,252 $ 207,632 $ 132,207 </TABLE> Notes to Selected Financial Data (1) See our consolidated financial statements and the related notes included in this report, including footnote 2 thereof for a discussion of a revision to the financial presentation resulting from a change in accounting. (2) Gross EBITDA represents earnings before interest, income taxes, depreciation and amortization, non-recurring items, gain on sale of communities and extraordinary items. Gross EBITDA is relevant to an understanding of the economics of AvalonBay because it indicates cash flow available from operations to service fixed obligations. Gross EBITDA should not be considered as an alternative to operating income, as determined in accordance with GAAP, as an indicator of our operating performance, or to cash flows from operating activities (as determined in accordance with GAAP) as a measure of liquidity. Our calculation of gross EBITDA may not be comparable to gross EBITDA as calculated by other companies. (3) We generally consider Funds from Operations, or FFO, to be an appropriate measure of our operating performance because it helps investors understand our ability to incur and service debt and to make capital expenditures. We believe that to gain a clear understanding of our operating results, FFO should be examined with net income as presented in the consolidated financial statements included elsewhere in this report. FFO is determined based on a definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts(R) and is defined as: - net income or loss computed in accordance with GAAP, excluding gains or losses from debt restructuring, other non-recurring items and sales of property; - plus depreciation of real estate assets; and - after adjustments for unconsolidated partnerships and joint ventures. FFO does not represent cash generated from operating activities in accordance with GAAP. Therefore it should not be considered as an alternative to net income or as an indication of performance. FFO should also not be considered an alternative to net cash flows from operating activities as determined by generally accepted accounting principles as a measure of liquidity. Additionally, it is not necessarily indicative of 34
37 cash available to fund cash needs. Further, FFO as calculated by other REITs may not be comparable to our calculation of FFO. The calculation of FFO for the periods presented is reflected in the following table: <TABLE> <CAPTION> Company (1) -------------------------------------------------------------------------------- Years ended -------------------------------------------------------------------------------- 12-31-99 12-31-98 12-31-97 12-31-96 12-31-95 -------------- -------------- --------------- -------------- --------------- <S> <C> <C> <C> <C> <C> Net income available to common stockholders $ 132,497 $ 95,403 $ 45,260 41,229 $ 30,937 Depreciation (real estate related) 107,928 75,614 27,360 18,566 14,468 Joint venture adjustments 751 725 399 321 316 Minority interest 1,975 1,770 -- -- -- Gain on sale of communities (47,093) (25,270) (677) (7,850) -- Non-recurring items (5) 16,782 -- -- -- -- Extraordinary items -- 245 1,183 2,356 1,158 ------------ ------------ ------------ ------------ ------------ Funds from Operations $ 212,840 $ 148,487 $ 73,525 $ 54,622 $ 46,879 ------------ ------------ ------------ ------------ ------------ Net cash provided by operating activities $ 250,066 $ 193,478 $ 93,649 $ 65,841 $ 56,314 ============ ============ ============ ============ ============ Net cash used in investing activities $ (264,619) $ (617,685) $ (421,420) $ (261,033) $ (189,582) ============ ============ ============ ============ ============ Net cash provided by financing activities $ 13,284 $ 426,375 $ 320,252 $ 207,632 $ 132,207 ============ ============ ============ ============ ============ Weighted average common shares and units outstanding - diluted 66,110,664 51,771,247 28,431,823 23,691,447 21,828,020 ============ ============ ============ ============ ============ </TABLE> (4) These amounts include communities only after stabilized occupancy has occurred. We consider a community to have achieved stabilized occupancy on the earlier of (i) the first day of any month in which the community reaches 95% physical occupancy or (ii) one year after completion of construction or reconstruction. These amounts also include joint venture investments. (5) Year to date consists of $16,076 related to management and other organizational changes and $706 for Y2K compliance costs. 35
38 ITEM 7. MANAGMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements This Form 10-K, including the footnotes to the Company's consolidated financial statements, contains "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by our use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume," and other similar expressions in this Form 10-K, that predict or indicate future events and trends or that do not relate to historical matters. In addition, information concerning the following are forward-looking statements: - the timing and cost of completion of apartment communities under construction, reconstruction, development or redevelopment; - the timing of lease-up and occupancy of apartment communities; the pursuit of land on which we are considering future development; - cost, yield and earnings estimates; - the development, implementation and use of management information systems. We cannot assure the future results or outcome of the matters described in these statements; rather, these statements merely reflect our current expectations of the approximate outcomes of the matters discussed. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. These risks, uncertainties and other factors may cause our actual results, performance or achievements to differ materially from the anticipated future results, performance or achievements expressed or implied by these forward-looking statements. Some of the factors that could cause our actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements include, but are not limited to, the following: - we may be unsuccessful in managing our current growth in the number of apartment communities and the related growth of our business operations; - our previous or possible future expansion into new geographic market areas may not produce financial results that are consistent with our historical performance; - we may fail to secure development opportunities due to an inability to reach agreements with third parties or to obtain desired zoning and other local approvals; - we may abandon development opportunities for a number of reasons, including changes in local market conditions which make development less desirable, increases in costs of development and increases in the cost of capital; - construction costs of a community may exceed our original estimates; - we may not complete construction and lease-up of communities under development or redevelopment on schedule, resulting in increased interest expense, construction costs and reduced rental revenues; - occupancy rates and market rents may be adversely affected by local economic and market conditions which are beyond our control; - financing may not be available on favorable terms and our cash flow from operations and access to cost effective capital may be insufficient for the development of our pipeline and could limit our pursuit of opportunities; - our cash flow may be insufficient to meet required payments of principal and interest, and we may be unable to refinance existing indebtedness or the terms of such refinancing may not be as favorable as the terms of existing indebtedness; - the development, implementation and use of new management information systems may cost more than anticipated or may be delayed for a number of reasons, including unforeseen technological or integration issues. 36
39 You should read our consolidated financial statements and notes for the year ended December 31, 1999 included in this report in conjunction with the following discussion. These forward-looking statements represent our estimates and assumptions only as of the date of this report. We do not undertake to update these forward-looking statements, and you should not rely upon them after the date of this report. Business Description and Community Information AvalonBay is a Maryland corporation that has elected to be treated as a real estate investment trust, or REIT, for federal income tax purposes. We focus on the ownership and operation of upscale apartment communities (which we consider to be apartment communities that generally command among the highest rents in their submarkets) in high barrier-to-entry markets of the United States. This is because we believe that the limited new supply of upscale apartment homes in these markets helps achieve more predictable cash flows. These barriers-to-entry generally include a difficult and lengthy entitlement process with local jurisdictions and dense in-fill locations where zoned and entitled land is in limited supply. These markets are located in Northern and Southern California and selected states in the Mid-Atlantic, Northeast, Midwest and Pacific Northwest regions of the country. AvalonBay is the surviving corporation from the merger of Avalon Properties, Inc. with and into Bay Apartment Communities, Inc. Prior to December 31, 1999, we accounted for the merger under the purchase method of accounting, using the historical financial statements of Bay prior to and after the merger. Based on discussions with the Securities and Exchange Commission, we agreed to revise our financial presentation as of and for the years ended December 31, 1998 and 1997 to present the merger whereby the historical financial statements for Avalon are presented prior to the merger. At that time, Avalon ceased to legally exist, and Bay as the surviving legal entity adopted the historical financial statements of Avalon, with Bay's assets recorded in the historical financial statements of Avalon at an amount equal to Bay's debt outstanding at that time plus the value of capital stock retained by the Bay stockholders, which approximates fair value. We are a fully-integrated real estate organization with in-house expertise in the following areas: - acquisition; - development and redevelopment; - construction and reconstruction; - financing; - marketing; - leasing and management; and - information technologies. With our expertise and in-house capabilities, we believe we are well-positioned to continue to pursue opportunities to develop and acquire upscale apartment homes in our target markets. Our ability to pursue attractive opportunities, however, may be constrained by capital market conditions that limit the availability of cost effective capital to finance these activities. We limited our acquisition activity in 1999 as compared to prior years due to these capital constraints, and we expect to direct most of our invested capital to new developments and redevelopments for the foreseeable future. We believe apartment communities present an attractive investment opportunity compared to other real estate investments because a broad potential resident base results in relatively stable demand during all phases of a real estate cycle. We intend to pursue appropriate new investments, including both new developments and acquisitions of communities, in markets where constraints to new supply exist and where new household formations have out-paced multifamily permit activity in recent years. Our real estate investments as of March 1, 2000 consist primarily of stabilized operating apartment communities as well as communities in various stages of the development and redevelopment cycle and land or land options held for development. We classify these investments into the following categories: 37
40 <TABLE> <CAPTION> Number of Number of communities apartment homes ----------- --------------- <S> <C> <C> Current Communities 121 35,648 - -------------------- Stabilized Communities 117 34,193 Established Communities: 63 17,706 Northern California 25 6,461 Southern California 3 600 Mid-Atlantic 18 5,259 Northeast 16 4,888 Midwest 1 498 Other Stabilized Communities: 54 16,487 Northern California 10 2,988 Southern California 13 4,476 Mid-Atlantic 4 1,240 Northeast 16 5,111 Midwest 7 1,717 Pacific Northwest 4 955 Lease-Up Communities - - Redevelopment Communities 4 1,455 Development Communities 12 3,173 - ----------------------- Development Rights 30 8,624 (*) - ------------------ </TABLE> (*) Represents an estimate Current Communities are apartment communities that have been completed and have reached occupancy of at least 95%, have been complete for one year, are in the initial lease-up process or are under redevelopment. Current Communities consist of the following: Stabilized Communities. Represents all Current Communities that have completed initial lease-up by attaining physical occupancy levels of at least 95% or have been completed for one year, whichever occurs earlier. Stabilized Communities are categorized as either Established Communities or Other Stabilized Communities. - Established Communities. Represents all Stabilized Communities owned by Avalon and, on a pro forma basis, those owned by Bay as of January 1, 1998, with stabilized operating costs as of January 1, 1998 such that a comparison of 1998 operating results to 1999 operating results is meaningful. Each of the Established Communities falls into one of the following six geographic areas: Northern California, Southern California, Mid-Atlantic, Northeast, Midwest and Pacific Northwest regions. At December 31, 1999, there were no Established Communities in the Pacific Northwest. When used in connection with a comparison of 1998 and 1997 results, the term "Established Communities" refers to communities that were stabilized as of January 1, 1997. 38
41 - Other Stabilized Communities. Represents Stabilized Communities as defined above, but which became stabilized or were acquired after January 1, 1998. Lease-Up Communities. Represents all communities where construction has been complete for less than one year and where occupancy has not reached at least 95%. Redevelopment Communities. Represents all communities where substantial redevelopment has begun. Redevelopment is considered substantial when capital invested during the reconstruction effort exceeds the lesser of $5 million or 10% of the community's acquisition cost. Development Communities are communities that are under construction and for which a final certificate of occupancy has not been received. These communities may be partially complete and operating. Development Rights are development opportunities in the early phase of the development process for which we have an option to acquire land or where we own land to develop a new community. We capitalize all related pre-development costs incurred in pursuit of these new developments. Of the Current Communities as of March 1, 2000, we own: - a fee simple, or absolute, ownership interest in 106 operating communities, one of which is on land subject to a 149 year land lease; - a general partnership interest in five partnerships that in the aggregate hold a fee simple interest in five other operating communities; - a general partnership interest in four partnerships structured as "DownREITs," as described more fully below, that own an aggregate of nine communities; and - a 100% interest in a senior participating mortgage note secured by one community, which allows us to share in part of the rental income or resale proceeds of the community. We also hold a fee simple ownership interest in 11 of the Development Communities and a membership interest in a limited liability company that holds a fee simple interest in one Development Community. In each of the four partnerships structured as DownREITs, either AvalonBay or one of our wholly-owned subsidiaries is the general partner, and there are one or more limited partners whose interest in the partnership is represented by units of limited partnership interest. For each DownREIT partnership, limited partners are entitled to receive distributions before any distribution is made to the general partner. Although the partnership agreements for each of the DownREITs are different, generally the distributions paid to the holders of units of limited partnership interests approximate the current AvalonBay common stock dividend rate. Each DownREIT partnership has been structured so that it is unlikely the limited partners will be entitled to a distribution greater than the initial distribution provided for in the partnership agreement. The holders of units of limited partnership interest have the right to present each unit of limited partnership interest for redemption for cash equal to the fair market value of a share of AvalonBay common stock on the date of redemption. In lieu of a cash redemption of a unit, we may elect to acquire any unit presented for redemption for one share of our common stock. As of December 31, 1999, there were 973,870 units outstanding. The DownREIT partnerships are consolidated for financial reporting purposes. At December 31, 1999, we had positioned our portfolio of Stabilized Communities, excluding communities owned by unconsolidated joint ventures, to an average physical occupancy level of 96.7%. Our strategy is to maximize total rental revenue through management of rental rates and occupancy levels. Our strategy of 39
42 maximizing total rental revenue could lead to lower occupancy levels. Given the current high occupancy level of our portfolio, we believe that any rental revenue and net income gains from our Established Communities would be achieved primarily through higher rental rates and the lower average operating costs per apartment home that result from economies of scale due to national and regional growth of our portfolio. We elected to be taxed as a REIT for federal income tax purposes for the year ended December 31, 1994 and we have not revoked that election. We were incorporated under the laws of the State of California in 1978, and we were reincorporated in the State of Maryland in July 1995. Our principal executive offices are located at 2900 Eisenhower Avenue, Suite 300, Alexandria, Virginia, 22314, and our telephone number at that location is (703) 329-6300. We also maintain regional offices and administrative or specialty offices in or near the following cities: - San Jose, California; - Wilton, Connecticut; - Boston, Massachusetts; - Chicago, Illinois; - Los Angeles, California; - Minneapolis, Minnesota; - Newport Beach, California; - New York, New York; - Princeton, New Jersey; and - Seattle, Washington. Recent Developments Sales of Existing Communities. During 1998, we completed a strategic planning effort that resulted in our decision to increase our geographical concentration in selected high barrier-to-entry markets where we believe we can: - apply sufficient market and management presence to enhance revenue growth; - reduce operating expenses; and - leverage management talent. To effect this increased concentration, we adopted an aggressive capital redeployment strategy and are selling assets in markets where our current presence is limited. We intend to redeploy the proceeds from sales to develop and redevelop communities currently under construction or reconstruction. Pending such redeployment, the proceeds from the sale of these communities will be used to repay amounts outstanding under our variable rate unsecured credit facility. Accordingly, we sold seven communities with an aggregate of 2,039 apartment homes in connection with our capital redeployment strategy in 1998. The net proceeds from these sales totaled $73,900,000. In 1999, we sold 16 communities with an aggregate of 4,464 apartment homes. Net proceeds from these sales totaled $255,618,000. In addition, during 1999 we sold a participating mortgage note secured by an apartment home community for net proceeds of $25,300,000. Since January 1, 2000, we have sold one additional community containing 360 apartment homes in connection with our capital redeployment strategy. The net proceeds from the sale of this community were approximately $29,325,000. We intend to dispose of additional assets as described more fully under "Future Financing and Capital Needs." Development, Redevelopment and Acquisition Activities. We began the development of eight new communities during 1999. These communities are expected to contain a total of 2,246 apartment homes upon completion, and the total investment, including land acquisition costs, is projected to be approximately $366,100,000. Also, we completed the development of ten new communities containing a total of 2,335 apartment homes for a total investment of $391,600,000. 40
43 We also acquired three land parcels during 1999 on which construction has not yet commenced. We expect to develop three new communities containing a total of 878 apartment homes on these parcels. The total investment in these communities, including land acquisition costs of $22,078,000, is projected to be approximately $111,300,000. We completed the redevelopment of thirteen communities during 1999 for a total investment in redevelopment (i.e. excluding acquisition costs) of $77,300,000. We acquired one community, containing 224 apartment homes, during 1999 for approximately $25,750,000, including 117,178 units of limited partnership in a DownREIT partnership valued at $4,614,000. We acquired this community in connection with a forward purchase agreement signed in 1997 with an unaffiliated party. The development and redevelopment of communities involves risks that the investment will fail to perform in accordance with expectations. See "Risks of Development and Redevelopment" in Part I of this Form 10-K for our discussion of these and other risks inherent in developing or redeveloping communities. Results of Operations Historically, the changes in our operating results from period-to-period have been primarily the result of increases in the number of apartment homes owned. Where appropriate, period-to-period comparisons of the number of occupied apartment homes are made on a weighted average basis to adjust for changes in the number of apartment homes during the period. For Stabilized Communities, excluding communities owned by unconsolidated joint ventures, all occupied apartment homes are included in the calculation of weighted average occupied apartment homes for each reporting period. For communities in the initial lease-up phase, only apartment homes of communities that are completed and occupied are included in the weighted average number of occupied apartment homes calculation for each reporting period. A comparison of our operating results for the years ended December 31, 1999 and December 31, 1998 as well as a comparison of our operating results for the years ended December 31, 1998 and December 31, 1997 follows. COMPARISON OF YEAR ENDED DECEMBER 31, 1999 TO YEAR ENDED DECEMBER 31, 1998 Net income available to common stockholders increased $37,094,000 (38.9%) to $132,497,000 for the year ended December 31, 1999 compared to $95,403,000 for the preceding year. Excluding non-recurring charges, gain on sale of communities and extraordinary items, net income available to common stockholders increased by $31,808,000 for the year ended December 31, 1999 compared to the preceding year. The increase in net income, as adjusted, for the year ended December 31, 1999 is primarily attributable to additional operating income from additional communities attributable to the merger. Additional operating income from newly developed or redeveloped communities and growth in operating income from Established Communities also contributed to the increase in net income. Rental income increased $133,187,000 (36.0%) to $503,132,000 for the year ended December 31, 1999 compared to $369,945,000 for the preceding year. The increase is primarily attributable to additional revenue from additional communities attributable to the merger and secondarily to newly developed and redeveloped communities, partially offset by the sale of communities in 1998 and 1999. Overall Portfolio - The $133,187,000 increase in rental income is primarily due to increases in the weighted average number of occupied apartment homes as well as an increase in the weighted average monthly rental income per occupied apartment home. The weighted average number of occupied apartment homes increased from 28,333 apartment homes for the year ended December 31, 1998 to 33,726 apartment homes for the year ended December 31, 1999 primarily as a result 41
44 of the additional apartment homes from additional communities attributable to the merger being part of the portfolio for all of 1999 and the development, redevelopment and acquisition of new communities, offset by the sale of communities in 1998 and 1999. For the year ended December 31, 1999, the weighted average monthly revenue per occupied apartment home increased $160 (14.8%) to $1,242 compared to $1,082 for the preceding year, which is primarily attributable to the development of new upscale apartment communities in premium locations, the sale of communities with lower average rents as well as the merger. These apartment communities were funded in part from the proceeds of communities sold in markets where rental rates are lower. Established Communities, on a pro forma basis, assuming the merger had occurred on January 1, 1998 - Rental revenue increased $10,114,000 (4.1%) for the year ended December 31, 1999 compared to the preceding year. The increase is due to market conditions that allowed for higher average rents that were partially offset by lower economic occupancy levels. For the year ended December 31, 1999, weighted average monthly revenue per occupied apartment home increased $52 (4.4%) to $1,226 compared to $1,174 for the preceding year. The average economic occupancy decreased from 96.9% for the year ended December 31, 1998 to 96.6% for the year ended December 31, 1999. Regions showing occupancy gains include the Mid-Atlantic, with an increase from 96.8% for the year ended December 31, 1998 to 97.1% for the year ended December 31, 1999, and the Midwest, with an increase from 97.1% for the year ended December 31, 1998 to 97.2% for the year ended December 31, 1999. Occupancy decreased in Northern California from 97.1% for the year ended December 31, 1998 to 96.2% for the year ended December 31, 1999 primarily due to softening in sub-markets dependent on Silicon Valley employment. Management fees decreased $201,000 to $1,176,000 for the year ended December 31, 1999 compared to $1,377,000 for the preceding year. Management fees represent revenue from third-party contracts. We anticipate that management and development fees will increase over the next several years due to the receipt of fees pursuant to joint venture arrangements. Operating expenses, excluding property taxes increased $29,826,000 (28.6%) to $134,172,000 for the year ended December 31, 1999 compared to $104,346,000 for the preceding year. Overall Portfolio - The increase for the year ended December 31, 1999 is primarily due to additional operating expenses from additional communities attributable to the merger and secondarily due to the addition of newly developed, redeveloped and acquired apartment homes, partially offset by the sale of communities in 1998 and 1999. Maintenance, insurance and other costs associated with Development and Redevelopment Communities are expensed as communities move from the initial construction and lease-up phase to the stabilized operating phase. Established Communities, on a pro forma basis, assuming the merger had occurred on January 1, 1998 - Operating expenses increased $1,821,000 (3.7%) to $50,912,000 for the year ended December 31, 1999 compared to $49,091,000 for the preceding year. The net changes are the result of higher redecorating, maintenance, payroll and administrative costs offset by lower utility, marketing, and insurance costs. Property taxes increased $10,926,000 (34.4%) to $42,701,000 for the year ended December 31, 1999 compared to $31,775,000 for the preceding year. Overall Portfolio - The increase for the year ended December 31, 1999 is primarily due to additional expenses from additional communities attributable to the merger and secondarily due to the addition of newly developed, redeveloped or acquired apartment homes, partially offset by the sale of communities in 1998 and 1999. Property taxes on Development and Redevelopment 42
45 Communities are expensed as communities move from the initial construction and lease-up phase to the stabilized operating phase. Established Communities, on a pro forma basis, assuming the merger had occurred on January 1, 1998 - Property taxes decreased $30,000 (0.1%) to $21,197,000 for the year ended December 31, 1999 compared to $21,227,000 for the preceding year. The decrease is primarily a result of revised base year tax assessments for previously renovated communities which resulted in supplemental taxes that were lower than those than originally projected. Interest expense increased $20,049,000 (36.7%) to $74,699,000 for the year ended December 31, 1999 compared to $54,650,000 for the preceding year. The increase is primarily attributable to approximately $600 million of debt assumed in connection with the merger and the issuance of $625,000,000 of unsecured notes during 1999 and 1998, offset by an increase in capitalized interest. Depreciation and amortization increased $32,385,000 (41.9%) to $109,759,000 for the year ended December 31, 1999 compared to $77,374,000 for the preceding year. The increase is attributable primarily to additional expense from additional communities attributable to the merger and secondarily to newly developed and redeveloped communities, partially offset by the sale of communities in 1998 and 1999. General and administrative increased $378,000 (4.1%) to $9,502,000 for the year ended December 31, 1999 compared to $9,124,000 for the preceding year. The increase is impacted by additional overhead from the combination of the two companies and related organizational structures, partially offset by a reorganization in February 1999 that reduced the management structure of the merged company. Equity in income of unconsolidated joint ventures increased $229,000 (8.7%) to $2,867,000 for the year ended December 31, 1999 compared to $2,638,000 for the preceding year. Equity in income of unconsolidated joint ventures represents our share of income from joint ventures. Interest income increased $3,854,000 (109.9%) to $7,362,000 for the year ended December 31, 1999 compared to $3,508,000 for the preceding year. These increases are primarily from an increase in interest from participating mortgage notes, including the Fairlane Woods participating mortgage note acquired in the third quarter of 1998. The Fairlane Woods promissory note was sold in the fourth quarter of 1999. Gain on sale of communities increased $21,823,000 to $47,093,000 for the year ended December 31, 1999 compared to $25,270,000 for the preceding year. The increase is due to an increase in the number of communities sold during 1999 as compared to 1998 as a result of the disposition strategy we implemented in the third quarter of 1998. COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997 Net income available to common stockholders increased $50,143,000 (110.8%) to $95,403,000 for the year ended December 31, 1998 compared to $45,260,000 for the preceding year. Excluding gain on sale of communities and extraordinary items, net income available to common stockholders increased by $24,612,000 (53.8%) for the year ended December 31, 1998 compared to the preceding year. The increase in net income, as adjusted, for the year ended December 31, 1998 is attributable primarily to gains from increased community sales, additional operating income from additional communities attributable to the merger, and additional operating income from communities developed, redeveloped or acquired during 1998 and 1997 as well as growth in operating income from Established Communities. Rental income increased $200,503,000 (118.3%) to $369,945,000 for the year ended December 31, 1998 compared to $169,442,000 for the preceding year. The increase is attributable primarily to additional revenue from additional communities attributable to the merger and secondarily to developed, redeveloped and acquired communities in 1998 and 1997. 43
46 Overall Portfolio - The $200,503,000 increase in rental income is primarily due to increases in the weighted average number of occupied apartment homes as well as an increase in the weighted average monthly rental income per occupied apartment home. The weighted average number of occupied apartment homes increased from 13,949 apartment homes for the year ended December 31, 1997 to 28,333 apartment homes for the year ended December 31, 1998 primarily as a result of additional apartment homes from additional communities attributable to the merger, as well as the development, redevelopment and acquisition of new communities. For the year ended December 31, 1998, the weighted average monthly revenue per occupied apartment home increased $74 (7.3%) to $1,082 compared to $1,008 for the preceding year. Established Communities, on a pro forma basis, assuming the merger had occurred on January 1, 1997 - Rental revenue increased $11,318,000 (6.2%) for the year ended December 31, 1998 compared to the preceding year. The increase is due to market conditions that allowed for higher average rents, with relatively stable economic occupancy levels. For the year ended December 31, 1998, weighted average monthly revenue per occupied apartment home increased $61 (6.2%) to $1,048 compared to $987 for the preceding year. Beginning in October 1998, the Northern California sub-markets that are primarily dependent on Silicon Valley employment softened. These sub-markets have experienced reduced rental rate growth and occupancy declines as compared to other Northern California sub-markets and our other markets as a whole. Management fees increased $348,000 (33.8%) to $1,377,000 for the year ended December 31, 1998 compared to $1,029,000 for the preceding year. Management fees represent revenue from third-party contracts. The increase is primarily due to certain third-party management contracts acquired in connection with the purchase of a portfolio of assets in December 1997. Operating expenses, excluding property taxes increased $57,067,000 (120.7%) to $104,346,000 for the year ended December 31, 1998 compared to $47,279,000 for the preceding year. Overall Portfolio - The increase for the year ended December 31, 1998 is primarily due to additional operating expenses from additional communities attributable to the merger and secondarily due to the addition of newly developed, redeveloped and acquired apartment homes. Maintenance, insurance and other costs associated with Development and Redevelopment Communities are expensed as communities move from the initial construction and lease-up phase to the stabilized operating phase. Established Communities, on a pro forma basis, assuming the merger had occurred on January 1, 1997 - Operating expenses increased $1,711,000 (4.2%) to $42,395,000 for the year ended December 31, 1998 compared to $40,684,000 for the preceding year. The net changes are the result of higher payroll and maintenance costs, offset by lower utility, administrative and insurance costs. Lower insurance costs are directly attributable to better pricing and risk sharing provided by the merger. Property taxes increased $17,346,000 (120.2%) to $31,775,000 for the year ended December 31, 1998 compared to $14,429,000 for the preceding year. Overall Portfolio - The increase for the year ended December 31, 1998 is primarily due to additional expense from additional communities attributable to the merger and secondarily to the addition of newly developed, redeveloped or acquired apartment homes. Property taxes on Development and Redevelopment Communities are expensed as communities move from the initial construction and lease-up phase to the stabilized operating phase. Established Communities, on a pro forma basis, assuming the merger had occurred on January 1, 1997 - Property taxes increased $535,000 (3.6%) to $15,265,000 for the year ended December 31, 1998 compared to $14,730,000 for the preceding year. The increase is primarily the result of 44
47 increased assessments of property values and increased property tax rates on the Mid-Atlantic, Northeast and Midwest communities as well as lower than estimated property tax assessments for our Northern and Southern California communities that resulted in a reduction in 1997 of previously accrued expenses. Interest expense increased $37,673,000 (221.9%) to $54,650,000 for the year ended December 31, 1998 compared to $16,977,000 for the preceding year. The increase is primarily attributable to $600 million of debt assumed in connection with the merger and secondarily to the issuance of unsecured notes in 1998 and 1997. Depreciation and amortization increased $48,261,000 (165.8%) to $77,374,000 for the year ended December 31, 1998 compared to $29,113,000 for the preceding year. The increase is primarily attributable to additional expense from additional communities attributable to the merger and secondarily to developed, redeveloped and acquired communities in 1998 and 1997. General and administrative increased $4,031,000 (79.1%) to $9,124,000 for the year ended December 31, 1998 compared to $5,093,000 for the preceding year. The increase is primarily due to the combination of the two companies and related increase in portfolio size. Equity in income of unconsolidated joint ventures decreased $3,051,000 (53.6%) to $2,638,000 for the year ended December 31, 1998 compared to $5,689,000 for the preceding year. Equity in income of unconsolidated joint ventures represents our share of income from joint ventures. The decrease is primarily due to non-recurring income from the Avalon Grove joint venture in which we were allocated 100% of the lease-up period income prior to the formation of the partnership in December 1997. Interest income increased $2,162,000 (160.6%) to $3,508,000 for the year ended December 31, 1998 compared to $1,346,000 for the preceding year. The increase is primarily due to an increase in interest from participating mortgage notes, including the Fairlane Woods promissory note acquired in August 1998. Gain on sale of communities increased $24,593,000 to $25,270,000 for the year ended December 31, 1999 compared to $677,000 for the preceding year. The increase in the gain on sale of communities is a result of the disposition strategy we implemented in the third quarter of 1998. Capitalization of Fixed Assets and Community Improvements Our policy with respect to capital expenditures is generally to capitalize only non-recurring expenditures. We capitalize improvements and upgrades only if the item: - exceeds $15,000; - extends the useful life of the asset; and - is not related to making an apartment home ready for the next resident. Under this policy, virtually all capitalized costs are non-recurring, as recurring make-ready costs are expensed as incurred. Recurring make-ready costs include the following: - carpet and appliance replacements; - floor coverings; - interior painting; and - other redecorating costs. We capitalize purchases of personal property, such as computers and furniture, only if the item is a new addition and the item exceeds $2,500. We generally expense purchases of personal property made for 45
48 replacement purposes. The application of these policies for the year ended December 31, 1999 resulted in non-revenue generating capitalized expenditures for Stabilized Communities of approximately $207 per apartment home. For the year ended December 31, 1999, we charged to maintenance expense, including carpet and appliance replacements, a total of approximately $32,411,000 for Stabilized Communities or $1,213 per apartment home. We anticipate that capitalized costs per apartment home will gradually rise as the average age of our communities increases. Liquidity and Capital Resources Liquidity. The primary source of liquidity is our cash flows from operations. Operating cash flows have historically been determined by: - the number of apartment homes; - rental rates; - occupancy levels; and - our expenses with respect to these apartment homes. The timing, source and amount of cash flows provided by financing activities and used in investing activities are sensitive to the capital markets environment, particularly to changes in interest rates that are charged to us as changes in interest rates affect our decision as to whether to issue debt securities, borrow money and invest in real estate. Thus, changes in the capital markets environment will affect our plans for the undertaking of construction and development as well as acquisition activity. Cash and cash equivalents decreased from $8,890,000 at December 31, 1998 to $7,621,000 at December 31, 1999 due to the excess of cash used in investing and financing activities over cash provided by operating activities. Net cash provided by operating activities increased by $56,588,000 from $193,478,000 for the year ended December 31, 1998 to $250,066,000 for the year ended December 31, 1999. The increase is primarily from additional operating cash flow from additional communities attributable to the merger, which were part of our portfolio for all of 1999 and the development, redevelopment and acquisition of new communities, offset by the loss of cash flow from communities sold in 1998 and 1999. Net cash used in investing activities decreased by $353,066,000 from $617,685,000 for the year ended December 31, 1998 to $264,619,000 for the year ended December 31, 1999. This decrease in expenditures reflects increased sales of communities and decreased acquisitions, offset by increased construction and reconstruction activity. The decrease in acquisitions is attributable to a shift in our investment focus away from acquisitions and towards development opportunities that offer higher projected yields, primarily in response to the lack of available properties that meet our increased yield requirements combined with a decrease in the availability of cost-effective capital. Net cash provided by financing activities decreased by $413,091,000 from $426,375,000 for the year ended December 31, 1998 to $13,284,000 for the year ended December 31, 1999. The decrease is primarily due to our development activities increasingly being funded through the sale of existing communities as opposed to incurring debt or selling equity, which reflects a reduction in our use of debt financing as opposed to other sources of financing in response to market conditions. Also, dividends paid increased as a result of additional common and preferred shares issued in connection with the merger. Cash and cash equivalents increased from $6,722,000 at December 31, 1997 to $8,890,000 at December 31, 1998 due to the excess of cash provided by financing and operating activities over cash flow used in investing activities. 46
49 Net cash provided by operating activities increased by $99,829,000 from $93,649,000 for the year ended December 31, 1997 to $193,478,000 for the year ended December 31, 1998 primarily due to an increase in operating income from additional communities attributable to the merger as well as increased operating income from existing communities. Net cash used in investing activities increased $196,265,000 from $421,420,000 for the year ended December 31, 1997 to $617,685,000 for the year ended December 31, 1998. This increase primarily reflects increased construction and reconstruction activity, offset by community sales. Net cash provided by financing activities increased by $106,123,000 from $320,252,000 for the year ended December 31, 1997 to $426,375,000 for the year ended December 31, 1998 primarily due to an increase in our use of debt financing as opposed to other sources of financing to fund acquisitions and construction and reconstruction activity. The increase is also offset by an increase in dividends paid as a result of additional common and preferred shares issued in connection with the merger. We regularly review our short and long-term liquidity needs and the adequacy of Funds from Operations, as defined below, and other expected liquidity sources to meet these needs. We believe our principal short-term liquidity needs are to fund: - normal recurring operating expenses; - debt service payments; - the distributions required with respect to our series of preferred stock; - the minimum dividend payments required to maintain our REIT qualification under the Internal Revenue Code of 1986; and - development and redevelopment activity in which we are currently engaged. We anticipate that we can fully satisfy these needs from a combination of cash flows provided by operating activities and capacity under the unsecured facility. We anticipate that we can satisfy any short-term liquidity needs not satisfied by current operating cash flows from our unsecured revolving credit facility. We believe our principal long-term liquidity needs are the repayment of medium and long-term debt, as well as the procurement of long-term debt to refinance construction and other development related short-term debt. We anticipate that no significant portion of the principal of any indebtedness will be repaid prior to maturity. If we do not have funds on hand sufficient to repay our indebtedness, it will be necessary for us to refinance this debt. This refinancing may be accomplished through additional debt financing, which may be collateralized by mortgages on individual communities or groups of communities, by uncollateralized private or public debt offerings or by additional equity offerings. We also anticipate having significant retained cash flow in each year so that when a debt obligation matures, some or all of each maturity can be satisfied from this retained cash. Although we believe we will have the capacity to meet our long-term 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. 47
50 Capital Resources. We intend to match the long-term nature of our real estate assets with long-term cost effective capital to the extent permitted by prevailing market conditions. We have raised approximately $950 million, on a pro forma basis to reflect the merger, in capital markets offerings since January 1998. The following table summarizes capital market activity for both Avalon and the Company since January 1, 1998: <TABLE> <CAPTION> Date Company Description of Offerings ------------------------------------------------------------------------------------------------------------ <S> <C> <C> January 1998 Avalon $100 million unsecured notes offering January 1998 Avalon $26.9 million direct placement of common stock to an institutional investor January 1998 Bay $150 million unsecured notes offering April 1998 Bay $46.5 million public offering of Common Stock July 1998 AvalonBay $250 million unsecured notes offering October 1998 AvalonBay $100 million public offering of Series H Cumulative Redeemable Preferred Stock January 1999 AvalonBay $125 million medium term notes offering July 1999 AvalonBay $150 million medium term notes offering </TABLE> We follow a focused strategy to help facilitate uninterrupted access to capital. This strategy includes: 1. Hiring, training and retaining associates with a strong resident service focus, which should lead to higher rents, lower turnover and reduced operating costs; 2. Managing, acquiring and developing upscale communities in dense locations where the availability of zoned and entitled land is limited to provide consistent, sustained earnings growth; 3. Operating in markets with growing demand, as measured by household formation and job growth, and high barriers-to-entry. We believe these characteristics generally combine to provide a favorable demand-supply balance, which we believe will create a favorable environment for future rental rate growth while protecting existing and new communities from new supply. We expect this strategy to result in a high level of quality to the revenue stream; 4. Maintaining a conservative capital structure largely comprised of equity and with modest, cost-effective leverage. We generally avoid secured debt except in order to obtain low cost, tax-exempt debt. We believe that such a structure should promote an environment whereby current ratings levels can be maintained; 5. Following accounting practices that provide a high level of quality to reported earnings; and 6. Providing timely, accurate and detailed disclosures to the investment community. We believe these strategies provide a disciplined approach to capital access to help position AvalonBay to fund portfolio growth. Capital markets conditions have decreased our access to cost effective capital. See "Future Financing and Capital Needs" for a discussion of our response to the current capital markets environment. The following is a discussion of specific capital transactions, arrangements and agreements. Unsecured Facility Our unsecured revolving credit facility is furnished by a consortium of banks and provides $600,000,000 in short-term credit. We pay these banks an annual facility fee of $900,000 in equal quarterly installments. The unsecured facility bears interest at varying levels tied to the London Interbank Offered Rate (LIBOR) 48
51 based on ratings levels achieved on our unsecured notes and on a maturity selected by us. The current stated pricing is LIBOR plus 0.6% per annum. The unsecured facility matures in July 2001, however we have two one-year extension options. Therefore, subject to certain conditions, we may extend the maturity to July 2003. A competitive bid option is available for borrowings of up to $400,000,000. This option allows banks that are part of the lender consortium to bid to provide us loans at a rate that is lower than the stated pricing provided by the unsecured facility. The competitive bid option may result in lower pricing if market conditions allow. Pricing under the competitive bid option resulted in average pricing of LIBOR plus .50% for balances most recently placed under the competitive bid option. At March 1, 2000, $203,500,000 was outstanding, $75,481,000 was used to provide letters of credit and $321,019,000 was available for borrowing under the unsecured facility. We intend to use borrowings under the unsecured facility for: - capital expenditures; - construction, development and redevelopment costs; - acquisitions of developed or undeveloped communities; - credit enhancement for tax-exempt bonds; and - working capital purposes. Interest Rate Protection Agreements We are not a party to any long-term interest rate agreements, other than interest rate protection and swap agreements on approximately $190 million of our variable rate tax-exempt indebtedness. We intend, however, to evaluate the need for long-term interest rate protection agreements as interest rate market conditions dictate, and we have engaged a consultant to assist in managing our interest rate risks and exposure. Financing Commitments/Transactions Completed In January 1999, we issued $125,000,000 of medium-term unsecured notes bearing interest at 6.58% and maturing in February 2004. Semi-annual interest payments are payable on February 15 and August 15. The net proceeds of approximately $124,000,000 were used to repay amounts outstanding under our unsecured facility. In July 1999, we issued $150,000,000 of unsecured notes bearing interest at 7.50% and maturing in August 2009. Semi-annual interest payments are payable on February 1 and August 1. The net proceeds of approximately $148,400,000 were used to repay amounts outstanding under our unsecured facility. In October 1999, we completed a refinancing of approximately $18,755,000 of variable rate tax-exempt bonds. The bonds have a maturity date of May 1, 2026, are fully amortizing and are credit enhanced by the Federal National Mortgage Association (Fannie Mae). During January 2000, the Company entered into a joint venture agreement with an entity controlled by Multi-Employer Development Partners (MEDP) to develop Avalon on the Sound, a 412 apartment high rise community in New Rochelle, New York, with total capitalized costs estimated to be $93,300,000. The terms of the limited liability company operating agreement contemplate a long-term capital structure comprised of 60% equity and 40% debt. Equity contributions will be funded 25% by AvalonBay and 75% by MEDP. Construction financing that converts to long-term financing following completion of construction will provide the debt capital. Operating cash flow will be distributed 25% to AvalonBay and 75% to MEDP until each receives a 9% return on invested capital. Thereafter, operating cash flow will be distributed equally to AvalonBay and MEDP. Upon a sale to a third party, cash is distributed first to each partner until capital contributions are recovered. Thereafter, sales proceeds are distributed based upon achievement of certain internal rate of return levels. Distributions that result in an internal rate of return to MEDP and the Company of 12-15% are made 40% to AvalonBay and 60% to MEDP. Thereafter, sales proceeds are distributed equally to AvalonBay and MEDP. After three years following completion of 49
52 construction, buy-sell provisions are in effect. AvalonBay will receive construction, development and management fees for services rendered to the joint venture. Registration Statements Filed in Connection with Financings On August 18, 1998, we filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission relating to the sale of up to $750,000,000 of securities. The registration statement provides for the issuance of common stock, preferred stock and debt securities. Future Financing and Capital Needs As of December 31, 1999, we had 21 new communities under construction either by us or by unaffiliated third parties with whom we have entered into forward purchase commitments. As of December 31, 1999, a total estimated cost of $295,071,000 remained to be invested in these communities. In addition, we had four other communities under reconstruction, for which an estimated $71,209,000 remained to be invested as of December 31, 1999. Substantially all of the capital expenditures necessary to complete the communities currently under construction and reconstruction will be funded from: - the remaining capacity under our $600,000,000 unsecured credit facility; - the net proceeds from sales of existing communities; - retained operating cash; and/or the issuance of debt or equity securities. We expect to continue to fund deferred development costs related to future developments from retained operating cash and borrowings under the unsecured facility. We believe these sources of capital will be adequate to take the proposed communities to the point in the development cycle where construction can begin. We have observed and been impacted by a reduction in the availability of cost effective capital beginning in the third quarter of 1998. We cannot assure you that cost effective capital will be available to meet future expenditures required to begin planned reconstruction activity or the construction of the Development Rights. Before planned reconstruction activity or the construction of a Development Right begins, we intend to arrange adequate capital sources to complete these undertakings, although we cannot assure you that we will be able to obtain such financing. In the event that financing cannot be obtained, we may have to abandon Development Rights, write-off associated pursuit costs and forego reconstruction activity; in such event, we will not realize the increased revenues and earnings that we expected from such pursuits, and the related write-off of costs will increase current period expenses and reduce FFO. To meet the balance of our liquidity needs, we will need to arrange additional capacity under our existing unsecured facility, sell additional existing communities and/or issue additional debt or equity securities. While we believe we have the financial position to expand our short term credit capacity and support our capital markets activity, we cannot assure you that we will be successful in completing these arrangements, offerings or sales. The failure to complete these transactions on a cost-effective basis could have a material adverse impact on our operating results and financial condition, including the abandonment of deferred development costs and a resultant charge to earnings. During 1998, the Company determined that it would pursue a disposition strategy for certain assets in markets that did not meet its long-term strategic direction. Under this program, we solicit competing bids from unrelated parties for these individual assets, and consider the sales price and tax ramifications of each proposal. In connection with this disposition program, we disposed of seven communities in 1998 for aggregate net proceeds of approximately $73,900,000. We have disposed of an additional 17 communities and a participating mortgage note since January 1, 1999. The net proceeds from the sale of these assets 50
53 were approximately $310,243,000. We intend to actively seek buyers for the remaining communities held for sale. However, we cannot assure you that these assets can be sold on terms that we consider satisfactory. The remaining assets that we have identified for disposition include land, buildings and improvements and furniture, fixtures and equipment. Total real estate, net of accumulated depreciation, of all communities identified for sale at December 31, 1999 totaled $164,758,000. Certain individual assets are secured by mortgage indebtedness which may be assumed by the purchaser or repaid from our net sales proceeds. Our Consolidated Statements of Operations include net income from the communities held for sale of $11,361,000 for the year ended December 31, 1999. Our Consolidated Statements of Operations include net income from the communities held for sale for the year ended December 31, 1998 of $10,262,000, or $10,724,000 on a pro forma basis assuming the merger had occurred on January 1, 1998. Because the proceeds from the sale of communities are used initially to reduce borrowings under our unsecured facility, the immediate effect of a sale of a community is to reduce Funds from Operations. This is because the yield on a community that is sold exceeds the interest rate on the borrowings that are repaid from such net proceeds. Therefore, changes in the number and timing of dispositions, and the redeployment of the resulting net proceeds, may have a material and adverse effect on our Funds from Operations. 51
54 Debt Maturities The following table details debt maturities for the next five years, excluding the unsecured facility: <TABLE> <CAPTION> (Dollars in thousands) ALL-IN PRINCIPAL BALANCE OUTSTANDING INTEREST MATURITY ----------------------- ---------- ---------- ---------- ------------ COMMUNITY RATE (1) DATE 12-31-98 12-31-99 2000 2001 2002 2003 - ---------------------------------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- ------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> TAX-EXEMPT BONDS FIXED RATE Canyon Creek 6.48% Jun-25 $ 38,052 $ 37,535 $ 554 $ 594 $ 637 $ 684 Waterford 5.88% Aug-14 33,100 33,100 -- -- -- -- City Heights 5.80% Jun-25 20,496 20,263 250 268 288 308 CountryBrook 7.87% Mar-12 19,568 19,264 330 357 386 417 Villa Mariposa 5.88% Mar-17 18,300 18,300 -- -- -- -- Sea Ridge 6.48% Jun-25 17,261 17,026 251 270 289 310 Foxchase I 5.88% Nov-07 16,800 16,800 -- -- -- -- Barrington Hills 6.48% Jun-25 13,020 12,843 190 203 218 234 Rivershore 6.48% Nov-22 10,162 -- -- -- -- -- Foxchase II 5.88% Nov-07 9,600 9,600 -- -- -- -- Fairway Glen 5.88% Nov-07 9,580 9,580 -- -- -- -- Crossbrook 6.48% Jun-25 8,382 8,273 117 126 136 146 Larkspur Canyon 5.50% Jun-25 7,530 7,445 91 98 105 112 Avalon View 7.55% Aug-24 19,085 18,795 330 350 373 397 Avalon at Lexington 6.56% Feb-25 14,843 14,602 255 271 288 307 Avalon Knoll 6.95% Jun-26 13,755 13,580 187 200 214 230 Avalon at Dulles 7.04% Jul-24 12,360 12,360 -- -- -- -- Avalon Fields 7.57% May-27 11,881 11,756 147 157 169 180 Avalon at Hampton II 7.04% Jul-24 11,550 -- -- -- -- -- Avalon at Symphony Glen 7.06% Jul-24 9,780 9,780 -- -- -- -- Avalon West 7.73% Dec-36 8,681 8,632 53 57 61 65 Avalon Landing 6.85% Jun-26 6,809 6,721 95 101 108 116 ------------ ------------ --------- ---------- ----------- ----------- 330,595 306,255 2,850 3,052 3,272 3,506 VARIABLE RATE Avalon Devonshire Dec-25 27,305 27,305 -- -- -- -- Avalon at Fairway Hills I Jun-26 11,500 11,500 -- -- -- -- Laguna Brisas Mar-09 10,400 10,400 -- -- -- -- Avalon at Hampton I Jun-26 8,060 -- -- -- -- -- Avalon Ridge May-26 -- 18,755 -- -- -- -- ------------ ------------ --------- ---------- ----------- ----------- 57,265 67,960 -- -- -- -- CONVENTIONAL LOANS: FIXED RATE $100 Million Unsecured Notes 7.375% Sep-02 100,000 100,000 -- -- 100,000 -- $100 Million Unsecured Notes 6.625% Jan-05 100,000 100,000 -- -- -- -- $110 Million Unsecured Notes 6.875% Dec-07 110,000 110,000 -- -- -- -- $50 Million Unsecured Notes 6.25% Jan-03 50,000 50,000 -- -- -- 50,000 $50 Million Unsecured Notes 6.50% Jan-05 50,000 50,000 -- -- -- -- $50 Million Unsecured Notes 6.625% Jan-08 50,000 50,000 -- -- -- -- $100 Million Unsecured Notes 6.50% Jul-03 100,000 100,000 -- -- -- 100,000 $150 Million Unsecured Notes 6.80% Jul-06 150,000 150,000 -- -- -- -- $125 Million Medium Term Notes 6.58% Feb-04 -- 125,000 -- -- -- -- $150 Million Medium Term Notes 7.50% Jul-09 -- 150,000 -- -- -- -- Governor's Square 7.65% Aug-04 14,064 13,923 153 165 178 193 The Arbors 7.25% May-04 12,870 12,870 -- -- -- -- Gallery Place 7.31% May-01 11,486 11,272 230 11,042 -- -- Cedar Ridge 6.50% Jul-99 1,000 -- -- -- -- -- Avalon Walk II 8.93% Nov-04 12,762 12,541 241 264 288 315 Avalon Pines 8.00% Dec-03 5,329 5,226 121 131 142 4,832 ------------ ------------ --------- ---------- ----------- ----------- 767,511 1,040,832 745 11,602 100,608 155,340 VARIABLE RATE-NONE -- -- -- -- -- -- ------------ ------------ --------- ---------- ----------- ----------- TOTAL INDEBTEDNESS - EXCLUDING CREDIT FACILITY $1,155,371 $1,415,047 $ 3,595 $ 14,654 $ 103,880 $ 158,846 ============ ============ ========= ========== =========== =========== </TABLE> <TABLE> <CAPTION> ----------- ----------- COMMUNITY 2004 THEREAFTER - ---------------------------------- ----------- ----------- <S> <C> <C> TAX-EXEMPT BONDS FIXED RATE Canyon Creek $ 733 $ 34,333 Waterford -- 33,100 City Heights 331 18,818 CountryBrook 451 17,323 Villa Mariposa -- 18,300 Sea Ridge 332 15,574 Foxchase I -- 16,800 Barrington Hills 251 11,747 Rivershore -- -- Foxchase II -- 9,600 Fairway Glen -- 9,580 Crossbrook 157 7,591 Larkspur Canyon 121 6,918 Avalon View 425 16,920 Avalon at Lexington 326 13,155 Avalon Knoll 246 12,503 Avalon at Dulles -- 12,360 Avalon Fields 193 10,910 Avalon at Hampton II -- -- Avalon at Symphony Glen -- 9,780 Avalon West 70 8,326 Avalon Landing 124 6,177 ----------- ----------- 3,760 289,815 VARIABLE RATE Avalon Devonshire -- 27,305 Avalon at Fairway Hills I -- 11,500 Laguna Brisas -- 10,400 Avalon at Hampton I -- -- Avalon Ridge -- 18,755 ----------- ----------- -- 67,960 CONVENTIONAL LOANS: FIXED RATE $100 Million Unsecured Notes -- -- $100 Million Unsecured Notes -- 100,000 $110 Million Unsecured Notes -- 110,000 $50 Million Unsecured Notes -- -- $50 Million Unsecured Notes -- 50,000 $50 Million Unsecured Notes -- 50,000 $100 Million Unsecured Notes -- -- $150 Million Unsecured Notes -- 150,000 $125 Million Medium Term Notes 125,000 -- $150 Million Medium Term Notes -- 150,000 Governor's Square 13,234 -- The Arbors 12,870 -- Gallery Place -- -- Cedar Ridge -- -- Avalon Walk II 11,433 -- Avalon Pines -- -- ----------- ----------- 162,537 610,000 VARIABLE RATE-NONE -- -- ----------- ----------- TOTAL INDEBTEDNESS - EXCLUDING CREDIT FACILITY $ 166,297 $ 967,775 =========== =========== </TABLE> (1) Includes credit enhancement fees, facility fees, trustees, etc. Inflation Substantially all of the leases at the Current Communities are for a term of one year or less. This may enable us to realize increased rents upon renewal of existing leases or the beginning of new leases. Short-term leases generally minimize our risk from the adverse effects of inflation, although these leases generally permit residents to leave at the end of the lease term without penalty. We believe that short-term leases combined with relatively consistent demand allow rents, and therefore cash flow, from our portfolio of apartments to provide an attractive inflation hedge. Year 2000 Compliance The Year 2000 compliance issue arose out of concerns that computer systems would be unable to accurately calculate, store or use a date after December 31, 1999. It was widely believed that this inability could result in a system failure causing disruptions of operations or creating erroneous results. The Year 52
55 2000 issue affected virtually all companies and organizations, and could have potentially affected both information technology and non-information technology systems. In the normal course of business, we completed the replacement and upgrade of our existing hardware and software information systems, resulting in Year 2000 compliance. The vendor that provided our previous accounting software has a compliant version of its product, but growth in our operations required a general ledger system with scope and functionality that is not present in either the system we previously used or the Year 2000 compliant version of that system. Accordingly, we replaced that general ledger system with an enhanced system that provides increased functionality. The implementation of the new general ledger system was completed July 1, 1999, and there have been no apparent effects from the Year 2000 issue. We have not treated the cost of this new system as a Year 2000 expense because the implementation date was not accelerated due to Year 2000 compliance concerns. The cost of the new general ledger system, after considering anticipated efficiencies provided by the new system, has not had a material effect, either beneficial or adverse, on our financial condition or results of operations. We also took action to ensure the compliance of our non-information embedded systems, such as security, heating and cooling, and fire and elevator systems, at each community. We are not aware of any non-information embedded systems at our communities that have functioned improperly as a result of the Year 2000 issue. The total costs incurred to become Year 2000 compliant for all potentially affected systems was approximately $706,000, which was less than our budgeted cost of completion. We did not delay any information technology or non-information technology projects due to our Year 2000 compliance efforts. Funds from Operations For the year ended December 31, 1999, FFO increased to $212,840,000 from $148,487,000 for the year ended December 31, 1998. FFO for the year ended December 31, 1998 reflects the operating results for Avalon through June 4, 1998 and for the combined company after that date. We generally consider Funds from Operations, or FFO, to be an appropriate measure of our operating performance because it helps investors understand our ability to incur and service debt and to make capital expenditures. We believe that to understand our operating results, FFO should be examined with net income as presented in the consolidated financial statements included elsewhere in this report. FFO is determined based on a definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts(R), and is defined as: - net income or loss computed in accordance with GAAP, except that excluded from net income or loss are gains or losses from debt restructuring, other non-recurring items and sales of property; - plus depreciation of real estate assets; and - after adjustments for unconsolidated partnerships and joint ventures. FFO does not represent cash generated from operating activities in accordance with GAAP. Therefore it should not be considered an alternative to net income as an indication of our performance. FFO should also 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. Further, FFO as calculated by other REITs may not be comparable to our calculation of FFO. For the year ended December 31, 1999, FFO increased to $212,840,000 from $148,487,000 for the preceding year. This increase is primarily from additional communities attributable to the merger and secondarily due to the completion of new development and redevelopment communities. Growth in earnings from Established Communities also contributed to the increase. 53
56 FFO for the three months and twelve months ended December 31, 1999 and 1998 respectively are summarized as follows, with cash flows from operating, investing and financing activities provided for comparison purposes (dollars in thousands): <TABLE> <CAPTION> Years ended ------------------------------------- 12-31-99 12-31-98 -------------------- -------------- <S> <C> <C> Net income available to common stockholders $ 132,497 $ 95,403 Depreciation (real estate assets) 107,928 75,614 Joint venture adjustments 751 725 Minority interest expense 1,975 1,770 Gain on sale of communities (47,093) (25,270) Non-recurring adjustments to net income: Non-recurring charges (1) 16,782 -- Extraordinary items -- 245 ------------ ------------ Funds from Operations available to common stockholders $ 212,840 $ 148,487 ============ ============ Net cash provided by operating activities $ 250,066 $ 193,478 ============ ============ Net cash used in investing activities $ (264,619) $ (617,685) ============ ============ Net cash provided by financing activities $ 13,284 $ 426,375 ============ ============ Common shares outstanding 65,758,009 63,887,126 Outstanding units 973,870 894,144 ------------ ------------ Total outstanding shares and units 66,731,879 64,781,270 ============ ============ Average shares outstanding - basic 65,657,921 51,113,206 Effect of dilutive securities 452,743 658,041 ------------ ------------ Average shares outstanding - diluted 66,110,664 51,771,247 ============ ============ </TABLE> (1) Year to date total consists of $16,076 related to management and other organizational changes and $706 for Y2K compliance costs. Management Information Systems We believe that an innovative management information systems infrastructure will be an important element in managing our future growth. This is because timely and accurate collection of financial and resident profile data will enable us to maximize revenue through careful leasing decisions and financial management. We currently employ a proprietary company-wide intranet using a digital network with high-speed digital lines. This network connects all of our communities and offices to central servers in Alexandria, Virginia, providing access to our associates and to AvalonBay's corporate information throughout the country from all locations. We are currently engaged in the development of an innovative on-site property management system and a leasing automation system to enable management to capture, review and analyze data to a greater extent than is possible using existing commercial software. We have entered into a formal joint venture 54
57 agreement, in the form of a limited liability company agreement, with United Dominion Realty Trust, Inc., another public multifamily real estate company, to continue development of these systems and system software, which are collectively referred to in this discussion as the "system." The system development process is currently managed by our employees, who have significant related project management experience, and the employees of the joint venturer. The actual programming and documentation of the system is being conducted by our employees, the employees of our joint venturer and third party consultants under the supervision of these experienced project managers. We currently expect that the total development costs over a three-year period will be approximately $7.5 million including hardware costs and expenses, the costs of employees and related overhead, and the costs of engaging third party consultants. These development costs will be shared on an equal basis by us and our joint venturer. Once developed, we intend to use the property management system in place of current property management information software for which we pay a license fee to third parties, and we intend to use the leasing automation system to make the lease application process easier for residents and more efficient for us to manage. We currently project that the property management system will undergo an on-site test (i.e., a "beta test") during the third quarter of 2000 and that the system will be functional and implemented during 2001. The leasing automation system is currently in beta testing at two communities. We believe that when implemented the system will result in cost savings due to increased data reliability and efficiencies in management time and overhead, and that these savings will largely offset the expense associated with amortizing the system development costs and maintaining the software. We also believe that it is possible that other real estate companies may desire to use the system concept and system software that we are developing and that therefore there may be an opportunity to recover, in the future, a portion of our investment by licensing the system to others. However, at the present time these potential cost savings and ancillary revenue are speculative, and we cannot assure that the system will provide sufficient benefits to offset the cost of development and maintenance. We have never before engaged in the development of systems or system software on this scale and have never licensed a system concept or system software to others. There are a variety of risks associated with the development of the system, both for internal use and for potential sale or licensing to third parties. Among the principal risks associated with this undertaking are the following: - we may not be able to maintain the schedule or budget that we have projected for the development and implementation of the system; - we may be unable to implement the system with the functionality and efficiencies we desire on commercially reasonable terms; - we may decide not to endeavor to license the system to other enterprises, the system may not be attractive to other enterprises, and we may not be able to effectively manage the licensing of the system to other enterprises; and - the system may not provide AvalonBay with meaningful cost savings or a meaningful source of ancillary revenues. The occurrence of any of the events described above could prevent us from achieving increased efficiencies, realizing revenue growth produced by ancillary revenues or recovering our initial investment. 55
58 ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to certain financial market risks, the most predominant being fluctuations in interest rates. Interest rate fluctuations are monitored by us as an integral part of our overall risk management program, which recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effect on our results of operations. The effect of interest rate fluctuations historically has been small relative to other factors affecting operating results, such as rental rates and occupancy. The specific market risks and the potential impact on our operating results are described below. Our operating results are affected by changes in interest rates as a result of borrowing under our variable rate unsecured credit facility as well as issuing bonds with variable interest rates. If interest rates under the variable rate unsecured credit facility and other variable rate indebtedness had been one percent higher throughout 1999, our annual interest costs would have increased by approximately $3,300,000, based on balances outstanding during the year ending December 31, 1999. Changes in interest rates also impact the fair value of our fixed rate debt. If the market interest rate applicable to fixed rate indebtedness with maturities similar to our fixed rate indebtedness had been one percent higher, the fair value of our fixed rate indebtedness on December 31, 1999 would have decreased by approximately $67,000,000, based on balances outstanding at December 31, 1999. We currently use interest rate swap agreements to reduce the impact of interest rate fluctuations on certain variable rate indebtedness. Under swap agreements, (A) we agree to pay to a counterparty the interest that would have been incurred on a fixed principal amount at a fixed interest rate (generally, the interest rate on a particular treasury bond on the date the agreement is entered into, plus a fixed increment), and (B) the counterparty agrees to pay to us the interest that would have been incurred on the same principal amount at an assumed floating interest rate tied to a particular market index. As of December 31, 1999, the effect of swap agreements is to fix the interest rate on approximately $190 million of our variable rate tax-exempt debt. The swap agreements were not electively entered into by us but, rather, were a requirement of either the bond issuer or the credit enhancement provider related to certain of our tax-exempt bond financings. In addition, because the counterparties providing the swap agreements are major financial institutions with AAA credit ratings by the Standard & Poor's Ratings Group and the interest rates fixed by the swap agreements are significantly higher than current market rates for such agreements, we do not believe there is exposure at this time to a default by a counterparty provider. 56
59 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this Item 8 is included as a separate section of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On November 11, 1998, PricewaterhouseCoopers LLP was dismissed and Arthur Andersen LLP was engaged as the principal independent public accountant for the Company. The decision to change accountants was unanimously approved by the Company's Board of Directors. The report of PricewaterhouseCoopers LLP on the financial statements of the Company for the year ended December 31, 1997 did not contain any adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope, or accounting principles. During the Company's fiscal year ended December 31, 1997, and the subsequent interim period through November 11, 1998, there were no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused them to make reference thereto in their report on the financial statements for such year. During the Company's fiscal year ended December 31, 1997, and the subsequent interim period through November 11, 1998, Arthur Andersen LLP was not engaged as an independent accountant to audit either the Company's financial statements or the financial statements of any of its subsidiaries, nor was it consulted regarding the application of the Company's accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT Information pertaining to directors and executive officers of the registrant is incorporated herein by reference to the registrant's Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting of Stockholders to be held on May 10, 2000. ITEM 11. EXECUTIVE COMPENSATION Information pertaining to executive compensation is incorporated herein by reference to the registrant's Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting of Stockholders to be held on May 10, 2000. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information pertaining to security ownership of management and certain beneficial owners of the registrant's Common Stock is incorporated herein by reference to the registrant's Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting of Stockholders to be held on May 10, 2000. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information pertaining to certain relationships and related transactions is incorporated herein by reference to the registrant's Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting of Stockholders to be held on May 10, 2000. 57
60 PART IV <TABLE> <CAPTION> ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K 14(a)(1) FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS <S> <C> Consolidated Financial Statements and Financial Statement Schedule: Report of Independent Accountants F-1 Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 F-6 Notes to Consolidated Financial Statements F-8 14(a)(2) FINANCIAL STATEMENT SCHEDULE Schedule III - Real Estate and Accumulated Depreciation F-30 14(a)(3) EXHIBITS The exhibits listed on the accompanying Index to Exhibits are filed as a part of this report. 14(b) REPORTS ON FORM 8-K </TABLE> No reports on Form 8-K were filed by the Company during the quarter ended December 31, 1999. 58
61 INDEX TO EXHIBITS <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION <S> <C> 3(i).1 -- Articles of Amendment and Restatement of Articles of Incorporation of AvalonBay Communities, Inc. (the "Company"), dated as of June 4, 1998. (Incorporated by reference to Exhibit 3(i).1 to Form 10-Q of the Company filed August 14, 1998.) 3(i).2 -- Articles of Amendment, dated as of October 2, 1998. (Incorporated by reference to Exhibit 3.1(ii) to Form 8-K of the Company filed on October 6, 1998.) 3(i).3 -- Articles Supplementary, dated as of October 13, 1998, relating to the 8.70% Series H Cumulative Redeemable Preferred Stock. (Incorporated by reference to Exhibit 1 to Form 8-A of the Company filed October 14, 1998.) 3(ii).1 -- Bylaws of the Company, as amended and restated, dated as of July 24, 1998. (Incorporated by reference to Exhibit 3(ii).1 to Form 10-Q of the Company filed August 14, 1998.) 3(ii).2 -- Amendment to Bylaws of the Company, dated February 10, 1999. (Incorporated by reference to Exhibit 3(ii).2 to Form 10-K of the Company filed March 31, 1999.) 3(ii).3 -- Amendment to Bylaws of the Company, dated May 5, 1999. (Incorporated by reference to Exhibit 3(ii).3 to Form 10-Q of the Company filed on August 16, 1999.) 4.1 -- Indenture of Avalon Properties, Inc. (hereinafter referred to as "Avalon Properties") dated as of September 18, 1995. (Incorporated by reference to Form 8-K of Avalon Properties dated September 18, 1995.) 4.2 -- First Supplemental Indenture of Avalon Properties dated as of September 18, 1995. (Incorporated by reference to Avalon Properties' Current Report on Form 8-K dated September 18, 1995.) 4.3 -- Second Supplemental Indenture of Avalon Properties dated as of December 16, 1997. (Incorporated by reference to Avalon Properties' Current Report on Form 8-K filed January 26, 1998.) 4.4 -- Third Supplemental Indenture of Avalon Properties dated as of January 22, 1998. (Incorporated by reference to Avalon Properties' Current Report on Form 8-K filed on January 26, 1998.) 4.5 -- Indenture, dated as of January 16, 1998, between the Company and State Street Bank and Trust Company, as Trustee. (Incorporated by reference to Exhibit 4.1 to Form 8-K of the Company filed on January 21, 1998.) 4.6 -- First Supplemental Indenture, dated as of January 20, 1998, between the Company and the Trustee. (Incorporated by reference to Exhibit 4.2 to Form 8-K of the Company filed on January 21, 1998.) 4.7 -- Second Supplemental Indenture, dated as of July 7, 1998, between the Company and the Trustee. (Incorporated by reference to Exhibit 4.2 to Form 8-K of the Company filed on July 9, 1998.) 4.8 -- Third Supplemental Indenture, dated as of December 21, 1998 between the Company and the Trustee, including forms of Floating Rate Note and Fixed Rate Note (Incorporated by reference to Exhibit 4.4 to Form 8-K filed on December 21, 1998.) </TABLE> 59
62 <TABLE> <S> <C> 4.9 -- The Company's 7.375% Senior Note due 2002. (Incorporated by reference to Avalon's Current Report on Form 8-K filed on September 18, 1995.) 4.10 -- The Company's 6.250% Senior Note due 2003. (Incorporated by reference to Exhibit 4.3 to Form 8-K of the Company filed January 21, 1998.) 4.11 -- The Company's 6.500% Senior Note due 2005. (Incorporated by reference to Exhibit 4.4 to Form 8-K of the Company filed January 21, 1998.) 4.12 -- The Company's 6.625% Senior Note due 2008. (Incorporated by reference to Exhibit 4.5 to Form 8-K of the Company filed January 21, 1998.) 4.13 -- The Company's 6.50% Senior Note due 2003. (Incorporated by reference to Exhibit 4.3 to Form 8-K of the Company filed July 9, 1998.) 4.14 -- The Company's 6.625% Senior Note due 2005. (Incorporated by reference to Avalon Properties' Current Report on Form 8-K dated September 18, 1995.) 4.15 -- The Company's 6.80% Senior Note due 2006. (Incorporated by reference to Exhibit 4.4 to Form 8-K of the Company filed July 9, 1998.) 4.16 -- The Company's 6.875% Senior Note due 2007. (Incorporated by reference to Exhibit 4.1 to Avalon Properties' Current Report on Form 8-K filed December 22, 1997.) 4.17 -- Dividend Reinvestment and Stock Purchase Plan of the Company filed September 14, 1999. (Incorporated by reference to Form S-3 of the Company, File No. 333-87063.) 4.18 -- Amendment to the Company's Dividend Reinvestment and Stock Purchase Plan filed on December 17, 1999. (Incorporated by reference to the Prospectus Supplement filed pursuant to Rule 424(b)(2) of the Securities Act of 1933 on December 17, 1999.) 4.19 -- Shareholder Rights Agreement, dated March 9, 1998 (the "Rights Agreement"), between the Company and First Union National Bank (as successor to American Stock Transfer and Trust Company) as Rights Agent (including the form of Rights Certificate as Exhibit B). (Incorporated by reference to Exhibit 4.1 to Form 8-A of the Company filed March 11, 1998.) 4.20 -- Amendment No. 1 to the Rights Agreement, dated as of February 28, 2000, between the Company and the Rights Agent. (Incorporated by reference to Exhibit 4.2 to Form 8-A/A of the Company filed February 28, 2000.) 10.1+ -- Employment Agreement, dated as of March 9, 1998, between the Company and Richard L. Michaux. (Incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company filed August 14, 1998.) 10.2+ -- Employment agreement, dated as of March 9, 1998, between the Company and Charles H. Berman. (Incorporated by reference to Exhibit 10.2 to Form 10-Q of the Company filed August 14, 1998.) 10.3+ -- Employment Agreement, dated as of March 9, 1998, between the Company and Robert H. Slater. (Incorporated by reference to Exhibit 10.3 to Form 10-Q of the Company filed August 14, 1998.) </TABLE> 60
63 <TABLE> <S> <C> 10.4+ -- Employment Agreement, dated as of March 9, 1998, between the Company and Thomas J. Sargeant. (Incorporated by reference to Exhibit 10.4 to Form 10-Q of the Company filed August 14, 1998.) 10.5+ -- Employment Agreement, dated as of March 9, 1998, between the Company and Bryce Blair. (Incorporated by reference to Exhibit 10.5 to Form 10-Q of the Company filed August 14, 1998.) 10.6+ -- Employment Agreement, dated as of March 9, 1998, between the Company and Gilbert M. Meyer. (Incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company filed May 15, 1998.) 10.7+ -- Employment agreement, dated as of March 9, 1998, between the Company and Jeffrey B. Van Horn. (Incorporated by reference to Exhibit 10.2 to Form 10-Q of the Company filed May 15, 1998.) 10.8+ -- Employment agreement, dated as of March 9, 1998, between the Company and Debra L. Shotwell. (Incorporated by reference to Exhibit 10.5 to Form 10-Q of the Company filed May 15, 1998.) 10.9+ -- Avalon Properties, Inc. 1993 Stock Option and Incentive Plan. (Incorporated by reference to Exhibit 10.1 to Avalon Properties' Annual Report to Form 10-K for the year ended December 31, 1993.) 10.10+ -- Avalon Properties, Inc. 1995 Equity Incentive Plan. (Incorporated by reference to Avalon Properties' Proxy Statement for the Annual Meeting of Stockholders held on May 9, 1995.) 10.11+ -- AvalonBay Communities, Inc. 1994 Stock Incentive Plan, as amended and restated on April 13, 1998, and subsequently amended on July 24, 1998 (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q filed November 16, 1998) and amendment thereto, dated May 6, 1999 (incorporated by reference to Exhibit 10.8 to Form 10-Q of the Company filed on August 16, 1999). 10.12+ -- 1996 Non-Qualified Employee Stock Purchase Plan, dated June 26, 1997, as amended and restated. (Incorporated by reference to Exhibit 99.1 to Post-effective Amendment No. 1 to Form S-8 of the Company filed June 26, 1997, File No. 333-16837.) 10.13+ -- 1996 Non-Qualified Employee Stock Purchase Plan - Plan Information Statement dated June 26, 1997. (Incorporated by reference to Exhibit 99.2 to Form S-8 of the company, File No. 333-16837.) 10.14 -- Interest Rate Swap Agreement. (Incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company dated May 13, 1994.) 10.15 -- Registration Rights Agreement between the Company and certain stockholders. (Incorporated by reference to Exhibit 10.2 to Form 10-Q of the Company dated May 13, 1994.) 10.16 -- Office lease dated January 4, 1995. (Incorporated by reference to Exhibit 10.21 to Form 10-Q of the Company dated May 10, 1995.) </TABLE> 61
64 <TABLE> <S> <C> 10.17 -- Form of Agreement of Limited Partnership of Bay Countrybrook, L.P., by and among Bay GP, Inc., the Company and certain other defined Persons. (Incorporated by reference to Exhibit 10.5 to Form 8-K/A of the Company filed July 5, 1996.) 10.18 -- Agreement dated as of May 16, 1997, between the Company, J.E. Butler & Associates, Inc. and AP Companies, Ltd. relating to the formation of Bay Rincon, L.P. (Incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company filed August 14, 1997.) 10.19 -- Agreement of Limited Partnership of Bay Pacific Northwest, L.P. dated as of September 12, 1997, between the Company and certain other defined Persons. (Incorporated by reference to Exhibit 10.1 to Form 8-K of the Company filed October 28, 1997.) 10.20 -- Registration Rights Agreement, dated as of September 23, 1997, between the Company and certain defined Holders of units of limited partnership interests in Bay Pacific Northwest, L.P. (Incorporated by reference to Exhibit 10.2 to Form 8-K of the Company filed October 28, 1997.) 10.21 -- Revolving Loan Agreement, dated as of June 23, 1998, between the Company and Fleet National Bank, Morgan Guaranty Trust Company of New York and Union Bank of Switzerland, each as co-agents. (Incorporated by reference to Exhibit 10.6 to Form 10-Q of the Company filed August 14, 1998.) 10.22 -- Contribution and Exchange Agreement dated November 7, 1997. (Incorporated by reference to Avalon Properties' Current Report on Form 8-K filed November 24, 1997.) 10.23 -- Umbrella Agreement, among the Company, certain subsidiaries of the Company, Citibank, N.A., as collateral agent, and Financial Guaranty Insurance Company. (Incorporated by reference to Exhibit 10.7 to Form 10-Q of the Company dated May 13, 1994.) 10.24 -- Cash Collateral Account, Security, Pledge and Assignment Agreement among the Company, certain subsidiaries of the Company, Citibank, N.A., as collateral agent, and Financial Guaranty Insurance Company. (Incorporated by reference to Exhibit 10.8 to Form 10-Q of the Company dated May 13, 1994.) 10.25 -- Reimbursement Agreements among certain subsidiaries of the Company, Citibank, N.A., as collateral agent, and Financial Guaranty Insurance Company. (Incorporated by reference to Exhibit 10.9 to Form 10-Q of the Company dated May 13, 1994.) 10.26 -- Guaranty Agreements by Bay Asset Group, Inc., a subsidiary of the Company, in favor of Citibank, N.A., as collateral agent for Financial Guaranty Insurance Company. (Incorporated by reference to Exhibit 10.10 to Form 10-Q of the Company dated May 13, 1994.) 10.27 -- Limited Guaranty Agreements by certain subsidiaries of the Company in favor of Citibank, N.A., as collateral agent, and Financial Guaranty Insurance Company. (Incorporated by reference to Exhibit 10.11 to Form 10-Q of the Company dated May 13, 1994.) 10.28 -- Pledge Agreement between Bay Asset Group, Inc., a subsidiary of the Company and Citibank, N.A., as collateral agent for Financial Guaranty Insurance Company. (Incorporated by reference to Exhibit 10.12 to Form 10-Q of the Company dated May 13, 1994.) 10.29 -- Master Reimbursement Agreement between Avalon Properties and certain Management stockholders. (Incorporated by reference to Avalon Properties' Annual Report on Form 10-K for the year ended December 31, 1993.) </TABLE> 62
65 <TABLE> <S> <C> 10.30 -- Master Reimbursement Agreement. (Incorporated by reference to Exhibit 10.23 to Form 10-Q of the Company dated August 11, 1995.) 10.31 -- ISDA Master Agreement (Interest rate swap agreement). (Incorporated by reference to Exhibit 10.24 to Form 10-Q of the Company dated August 11, 1995.) 10.32 -- Cash Collateral Pledge, Security and Custody Agreement. (Incorporated by reference to Exhibit 10.25 to Form 10-Q of the Company dated August 11, 1995.) 10.33 -- Indemnification Agreements between the Company and the Directors of the Company (Incorporated by reference to Exhibit 10.39 to Form 10-K of the Company filed on March 31, 1999.) 10.34 -- Distribution Agreement dated December 21, 1998 among the Company and the Agents, including Administrative Procedures, relating to the medium-term notes. (Incorporated by reference to Exhibit 1.1 to Form 8-K of the Company filed on December 21, 1998.) 10.35+ -- Amendment, dated as of July 30, 1999, to Employment Agreement, dated as of March 9, 1998, between the Company and Richard L. Michaux. (Incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company filed on August 16, 1999.) 10.36+ -- Amendment, dated as of July 30, 1999, to Employment Agreement, dated as of March 9, 1998, between the Company and Bryce Blair. (Incorporated by reference to Exhibit 10.2 to Form 10-Q of the Company filed on August 16, 1999.) 10.37+ -- Amendment, dated as of July 30, 1999, to Employment Agreement, dated as of March 9, 1998, between the Company and Robert H. Slater. (Incorporated by reference to Exhibit 10.3 to Form 10-Q of the Company filed on August 16, 1999.) 10.38+ -- Letters of clarification, dated as of July 30, 1999, to the Employment Agreements of Messrs. Michaux, Blair and Slater. (Incorporated by reference to Exhibit 10.4 to Form 10-Q of the Company filed on August 16, 1999.) 10.39+ -- Separation Agreement, dated as of April 15, 1999, by and between the Company and Jeffrey B. Van Horn. (Incorporated by reference to Exhibit 10.5 to Form 10-Q of the Company filed on August 16, 1999.) 10.40+ -- Separation Agreement, dated as of May 27, 1999, by and between the Company and Charles H. Berman. (Incorporated by reference to Exhibit 10.6 to Form 10-Q of the Company filed on August 16, 1999.) 10.41+ -- Letter agreement regarding departure, dated as of August 26, 1999, by and between the Company and Debra L. Shotwell. 10.42 -- Amendment, dated May 6, 1999, to the Avalon Properties Amended and Restated 1995 Equity Incentive Plan. (Incorporated by reference to Exhibit 10.7 to Form 10-Q of the Company filed on August 16, 1999.) 12.1 -- Statements re: Computation of Ratios. 16.1 -- Letter re: Change in certifying accountant. (Incorporated by reference to Exhibit 16.2 to Form 8-K </TABLE> 63
66 <TABLE> <S> <C> filed November 18, 1998.) 21.1 -- Schedule of Subsidiaries of the Company. 23.1 -- Consent of Arthur Andersen LLP. 23.2 -- Consent of Coopers & Lybrand, L.L.P. 27.1 -- Financial Data Schedule. </TABLE> - -------------- + Management contract or compensatory plan or arrangement required to be filed or incorporated by reference as an exhibit to this Form 10-K pursuant to Item 14(c) of Form 10-K. 64
67 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AVALONBAY COMMUNITIES, INC. <TABLE> <S> <C> Date: March 10, 2000 By: /s/ GILBERT M. MEYER ------------------------------------------------- Gilbert M. Meyer, Executive Chairman of the Board </TABLE> Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. <TABLE> <S> <C> Date: March 10, 2000 By: /s/ GILBERT M. MEYER ----------------------------------------------------------- Gilbert M. Meyer, Executive Chairman of the Board, Director (Principal Executive Officer) Date: March 10, 2000 By: /s/ RICHARD L. MICHAUX ----------------------------------------------------------- Richard L. Michaux, Chief Executive Officer and President, Director (Principal Executive Officer) Date: March 10, 2000 By: /s/ THOMAS J. SARGEANT ----------------------------------------------------------- Thomas J. Sargeant, Chief Financial Officer and Executive VP Financial Services (Principal Financial and Accounting Officer) Date: March 10, 2000 By: /s/ BRUCE A. CHOATE ----------------------------------------------------------- Bruce A. Choate, Director Date: March 10, 2000 By: /s/ MICHAEL A. FUTTERMAN ----------------------------------------------------------- Michael A. Futterman, Director Date: March 10, 2000 By: /s/ JOHN J. HEALY, JR. ----------------------------------------------------------- John J. Healy, Jr., Director Date: March 10, 2000 By: /s/ RICHARD W. MILLER ----------------------------------------------------------- Richard W. Miller, Director Date: March 10, 2000 By: /s/ BRENDA J. MIXSON ----------------------------------------------------------- Brenda J. Mixson, Director Date: March 10, 2000 By: /s/ ALLAN D. SCHUSTER ----------------------------------------------------------- Allan D. Schuster, Director Date: March 10, 2000 By: ----------------------------------------------------------- Lance R. Primis, Director </TABLE> 65
68 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of AvalonBay Communities, Inc.: We have audited the accompanying consolidated balance sheets of AvalonBay Communities, Inc. (a Maryland corporation, the "Company") and subsidiaries as of December 31, 1999 and 1998 (as revised for 1998 - see Note 2), and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended (as revised for 1998 - see Note 2). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AvalonBay Communities, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule of Real Estate and Accumulated Depreciation is presented for purposes of complying with the rules of the Securities and Exchange Commission and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Vienna, Virginia March 3, 2000 F-1
69 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Avalon Properties, Inc. We have audited the consolidated statements of operations, stockholders' equity and cash flows of Avalon Properties, Inc. (the "Company") for the year ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows for the year ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ COOPERS & LYBRAND L.L.P. New York, New York January 13, 1998, except for the 1997 information in Note 10, as to which the date is March 9, 2000 F-2
70 AVALONBAY COMMUNITIES, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share data) <TABLE> <CAPTION> 12-31-99 12-31-98 ----------------- ------------------ <S> <C> <C> ASSETS Real estate: Land $ 663,007 $ 643,562 Buildings and improvements 2,942,866 2,656,674 Furniture, fixtures and equipment 82,467 80,401 ----------------- ------------------ 3,688,340 3,380,637 Less accumulated depreciation (206,962) (120,771) ----------------- ------------------ Net operating real estate 3,481,378 3,259,866 Construction in progress (including land) 395,187 413,822 Communities held for sale 164,758 195,394 ----------------- ------------------ Total real estate, net 4,041,323 3,869,082 Cash and cash equivalents 7,621 8,890 Cash in escrow 8,801 8,453 Resident security deposits 14,113 10,383 Investments in unconsolidated joint ventures 10,702 9,192 Deferred financing costs, net 14,056 13,461 Deferred development costs 12,938 15,489 Participating mortgage notes 21,483 45,483 Prepaid expenses and other assets 23,625 24,580 ----------------- ------------------ TOTAL ASSETS $ 4,154,662 $ 4,005,013 ================= ================== LIABILITIES AND STOCKHOLDERS' EQUITY Variable rate unsecured credit facility $ 178,600 $ 329,000 Unsecured notes 985,000 710,000 Notes payable 430,047 445,371 Dividends payable 44,139 43,323 Payables for construction 18,874 48,150 Accrued expenses and other liabilities 40,226 42,354 Accrued interest payable 28,134 20,664 Resident security deposits 23,980 19,501 ----------------- ------------------ TOTAL LIABILITIES 1,749,000 1,658,363 ----------------- ------------------ Minority interest of unitholders in consolidated partnerships 35,377 32,213 Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value; $25 liquidation value; 50,000,000 shares authorized at both December 31, 1999 and 1998; 18,322,700 shares outstanding at both December 31, 1999 and 1998 183 183 Common stock, $.01 par value; 140,000,000 shares authorized at both December 31, 1999 and 1998; 65,758,009 and 63,887,126 shares outstanding at December 31, 1999 and December 31, 1998, respectively 658 639 Additional paid-in capital 2,442,510 2,386,087 Deferred compensation (3,559) (4,356) Dividends in excess of accumulated earnings (69,507) (68,116) ----------------- ------------------ TOTAL STOCKHOLDERS' EQUITY 2,370,285 2,314,437 ----------------- ------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,154,662 $ 4,005,013 ================= ================== </TABLE> See accompanying notes to consolidated financial statements. Amounts for 1998 have been revised to conform with the 1999 presentation (see note 2). F-3
71 AVALONBAY COMMUNITIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data) <TABLE> <CAPTION> Year ended ----------------------------------------------------------------- 12-31-99 12-31-98 12-31-97 -------------------- -------------------- ------------------- <S> <C> <C> <C> Revenue: Rental income $ 503,132 $ 369,945 $ 169,442 Management fees 1,176 1,377 1,029 Other income 236 81 633 ------------------- ------------------- ------------------ Total revenue 504,544 371,403 171,104 ------------------- ------------------- ------------------ Expenses: Operating expenses, excluding property taxes 134,172 104,346 47,279 Property taxes 42,701 31,775 14,429 Interest expense 74,699 54,650 16,977 Depreciation and amortization 109,759 77,374 29,113 General and administrative 9,502 9,124 5,093 Non-recurring charges 16,782 -- -- ------------------- ------------------- ------------------ Total expenses 387,615 277,269 112,891 ------------------- ------------------- ------------------ Equity in income of unconsolidated joint ventures 2,867 2,638 5,689 Interest income 7,362 3,508 1,346 Minority interest in consolidated partnerships (1,975) (1,770) 174 ------------------- ------------------- ------------------ Income before gain on sale of communities and extraordinary item 125,183 98,510 65,422 Gain on sale of communities 47,093 25,270 677 ------------------- ------------------- ------------------ Income before extraordinary item 172,276 123,780 66,099 Extraordinary item -- (245) (1,183) ------------------- ------------------- ------------------ Net income 172,276 123,535 64,916 Dividends attributable to preferred stock (39,779) (28,132) (19,656) ------------------- ------------------- ------------------ Net income available to common stockholders $ 132,497 $ 95,403 $ 45,260 =================== =================== ================== Per common share: Income before extraordinary item - basic $ 2.02 $ 1.87 $ 1.64 =================== =================== ================== Income before extraordinary item - diluted $ 2.00 $ 1.84 $ 1.63 =================== =================== ================== Extraordinary item - basic and diluted $ -- $ (0.00) $ (0.04) =================== =================== ================== Net income - basic $ 2.02 $ 1.87 $ 1.60 =================== =================== ================== Net income - diluted $ 2.00 $ 1.84 $ 1.59 =================== =================== ================== </TABLE> See accompanying notes to consolidated financial statements. Amounts for 1998 and 1997 have been revised to conform with the 1999 presentation (see note 2). F-4
72 AVALONBAY COMMUNITIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands, except share data) <TABLE> <CAPTION> Shares issued Amount ---------------------------- ------------------- Preferred Common Preferred Common Stock Stock Stock Stock --------------- ------------- ---------- -------- <S> <C> <C> <C> <C> Balance at 12-31-96 8,755,000 25,655,068 $ 88 $ 256 Net income -- -- -- -- Dividends declared to common and preferred stockholders -- -- -- -- Issuance of Common Stock, net of offering costs -- 6,594,509 -- 66 Amortization of deferred compensation -- -- -- -- --------------- ------------- ---------- -------- Balance at 12-31-97 8,755,000 32,249,577 88 322 Net income -- -- -- -- Dividends declared to common and preferred stockholders -- -- -- -- Issuance of Common Stock, net of offering costs -- 1,273,554 -- 13 Issuance of Preferred Stock, net of offering costs 4,000,000 -- 40 -- Stock acquired in connection with the Merger of Bay and Avalon 6,922,786 29,008,909 69 290 Conversion of Preferred Stock to Common Stock (1,355,086) 1,355,086 (14) 14 Amortization of deferred compensation -- -- -- -- --------------- ------------- ---------- -------- Balance at 12-31-98 18,322,700 63,887,126 183 639 Net income -- -- -- -- Dividends declared to common and preferred stockholders -- -- -- -- Issuance of Common Stock -- 1,870,883 -- 19 Amortization of deferred compensation -- -- -- -- --------------- ------------- ---------- -------- Balance at 12-31-99 18,322,700 65,758,009 $ 183 $ 658 ============== ============= ========== ======== <CAPTION> Dividends in Additional excess of paid-in Deferred accumulated Stockholders' capital compensation earnings equity --------------- -------------- --------------- --------------- <S> <C> <C> <C> <C> Balance at 12-31-96 $ 752,237 $ (1,699) $ (12,894) $ 737,988 Net income -- -- 64,916 64,916 Dividends declared to common and preferred stockholders -- -- (75,795) (75,795) Issuance of Common Stock, net of offering costs 235,401 (3,569) -- 231,898 Amortization of deferred compensation -- 2,003 -- 2,003 ------------- -------------- --------------- -------------- Balance at 12-31-97 987,638 (3,265) (23,773) 961,010 Net income -- -- 123,535 123,535 Dividends declared to common and preferred stockholders -- -- (167,878) (167,878) Issuance of Common Stock, net of offering costs 45,267 (4,346) -- 40,934 Issuance of Preferred Stock, net of offering costs 96,195 -- -- 96,235 Stock acquired in connection with the Merger of Bay and Avalon 1,256,987 -- -- 1,257,346 Conversion of Preferred Stock to Common Stock -- -- -- -- Amortization of deferred compensation -- 3,255 -- 3,255 ------------- -------------- --------------- --------------- Balance at 12-31-98 2,386,087 (4,356) (68,116) 2,314,437 Net income -- -- 172,276 172,276 Dividends declared to common and preferred stockholders -- -- (173,667) (173,667) Issuance of Common Stock 56,423 (3,167) -- 53,275 Amortization of deferred compensation -- 3,964 -- 3,964 ------------- -------------- --------------- --------------- Balance at 12-31-99 $ 2,442,510 $ (3,559) $ (69,507) $ 2,370,285 ============= ============== =============== =============== </TABLE> See accompanying notes to consolidated financial statements. Amounts for 1998 and 1997 have been revised to conform with the 1999 presentation (see note 2). F-5
73 AVALONBAY COMMUNITIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) <TABLE> <CAPTION> For the year ended -------------------------------------------------- 12-31-99 12-31-98 12-31-97 ---------------- --------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: <S> <C> <C> <C> Net income $ 172,276 $ 123,535 $ 64,916 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 109,759 77,374 29,113 Amortization of deferred compensation 3,964 3,255 2,003 Decrease (increase) in investments in unconsolidated joint ventures (1,510) 1,139 65 Income allocated to minority interest in consolidated partnerships 1,975 1,770 (174) Gain on sale of communities (47,093) (25,270) (677) Extraordinary item -- 245 1,183 Decrease (increase) in cash in escrow (348) 2,172 966 Increase in resident security deposits, accrued interest on participating mortgage notes, prepaid expenses and other assets (310) (14,383) (7,575) Increase in accrued expenses, other liabilities and accrued interest payable 11,353 23,641 3,829 ----------- ----------- ----------- Net cash provided by operating activities 250,066 193,478 93,649 ----------- ----------- ----------- CASH FLOWS USED IN INVESTING ACTIVITIES: Increase (decrease) in construction payables (29,276) 26,052 3,698 Proceeds from sale of communities, net of selling costs 255,618 118,025 16,577 Sale (acquisition) of participating mortgage note 25,300 (24,000) -- Merger costs and related activities -- (24,562) -- Investment in unconsolidated joint venture -- -- (7,980) Proceeds from joint venture partner -- -- 37,700 Purchase and development of real estate (516,261) (713,200) (471,415) ----------- ----------- ----------- Net cash used in investing activities (264,619) (617,685) (421,420) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common and preferred stock, net of offering costs 53,275 137,169 231,898 Dividends paid (172,333) (126,247) (75,795) Proceeds from sale of unsecured notes 275,000 350,000 -- Payment of deferred financing costs (3,654) (4,435) (3,901) Repayments of notes payable (3,934) (2,391) (25,341) Borrowings under notes payable -- -- 121,891 Refinancings of notes payable 18,755 -- -- Net borrowings under (repayments of) unsecured facilities (150,400) 75,695 71,500 Distributions to minority partners (3,425) (3,416) -- ----------- ----------- ----------- Net cash provided by financing activities 13,284 426,375 320,252 ----------- ----------- ----------- Net increase (decrease) in cash (1,269) 2,168 (7,519) Cash and cash equivalents, beginning of year 8,890 6,722 14,241 ----------- ----------- ----------- Cash and cash equivalents, end of year $ 7,621 $ 8,890 $ 6,722 =========== =========== =========== Cash paid during period for interest, net of amount capitalized $ 60,705 $ 31,405 $ 17,371 =========== =========== =========== </TABLE> See accompanying notes to consolidated financial statements. Amounts for 1998 and 1997 have been revised to conform with the 1999 presentation (see note 2). F-6
74 Supplemental disclosures of non-cash investing and financing activities (dollars in thousands): During the year ended December 31, 1997, the Company assumed $27,305 of debt and issued 464,966 units of limited partnership in DownREIT partnerships, valued at $18,157, in connection with acquisitions. In June 1998, Avalon Properties, Inc. merged into Bay Apartment Communities, whereupon Avalon ceased to exist and Bay legally succeeded to all of the assets and liabilities of Avalon. In these financial statements, the merger was accounted for under the purchase method of accounting whereby Bay, as the surviving legal entity, adopted the historical financial statements of Avalon, and therefore the historical financial statements for Avalon are presented prior to the merger and Bay's assets were recorded in the historical financial statements of Avalon, as of the date of the merger, at an amount equal to Bay's debt outstanding at that time plus the value of capital stock retained by the Bay stockholders, which approximates fair value. As a result, the financial statements presented reflect that, in connection with the merger, the following was assumed or acquired: debt of $604,663; net other liabilities of $25,239; cash and cash equivalents of $1,419; and a minority interest of $9,020. During the year ended December 31, 1998, the Company assumed $10,400 of debt and issued 104,222 units of limited partnership in DownREIT partnerships, valued at $3,851, in connection with acquisitions. A total of 6,818 units of limited partnership were presented for redemption to the DownREIT partnership that issued such units and were acquired by the Company for an equal number of shares of the Company's Common Stock. Additionally, 950,064 shares of Series A Preferred Stock and 405,022 shares of Series B Preferred Stock were converted into an aggregate of 1,355,086 shares of Common Stock. During the year ended December 31, 1999, 117,178 units of limited partnership in DownREIT partnerships, valued at $4,614, were issued in connection with an acquisition for cash and units pursuant to a forward purchase agreement signed in 1997 with an unaffiliated party. Also during the year ended December 31, 1999, 22,623 units of limited partnership were presented for redemption to the DownREIT partnership that issued such units and were acquired by the Company for an equal number of shares of the Company's Common Stock. Common and preferred dividends declared but not paid as of December 31, 1999, 1998 totaled $44,139 and $43,323, respectively. There were no dividends declared that were not paid as of December 31, 1997. F-7
75 AVALONBAY COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1. Organization and Significant Accounting Policies Organization and Recent Developments AvalonBay Communities, Inc. (the "Company," which term is often used to refer to AvalonBay Communities, Inc. together with its subsidiaries) is a Maryland corporation that has elected to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended. The Company focuses on the ownership and operation of institutional-quality apartment communities in high barrier-to-entry markets of the United States. These markets include Northern and Southern California and selected markets in the Mid-Atlantic, Northeast, Midwest and Pacific Northwest regions of the country. The Company is the surviving corporation from the merger (the "Merger") of Bay Apartment Communities, Inc. ("Bay") and Avalon Properties, Inc. (sometimes hereinafter referred to as "Avalon" before the Merger) on June 4, 1998, where Avalon shareholders received 0.7683 share of common stock of the Company for each share owned of Avalon common stock. The merger was accounted for under the purchase method of accounting, with the historical financial statements for Avalon presented prior to the Merger. At that time, Avalon ceased to legally exist, and Bay as the surviving legal entity adopted the historical financial statements of Avalon, with Bay's assets recorded in the historical financial statements of Avalon at an amount equal to Bay's debt outstanding at that time plus the value of capital stock retained by the Bay stockholders, which approximates fair value. All disclosures related to 1997 share and per share information of Avalon have been revised to reflect the 0.7683 share conversion ratio used in the merger. In connection with the Merger, the Company changed its name from Bay Apartment Communities, Inc. to AvalonBay Communities, Inc. At December 31, 1999, the Company owned or held a direct or indirect ownership interest in 122 operating apartment communities containing 36,008 apartment homes in twelve states and the District of Columbia, of which four communities containing 1,455 apartment homes were under reconstruction. The Company also owned 12 communities with 3,173 apartment homes under construction and rights to develop an additional 30 communities that, if developed as expected, will contain an estimated 8,624 apartment homes. During the period January 1, 1998 through June 4, 1998, Avalon acquired four communities containing a total of 1,084 apartment homes from unrelated third parties for an aggregate acquisition price of approximately $75,335. One of these communities had been sold as of December 31, 1999. The cumulative capitalized cost of the remaining three communities at December 31, 1999 was $47,124. During the period subsequent to the Merger through December 31, 1998, the Company acquired three communities containing a total of 1,433 apartment homes from unrelated third parties for an aggregate acquisition price of approximately $201,800 (cumulative capitalized cost of $205,214 as of December 31, 1999). The Company also acquired a participating mortgage note for $24,000 which was sold by the Company for a gross sales price of $25,300 in October 1999. During the year ended December 31, 1999, the Company acquired one community containing 224 apartment homes through a DownREIT partnership for an acquisition price of approximately $25,750, including 117,178 units of limited partnership in the DownREIT partnership valued at $4,614. The community was acquired in connection with a forward purchase agreement signed in 1997 with an unaffiliated party. During 1999, the Company completed development of ten communities, containing 2,335 apartment homes for a total investment of approximately $391,600. Also, during 1999, the Company completed redevelopment of thirteen communities, containing 4,051 apartment homes for a total investment in redevelopment (i.e., excluding acquisition costs) of $77,300. In 1998, the Company adopted a strategy of disposing of certain assets in markets that did not meet its long-term strategic direction. In connection with this strategy, the Company sold seven communities in 1998 containing a total of 2,039 apartment homes for net proceeds of approximately $73,900. During 1999, the Company also sold 16 F-8
76 communities containing 4,464 apartment homes and a participating mortgage note secured by a community for net proceeds of approximately $280,918. This disposition strategy is also enabling redeployment of capital; the net proceeds from these dispositions will be redeployed to develop and redevelop communities currently under construction or reconstruction. Pending such redeployment, the proceeds from the sale of these communities were used to repay amounts outstanding under the Company's variable rate unsecured credit facility. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned partnerships and two joint venture partnerships in addition to four subsidiary partnerships structured as DownREITs. All significant intercompany balances and transactions have been eliminated in consolidation. In each of the four partnerships structured as DownREITs, either AvalonBay or one of our wholly-owned subsidiaries is the general partner, and there are one or more limited partners whose interest in the partnership is represented by units of limited partnership interest. For each DownREIT partnership, limited partners are entitled to receive distributions before any distribution is made to the general partner. Although the partnership agreements for each of the DownREITs are different, generally the distributions paid to the holders of units of limited partnership interests approximate the current AvalonBay common stock dividend rate. Each DownREIT partnership has been structured so that it is unlikely the limited partners will be entitled to a distribution greater than the initial distribution provided for in the partnership agreement. The holders of units of limited partnership interest have the right to present each unit of limited partnership interest for redemption for cash equal to the fair market value of a share of AvalonBay common stock on the date of redemption. In lieu of a cash redemption of a unit by a partner, we may elect to acquire any unit presented for redemption for one share of common stock. Real Estate Significant expenditures which improve or extend the life of an asset are capitalized. The operating real estate assets are stated at cost and consist of land, buildings and improvements, furniture, fixtures and equipment, and other costs incurred during their development, redevelopment and acquisition. Expenditures for maintenance and repairs are charged to operations as incurred. The capitalization of costs during the development of assets (including interest and related loan fees, property taxes and other direct and indirect costs) begins when active development commences and ends when the asset is delivered and a final certificate of occupancy is issued. Cost capitalization during redevelopment of assets (including interest and related loan fees, property taxes and other direct and indirect costs) begins when an apartment home is taken out-of-service for redevelopment and ends when the apartment home redevelopment is completed and the apartment home is placed in-service. The accompanying consolidated financial statements include a charge to expense for unrecoverable deferred development costs related to pre-development communities that are unlikely to be developed. Depreciation is calculated on buildings and improvements using the straight-line method over their estimated useful lives, which range from seven to thirty years. Furniture, fixtures and equipment are generally depreciated using the straight-line method over their estimated useful lives, which range from three years (computer related equipment) to seven years. Lease terms for apartment homes are generally one year or less. Rental income and operating costs incurred during the initial lease-up or post-redevelopment lease-up period are fully recognized as they accrue. If there is an event or change in circumstance that indicates an impairment in the value of a community, the Company's policy is to assess any impairment in value by making a comparison of the current and projected operating cash flows of the community over its remaining useful life, on an undiscounted basis, to the carrying amount of the community. If such carrying amounts are in excess of the estimated projected operating cash flows of the community, the Company F-9
77 would recognize an impairment loss equivalent to an amount required to adjust the carrying amount to its estimated fair market value. The Company has not recognized an impairment loss in 1999, 1998 or 1997 on any of its real estate. Investments in Unconsolidated Joint Ventures Investments in unconsolidated real estate joint ventures are accounted for under the equity method as the Company does not control the significant operating and financial decisions of the joint ventures. The joint venture agreements require that a majority voting interest of the partners approve potential sales, liquidations, significant refinancings, as well as operating budget and capital and financing plans. Income Taxes The Company elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, for the year ended December 31, 1994 and has not revoked such election. A corporate REIT is a legal entity which holds real estate interests and, if certain conditions are met (including but not limited to the payment of a minimum level of dividends to stockholders), the payment of federal and state income taxes at the corporate level is avoided or reduced. Management believes that all such conditions for the avoidance of taxes have been met for the periods presented. Accordingly, no provision for federal and state income taxes has been made. The following summarizes the tax components of the Company's common dividends declared for the years ended December 31, 1999, 1998 and 1997: <TABLE> <CAPTION> % of common dividends declared for: --------------------------------------------------------------------------------------- (AvalonBay) (AvalonBay, (Avalon, prior (Bay, prior post merger) to merger) to merger)(1) (Avalon) (Bay)(1) 1999 1998 1998 1998 1997 1997 ----------------- -------------- -------------- ------------- ----------- --------- <S> <C> <C> <C> <C> <C> <C> Ordinary income 76% 77% 56% 77% 80% 100% 20% rate gain 11% 9% -- 9% 1% -- Unrecaptured Section 1250 gain 13% 14% -- 14% 2% -- Non-taxable return of capital -- -- 44% -- 17% -- </TABLE> (1) Information presented for Bay for periods prior to Merger is unaudited. Dividends declared on all series of the Company's preferred stock in 1999 represented 76.0% of ordinary income, 11.0% of twenty percent rate gain and 13.0% of unrecaptured Section 1250 gain. Dividends declared on all series of the Company's preferred stock subsequent to the Merger through December 31, 1998 represented ordinary income. Dividends declared on all series of Bay's preferred stock during 1998 prior to the Merger and in 1997 represented ordinary income. Dividends declared on all series of Avalon's preferred stock during 1998 prior to the Merger represented ordinary income. Dividends declared on all series of Avalon's preferred stock in 1997 represented 97.0% of ordinary income, 1.0% of twenty percent rate gain and 2.0% of unrecaptured Section 1250 gain. Development Costs of Software for Internal Use The Company has entered into a formal joint venture cost sharing agreement with another public multifamily real estate company to develop a new on-site property management system and a leasing automation system to enable the Company to capture, review and analyze data to a greater degree than the Company found currently possible with third-party software products. The software development process is currently being managed by Company employees who oversee a project team of employees and third-party consultants. Development costs associated with the software project include computer hardware costs, direct labor costs and third-party consultant costs related to programming and documenting the system. The project began in January 1998 and is expected to be fully implemented by March 2001, although no assurance can be provided in this regard. The Company will continue to develop these systems through the joint venture agreement and the total cost of development will be shared equally between the Company and the joint venture partner. Once developed, the Company and the joint venture partner intend to use the property management F-10
78 and leasing systems in place of their respective systems currently in use for which fees are generally paid to third party vendors. Costs associated with the project are accounted for in accordance with the American Institute of Certified Public Accountants' Statement of Position 98-1 ("SOP 98-1") "Accounting for Costs of Computer Software Developed or Obtained for Internal Use." Under SOP 98-1, costs of acquiring hardware and costs of coding, documenting and testing the software are capitalized during the application development stage. Following implementation, capitalized development costs are amortized over the system's estimated useful life and other costs such as training and application maintenance are expensed as incurred. Deferred Financing Costs Deferred financing costs include fees and costs incurred to obtain debt financing and are amortized on a straight-line basis, which approximates the effective interest method, over the shorter of the term of the loan or the related credit enhancement facility, if applicable. Unamortized financing costs are written-off when debt is retired before the maturity date. Cash and Cash Equivalents Cash and cash equivalents include all cash and liquid investments with an original maturity of three months or less from the date acquired. The majority of the Company's cash, cash equivalents, and cash in escrows is held at major commercial banks. Earnings per Common Share In accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", basic earnings per share for the years ended December 31, 1999, 1998 and 1997 is computed by dividing earnings available to common shares (net income less preferred stock dividends) by the weighted average number of shares and Units outstanding during the period. Additionally, other potentially dilutive common shares are considered when calculating earnings per share on a diluted basis. The Company's basic and diluted weighted average shares outstanding for the years ended December 31, 1999, 1998 and 1997 are as follows: <TABLE> <CAPTION> Year ended ------------------------------------------------- 12-31-99 12-31-98 12-31-97 --------------- ------------- ---------- <S> <C> <C> <C> Weighted average common shares outstanding - basic 64,724,799 50,387,258 28,244,845 Weighted average Units outstanding 933,122 725,948 469 ------------- ------------- ------------ Weighted average common shares and Units outstanding - basic 65,657,921 51,113,206 28,245,314 Effect of dilutive securities 452,743 658,041 186,509 ------------- ------------------------------ Weighted average common shares and Units outstanding - diluted 66,110,664 51,771,247 28,431,823 ============= ============= ============ </TABLE> Certain options to purchase shares of common stock in the amount of 2,282,192, 2,643,190 and 899,679 were outstanding during 1999, 1998 and 1997, respectively but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares. Non-recurring Charges In February 1999, the Company announced certain management changes including (i) the departure of three senior officers (including the former President of Avalon) who became entitled to severance benefits in accordance with the F-11
79 terms of their employment agreements with the Company dated as of March 9, 1998 and (ii) elimination of duplicate accounting functions and related employee departures. The Company recorded a non-recurring charge of approximately $16,100 in the first quarter of 1999 related to the expected costs associated with this management realignment and certain related organizational adjustments. Because a plan of management realignment was not in existence on June 4, 1998, the date of the Merger, this charge is not considered a cost of the Merger. Accordingly, the expenses associated with the management realignment have been treated as a non-recurring charge. The charge includes severance and benefits expenses, costs to eliminate duplicate accounting functions and legal fees. Certain former employees have elected to receive their severance benefits in an installment basis for up to twelve months. Accordingly, the Company had a remaining liability of approximately $1,457 at December 31, 1999 related to severance benefits after payments of $14,019 made for the year ended December 31, 1999. The non-recurring charge also includes Year 2000 remediation costs of $706 that has been incurred for the year ended December 31, 1999. Selected information relating to the non-recurring charge is summarized below: <TABLE> <CAPTION> Elimination of duplicate Severance accounting Legal benefits costs fees Total -------------- -------------- --------- ------------ <S> <C> <C> <C> <C> Total non-recurring charge (1) $ 15,476 $ 250 $ 350 $ 16,076 Cash payments (14,019) (250) (252) (14,521) -------------- -------------- --------- ------------ Restructuring liability as of December 31, 1999 $ 1,457 -- $ 98 $ 1,555 ============== ============== ========= ============ (1) Excludes Y2K costs of $706. </TABLE> Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles ("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 years' financial statements to conform with current year presentations. Recently Issued Accounting Standards In June 1997, the Financial Accounting Standards Board issued SFAS No. 131 "Disclosure about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for determining an entity's operating segments and the type and level of financial information to be disclosed. SFAS No. 131 became effective for the Company for the fiscal year ending December 31, 1998. The Company adopted SFAS No. 131 effective with the December 31, 1998 reporting period. F-12
80 In March 1998, the Emerging Issues Task Force of the Financial Accounting Standards Board issued Ruling 97-11 entitled "Accounting for Internal Costs Relating to Real Estate Property Acquisitions," which requires that internal costs of identifying and acquiring operating property be expensed as incurred. Costs associated with the acquisition of non-operating property may still be capitalized. The ruling is effective for acquisitions completed subsequent to March 19, 1998. At December 31, 1999, this ruling does not have a material effect on the Company's consolidated financial statements. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This pronouncement establishes accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. In June 1999, the Financial Accounting Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective date of SFAS No. 133." SFAS No. 137 delays the effective date of SFAS No. 133 for one year, to fiscal years beginning after June 15, 2000. The Company currently plans to adopt this pronouncement effective January 1, 2001, and will determine both the method and impact of adoption, which is expected to be immaterial, prior to that date. 2. Merger Between Bay and Avalon and Revised Financial Presentation Prior to December 31, 1999, the Company accounted for the Merger between Avalon and Bay under the purchase method of accounting, using the historical financial statements of Bay prior to and after the merger. Based on discussions with the Securities and Exchange Commission, the Company agreed to revise its financial presentation as of and for the years ended December 31, 1998 and 1997 to present the merger whereby the historical financial statements for Avalon are presented prior to the Merger. At that time, Avalon ceased to legally exist and Bay as the surviving legal entity adopted the historical financial statements of Avalon, with Bay's assets recorded in the historical financial statements of Avalon at an amount equal to Bay's debt outstanding at that time plus the value of capital stock retained by the Bay stockholders, which approximates fair value. Unaudited quarterly data for the years ended December 31, 1999 and 1998, as shown in Note 12, has also been revised. Except as otherwise stated herein, all information presented in the consolidated financial statements and related notes includes all such revisions. Adjustments have been made in the revised financial statements to reflect the following: - - The financial statements presented for 1997 and the period from January 1, 1998 through the date of the Merger are the historical financial statements of Avalon after giving effect to the number of shares outstanding based on the Merger exchange ratio. - - Assets and liabilities of Avalon as of the Merger date are recorded at historical cost. - - Assets and liabilities of Bay as of the Merger date are recorded at an amount equal to Bay's debt outstanding plus the value of capital stock retained by Bay, which approximates fair value; write-downs of assets or additional accruals have been recorded as additional purchase price. - - The results of operations of the Company for the year ended December 31, 1998 reflect the historical operations of Avalon prior to the Merger and operations of the combined company after the merger date through December 31, 1998. These revisions increased (decreased) previously reported total assets, total stockholders' equity, net income and earnings per share for the years ended December 31, 1998 and 1997 as follows: F-13
81 <TABLE> <CAPTION> 1998 1997 --------------- ---------- <S> <C> <C> Total Assets $ (25,191) $ 212,053 =============== ========== Total Stockholders' equity $ (25,016) $ 168,315 =============== ========== Income before extraordinary item $ 29,346 $ 27,158 Extraordinary item $ (245) $ (1,183) --------------- ---------- Net income $ 29,101 $ 25,975 =============== ========== Net income available to common $ 26,843 $ 13,799 =============== ========== stockholders Per common share: Income before extraordinary item - basic $ 0.48 $ 0.24 =============== ========== Income before extraordinary item - diluted $ 0.47 $ 0.23 =============== ========== Extraordinary item - basic and diluted -- $ (0.04) =============== ========== Net income - basic $ 0.48 $ 0.20 =============== ========== Net income - diluted $ 0.47 $ 0.19 =============== ========== </TABLE> The following unaudited pro forma information has been prepared as if the Merger and related transactions had occurred on January 1, 1998. The pro forma financial information is presented for informational purposes only and is not necessarily indicative of what actual results would have been nor does it purport to represent the results of operations for future periods had the Merger been consummated on January 1, 1998. <TABLE> <CAPTION> Year ended (Unaudited) -------------- 12-31-98 <S> <C> Pro forma total revenue $ 449,085 ================== Pro forma net income available to common stockholders $ 111,114 ================== Per common share: Pro forma net income-basic $ 1.74 ================== Pro forma net income-diluted $ 1.73 ================== </TABLE> 3. Interest Capitalized Capitalized interest associated with communities under development or redevelopment totaled $21,888, $14,724 and $9,024 for the years ended December 31, 1999, 1998 and 1997, respectively. F-14
82 4. Notes Payable, Unsecured Notes and Credit Facility The Company's notes payable, unsecured notes and credit facility are summarized as follows: <TABLE> <CAPTION> 12-31-99 12-31-98 ------------- --------------- <S> <C> <C> Fixed rate mortgage notes payable (conventional and tax-exempt) $ 362,087 $ 388,106 Variable rate mortgage notes payable (tax-exempt) 67,960 57,265 Fixed rate unsecured notes 985,000 710,000 ------------ ------------ Total notes payable and unsecured notes 1,415,047 1,155,371 Variable rate unsecured credit facility 178,600 329,000 ------------- ------------ Total notes payable, unsecured notes and credit facility $ 1,593,647 $ 1,484,371 ============= ============ </TABLE> Mortgage notes payable are collateralized by certain apartment communities and mature at various dates from May 2001 through December 2036. The weighted average interest rate of the Company's variable rate notes and credit facility was 6.9% at December 31, 1999. The weighted average interest rate of the Company's fixed rate notes (conventional and tax-exempt) was 6.9% and 6.7% at December 31, 1999 and 1998, respectively. The maturity schedule for the Company's unsecured notes consists of the following: <TABLE> <CAPTION> Year of Maturity Principal Interest Rate -------------------------------------------------------------- <S> <C> <C> 2002 $ 100,000 7.375% 2003 $ 50,000 6.25% $ 100,000 6.5% 2004 $ 125,000 6.58% 2005 $ 100,000 6.625% $ 50,000 6.5% 2006 $ 150,000 6.8% 2007 $ 110,000 6.875% 2008 $ 50,000 6.625% 2009 $ 150,000 7.5% </TABLE> The Company's unsecured notes contain a number of financial and other covenants with which the Company must comply, including, but not limited to, limits on the aggregate amount of total and secured indebtedness the Company may have on a consolidated basis and limits on the Company's required debt service payments. F-15
83 Scheduled maturities of notes payable and unsecured notes are as follows for the years ending December 31: <TABLE> <S> <C> 2000 $ 3,595 2001 14,654 2002 103,880 2003 158,846 2004 166,297 Thereafter 967,775 ---------- Total notes payable $ 1,415,047 ========= </TABLE> The Company has a $600,000 variable rate unsecured credit facility (the "Unsecured Facility") with Morgan Guaranty Trust Company of New York, Union Bank of Switzerland and Fleet National Bank, serving as co-agents for a syndicate of commercial banks. The Unsecured Facility bears interest at a spread over the London Interbank Offered Rate ("LIBOR") based on rating levels achieved on the Company's unsecured notes and on a maturity selected by the Company. The current stated pricing is LIBOR plus 0.6% per annum (7.1% at December 31, 1999). In addition, the Unsecured Facility includes a competitive bid option (which allows banks that are part of the lender consortium to bid to make loans to the Company at a rate that is lower than the stated rate provided by the Unsecured Facility) for up to $400,000. The Company is subject to certain customary covenants under the Unsecured Facility, including, but not limited to, maintaining certain maximum leverage ratios, a minimum fixed charges coverage ratio, minimum unencumbered assets and equity levels and restrictions on paying dividends in amounts that exceed 95% of the Company's Funds from Operations, as defined therein. The Unsecured Facility matures in July 2001 and has two, one-year extension options. 5. Stockholders' Equity As of December 31, 1999 and 1998, the Company had authorized for issuance 140,000,000 and 50,000,000 of Common and Preferred Stock, respectively. Dividends on the Series C, Series D, Series F, Series G and Series H Preferred Stock are cumulative from the date of original issue and are payable quarterly in arrears on or before the 15th day of each month as stated in the table below. None of the series of Preferred Stock are redeemable prior to the date stated in the table below, but on or after the stated date, may be redeemed for cash at the option of the Company in whole or in part, at a redemption price of $25 per share, plus all accrued and unpaid dividends, if any. The series of Preferred Stock have no stated maturity and are not subject to any sinking fund or mandatory redemptions. In addition, the series of Preferred Stock are not convertible into any other securities of the Company and may be redeemed solely from proceeds of other capital stock of the Company, which may include shares of other series of preferred stock. <TABLE> <CAPTION> Shares outstanding Payable Annual Liquidation Non-redeemable Series December 31, 1999 quarterly rate preference prior to - --------------- ------------------ ------------------------ ---------- ------------ ----------------- <S> <C> <C> <C> <C> <C> C 2,300,000 March, June, September, 8.50% $25 June 20, 2002 December D 3,267,700 March, June, September, 8.00% $25 December 15, 2002 December F 4,455,000 February, May, August, 9.00% $25 February 15, 2001 November G 4,300,000 February, May, August, 8.96% $25 October 15, 2001 November H 4,000,000 March, June, September, 8.70% $25 October 15, 2008 December </TABLE> F-16
84 The Company also has 1,000,000 shares of Series E Junior Participating Cumulative Preferred Stock authorized for issuance pursuant to the Company's Shareholder Rights Agreement. As of December 31, 1999, there were no shares of Series E Preferred Stock outstanding. 6. Investments in Unconsolidated Joint Ventures At December 31, 1999, the Company's investments in unconsolidated joint ventures consisted of a 50% general partnership interest in Falkland Partners, a 49% general partnership interest in Avalon Run and a 50% limited liability company membership interest in Avalon Grove. Also during 1999, the Company entered into a joint venture to develop an on-site property management system and a leasing automation system; the Company's joint venture interest consists of a 60% limited liability company membership interest. The following is a combined summary of the financial position of these joint ventures as of the dates presented. <TABLE> <CAPTION> Unaudited ------------------------ 12-31-99 12-31-98 -------- -------- <S> <C> <C> Assets: Real estate, net $ 94,644 $ 96,419 Other assets 10,666 4,532 -------- -------- Total assets $105,310 $100,951 ======== ======== Liabilities and partners' equity: Mortgage notes payable $ 26,000 $ 26,000 Other liabilities 6,479 4,933 Partners' equity 72,831 70,018 -------- -------- Total liabilities and partners' equity $105,310 $100,951 ======== ======== </TABLE> The following is a combined summary of the operating results of these joint ventures for the periods presented: <TABLE> <CAPTION> Year ended (Unaudited) ----------------------------------------------------- 12-31-99 12-31-98 12-31-97 ---------------- --------------- --------------- <S> <C> <C> <C> Rental income $ 20,781 $ 19,799 $ 16,497 Other income 26 26 44 Operating and other expenses (6,051) (5,591) (5,020) Mortgage interest expense (773) (833) (893) Depreciation and amortization (3,091) (3,044) (1,869) ---------------- --------------- --------------- Net income $ 10,892 $ 10,357 $ 8,759 ================ =============== =============== </TABLE> 7. Communities Held for Sale During 1998, the Company completed a strategic planning effort resulting in a decision to pursue a disposition strategy for certain assets in markets that did not meet its long-term strategic direction. In connection with this strategy, the Company solicits competing bids from unrelated parties for individual assets, and considers the sales price and tax ramifications of each proposal. The Company sold seven communities with a total of 2,039 apartment F-17
85 homes in connection with this strategy in 1998. The aggregate gross sales price for these assets was $126,200, with total net proceeds of $73,900. A portion of the gross sales price was used to repay $50,030 of debt secured by assets sold. The communities sold during 1999 and the respective sales price and net proceeds are summarized on the following page: <TABLE> <CAPTION> Period Apartment Communities Location of sale homes ------------------------------- --------------------------- ------------ ------------- <S> <C> <C> <C> Blairmore Rancho Cordova, CA 1Q99 252 Avalon at Park Center Alexandria, VA 2Q99 492 Avalon at Lake Arbor Mitchellville, MD 2Q99 209 Avalon Station Fredricksburg, VA 2Q99 223 Avalon Gayton Richmond, VA 2Q99 328 Avalon at Boulders Richmond, VA 2Q99 284 The Pointe (1) Fairfield, CA 3Q99 296 Avalon at Willow Lake Indianapolis, IN 3Q99 230 Avalon at Geist Lawrence, IN 3Q99 146 Avalon at Montgomery Cincinnati, OH 4Q99 264 Avalon at Oxford Hill Creve Coeur, MO 4Q99 480 Avalon Heights Madison Heights, MI 4Q99 225 Rivershore Bay Pointe, CA 4Q99 245 Avalon at Hampton I Hampton, VA 4Q99 187 Avalon at Hampton II Hampton, VA 4Q99 231 Avalon Park Manassas, VA 4Q99 372 Fairlane Woods (2) Detroit, MI 4Q99 N/A --- 4,464 ===== <CAPTION> Gross sales Net Communities Debt price proceeds ------------------------------- --------------- -------------- ---------------- <S> <C> <C> <C> Blairmore $ -- $13,250 $ 12,991 Avalon at Park Center -- 44,250 43,820 Avalon at Lake Arbor -- 14,160 13,800 Avalon Station -- 12,734 12,500 Avalon Gayton -- 18,418 18,210 Avalon at Boulders -- 16,075 15,840 The Pointe (1) -- 24,350 23,833 Avalon at Willow Lake -- 14,350 14,055 Avalon at Geist -- 10,300 10,006 Avalon at Montgomery -- 15,600 15,379 Avalon at Oxford Hill -- 29,900 29,443 Avalon Heights -- 15,150 15,115 Rivershore 10,035 13,300 2,205 Avalon at Hampton I 8,060 10,547 1,961 Avalon at Hampton II 11,550 13,028 848 Avalon Park -- 25,800 25,612 Fairlane Woods (2) -- 25,300 25,300 -------- ------ ------ $ 29,645 $316,512 $ 280,918 ======== ======= ======= </TABLE> (1) Proceeds from The Pointe were deposited into an escrow account to facilitate a like-kind exchange transaction. (2) Fairlane Woods was a participating mortgage note, not an owned community. In addition to assets disposed of in connection with this disposition strategy, the Company disposed of two communities in July 1998 in connection with an agreement executed by Avalon in March 1998 which provided for the buyout of certain limited partners in DownREIT V Limited Partnership. Net proceeds from the sale of the two communities, containing an aggregate of 758 apartment homes, were approximately $44,000. The following unaudited pro forma information has been prepared as if the communities sold in connection with the disposition strategy during 1999 and 1998 had been sold as of January 1, 1998. The pro forma financial information is presented for informational purposes only and is not necessarily indicative of what actual results would have been nor does it purport to represent the results of operations for future periods had the dispositions occurred as of January 1, 1998. <TABLE> <CAPTION> Year Ended Year Ended (Unaudited) (Unaudited) ----------- ----------- 12-31-99 12-31-98 <S> <C> <C> Pro forma revenue $ 481,190 $ 320,027 ============= ============ Pro forma net income available to common stockholders $ 123,841 $ 79,525 ============= ============ Per common share: Pro forma net income - basic $ 1.89 $ 1.56 ============= ============ Pro forma net income - diluted $ 1.87 $ 1.54 ============= ============ </TABLE> F-18
86 Management intends to market additional communities for sale during 2000. However, there can be no assurance that such assets will be sold, or that such sales will prove to be beneficial to the Company. The assets targeted for sale include land, buildings and improvements and furniture, fixtures and equipment, and are recorded at the lower of cost or fair value less estimated selling costs. The Company has not recognized a write-down in its real estate to arrive at net realizable value, although there can be no assurance that the Company can sell these assets for amounts that equal or exceed its estimates of net realizable value. At December 31, 1999 and 1998, total real estate, net of accumulated depreciation, subject to sale totaled $164,758 and $195,394, respectively. Certain individual assets are secured by mortgage indebtedness which may be assumed by the purchaser or repaid by the Company from the net sales proceeds. The Company's consolidated statements of operations include net income of the communities held for sale at December 31, 1999 of $11,361, $10,262 and $9,146 for the years ended December 31, 1999, 1998 and 1997, respectively. 8. Commitments and Contingencies Presale Commitments The Company occasionally enters into forward purchase commitments with unrelated third parties which allows the Company to purchase communities upon completion of construction. As of December 31, 1999, the Company has an agreement to purchase nine communities with an estimated 2,753 homes for an estimated aggregate purchase price of $347,052. The Company expects these acquisitions to close at different times through 2002. However, there can be no assurance that such acquisitions will be consummated or consummated on the schedule currently contemplated. As of December 31, 1999 and 1998, the Company had provided interim construction financing of $145,241 and $67,129, respectively, for these communities. Employment Agreements and Arrangements The Company has entered into employment agreements with five executive officers. In addition, during 2000 and prior to March 1, 2000, three other senior officers entered into employment agreements, which are generally similar in structure to those entered into with executive officers but which do not provide for the same level of severance payments. The employment agreements provide for severance payments in the event of a termination of employment (except for a termination by the Company with cause or a voluntary termination by the employee). The initial term of these agreements ends on dates that vary between June 4, 2001 and March 29, 2002. The employment agreements provide for one-year automatic renewals after the initial term unless an advance notice of non-renewal is provided by either party. Upon a change in control, the agreements provide for an automatic extension of three years (two years in the case of senior officers). The employment agreements provide for base salary and incentive compensation in the form of cash awards, stock options and stock grants subject to the discretion of, and attainment of performance goals established by, the Compensation Committee of the Board of Directors. The employment agreements of the executive officers also provide that base salary may be increased during the initial term in amounts determined by the Compensation Committee, and that during any renewal term base salary increases will be equal to the greater of 5% of the prior year's base salary, a factor based on increases in the consumer price index, or an amount determined at the discretion of the Compensation Committee. During the fourth quarter of 1999, the Company adopted an Officer Severance Program (the "Program") for the benefit of those officers of the Company who do not have employment agreements. Under the Program, in the event an officer who is not otherwise covered by a severance arrangement is terminated without cause in connection with a change in control (as defined) of the Company, such officer will generally receive a cash lump sum payment equal to one times the amount of such officer's base salary and cash bonus. F-19
87 Contingencies The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, Management believes the final outcome of such matters will not have a material adverse effect on the financial position or results of operations of the Company. 9. Value of Financial Instruments The Company has historically used interest rate swap agreements (the "Swap Agreements") to reduce the impact of interest rate fluctuations on its variable rate tax-exempt bonds. The Swap Agreements are held for purposes other than trading. The amortization of the cost of the Swap Agreements is included in interest expense. The remaining unamortized cost of the Swap Agreements is included in prepaid expenses and other assets and is amortized over the remaining life of the agreements. As of December 31, 1999, the effect of these Swap Agreements is to fix $190,765 of the Company's tax-exempt debt at an average interest rate of 6.1% with an average maturity of 7 years. The off-balance-sheet risk in these contracts includes the risk of a counterparty not performing under the terms of the contract. The counterparties to these contracts are major financial institutions with AAA credit ratings by the Standard & Poor's Ratings Group. The Company monitors the credit ratings of counterparties and the amount of the Company's debt subject to swap agreements with any one party. Therefore, the Company believes the likelihood of realizing material losses from counterparty nonperformance is remote. The Company has not entered into any interest rate hedge agreements or treasury locks for its conventional unsecured debt. Cash and cash equivalent balances are held with various financial institutions and may at times exceed the applicable Federal Deposit Insurance Corporation limit. 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 from the excess of cash and cash equivalent balances over insurance limits is remote. The following estimated fair values of financial instruments were determined by Management using available market information and established valuation methodologies, including discounted cash flows. Accordingly, the estimates presented are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. - Cash equivalents, rents receivable, accounts payable and accrued expenses, and other liabilities are carried at their face amounts, which reasonably approximate their fair values. - The Company's unsecured credit facility with an aggregate carrying value of $178,600 and $329,000 at December 31, 1999 and 1998, respectively approximates fair value. Bond indebtedness and notes payable with an aggregate carrying value of $1,415,047 and $1,155,371 had an estimated aggregate fair value of $1,346,288 and $1,137,411 at December 31, 1999 and 1998, respectively. 10. Segment Reporting The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," during 1998. SFAS No. 131 established standards for reporting financial and descriptive information about operating segments in annual financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision F-20
88 maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision making group consists primarily of the Company's senior officers. The Company's reportable operating segments include Stable Communities, Developed Communities and Redeveloped Communities: - Stable Communities are communities that 1) have attained stabilized occupancy levels (at least 95% occupancy) and operating costs since the beginning of the prior calendar year (these communities are also known as Established Communities); or 2) were acquired after the beginning of the previous calendar year but were stabilized in terms of occupancy levels and operating costs at the time of acquisition, and remained stabilized throughout the end of the current calendar year. Stable Communities do not include communities where planned redevelopment or development activities have not yet commenced. The primary financial measure for this business segment is Net Operating Income ("NOI"), which represents total revenue less operating expenses and property taxes. With respect to Established Communities, an additional financial measure of performance is NOI for the current year as compared against the prior year and against current year budgeted NOI. With respect to other Stable Communities, performance is primarily based on reviewing growth in NOI for the current period as compared against prior periods within the calendar year and against current year budgeted NOI. - Developed Communities are communities which completed development and attained stabilized occupancy and expense levels during the prior calendar year of presentation. The primary financial measure for this business segment is Operating Yield (defined as NOI divided by total capitalized costs). Performance of Developed Communities is based on comparing Operating Yields against projected yields as determined by Management prior to undertaking the development activity. - Redeveloped Communities are communities that completed redevelopment and attained stabilized occupancy and expense levels during the prior calendar year of presentation. The primary financial measure for this business segment is Operating Yield. Performance for Redeveloped Communities is based on comparing Operating Yields against projected yields as estimated by Management prior to undertaking the redevelopment activity. Other communities owned by the Company which are not included in the above segments are communities that were under development or redevelopment or lease-up at any point in time during the applicable calendar year. The primary performance measure for these assets depends on the stage of development or redevelopment of the community. While under development or redevelopment, Management monitors actual construction costs against budgeted costs as well as economic occupancy. While under lease-up, the primary performance measures for these assets are projected Operating Yield as defined above, lease-up pace compared to budget and rent levels compared to budget. Net Operating Income for each community is generally equal to that community's contribution to Funds from Operations ("FFO"), except that interest expense related to indebtedness secured by an individual community and depreciation and amortization on non-real estate assets are not included in the community's NOI although such expenses decrease the Company's consolidated net income and FFO. 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. F-21
89 In addition to reporting segments based on the above property types, the Company previously reported results within these segments based on the East and West Coast geographic areas. This disclosure was provided as the East and West Coast geographic areas substantially reflected the operating communities of Avalon and Bay, respectively, prior to the Merger. Management currently reviews its operating segments by geographic regions, including Northern and Southern California, Pacific Northwest, Northeast, Mid-Atlantic and Midwest regions. Because the various locations within each individual region have similar economic and other characteristics, Management finds it useful to review the performance of the Company's communities in those locations on a regional, aggregated basis. The accounting policies applicable to the operating segments described above are the same as those described in the summary of significant accounting policies. <TABLE> <CAPTION> Stable Developed Redeveloped Communities Communities Communities Other Total ----------- ----------- ----------- ----- ----- <S> <C> <C> <C> <C> <C> FOR THE YEAR ENDED DECEMBER 31, 1999 TOTAL, ALL SEGMENTS Total revenue $ 348,212 $ 32,820 $ 36,476 $ 85,088 $ 502,596 Net Operating Income $ 243,519 $ 24,678 $ 25,959 $ 55,768 $ 349,924 Gross real estate $ 2,386,523 $ 225,841 $ 288,511 $ 1,088,557 $ 3,989,432 NON-ALLOCATED OPERATIONS Total revenue $ -- $ -- $ -- $ 1,948 $ 1,948 Net Operating Income $ -- $ -- $ -- $ 1,697 $ 1,697 Gross real estate $ -- $ -- $ -- $ 276,994 $ 276,994 TOTAL, AVALONBAY Total revenue $ 348,212 $ 32,820 $ 36,476 $ 87,036 $ 504,544 Net Operating Income $ 243,519 $ 24,678 $ 25,959 $ 57,465 $ 351,621 Gross real estate $ 2,386,523 $ 225,841 $ 288,511 $ 1,365,551 $ 4,266,426 FOR THE YEAR ENDED DECEMBER 31, 1998 TOTAL, ALL SEGMENTS Total revenue $ 266,371 $ 13,032 $ 5,907 $ 83,927 $ 369,237 Net Operating Income $ 183,799 $ 9,572 $ 3,744 $ 54,516 $ 251,631 Gross real estate $ 2,488,123 $ 77,655 $ 41,271 $ 1,261,922 $ 3,868,971 NON-ALLOCATED OPERATIONS Total revenue $ -- $ -- $ -- $ 2,166 $ 2,166 Net Operating Income $ -- $ -- $ -- $ 1,915 $ 1,915 Gross real estate $ -- $ -- $ -- $ 137,485 $ 137,485 TOTAL, AVALONBAY Total revenue $ 266,371 $ 13,032 $ 5,907 $ 86,093 $ 371,403 Net Operating Income $ 183,799 $ 9,572 $ 3,744 $ 56,431 $ 253,546 Gross real estate $ 2,488,123 $ 77,655 $ 41,271 $ 1,399,407 $ 4,006,456 FOR THE YEAR ENDED DECEMBER 31, 1997 TOTAL, ALL SEGMENTS Total revenue $ 129,149 $ 10,661 $ -- $ 30,102 $ 169,912 Net Operating Income $ 85,799 $ 7,464 $ -- $ 21,771 $ 115,034 Gross real estate $ 1,043,662 $ 67,119 $ -- $ 402,515 $ 1,513,296 NON-ALLOCATED OPERATIONS Total revenue $ -- $ -- $ -- $ 1,192 $ 1,192 Net Operating Income $ -- $ -- $ -- $ 410 $ 410 Gross real estate $ -- $ -- $ -- $ 21,690 $ 21,690 TOTAL, AVALONBAY Total revenue $ 129,149 $ 10,661 $ -- $ 31,294 $ 171,104 Net Operating Income $ 85,799 $ 7,464 $ -- $ 22,181 $ 115,444 Gross real estate $ 1,043,662 $ 67,119 $ -- $ 424,205 $ 1,534,986 </TABLE> F-22
90 Operating expenses as reflected on the Consolidated Statements of Operations include $23,950, $18,264 and $6,048 for the years ended December 31, 1999, 1998 and 1997, respectively, of property management overhead costs that are not allocated to individual communities. These costs are not reflected in NOI as shown in the above tables. The amount reflected for "Communities held for sale" on the Consolidated Balance Sheets is net of $18,141 and $16,603 of accumulated depreciation as of December 31, 1999 and 1998, respectively. In June 1998, the Company completed the Merger. For comparative purposes, the 1998 and 1997 segment information for the Company is presented below on a pro forma basis (unaudited) assuming the Merger had occurred as of January 1, 1997. <TABLE> <CAPTION> Stable Developed Redeveloped Communities Communities Communities Other Total -------------- --------------- --------------- --------------- -------------- <S> <C> <C> <C> <C> <C> FOR THE YEAR ENDED 12-31-98 Total revenue $ 254,213 $ 51,570 24,173 $ 116,837 $ 446,793 Net Operating Income 173,570 $ 38,895 16,950 $ 75,404 $ 304,819 Current gross real estate $2,107,129 $277,958 $221,961 $1,279,957 $3,887,005 FOR THE YEAR ENDED 12-31-97 Total revenue $ 204,696 $ 10,661 $ 2,926 $ 77,851 $ 296,134 Net Operating Income $ 139,954 $ 7,464 $ 2,210 $ 53,568 $ 203,196 Current gross real estate $1,535,521 $ 67,119 $ 17,797 $1,262,942 $2,883,379 </TABLE> 11. Stock-Based Compensation Plans The Company has adopted the 1994 Stock Incentive Plan as amended and restated (the "Plan") for the purpose of encouraging and enabling the Company's officers, associates and directors to acquire a proprietary interest in the Company and as a means of aligning management and stockholder interests and expanding management's long-term perspective. Individuals who are eligible to participate in the Plan include officers, other associates, outside directors and other key persons of the Company and its subsidiaries who are responsible for or contribute to the management, growth or profitability of the Company and its subsidiaries. The Plan authorizes (i) the grant of stock options that qualify as incentive stock options under Section 422 of the Internal Revenue Code, (ii) the grant of stock options that do not so qualify, (iii) grants of shares of restricted and unrestricted Common Stock, (iv) grants of deferred stock awards, (v) performance share awards entitling the recipient to acquire shares of Common Stock and (vi) dividend equivalent rights. Under the Plan, a maximum of 2,500,000 shares of Common Stock, plus 9.9% of any net increase in the total number of shares of Common Stock actually outstanding from time to time after April 13, 1998, may be issued. Notwithstanding the foregoing, the maximum number of shares of stock for which Incentive Stock Options may be issued under the Plan shall not exceed 2,500,000 and no awards shall be granted under the Plan after April 13, 2008. For purposes of this limitation, shares of Common Stock which are forfeited, canceled and reacquired by the Company, satisfied without the issuance of Common Stock or otherwise terminated (other than by exercise) shall be added back to the shares of Common Stock available for issuance under the Plan. Stock Options with respect to no more than 300,000 shares of stock may be granted to any one individual participant during any one calendar year period. Options granted to officers and employees under the Plan vest over periods determined by the Compensation Committee of the Board of Directors and expire ten years from the date of grant. Options granted to F-23
91 non-employee directors under the Plan are subject to accelerated vesting under certain limited circumstances and become exercisable on the first anniversary of the date of grant and expire ten years from the date of grant. Restricted stock granted to officers and employees under the Plan vest over periods determined by the Compensation Committee of the Board of Directors which is generally four years, with 20% vesting immediately on the grant date and the remaining 80% vesting equally over the next four years from the date of grant. Restricted stock granted to non-employee directors vests 20% on the date of issuance and 20% on each of the first four anniversaries of the date of issuance. Information with respect to stock options granted under the Plan is as follows: <TABLE> <CAPTION> Average Exercise Price Shares Per Share -------------- ---------------- <S> <C> <C> Options outstanding, December 31, 1996 (1) 722,875 $ 21.70 Exercised (26,251) 21.13 Granted 394,100 36.35 Forfeited (20,350) 26.43 ------------- ------------ Options outstanding, December 31, 1997 (1) 1,070,374 $ 27.02 Exercised (164,924) 21.71 Granted 1,225,132 36.81 Forfeited (244,500) 35.25 ------------- ------------ Options outstanding, December 31, 1998 (1) 1,886,082 $ 32.74 Exercised (311,989) 25.44 Granted 993,084 32.24 Forfeited (533,903) 36.25 ------------- ------------ Options outstanding, December 31, 1999 2,033,274 $ 32.63 ============= ============ Options exercisable: December 31, 1997 343,974 $ 20.91 ============= ============ December 31, 1998 656,925 $ 27.26 ============= ============ December 31, 1999 682,110 $ 30.33 ============= ============ </TABLE> (1) The information presented for Bay for periods prior to June 4, 1998 is unaudited. The following table summarizes information concerning currently outstanding and exercisable options: F-24
92 <TABLE> <CAPTION> Options Outstanding Options Exercisable - --------------------------------------------------------------------------- ----------------------------------- Number Outstanding Weighted Average Weighted Weighted Exercise as of Remaining Average Number Average Price December 31, 1999 Contractual Life Exercise Price Exercisable Exercise Price - --------------------------------------------------------------------------- ----------------------------------- <S> <C> <C> <C> <C> <C> $18.38 60,000 5.24 $ 18.38 60,000 $ 18.38 19.25 6,000 5.35 19.25 6,000 19.25 19.63 19,450 5.55 19.63 19,450 19.63 20.00 101,300 4.19 20.00 101,300 20.00 20.50 6,000 4.27 20.50 6,000 20.50 23.38 40,000 6.07 23.38 30,000 23.38 25.38 15,000 6.33 25.38 15,000 25.38 27.75 44,700 6.66 27.75 37,200 27.75 31.50 216,500 9.80 31.50 -- -- 31.50 50,000 9.80 31.50 -- -- 32.00 458,220 9.13 32.00 -- -- 32.25 8,000 9.85 32.25 -- -- 32.56 10,000 9.09 32.56 -- -- 33.69 1,500 9.55 33.69 -- -- 33.75 1,500 8.97 33.75 500 33.75 33.75 6,500 8.97 33.75 2,165 33.75 33.81 6,000 9.78 33.81 -- -- 33.94 10,000 9.01 33.94 -- -- 34.38 30,000 7.38 34.38 30,000 34.38 34.81 1,500 9.49 34.81 -- -- 35.31 768 9.64 35.31 -- -- 35.31 768 9.71 35.31 -- -- 35.38 4,000 9.69 35.38 -- -- 35.44 6,000 9.69 35.44 -- -- 35.63 1,500 9.68 35.63 -- -- 36.00 70,000 9.36 36.00 -- -- 36.06 768 9.36 36.06 -- -- 36.13 90,000 8.44 36.13 90,000 36.13 36.31 107,100 8.43 36.13 35,664 36.31 36.31 245,000 8.43 36.31 81,585 36.31 36.31 85,500 8.43 36.31 28,472 36.31 36.63 142,700 7.07 36.63 82,700 36.63 36.63 29,500 8.56 36.63 9,824 36.63 37.94 130,000 8.08 37.94 32,500 37.94 38.81 20,000 7.84 38.81 10,000 38.81 39.63 7,500 7.73 39.63 3,750 39.63 =========== ====== ========= ========= ========= 2,033,274 8.23 $ 32.63 682,110 $ 30.33 =========== ====== ========= ========= ========= </TABLE> Options to purchase 3,637,724, 4,488,189 and 348,400 shares of Common Stock were available for grant under the Plan at December 31, 1999, 1998 and 1997, respectively. Before the Merger, Avalon had adopted its 1995 Equity Incentive Plan (the "Avalon 1995 Incentive Plan"). The 1995 Incentive Plan authorized the grant of (i) stock options that qualified as incentive stock options under Section 422 of the Internal Revenue Code, (ii) stock options that did not so qualify, (iii) shares of restricted and unrestricted common stock, (iv) shares of unrestricted common stock and (v) dividend equivalent rights. Under the Avalon 1995 Incentive Plan, a maximum number of 3,315,054 shares (or 2,546,956 shares as adjusted for the Merger) of common stock were issuable, plus any shares of common stock represented by awards under Avalon's 1993 Stock Option and Incentive Plan (the "Avalon 1993 Plan") that were forfeited, canceled, reacquired by Avalon, satisfied without the issuance of common F-25
93 stock or otherwise terminated (other than by exercise). Options granted to officers, non-employee directors and associates under the Avalon 1995 Incentive Plan generally vested over a three-year term, expire ten years from the date of grant and are exercisable at the market price on the date of grant. In connection with the Merger, the exercise prices and the number of options under the Avalon 1995 Incentive Plan and the Avalon 1993 Plan were adjusted to reflect the equivalent Bay shares and exercise prices based on the 0.7683 share conversion ratio used in the Merger. Officers, non-employee directors and associates with Avalon 1995 Incentive Plan options may exercise their adjusted number of options for the Company's Common Stock at the adjusted exercise price. Information with respect to stock options granted under the Avalon 1995 Incentive Plan and the Avalon 1993 Plan is as follows: <TABLE> <CAPTION> Weighted Average Exercise Price Shares Per Share ------------- -------------- <S> <C> <C> Options outstanding, December 31, 1996 810,557 $ 26.99 Exercised (34,814) 26.83 Granted 930,411 38.02 Forfeited (2,806) 28.89 ------------ ------------- Options outstanding, December 31, 1997 1,703,348 $ 33.01 Exercised (49,375) 36.12 Granted 464,227 37.60 Forfeited (65,946) 38.00 ------------ ------------- Options outstanding, December 31, 1998 2,052,254 $ 34.05 Exercised (172,977) 26.97 Granted -- -- Forfeited (50,940) 37.61 ------------ ------------- Options outstanding, December 31, 1999 1,828,337 $ 34.63 ============ ============= Options exercisable: December 31, 1997 722,023 $ 26.84 ============ ============= December 31, 1998 1,014,530 $ 30.26 ============ ============= December 31, 1999 1,268,520 $ 33.22 ============ ============= </TABLE> F-26
94 The following table summarizes information concerning currently outstanding and exercisable options under the Avalon 1995 Incentive Plan and the Avalon 1993 Plan: <TABLE> <CAPTION> Options Outstanding Options Exercisable - ---------------------------------------------------------------------- ------------------------------- Number Outstanding Weighted Average Weighted Weighted Exercise as of Remaining Average Number Average Price December 31, 1999 Contractual Life Exercise Price Exercisable Exercise Price - ---------------------------------------------------------------------- ------------------------------- <S> <C> <C> <C> <C> <C> $26.19 15,366 5.37 $ 26.19 15,366 $ 26.19 26.68 433,876 3.86 26.68 433,876 26.68 26.68 7,683 3.86 26.68 7,683 26.68 27.33 29,529 5.35 27.33 29,529 27.33 27.33 2,305 6.04 27.33 2,305 27.33 27.33 1,152 7.96 27.33 769 27.33 28.15 21,001 6.48 28.15 21,001 28.15 28.31 15,366 6.37 28.31 15,366 28.31 30.10 4,610 4.37 30.10 4,610 30.10 30.26 4,610 6.69 30.26 4,610 30.26 34.98 9,604 6.96 34.98 9,604 34.98 35.31 30,732 7.36 35.31 30,732 35.31 36.44 1,921 7.68 36.44 1,281 36.44 36.61 50,452 8.41 36.61 16,799 36.61 36.69 1,921 8.32 36.69 640 36.69 37.18 5,762 8.37 37.18 1,919 37.18 37.26 384 8.27 37.26 - - 37.58 355,000 8.19 37.58 118,215 37.58 37.66 35,726 7.87 37.66 23,829 37.66 38.15 782,898 7.83 38.15 522,193 38.15 38.72 768 7.86 38.72 512 38.72 39.29 3,457 7.96 39.29 2,306 39.29 39.70 1,921 7.80 39.70 1,281 39.70 39.86 12,293 8.01 39.86 4,094 39.86 ========= ====== ========= ========= ========= 1,828,337 6.84 $ 34.63 1,268,520 $ 33.22 ========= ====== ========= ========= ========= </TABLE> As of June 4, 1998, the date of the Merger, options ceased to be granted under the Avalon 1995 Incentive Plan. Accordingly, there were no options to purchase shares of Common Stock available for grant under the Avalon 1995 Incentive Plan at December 31, 1999 or 1998. Options to purchase 561,232 shares of Common Stock were available for grant under the Avalon 1995 Incentive Plan at December 31, 1997. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its Plans. Accordingly, no compensation expense has been recognized for the stock option portion of the stock-based compensation plan. Had compensation expense for the Company's stock option plan been determined based on the fair value at the grant date for awards under the Plan consistent with the methodology prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share would have been reduced to the following pro forma amounts (unaudited): F-27
95 <TABLE> <CAPTION> Pro Forma ---------------------------------------------------------- Year ended Year ended Year ended 12-31-99 12-31-98 12-31-97 ------------------ ----------------- ---------------- <S> <C> <C> <C> Income before extraordinary items $ 171,748 $ 121,198 $ 65,505 =========== =========== ========== Net income $ 171,748 $ 120,953 $ 64,322 =========== =========== ========== Income before extraordinary item per common share - basic $ 2.01 $ 1.82 $ 1.62 =========== =========== ========== Income before extraordinary item per common share - diluted $ 2.00 $ 1.80 $ 1.61 =========== =========== ========== Net income per share - basic $ 2.01 $ 1.82 $ 1.57 =========== =========== ========== Net income per share - diluted $ 2.00 $ 1.79 $ 1.56 =========== =========== ========== </TABLE> The fair value of the options granted during 1999 is estimated at $3.40 per share on the date of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield of 6.10%, volatility of 17.04%, risk free interest rates of 5.54%, actual number of forfeitures, and an expected life of approximately 3 years. The fair value of the options granted during 1998 is estimated at $3.72 per share on the date of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield of 5.96%, volatility of 16.77%, risk free interest rates of 5.55%, actual number of forfeitures, and an expected life of approximately 3 years. The fair value of the options granted during 1997 is estimated at $5.13 per share on the date of grant using the Binomial option pricing model with the following assumptions: dividend yield ranging from 5.0% to 5.5%, volatility factor of the expected market price of the Company's Common Stock of .142, risk free interest rate ranging from 5.8% to 6.7% and a weighted-average expected life of the options of 8 years. In connection with the Merger, the Company adopted the 1996 Non-Qualified Employee Stock Purchase Plan, as amended and restated (the "1996 ESP Plan"). The primary purpose of the 1996 ESP Plan is to encourage Common Stock ownership by eligible directors, officers and associates (the "Participants") in the belief that such ownership will increase each Participant's interest in the success of the Company. Until January 1, 2000, the 1996 ESP Plan provided for two purchase periods per year. A purchase period was a six month period beginning each January 1 and July 1 and ending each June 30 and December 31, respectively. Beginning on January 1, 2000, there will be one purchase period per year, which will begin May 1 and end October 31. Participants may contribute portions of their compensation during a purchase period and purchase Common Stock at the end thereof. One million shares of Common Stock are reserved for issuance under the 1996 ESP Plan. Participation in the 1996 ESP Plan entitles each Participant to purchase Common Stock at a price which is equal to the lesser of 85% of the closing price for a share of stock on the first day of such purchase period or 85% of the closing price on the last day of such purchase period. The Company issued 35,408 and 23,396 shares under the 1996 ESP Plan for the two purchase periods during the years ending December 31, 1999 and 1998, respectively. F-28
96 12. Quarterly Financial Information (Unaudited) The following summary represents the quarterly results of operations for the years ended December 31, 1999 and 1998: <TABLE> <CAPTION> Three months ended ----------------------------------------------------------------------- 1999 March 31 June 30 September 30 December 31 - ---- -------------- --------------- ---------------- ------------------ <S> <C> <C> <C> <C> Total revenue $ 118,632 $ 122,822 $ 130,747 $ 132,343 Net income available to common stockholders $ 6,355 $ 52,977 $ 24,336 $ 48,829 Net income per common share - basic $ 0.10 $ 0.81 $ 0.37 $ 0.74 Net income per common share - diluted $ 0.10 $ 0.80 $ 0.37 $ 0.73 </TABLE> <TABLE> <CAPTION> Three months ended ------------------------------------------------------------------ 1998 March 31 June 30 September 30 December 31 - ---- ------------- -------------- -------------- --------------- <S> <C> <C> <C> <C> Total revenue $ 56,370 $ 77,297 $ 118,129 $ 119,607 Net income available to common stockholders $ 13,955 $ 13,815 $ 22,089 $ 45,544 Net income per common share - basic $ 0.43 $ 0.33 $ 0.34 $ 0.71 Net income per common share - diluted $ 0.42 $ 0.32 $ 0.34 $ 0.70 </TABLE> The sum of the quarterly net income per common share, basic and diluted, for 1998 are not equal to the full year amounts primarily because of fluctuations in quarterly net income during the year. 13. Subsequent Events During January 2000, the Company sold one community, Avalon Chase, a 360 apartment home community located in Marlton, New Jersey. The net proceeds of approximately $29,325 from the sale of this community will be redeployed to development and redevelopment communities. Pending such redeployment, the proceeds from the sale of this community were primarily used to repay amounts outstanding under the Company's Unsecured Facility. During January 2000, the Company entered into a joint venture agreement with an entity controlled by Multi-Employer Development Partners ("MEDP") to develop Avalon on the Sound, a 412 apartment high rise community in New Rochelle, New York with total capitalized costs estimated to be $93,300. The terms of the limited liability company agreement anticipate a capital structure, after completion of construction, that is comprised of 60% equity and 40% debt. Equity contributions will be funded 25% by the Company and 75% by MEDP. Construction financing that converts to long-term financing following completion will provide the debt capital. Operating cash flow will be distributed 25% to the Company and 75% to MEDP until each receives a 9% return on invested capital. Thereafter, operating cash flow will be distributed equally to the Company and MEDP. Upon a sale to a third party, cash is distributed first to each partner until capital contributions are recovered. Thereafter, sales proceeds are distributed based upon achievement of certain internal rate of return levels ("IRR"). Distributions that result in an IRR to MEDP and the Company of 12-15% are made 40% to the Company and 60% to MEDP. Thereafter, sales proceeds are distributed equally to the Company and MEDP. Following the third year after completion of construction, buy-sell provisions are in effect. The Company will receive construction, development and management fees for services rendered to the joint venture. F-29
97 SCHEDULE III AVALONBAY COMMUNITIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1999 (Dollars in thousands) <TABLE> <CAPTION> Initial Cost ----------------------------- Costs Building/ Subsequent Construction to in Progress & Acquisition/ Land Improvements Construction ----------- -------------- ------------- <S> <C> <C> <C> Current Communities Waterford 11,324 45,717 736 Hampton Place 10,746 43,399 444 Hacienda Gardens 11,610 46,552 800 Amador Oaks 5,276 19,651 1,788 Willow Creek 6,581 26,583 480 Alicante 4,271 17,282 456 Barrington Hills 3,574 14,357 427 Parc Centre at Union Square 4,249 16,820 489 Governor's Square 3,316 13,244 4,431 Crown Ridge 5,982 16,885 7,572 Sunset Towers 3,561 21,324 3,205 City Heights 5,403 21,567 422 Village Square 4,726 19,130 196 Avalon Towers by the Bay 9,154 56,240 469 Crossbrook 3,389 14,816 780 Cedar Ridge 4,230 9,666 11,629 Regatta Bay 7,852 31,445 1,397 Sea Ridge 6,125 24,796 60 Toscana 20,713 99,425 - Carriage Square 11,933 48,313 406 Canyon Creek 11,830 47,828 171 CountryBrook 9,384 34,794 3,343 The Arbors 3,414 15,473 12,675 Avalon at Creekside 6,546 26,301 4,931 The Fountains at River Oaks 8,904 35,126 1,540 Parkside Commons 7,406 29,823 142 Villa Mariposa 9,755 39,419 207 San Marino 6,607 26,673 206 The Promenade 6,786 27,388 167 Foxchase I & II 11,340 45,532 784 Glen Creek 3,598 14,527 212 Fairway Glen 3,341 13,338 368 CentreMark 9,099 39,244 504 Avalon on the Alameda 5,396 50,009 404 Rosewalk at Waterford Park I 11,177 44,896 167 Rosewalk at Waterford Park II 4,637 16,750 234 ViewPointe 23,828 40,375 6,626 Lakeside 22,483 28,207 5,056 Avalon Westside Terrace 5,878 23,708 7,221 Arbor Heights 2,984 17,927 8,547 Warner Oaks 7,045 12,986 6,037 TimberWood 1,210 8,607 4,919 SunScape 6,663 21,647 8,675 Avalon at Pacific Bay 4,871 19,745 7,076 Mill Creek 4,709 16,063 3,362 Villa Serena 4,607 17,001 1,933 <CAPTION> Total Cost ---------------------------------------- Building/ Construction in Progress & Land Improvements Total ------------ ---------------- ---------- <S> <C> <C> <C> Current Communities Waterford 11,324 46,453 57,777 Hampton Place 10,746 43,843 54,589 Hacienda Gardens 11,610 47,352 58,962 Amador Oaks 5,276 21,439 26,715 Willow Creek 6,581 27,063 33,644 Alicante 4,271 17,738 22,009 Barrington Hills 3,574 14,784 18,358 Parc Centre at Union Square 4,249 17,309 21,558 Governor's Square 3,316 17,675 20,991 Crown Ridge 5,982 24,457 30,439 Sunset Towers 3,561 24,529 28,090 City Heights 5,403 21,989 27,392 Village Square 4,726 19,326 24,052 Avalon Towers by the Bay 9,154 56,709 65,863 Crossbrook 3,389 15,596 18,985 Cedar Ridge 4,230 21,295 25,525 Regatta Bay 7,852 32,842 40,694 Sea Ridge 6,125 24,856 30,981 Toscana 20,713 99,425 120,138 Carriage Square 11,933 48,719 60,652 Canyon Creek 11,830 47,999 59,829 CountryBrook 9,384 38,137 47,521 The Arbors 3,414 28,148 31,562 Avalon at Creekside 6,546 31,232 37,778 The Fountains at River Oaks 8,904 36,666 45,570 Parkside Commons 7,406 29,965 37,371 Villa Mariposa 9,755 39,626 49,381 San Marino 6,607 26,879 33,486 The Promenade 6,786 27,555 34,341 Foxchase I & II 11,340 46,316 57,656 Glen Creek 3,598 14,739 18,337 Fairway Glen 3,341 13,706 17,047 CentreMark 9,099 39,748 48,847 Avalon on the Alameda 5,396 50,413 55,809 Rosewalk at Waterford Park I 11,177 45,063 56,240 Rosewalk at Waterford Park II 4,637 16,984 21,621 ViewPointe 23,828 47,001 70,829 Lakeside 22,483 33,263 55,746 Avalon Westside Terrace 5,878 30,929 36,807 Arbor Heights 2,984 26,474 29,458 Warner Oaks 7,045 19,023 26,068 TimberWood 1,210 13,526 14,736 SunScape 6,663 30,322 36,985 Avalon at Pacific Bay 4,871 26,821 31,692 Mill Creek 4,709 19,425 24,134 Villa Serena 4,607 18,934 23,541 <CAPTION> Total Cost, Net Year of Accumulated of Accumulated Completion/ Depreciation Depreciation Encumbrances Acquisition --------------- ---------------- --------------- ---------------- <S> <C> <C> <C> <C> Current Communities Waterford 2,601 55,176 33,100 1985/86 Hampton Place 2,404 52,185 - 1992/94 Hacienda Gardens 2,612 56,350 - 1988/94 Amador Oaks 1,188 25,527 - 1989/97 Willow Creek 1,642 32,002 - 1985/94 Alicante 971 21,038 - 1992/94 Barrington Hills 827 17,531 12,843 1986/94 Parc Centre at Union Square 967 20,591 - 1973/96 Governor's Square 816 20,175 13,923 1976/97 Crown Ridge 1,367 29,072 - 1973/96 Sunset Towers 1,499 26,591 - 1961/96 City Heights 1,219 26,173 20,263 1990/95 Village Square 1,058 22,994 - 1972/94 Avalon Towers by the Bay 477 65,386 - 1999 Crossbrook 793 18,192 8,273 1986/94 Cedar Ridge 1,133 24,392 - 1975/97 Regatta Bay 1,829 38,865 - 1973/94 Sea Ridge 1,364 29,617 17,026 1971/95 Toscana 4,993 115,145 - 1997 Carriage Square 2,672 57,980 - 1995 Canyon Creek 2,585 57,244 37,535 1995 CountryBrook 2,126 45,395 19,264 1985/96 The Arbors 1,219 30,343 12,870 1966/97 Avalon at Creekside 1,494 36,284 - 1962/97 The Fountains at River Oaks 1,978 43,592 - 1990/96 Parkside Commons 1,647 35,724 - 1991/96 Villa Mariposa 2,144 47,237 18,300 1986 San Marino 1,482 32,004 - 1984/88 The Promenade 1,522 32,819 - 1987/95 Foxchase I & II 2,411 55,245 26,400 1986/87 Glen Creek 821 17,516 - 1989 Fairway Glen 748 16,299 9,580 1986 CentreMark 1,467 47,380 - 1999 Avalon on the Alameda 1,018 54,791 - 1999 Rosewalk at Waterford Park I 2,473 53,767 - 1997 Rosewalk at Waterford Park II 428 21,193 - 1999 ViewPointe 2,730 68,099 - 1989/97 Lakeside 2,097 53,649 - 1969/97 Avalon Westside Terrace 1,440 35,367 - 1966/97 Arbor Heights 1,191 28,267 - 1970/97 Warner Oaks 840 25,228 - 1979/98 TimberWood 787 13,949 - 1972/97 SunScape 1,854 35,131 - 1972/97 Avalon at Pacific Bay 1,171 30,521 - 1971/97 Mill Creek 1,098 23,036 - 1973/96 Villa Serena 1,077 22,464 - 1990/97 </TABLE> F-30
98 AVALONBAY COMMUNITIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1999 (Dollars in thousands) <TABLE> <CAPTION> Initial Cost ----------------------------- Building/ Costs Construction Subsequent in Progress & to Land Improvements Construction ----------- -------------- ------------- <S> <C> <C> <C> Amberway 10,285 7,249 3,455 Laguna Brisas 656 16,588 1,376 Lafayette Place 1,975 3,831 4,283 Larkspur Canyon 2,517 9,258 1,079 Mission Bay Club 9,922 40,633 10,001 Gateway Tower 2,768 20,134 1,424 Mission Woods 2,710 10,924 7,910 SummerWalk 2,760 9,391 1,946 Waterhouse Place 2,109 13,514 5,048 The Verandas at Bear Creek 6,786 27,035 561 Gallery Place 4,558 17,504 3,872 Avalon Ridge 3,066 18,268 7,258 Avalon Westhaven 2,316 6,769 3,434 Avalon at Prudential Center 25,811 103,233 2,893 Longwood Towers 4,219 35,484 2,102 Avalon at Center Place - 26,816 179 Avalon Summit 1,743 14,654 71 Avalon at Lexington 2,124 12,599 189 Avalon at Faxon Park 1,136 13,960 135 Avalon West 943 9,881 - Avalon Oaks 2,129 18,139 306 Avalon Walk I & II 9,102 48,796 736 Avalon Glen 5,956 23,993 774 Avalon Gates 4,414 31,305 46 Hanover Hall 7,510 29,750 1,635 Avalon Springs 2,116 14,512 1 Avalon Valley 2,277 22,516 402 Avalon Lake 3,314 13,163 203 Avalon Pavilions 11,256 45,159 1,093 Avalon Commons 4,679 28,552 24 Avalon Towers 3,118 12,712 604 Avalon Court 3,083 15,862 9 Avalon Cove 8,760 82,356 40 The Tower at Avalon Cove 3,738 43,002 404 Avalon Chase 4,718 18,992 220 Avalon Watch 5,585 22,394 759 Avalon Crest 11,468 42,899 526 Avalon Run East 1,579 14,668 - Avalon Gardens 8,428 45,561 149 Avalon View 3,529 14,140 262 Avalon Green 1,820 10,525 187 The Avalon 2,489 25,466 173 Avalon at Fairway Hills I & II 8,612 34,463 708 Avalon at Symphony Glen 1,594 6,384 528 Avalon Landing 1,849 7,409 167 Avalon Birches 2,678 10,842 281 Avalon Pines 1,714 6,958 121 Avalon at Ballston - Vermont & Quincy Towers 9,340 37,360 173 Avalon Crescent 13,851 43,401 - <CAPTION> Total Cost ---------------------------------------- Building/ Construction in Progress & Land Improvements Total ------------ ---------------- ---------- <S> <C> <C> <C> Amberway 10,285 10,704 20,989 Laguna Brisas 656 17,964 18,620 Lafayette Place 1,975 8,114 10,089 Larkspur Canyon 2,517 10,337 12,854 Mission Bay Club 9,922 50,634 60,556 Gateway Tower 2,768 21,558 24,326 Mission Woods 2,710 18,834 21,544 SummerWalk 2,760 11,337 14,097 Waterhouse Place 2,109 18,562 20,671 The Verandas at Bear Creek 6,786 27,596 34,382 Gallery Place 4,558 21,376 25,934 Avalon Ridge 3,066 25,526 28,592 Avalon Westhaven 2,316 10,203 12,519 Avalon at Prudential Center 25,811 106,126 131,937 Longwood Towers 4,219 37,586 41,805 Avalon at Center Place - 26,995 26,995 Avalon Summit 1,743 14,725 16,468 Avalon at Lexington 2,124 12,788 14,912 Avalon at Faxon Park 1,136 14,095 15,231 Avalon West 943 9,881 10,824 Avalon Oaks 2,129 18,445 20,574 Avalon Walk I & II 9,102 49,532 58,634 Avalon Glen 5,956 24,767 30,723 Avalon Gates 4,414 31,351 35,765 Hanover Hall 7,510 31,385 38,895 Avalon Springs 2,116 14,513 16,629 Avalon Valley 2,277 22,918 25,195 Avalon Lake 3,314 13,366 16,680 Avalon Pavilions 11,256 46,252 57,508 Avalon Commons 4,679 28,576 33,255 Avalon Towers 3,118 13,316 16,434 Avalon Court 3,083 15,871 18,954 Avalon Cove 8,760 82,396 91,156 The Tower at Avalon Cove 3,738 43,406 47,144 Avalon Chase 4,718 19,212 23,930 Avalon Watch 5,585 23,153 28,738 Avalon Crest 11,468 43,425 54,893 Avalon Run East 1,579 14,668 16,247 Avalon Gardens 8,428 45,710 54,138 Avalon View 3,529 14,402 17,931 Avalon Green 1,820 10,712 12,532 The Avalon 2,489 25,639 28,128 Avalon at Fairway Hills I & II 8,612 35,171 43,783 Avalon at Symphony Glen 1,594 6,912 8,506 Avalon Landing 1,849 7,576 9,425 Avalon Birches 2,678 11,123 13,801 Avalon Pines 1,714 7,079 8,793 Avalon at Ballston - Vermont & Quincy Towers 9,340 37,533 46,873 Avalon Crescent 13,851 43,401 57,252 <CAPTION> Total Cost, Net Year of Accumulated of Accumulated Completion/ Depreciation Depreciation Encumbrances Acquisition --------------- ---------------- --------------- ---------------- <S> <C> <C> <C> <C> Amberway 569 20,420 - 1983/98 Laguna Brisas 1,076 17,544 10,400 1988/98 Lafayette Place 465 9,624 - 1956/96 Larkspur Canyon 594 12,260 7,445 1984/96 Mission Bay Club 2,287 58,269 - 1969/97 Gateway Tower 1,301 23,025 - 1973/98 Mission Woods 1,043 20,501 - 1960/97 SummerWalk 650 13,447 - 1982/97 Waterhouse Place 979 19,692 - 1990/97 The Verandas at Bear Creek 1,488 32,894 - 1998 Gallery Place 1,230 24,704 11,272 1991/97 Avalon Ridge 1,112 27,480 18,755 1987/88 Avalon Westhaven 543 11,976 - 1989/97 Avalon at Prudential Center 5,300 126,637 - 1998 Longwood Towers 4,232 37,573 - 1993 Avalon at Center Place 2,267 24,728 - 1997 Avalon Summit 1,823 14,645 - 1996 Avalon at Lexington 2,280 12,632 14,602 1994 Avalon at Faxon Park 967 14,264 - 1998 Avalon West 1,155 9,669 8,632 1996 Avalon Oaks 538 20,036 - 1999 Avalon Walk I & II 8,691 49,943 12,541 1992/94 Avalon Glen 4,432 26,291 - 1991 Avalon Gates 2,752 33,013 - 1997 Hanover Hall 1,146 37,749 - 1961/98 Avalon Springs 1,383 15,246 - 1996 Avalon Valley 508 24,687 - 1999 Avalon Lake 293 16,387 - 1999 Avalon Pavilions 8,873 48,635 - 1990/92 Avalon Commons 2,366 30,889 - 1997 Avalon Towers 1,728 14,706 - 1995 Avalon Court 1,211 17,743 - 1997 Avalon Cove 8,054 83,102 - 1997 The Tower at Avalon Cove 988 46,156 - 1999 Avalon Chase 2,225 21,705 - 1996 Avalon Watch 4,629 24,109 - 1988 Avalon Crest 843 54,050 - 1999 Avalon Run East 1,623 14,624 - 1996 Avalon Gardens 3,063 51,075 - 1998 Avalon View 2,819 15,112 18,795 1993 Avalon Green 1,610 10,922 - 1995 The Avalon 318 27,810 - 1999 Avalon at Fairway Hills I & II 4,659 39,124 11,500 1987/96 Avalon at Symphony Glen 1,377 7,129 9,780 1986 Avalon Landing 1,178 8,247 6,721 1995 Avalon Birches 1,723 12,078 - 1995 Avalon Pines 852 7,941 5,226 1996 Avalon at Ballston - Vermont & Quincy Towers 3,553 43,320 - 1997 Avalon Crescent 3,880 53,372 - 1996 </TABLE> F-31
99 AVALONBAY COMMUNITIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1999 (Dollars in thousands) <TABLE> <CAPTION> Initial Cost ---------------------------- Building/ Costs Construction Subsequent in Progress & to Land Improvements Construction ----------- -------------- ------------- <S> <C> <C> <C> Avalon at Ballston - Washington Towers 7,291 29,177 540 Avalon at Cameron Court 10,292 32,569 362 AutumnWoods 6,096 24,400 294 Avalon at Fair Lakes 4,334 19,091 36 Avalon at Dulles 2,302 9,215 227 Avalon at Providence Park 2,152 8,907 91 Avalon Woods 1,490 6,643 528 Avalon at Decoverly 6,157 24,800 301 Avalon Knoll 1,528 6,136 509 Avalon Fields I & II 4,047 18,431 186 Avalon Crossing 2,207 11,683 - 4100 Massachusetts Avenue 6,848 27,614 681 Avalon at Danada Farms 7,535 30,444 89 Avalon at West Grove 5,149 21,473 2,537 Avalon at Stratford Green 4,326 17,569 13 Avalon at Devonshire 7,250 29,641 21 The Gates of Edinburg 3,541 14,758 136 Avalon at Town Centre 3,450 14,449 37 Avalon at Town Square 2,099 8,642 12 Avalon at Woodbury 5,033 20,470 5 ----------- -------------- ------------- 679,750 2,885,715 196,046 ----------- -------------- ------------- Development Communities - ----------------------- Avalon Corners 4,214 25,963 - Avalon Court North 3,996 34,515 - Avalon Willow 4,139 34,963 - Avalon at Fox Mill 1,989 16,894 - Avalon Essex - 14,727 - Avalon Haven - 3,033 - Avalon at Florham Park - 16,880 - Avalon River Mews - 20,747 - Avalon Bellevue - 9,543 - Avalon at Arlington Square I - 25,859 - Avalon on the Sound - 4,022 - Avalon Estates - 2,623 - ----------- -------------- ------------- 14,338 209,769 - ----------- -------------- ------------- Corporate 3,579 10,596 266,633 ----------- -------------- ------------- 697,667 3,106,080 462,679 =========== ============== ============= <CAPTION> Total Cost ---------------------------------------- Building/ Construction in Progress & Land Improvements Total ------------ ---------------- ---------- <S> <C> <C> <C> Avalon at Ballston - Washington Towers 7,291 29,717 37,008 Avalon at Cameron Court 10,292 32,931 43,223 AutumnWoods 6,096 24,694 30,790 Avalon at Fair Lakes 4,334 19,127 23,461 Avalon at Dulles 2,302 9,442 11,744 Avalon at Providence Park 2,152 8,998 11,150 Avalon Woods 1,490 7,171 8,661 Avalon at Decoverly 6,157 25,101 31,258 Avalon Knoll 1,528 6,645 8,173 Avalon Fields I & II 4,047 18,617 22,664 Avalon Crossing 2,207 11,683 13,890 4100 Massachusetts Avenue 6,848 28,295 35,143 Avalon at Danada Farms 7,535 30,533 38,068 Avalon at West Grove 5,149 24,010 29,159 Avalon at Stratford Green 4,326 17,582 21,908 Avalon at Devonshire 7,250 29,662 36,912 The Gates of Edinburg 3,541 14,894 18,435 Avalon at Town Centre 3,450 14,486 17,936 Avalon at Town Square 2,099 8,654 10,753 Avalon at Woodbury 5,033 20,475 25,508 ------------ ---------------- ---------- 679,750 3,081,761 3,761,511 ------------ ---------------- ---------- Development Communities - ----------------------- Avalon Corners 4,214 25,963 30,177 Avalon Court North 3,996 34,515 38,511 Avalon Willow 4,139 34,963 39,102 Avalon at Fox Mill 1,989 16,894 18,883 Avalon Essex - 14,727 14,727 Avalon Haven - 3,033 3,033 Avalon at Florham Park - 16,880 16,880 Avalon River Mews - 20,747 20,747 Avalon Bellevue - 9,543 9,543 Avalon at Arlington Square I - 25,859 25,859 Avalon on the Sound - 4,022 4,022 Avalon Estates - 2,623 2,623 ------------ ---------------- ---------- 14,338 209,769 224,107 ------------ ---------------- ---------- Corporate 3,579 277,229 280,808 ------------ ---------------- ---------- 697,667 3,568,759 4,266,426 ============ ================ ========== <CAPTION> Total Cost, Net Year of Accumulated of Accumulated Completion/ Depreciation Depreciation Encumbrances Acquisition --------------- ---------------- --------------- ---------------- <S> <C> <C> <C> <C> Avalon at Ballston - Washington Towers 5,524 31,484 - 1990 Avalon at Cameron Court 1,949 41,274 - 1998 AutumnWoods 2,479 28,311 - 1996 Avalon at Fair Lakes 1,266 22,195 - 1998 Avalon at Dulles 1,895 9,849 12,360 1986 Avalon at Providence Park 752 10,398 - 1997 Avalon Woods 1,461 7,200 - 1994 Avalon at Decoverly 3,471 27,787 - 1995 Avalon Knoll 1,579 6,594 13,580 1985 Avalon Fields I & II 2,045 20,619 11,756 1998 Avalon Crossing 1,275 12,615 - 1996 4100 Massachusetts Avenue 4,881 30,262 - 1982 Avalon at Danada Farms 2,050 36,018 - 1997 Avalon at West Grove 1,524 27,635 - 1967 Avalon at Stratford Green 1,190 20,718 - 1997 Avalon at Devonshire 2,062 34,850 27,305 1988 The Gates of Edinburg 834 17,601 - 1992 Avalon at Town Centre 988 16,948 - 1986 Avalon at Town Square 599 10,154 - 1986 Avalon at Woodbury 338 25,170 - 1999 --------------- ---------------- --------------- 219,118 3,542,393 430,047 --------------- ---------------- --------------- Development Communities - ----------------------- Avalon Corners 135 30,042 - Avalon Court North 269 38,242 - Avalon Willow 502 38,600 - Avalon at Fox Mill 129 18,754 - Avalon Essex - 14,727 - Avalon Haven - 3,033 - Avalon at Florham Park - 16,880 - Avalon River Mews - 20,747 - Avalon Bellevue - 9,543 - Avalon at Arlington Square I - 25,859 - Avalon on the Sound - 4,022 - Avalon Estates - 2,623 - --------------- ---------------- --------------- 1,035 223,072 - --------------- ---------------- --------------- Corporate 4,950 275,858 - --------------- ---------------- --------------- 225,103 4,041,323 430,047 =============== ================ =============== </TABLE> F-32
100 AVALONBAY COMMUNITIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1999 (Dollars in thousands) Depreciation of AvalonBay Communities, Inc. building, improvements, upgrades and furniture, fixtures and equipment (FF&E) is calculated over the following useful lives, on a straight line basis: Building - 30 years Improvements, upgrades and FF&E - not to exceed 7 years The aggregate cost of total real estate for Federal income tax purposes was approximately $4.3 billion at December 31, 1999. The changes in total real estate assets for the years ended December 31, 1999, 1998 and 1997 are as follows: <TABLE> <CAPTION> Years ended December 31, ------------------------------------ 1998 1997 1999 (Revised) (Revised) ----------- --------- ---------- <S> <C> <C> <C> Balance, beginning of period $ 4,006,456 $1,534,986 $1,081,906 Acquisitions, Construction Costs and Improvements 519,381 2,622,427 515,976 Reclassification to investments in JV's -- -- (45,527) Dispositions (259,411) (150,957) (17,369) ----------- ---------- ---------- Balance, end of period $ 4,266,426 $4,006,456) $1,534,986 =========== ========== ========== </TABLE> The changes in accumulated depreciation for the years ended December 31, 1999, 1998 and 1997, are as follows: <TABLE> <CAPTION> Years ended December 31, ----------------------------------- 1998 1997 1999 (Revised) (Revised) ----------- --------- --------- <S> <C> <C> <C> Balance, beginning of period $ 137,374 $ 69,932 $ 44,547 Depreciation for period 107,928 75,614 26,854 Dispositions (20,199) (8,172) (1,469) --------- -------- ------- Balance, end of period $ 225,103 $137,374 $69,932 ========= ======== ======= </TABLE> F-33