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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, 2002

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:

     
Common Stock, par value $.01 per share   New York Stock Exchange, Pacific Exchange
8.00% Series D 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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days.

Yes x      No o

Indicate by check mark 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. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes x      No o

The aggregate market value of the Registrant’s Common Stock, par value $.01 per share, held by nonaffiliates of the Registrant, as of June 28, 2002 was $3,239,807,363.

The number of shares of the Registrant’s Common Stock, par value $.01 per share, outstanding as of February 1, 2003 was 68,149,232.

Documents Incorporated by Reference

Portions of AvalonBay Communities, Inc.’s Proxy Statement for the 2003 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.



 


 

TABLE OF CONTENTS

                 
            PAGE
           
 
  PART I        
ITEM 1.
  BUSINESS     1  
ITEM 2.
  COMMUNITIES     6  
ITEM 3.
  LEGAL PROCEEDINGS     31  
ITEM 4.
  SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS     32  
 
  PART II        
ITEM 5.
  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED        
 
  STOCKHOLDER MATTERS     33  
ITEM 6.
  SELECTED FINANCIAL DATA     34  
ITEM 7.
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL        
 
  CONDITION AND RESULTS OF OPERATIONS     37  
ITEM 7a.
  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT        
 
  MARKET RISK     52  
ITEM 8.
  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA     54  
ITEM 9.
  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS        
 
  ON ACCOUNTING AND FINANCIAL DISCLOSURE     54  
 
  PART III        
ITEM 10.
  DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT     54  
ITEM 11.
  EXECUTIVE COMPENSATION     54  
ITEM 12.
  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS        
 
  AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS     54  
ITEM 13.
  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS     55  
ITEM 14.
  CONTROLS AND PROCEDURES     56  
 
  PART IV        
ITEM 15.
  EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND        
 
  REPORTS ON FORM 8-K     57  
SIGNATURES
            62  
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002     63  

 


 

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 37 of this Form 10-K.

ITEM 1. BUSINESS

General

AvalonBay Communities, Inc. 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 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, long term, the limited new supply of upscale apartment homes and lower housing affordability in these markets will result in larger increases in cash flows relative to other markets over an entire business cycle. These barriers-to-entry generally include a difficult and lengthy entitlement process with local jurisdictions and dense urban or suburban areas where zoned and entitled land (“in-fill locations”) is in limited supply. Our markets are located in the Northeast, Mid-Atlantic, Midwest, Pacific Northwest, and Northern and Southern California regions of the United States. We believe that we have penetrated substantially all of the high barrier-to-entry markets of the country.

At February 1, 2003, we owned or held a direct or indirect ownership interest in 137 operating apartment communities containing 40,179 apartment homes in eleven states and the District of Columbia, of which two communities containing 1,089 apartment homes were under reconstruction. In addition, we owned or held a direct or indirect ownership interest in 12 communities under construction that are expected to contain an aggregate of 3,429 apartment homes when completed. We also owned a direct or indirect ownership interest in rights to develop an additional 38 communities that, if developed in the manner expected, will contain an estimated 9,950 apartment homes. We generally obtain ownership in an apartment community by developing a new community on vacant land 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 real estate investments consist of Established Communities, Other Stabilized Communities, Development Communities and Redevelopment Communities. A description of these segments and other related information can be found in Note 9, “Segment Reporting,” of the Consolidated Financial Statements set forth in Item 8 of this report.

Our principal operating objectives are to develop, own and operate, in our selected markets, high-quality, upscale communities that contain features and amenities desired by prospective residents, and to provide our residents with efficient and effective service. Our principal financial goals are to successfully implement those operating objectives in a cost effective manner and thereby increase long-term stockholder value by increasing operating cash flow and Funds from Operations (as defined by the National Association of Real Estate Investment Trusts). For a description of the meaning of Funds from Operations and its use and limitation as an operating measure, see the discussion titled “Funds from Operations” in Item 7 of this report. Our strategies to achieve these objectives and goals include:

    generating consistent, sustained earnings growth at each community through increased revenue, by balancing high occupancy with premium pricing, and increased operating margins from operating expense management;
 
    investing selectively in new development, redevelopment and acquisition communities in markets with growing or high potential for demand and high barriers-to-entry;
 
    selling communities in markets where we seek to reduce our presence or where value creation has been optimized; and
 
    maintaining a conservative capital structure to provide continuous access to cost-effective capital.

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We believe that we can generally implement these strategies best by developing, redeveloping, acquiring and managing upscale assets in high barrier-to-entry markets while maintaining the financial discipline to ensure balance sheet flexibility.

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:

    Boston, Massachusetts;
 
    Chicago, Illinois;
 
    New Canaan, Connecticut;
 
    New York, New York;
 
    Newport Beach, California;
 
    San Jose, California;
 
    Seattle, Washington; and
 
    Woodbridge, New Jersey.

After selecting a target site, we usually negotiate for the right to acquire the site either through an option or a long-term conditional contract. Options and long-term conditional contracts generally enable us to acquire the target site shortly before the start of construction, which reduces development-related risks as well as preserves capital. After we acquire land, we generally shift our focus to construction. Except for certain mid-rise and high-rise apartment communities where we may elect to use third-party general contractors or construction managers, we act as our own general contractor and construction manager. We believe this enables us to achieve higher construction quality, greater control over construction schedules and significant cost savings. Our development, property management and construction teams monitor construction progress to ensure high-quality workmanship and a smooth and timely transition into the leasing and operational phase.

Redevelopment Strategy. When we undertake the redevelopment of a community, our goal is to generally renovate and/or rebuild an existing 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. To optimize our concentration of communities in selected high barrier-to-entry markets, we sell assets that do not meet our long-term investment criteria when market conditions are favorable and redeploy the proceeds from those sales to develop and redevelop communities under construction or reconstruction. This disposition strategy 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 by issuing debt or equity securities. When we decide to sell a community, we generally 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 strategy, we have disposed of one community since January 1, 2002. The net proceeds from the sale of this community were approximately $78,454,000. We expect to increase our disposition activity during 2003 in response to current and anticipated real estate and capital markets conditions. However, we cannot assure you that assets can be sold on terms that we consider satisfactory, or at all, or that market conditions will continue to make the sale of assets an appealing strategy.

Acquisition Strategy. Our core competencies in development and redevelopment discussed above allow us to be selective in the acquisitions we target. Between January 1, 2002 and February 1, 2003, we acquired two

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communities containing 706 apartment homes, one of which was acquired in connection with a forward purchase contract agreed to in 1997. The acquisition of these communities was designed to achieve rapid penetration into markets that are generally supply constrained and in which we desired an increased presence.

Property Management Strategy. We intend to increase operating income through innovative, proactive property management that will result in higher revenue from communities and controlled operating expenses.

Our principal strategies to maximize revenue include:

    strong focus on resident satisfaction;
 
    staggering lease terms such that lease expirations are better matched to traffic patterns;
 
    increasing rents as market conditions permit;
 
    managing community occupancy for optimal rental revenue levels; and
 
    applying new technology to optimize revenue from each community.

Controlling operating expenses is another way in which we intend to increase earnings growth. 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 aggressively pursue real estate tax appeals and control operating expenses as follows:

    receive and approve invoices on-site to ensure careful monitoring of budgeted versus actual expenses;
 
    purchase supplies in bulk where possible;
 
    bid third-party contracts on a volume basis;
 
    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 vacant apartment utility costs;
 
    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.

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.

Technology Strategy. We believe that an innovative management information system infrastructure is 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 have investments in three technology companies. These investments were made with the belief that they would promote the development and application of technology and services which would improve the operating performance of our real estate holdings. Historically, our most significant technology investment has been Realeum, Inc., (“Realeum”), an entity engaged in the development and deployment of an on-site property management and leasing automation system that enables management to capture, review and analyze data to a greater extent than is possible using existing commercial software. To help monitor this investment, Thomas J. Sargeant, our Executive Vice President and Chief Financial Officer, is a director of Realeum. After consideration of our share of Realeum’s losses, the carrying value of our investment in Realeum has been reduced to zero as of December 31, 2002. We are also a member of Constellation Real Technologies LLC, (“Constellation”), an entity formed by a number of real estate investment trusts and real estate operating companies for the purpose of investing in multi-sector real estate technology opportunities. Our original commitment to Constellation was $4,000,000 but, as a result of an agreement among the members reducing the commitment due from each member, our commitment is currently $2,600,000, of which we have contributed $959,000 to date. The remaining unfunded commitment of $1,641,000 is expected to be funded over the next five years. Our third investment is in Rent.com, an internet-based rental housing information provider. The aggregate carrying value of our technology investments at February 1, 2003 was $1,404,000.

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Financing Strategy. We have consistently maintained, and intend to continue to maintain, a conservative capital structure. At December 31, 2002, our debt-to-total market capitalization was 46.1%, and our permanent long-term floating rate debt, not including borrowings under the unsecured credit facility, was only 2.0% of total market capitalization. Market capitalization reflects the aggregate of the market value of common stock, the liquidation preference of preferred stock and the principal amount of debt.

Before planned construction or reconstruction activity 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. During 2002, substantially all of our construction and reconstruction activities were funded by the issuance of unsecured debt securities, net proceeds from asset sales and retained operating cash. In the event that financing cannot be obtained, we may have to abandon planned development activities, write-off associated pursuit costs and/or forego reconstruction activity. In such instances, we will not realize the increased revenues and earnings that we expected from such pursuits.

We estimate that a portion of our short-term liquidity needs will be met from retained operating cash and borrowings under our $500,000,000 variable rate unsecured credit facility. At February 28, 2003, $155,470,000 was outstanding, $15,529,000 was used to provide letters of credit and $329,001,000 was available for borrowing under the unsecured credit facility.

If required to meet the balance of our liquidity needs, we will attempt to arrange additional capacity under our existing unsecured credit facility, sell additional existing communities or land and/or issue additional debt or equity securities. While we believe we have the financial position to expand our short-term credit capacity and access the capital markets as needed, 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 or at all could have a material adverse impact on our operating results and financial condition, including the abandonment of development pursuits.

Inflation and Deflation

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 and therefore expose us to the effect of a decline in market rent. Our current policy is generally to allow residents to terminate leases upon an agreed advance written notice and a lease termination payment, as provided for in the resident’s lease. Short-term leases combined with relatively consistent demand have allowed rents, and therefore cash flow from the portfolio, to provide an attractive inflation hedge. However, in a deflationary rent environment as is currently being experienced, we are exposed to declining rents more quickly under these shorter-term leases.

Tax Matters

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 make sufficient distributions to avoid income tax at the corporate level.

Environmental and Related Matters

Under various federal, state and local environmental laws, regulations and ordinances, a current or previous owner or operator of real estate may be required, regardless of knowledge or responsibility, to investigate and remediate the effects of hazardous or toxic substances or petroleum product releases at the property and may be held liable to a governmental entity or to third parties for property damage and for investigation and remediation costs incurred by these parties as a result of the contamination. These damages and costs may be substantial. The presence of such substances, or the failure to properly remediate the contamination, may adversely affect the owner’s ability to

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borrow against, sell or rent the affected property. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs it incurs as a result of the contamination.

Certain federal, state and local laws, regulations and ordinances govern the removal, encapsulation or disturbance of asbestos containing materials (“ACMs”) when such materials are in poor condition or in the event of reconstruction, remodeling, renovation, or demolition of a building. These 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 exposure to ACMs. We are not aware that any ACMs were used in the construction of the communities we developed. ACMs were, however, used in the construction of several of the communities that we acquired. We have implemented an operations and maintenance program for each of the communities at which ACMs have been detected. We do not anticipate that we will incur any material liabilities as a result of the presence of ACMs at our communities.

We are aware that some of our communities have lead paint and have implemented an operations and maintenance program at each of those communities. We do not anticipate that we will incur any material liabilities as a result of the presence of lead paint at our communities.

All of our stabilized operating communities, and all of the communities that we are currently developing or redeveloping, have been subjected to at least a Phase I or similar environmental assessment, which generally does not involve invasive techniques such as soil or ground water sampling. These assessments, together with subsurface assessments conducted on some properties, have not revealed, and we are not otherwise aware of, any environmental conditions that we believe would have a material adverse effect on our business, assets, financial condition or results of operations. In connection with our ownership, operation and development of communities, from time to time we undertake remedial action in response to the presence of subsurface or other contaminants. In some cases, an indemnity exists upon which we may be able to rely if environmental liability arises from the contamination. There can be no assurance, however, that all necessary remediation actions have been or will be undertaken at our properties or that we will be indemnified, in full or at all, in the event that environmental liability arises.

Mold growth may occur when excessive moisture accumulates in buildings or on building materials, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Although the occurrence of mold at multifamily and other structures, and the need to remediate such mold, is not a new phenomenon, there has been increased awareness in recent years that certain molds may in some instances lead to adverse health effects, including allergic or other reactions. To help limit mold growth, we educate residents about the importance of adequate ventilation and request or require that they notify us when they see mold or excessive moisture. We have established procedures for promptly addressing and remediating mold or excessive moisture from apartment homes when we become aware of its presence regardless of whether we or the resident believe a health risk is presented. However, we cannot assure that mold or excessive moisture will be detected and remediated in a timely manner. If a significant mold problem arises at one of our communities, we could be required to undertake a costly remediation program to contain or remove the mold from the affected community and could be exposed to other liabilities.

Additionally, we have occasionally been 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 managed or developed by us or our predecessors for such third parties.

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We cannot assure you that:

    the environmental assessments described above have 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 have developed since the 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 our communities;
 
    future uses or conditions, including, without limitation, changes in applicable environmental laws and regulations, will not result in the imposition of environmental liability; and
 
    no environmental liabilities will develop at communities that we have sold for which we may have liability.

Other Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934 are available free of charge in the “Investor Relations” section of our website (www.avalonbay.com) as soon as reasonably practicable after the reports are filed with or furnished to the SEC.

We were incorporated under the laws of the State of California in 1978. In 1995, we reincorporated in the State of Maryland and have been focused on the ownership and operation of apartment communities since that time. As of December 31, 2002, we had 1,775 employees.

ITEM 2. COMMUNITIES

Our real estate investments consist of current operating apartment communities, communities in various stages of development, and land or land options held for development. The following is a description of each category:

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

    Established Communities (also known as Same Store Communities) are communities where a comparison of operating results from the prior year to the current year is meaningful, as these communities were owned and had stabilized occupancy and costs as of the beginning of the prior year. We determine which of our communities fall into the Established Communities category annually as of January 1st of each year and maintain that classification throughout the year. For the year 2002, the Established Communities were communities that had stabilized occupancy and costs as of January 1, 2001 and are not conducting or planning to conduct substantial redevelopment activities, as described below, within the current year. We consider a community to have stabilized occupancy at the earlier of (i) attainment of 95% physical occupancy or (ii) the one year anniversary of completion of development or redevelopment.
 
    Other Stabilized Communities are all other completed communities that have stabilized occupancy and are not conducting or planning redevelopment activities. Other Stabilized Communities therefore include communities that were either acquired or achieved stabilization after January 1, 2001 and that were not conducting or planning to start redevelopment activities within the current year.
 
    Lease-Up Communities are communities where construction has been complete for less than one year and where occupancy has not reached 95%.
 
    Redevelopment Communities are communities where substantial redevelopment is in progress or is planned to begin during the current year. Redevelopment is

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      considered substantial when capital invested during the reconstruction effort exceeds the lesser of $5,000,000 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 either have an option to acquire land or enter into a leasehold interest, for which we are the buyer under a long-term conditional contract to purchase land or where we own land to develop a new community. We capitalize all related pre-development costs incurred in pursuit of these new developments.

As of December 31, 2002, our communities were classified as follows:

                       
          Number of   Number of
          communities   apartment homes
         
 
Current Communities
               
 
Established Communities:
               
   
Northeast
    27       7,196  
   
Mid-Atlantic
    18       5,154  
   
Midwest
    9       2,624  
   
Pacific Northwest
    3       907  
   
Northern California
    29       8,601  
   
Southern California
    11       3,404  
 
   
     
 
     
Total Established
    97       27,886  
 
   
     
 
 
Other Stabilized Communities:
               
   
Northeast
    11       3,040  
   
Mid-Atlantic
    2       960  
   
Midwest
           
   
Pacific Northwest
    8       2,152  
   
Northern California
    2       499  
   
Southern California
    6       2,253  
 
   
     
 
     
Total Other Stabilized
    29       8,904  
 
   
     
 
 
Lease-Up Communities
    9       2,300  
 
Redevelopment Communities
    2       1,089  
 
   
     
 
 
Total Current Communities
    137       40,179  
 
   
     
 
Development Communities
    12       3,429  
 
   
     
 
Development Rights
    38       9,950  
 
   
     
 

Our holdings under each of the above categories are discussed on the following pages.

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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 February 1, 2003, include 106 garden-style, 17 high-rise and 14 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 substantially free of deferred maintenance and, where vacant, available for immediate occupancy. We believe that the aesthetic appeal of our communities and a service oriented property management team 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.

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These Current Communities are located in the following geographic markets:

                                                   
      Number of   Number of   Percentage of total
      communities at   apartment homes at   apartment homes at
     
 
 
      1-1-02   2-1-03   1-1-02   2-1-03   1-1-02   2-1-03
     
 
 
 
 
 
Northeast
    38       45       10,877       12,667       29.3 %     31.5 %
 
Boston, MA
    11       13       2,839       3,142       7.6 %     7.8 %
 
Fairfield County, CT
    11       13       2,939       3,350       7.9 %     8.3 %
 
Long Island, NY
    3       3       915       915       2.5 %     2.3 %
 
Northern New Jersey
    4       5       1,394       1,802       3.8 %     4.5 %
 
Central New Jersey
    3       4       1,144       1,440       3.1 %     3.6 %
 
New York, NY
    6       7       1,646       2,018       4.4 %     5.0 %
Mid-Atlantic
    21       22       6,422       6,754       17.2 %     16.8 %
 
Baltimore, MD
    4       4       1,054       1,054       2.8 %     2.6 %
 
Washington, DC
    17       18       5,368       5,700       14.4 %     14.2 %
Midwest
    9       9       2,624       2,624       7.1 %     6.5 %
 
Chicago, IL
    4       4       1,296       1,296       3.5 %     3.2 %
 
Minneapolis, MN
    5       5       1,328       1,328       3.6 %     3.3 %
Pacific Northwest
    12       12       3,159       3,159       8.5 %     7.9 %
 
Seattle, WA
    12       12       3,159       3,159       8.5 %     7.9 %
Northern California
    30       32       8,889       9,318       23.8 %     23.2 %
 
Oakland-East Bay, CA
    6       6       2,090       2,090       5.6 %     5.2 %
 
San Francisco, CA
    8       8       1,765       1,765       4.7 %     4.4 %
 
San Jose, CA
    16       18       5,034       5,463       13.5 %     13.6 %
Southern California
    16       17       5,257       5,657       14.1 %     14.1 %
 
Los Angeles, CA
    4       5       2,001       2,401       5.4 %     6.0 %
 
Orange County, CA
    8       8       2,022       2,022       5.4 %     5.0 %
 
San Diego, CA
    4       4       1,234       1,234       3.3 %     3.1 %
 
   
     
     
     
     
     
 
 
    126       137       37,228       40,179       100.0 %     100.0 %
 
   
     
     
     
     
     
 

We manage and operate all of the Current Communities. During the year ended December 31, 2002, we completed construction of 2,521 apartment homes in ten communities for a total cost of $466,600,000. The average age of the Current Communities, on a weighted average basis according to number of apartment homes, is 8.1 years.

Of the Current Communities, as of February 1, 2003, we own:

    a fee simple, or absolute, ownership interest in 112 operating communities, one of which is on land subject to a land lease expiring in March 2142;
 
    a general partnership interest in three partnerships that each own a fee simple interest in an operating community;
 
    a general partnership interest in four partnerships structured as “DownREITs,” as described more fully below, that own an aggregate of 17 communities;
 
    a membership interest in four limited liability companies that each hold a fee simple interest in an operating community; 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


 

We also hold a fee simple ownership interest in nine of the Development Communities, a membership interest in a limited liability company that holds a fee simple interest in a Development Community and a general partnership interest in two partnerships structured as “DownREITs” that each own one Development Community.

In each of the six partnerships structured as DownREITs, either we 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 an initial distribution before any distribution is made to the general partner. Although the partnership agreements for each of the DownREITs are different, generally the distributions per unit paid to the holders of units of limited partnership interests have approximated our current common stock dividend amount. 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 applicable 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 our common stock on the date of redemption. In lieu of cash, we may elect to acquire any unit presented for redemption for one share of our common stock. As of February 1, 2003, there were 975,751 DownREIT partnership units outstanding. The DownREIT partnerships are consolidated for financial reporting purposes.

10


 

Profile of Current and Development Communities
(Dollars in thousands, except per apartment home data)

                                                               
                          Approx.           Year of   Average        
                  Number of   rentable area           completion/   size        
          City and state   homes   (Sq. Ft.)   Acres   acquisition   (Sq. Ft.)        
         
 
 
 
 
 
       
   
CURRENT COMMUNITIES (1)
                                                   
NORTHEAST
                                                       
Boston, MA
                                                       
 
Avalon at Center Place
  Providence, RI     225       231,671       1.2       1997       1,030          
 
Avalon at Faxon Park
  Quincy, MA     171       175,494       8.3       1998       1,026          
 
Avalon at Lexington
  Lexington, MA     198       231,182       18.0       1994       1,168          
 
Avalon at Prudential Center
  Boston, MA     781       747,954       1.0       1968/98       958          
 
Avalon Essex
  Peabody, MA     154       173,520       11.1       2000       1,127          
 
Avalon Estates
  Hull, MA     162       188,392       55.0       2001       1,163          
 
Avalon Ledges
  Weymouth, MA     304       315,554       58.0       2002       1,023          
 
Avalon Oaks
  Wilmington, MA     204       229,748       22.5       1999       1,023          
 
Avalon Oaks West
  Wilmington, MA     120       123,960       27.0       2002       1,033          
 
Avalon Orchards
  Marlborough, MA     156       186,500       23.0       2002       1,219          
 
Avalon Summit
  Quincy, MA     245       203,848       9.1       1996       832          
 
Avalon West
  Westborough, MA     120       147,472       10.1       1996       1,229          
Fairfield-New Haven, CT
                                                       
 
Avalon at Greyrock Place
  Stamford, CT     306       201,500       3.0       2002       1,040          
 
Avalon Corners
  Stamford, CT     195       192,174       3.2       2000       986          
 
Avalon Gates
  Trumbull, CT     340       381,322       37.0       1997       1,122          
 
Avalon Glen
  Stamford, CT     238       221,828       4.1       1991       932          
 
Avalon Haven
  North Haven, CT     128       140,107       10.6       2000       1,095          
 
Avalon Lake
  Danbury, CT     135       166,231       32.0       1999       1,184          
 
Avalon New Canaan
  New Canaan, CT     104       130,104       9.1       2002       1,251          
 
Avalon Springs
  Wilton, CT     102       158,259       12.0       1996       1,552          
 
Avalon Valley
  Danbury, CT     268       297,479       17.1       1999       1,070          
 
Avalon Walk I & II
  Hamden, CT     764       761,441       38.4       1992/94       996          
Long Island, NY
                                                       
 
Avalon Commons
  Smithtown, NY     312       363,049       20.6       1997       1,164          
 
Avalon Court
  Melville, NY     494       597,104       35.4       1997/2000       1,209          
 
Avalon Towers
  Long Beach, NY     109       124,836       1.3       1995       1,145          
Northern New Jersey
                                                       
 
Avalon at Edgewater
  Edgewater, NJ     408       405,144       7.1       2002       993          
 
Avalon at Florham Park
  Florham Park, NJ     270       331,560       41.9       2001       1,228          
 
Avalon Cove
  Jersey City, NJ     504       574,675       11.1       1997       1,140          
 
Avalon Crest
  Fort Lee, NJ     351       371,411       13.1       1998       1,058          
 
The Tower at Avalon Cove
  Jersey City, NJ     269       241,825       2.8       1999       905          
Central New Jersey
                                                       
 
Avalon at Freehold
  Freehold, NJ     296       317,608       42.3       2002       1,073          
 
Avalon Run East
  Lawrenceville, NJ     206       265,198       27.0       1996       1,287          
 
Avalon Watch
  West Windsor, NJ     512       485,871       64.0       1999       949          
New York, NY
                                                       
 
Avalon Riverview I
  Long Island City, NY     372       332,940       1.0       2002       895          
 
Avalon Gardens
  Nanuet, NY     504       638,439       55.0       1998       1,267          
 
Avalon Green
  Elmsford, NY     105       113,538       16.9       1995       1,081          

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                                       
          Physical   Average economic   Average rental rate   Financial
          occupancy at   occupancy   $ per   $ per   reporting cost
          12/31/02   2002   2001   Apt (4)   Sq. Ft.   (5)
         
 
 
 
 
 
   
CURRENT COMMUNITIES (1)
                                               
NORTHEAST
                                               
Boston, MA
                                               
 
Avalon at Center Place
    94.7 %     96.2 %     96.1 %   $ 2,172     $ 2.03     $ 27,318  
 
Avalon at Faxon Park
    93.6 %     93.9 %     97.4 %     1,833       1.68       15,231  
 
Avalon at Lexington
    93.9 %     93.8 %     96.5 %     1,933       1.55       15,347  
 
Avalon at Prudential Center
    93.3 %     89.2% (2)     94.9% (2)     2,612       2.43 (2)     151,813  
 
Avalon Essex
    95.5 %     94.0 %     96.4 %     1,870       1.56       21,537  
 
Avalon Estates
    83.3 %     88.5 %     91.2% (3)     1,736       1.32       20,216  
 
Avalon Ledges
    71.1 %     37.5% (3)     N/A       1,603       0.58 (3)     35,527  
 
Avalon Oaks
    94.6 %     92.2 %     96.3 %     1,687       1.38       20,823  
 
Avalon Oaks West
    94.6 %     76.3% (3)     N/A       1,495       1.10 (3)     16,619  
 
Avalon Orchards
    93.0 %     63.1% (3)     N/A       1,546       0.82 (3)     20,835  
 
Avalon Summit
    88.2 %     90.7 %     96.8 %     1,375       1.50       16,748  
 
Avalon West
    95.0 %     92.1 %     97.8 %     1,625       1.22       10,921  
Fairfield-New Haven, CT
                                               
 
Avalon at Greyrock Place
    83.0 %     66.7% (3)     N/A       1,998       2.02 (3)     69,673  
 
Avalon Corners
    82.1 %     87.7 %     96.5 %     2,145       1.91       31,778  
 
Avalon Gates
    88.2 %     93.0 %     98.8 %     1,672       1.39       36,100  
 
Avalon Glen
    89.1 %     91.4 %     96.5 %     1,763       1.73       31,295  
 
Avalon Haven
    82.0 %     91.0 %     98.8 %     1,638       1.36       13,750  
 
Avalon Lake
    87.4 %     95.2 %     98.1 %     1,800       1.39       16,995  
 
Avalon New Canaan
    69.2 %     31.0% (3)     N/A       2,852       0.71 (3)     32,050  
 
Avalon Springs
    79.4 %     86.1 %     95.9 %     2,777       1.54       16,873  
 
Avalon Valley
    90.3 %     96.4 %     99.0 %     1,646       1.43       26,059  
 
Avalon Walk I & II
    91.4 %     94.6 %     98.5 %     1,313       1.25       59,044  
Long Island, NY
                                               
 
Avalon Commons
    99.7 %     98.1 %     97.1 %     1,796       1.51       33,293  
 
Avalon Court
    99.4 %     98.9 %     99.3 %     2,201       1.80       59,272  
 
Avalon Towers
    99.1 %     97.6 %     99.0 %     2,850       2.43       16,913  
Northern New Jersey
                                               
 
Avalon at Edgewater
    90.2 %     71.9% (3)     N/A       2,167       1.57 (3)     74,590  
 
Avalon at Florham Park
    88.9 %     93.4 %     91.8% (3)     2,404       1.83       41,569  
 
Avalon Cove
    91.7 %     87.4 %     96.7 %     2,565       1.97       91,953  
 
Avalon Crest
    83.2 %     90.2 %     94.2 %     2,167       1.85       56,062  
 
The Tower at Avalon Cove
    91.5 %     85.6 %     96.6 %     2,364       2.25       49,659  
Central New Jersey
                                               
 
Avalon at Freehold
    89.9 %     80.7% (3)     N/A       1,560       1.17 (3)     34,307  
 
Avalon Run East
    93.7 %     93.0 %     97.2 %     1,658       1.20       16,272  
 
Avalon Watch
    92.8 %     92.0 %     96.7 %     1,378       1.34       29,597  
New York, NY
                                               
 
Avalon Riverview I
    71.5 %     37.3% (3)     N/A       2,520       1.05 (3)     94,045  
 
Avalon Gardens
    95.4 %     90.7 %     94.3 %     1,863       1.33       54,265  
 
Avalon Green
    88.6 %     94.8 %     94.5 %     2,419       2.12       12,603  

11


 

Profile of Current and Development Communities
(Dollars in thousands, except per apartment home data)
                                                               
                          Approx.           Year of   Average        
                  Number of   rentable area           completion/   size        
          City and state   homes   (Sq. Ft.)   Acres   acquisition   (Sq. Ft.)        
         
 
 
 
 
 
       
 
Avalon on the Sound
  New Rochelle, NY     412       372,860       2.4       2001       905          
 
Avalon View
  Wappingers Falls, NY     288       335,088       41.0       1993       1,164          
 
Avalon Willow
  Mamaroneck, NY     227       199,945       4.0       2000       881          
 
The Avalon
  Bronxville, NY     110       119,186       1.5       1999       1,085          
MID-ATLANTIC
                                                       
Baltimore, MD
                                                       
 
Avalon at Fairway Hills I & II
  Columbia, MD     720       724,253       42.1       1987/96       1,005          
 
Avalon at Symphony Glen
  Columbia, MD     176       179,867       10.0       1986       1,022          
 
Avalon Landing
  Annapolis, MD     158       117,033       13.8       1995       741          
Washington, DC
                                                       
 
4100 Massachusetts Avenue
  Washington, DC     308       298,725       2.7       1982       970      
 
Autumn Woods
  Fairfax, VA     420       355,228       24.2       1996       846          
 
Avalon at Arlington Square I
  Arlington, VA     510       583,950       14.2       2001       1,145          
 
Avalon at Arlington Square II
  Arlington, VA     332       325,499       6.1       2002       980          
 
Avalon at Ballston — Vermont & Quincy Towers
  Arlington, VA     454       420,242       2.3       1997       926          
 
Avalon at Ballston — Washington Towers
  Arlington, VA     344       294,786       4.1       1990       857          
 
Avalon at Cameron Court
  Alexandria, VA     460       467,292       16.0       1998       1,016          
 
Avalon at Decoverly
  Rockville, MD     368       368,446       25.0       1995       1,001          
 
Avalon at Dulles
  Sterling, VA     236       232,632       15.7       1986       986          
 
Avalon at Fair Lakes
  Fairfax, VA     234       285,822       10.0       1998       1,221          
 
Avalon at Fox Mill
  Herndon, VA     165       219,360       12.8       2000       1,329          
 
Avalon at Providence Park
  Fairfax, VA     141       148,211       4.0       1997       1,051          
 
Avalon Crescent
  McLean, VA     558       613,426       19.1       1996       1,099          
 
Avalon Crossing
  Rockville, MD     132       147,690       5.0       1996       1,119          
 
Avalon Fields I & II
  Gaithersburg, MD     288       292,282       9.2       1998       1,050          
 
Avalon Knoll
  Germantown, MD     300       290,365       26.7       1985       968          
MIDWEST
                                                       
Chicago, IL
                                                       
 
200 Arlington Place
  Arlington Heights, IL     409       346,832       2.8       1987/2000       848          
 
Avalon at Danada Farms
  Wheaton, IL     295       350,606       19.2       1997       1,188          
 
Avalon at Stratford Green
  Bloomingdale, IL     192       237,204       12.7       1997       1,235          
 
Avalon at West Grove
  Westmont, IL     400       388,500       17.4       1967       971          
Minneapolis, MN
                                                       
 
Avalon at Devonshire
  Bloomington, MN     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          
PACIFIC NORTHWEST
                                                       
Seattle, WA
                                                       
 
Avalon at Bear Creek
  Redmond, WA     264       288,250       22.0       1998       1,092          
 
Avalon Bellevue
  Bellevue, WA     202       164,226       1.7       2001       813          
 
Avalon Belltown
  Seattle, WA     100       80,200       0.7       2001       802          
 
Avalon Brandemoor
  Lynwood, WA     424       453,602       22.6       2001       1,070          

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                                       
          Physical   Average economic   Average rental rate   Financial
          occupancy at   occupancy   $ per   $ per   reporting cost
          12/31/02   2002   2001   Apt (4)   Sq. Ft.   (5)
         
 
 
 
 
 
 
Avalon on the Sound
    94.2 %     87.7 %     35.5% (3)     2,182       2.11       91,614  
 
Avalon View
    92.7 %     95.3 %     98.4 %     1,343       1.10       18,290  
 
Avalon Willow
    92.1 %     90.3 %     95.5 %     2,276       2.33       47,000  
 
The Avalon
    96.4 %     96.0 %     97.8 %     3,373       2.99       31,228  
MID-ATLANTIC
                                               
Baltimore, MD
                                               
 
Avalon at Fairway Hills I & II
    95.2 %     95.0 %     96.8 %     1,121       1.06       44,855  
 
Avalon at Symphony Glen
    97.7 %     97.2 %     97.1 %     1,143       1.09       9,172  
 
Avalon Landing
    96.8 %     97.7 %     97.5 %     1,030       1.36       9,791  
Washington, DC
                                               
 
4100 Massachusetts Avenue
    81.5 %     88.4% (2)     96.4 %     1,822     1.66 (2)     36,028  
 
Autumn Woods
    93.1 %     93.8 %     95.7 %     1,134       1.26       30,928  
 
Avalon at Arlington Square I
    88.0 %     90.7 %     49.9% (3)     1,730       1.37       69,678  
 
Avalon at Arlington Square II
    68.4 %     40.1% (3)     N/A       1,619       0.66 (3)     42,405  
 
Avalon at Ballston — Vermont & Quincy Towers
    87.4 %     90.9 %     95.3 %     1,456       1.43       47,169  
 
Avalon at Ballston — Washington Towers
    88.1 %     91.9 %     96.9 %     1,444       1.55       37,359  
 
Avalon at Cameron Court
    92.6 %     94.6 %     96.3 %     1,631       1.52       43,246  
 
Avalon at Decoverly
    94.6 %     92.7 %     97.0 %     1,327       1.23       31,772  
 
Avalon at Dulles
    96.2 %     92.2 %     95.5 %     1,069       1.00       12,164  
 
Avalon at Fair Lakes
    96.6 %     94.0 %     96.0 %     1,497       1.15       23,476  
 
Avalon at Fox Mill
    88.5 %     93.3 %     95.6 %     1,560       1.09       19,513  
 
Avalon at Providence Park
    96.5 %     96.0 %     96.4 %     1,271       1.16       11,299  
 
Avalon Crescent
    90.1 %     93.4 %     93.9 %     1,622       1.38       57,283  
 
Avalon Crossing
    92.4 %     94.0 %     95.3 %     1,740       1.46       13,895  
 
Avalon Fields I & II
    90.9 %     92.3 %     97.2 %     1,341       1.22       22,700  
 
Avalon Knoll
    96.3 %     95.0 %     97.8 %     1,067       1.05       8,609  
MIDWEST
                                               
Chicago, IL
                                               
 
200 Arlington Place
    91.7 %     92.3 %     95.1 %     1,190       1.30       49,962  
 
Avalon at Danada Farms
    92.9 %     93.5 %     95.7 %     1,347       1.06       38,423  
 
Avalon at Stratford Green
    86.5 %     91.5 %     95.2 %     1,339       0.99       21,949  
 
Avalon at West Grove
    91.5 %     91.5 %     96.4 %     904       0.85       29,915  
Minneapolis, MN
                                               
 
Avalon at Devonshire
    91.2 %     93.7 %     95.4 %     1,022       1.01       37,686  
 
Avalon at Edinburgh
    93.4 %     93.6 %     96.5 %     1,138       0.95       18,559  
 
Avalon at Town Centre
    95.2 %     93.6 %     95.9 %     1,000       0.99       18,214  
 
Avalon at Town Square
    93.1 %     91.5 %     96.8 %     1,020       1.04       10,898  
 
Avalon at Woodbury
    94.6 %     94.9 %     93.9 %     1,153       0.85       25,985  
PACIFIC NORTHWEST
                                               
Seattle, WA
                                               
 
Avalon at Bear Creek
    93.9 %     94.3 %     94.2 %     1,164       1.01       34,437  
 
Avalon Bellevue
    98.0 %     92.5 %     63.5% (3)     1,131       1.29       30,633  
 
Avalon Belltown
    98.0 %     83.8 %     16.1% (3)     1,263       1.32       18,279  
 
Avalon Brandemoor
    96.0 %     93.9 %     96.5% (3)     978       0.86       45,309  

12


 

Profile of Current and Development Communities
(Dollars in thousands, except per apartment home data)
                                                               
                          Approx.           Year of   Average        
                  Number of   rentable area           completion/   size        
          City and state   homes   (Sq. Ft.)   Acres   acquisition   (Sq. Ft.)        
         
 
 
 
 
 
       
 
Avalon Greenbriar
  Renton, WA     421       382,382       20.0       1987/88       908          
 
Avalon HighGrove
  Everett, WA     391       422,482       19.8       2000       1,081          
 
Avalon ParcSquare
  Redmond, WA     124       127,236       1.9       2000       1,026          
 
Avalon Redmond Place
  Redmond, WA     222       206,004       22.0       1991/97       928          
 
Avalon RockMeadow
  Mill Creek, WA     206       240,817       11.5       2000       1,169          
 
Avalon WildReed
  Everett, WA     234       259,080       22.3       2000       1,107          
 
Avalon WildWood
  Lynwood, WA     238       313,107       15.8       2001       1,316          
 
Avalon Wynhaven
  Issaquah, WA     333       424,604       11.6       2001       1,275          
NORTHERN CALIFORNIA
                                                       
Oakland-East Bay, CA
                                                       
 
Avalon at Union Square
  Union City, CA     208       150,140       8.5       1973/96       722          
 
Avalon at Willow Creek
  Fremont, CA     235       197,575       3.5       1985/94       841          
 
Avalon Dublin
  Dublin, CA     204       179,004       13.0       1989/97       877          
 
Avalon Fremont
  Fremont, CA     443       446,422       22.3       1992/94       1,008          
 
Avalon Pleasanton
  Pleasanton, CA     456       377,438       14.7       1988/94       828          
 
Waterford
  Hayward, CA     544       451,937       11.1       1985/86       831          
San Francisco, CA
                                                       
 
Avalon at Cedar Ridge
  Daly City, CA     195       141,411       8.0       1975/97       725          
 
Avalon at Diamond Heights
  San Francisco, CA     154       123,080       2.6       1972/94       799          
 
Avalon at Nob Hill
  San Francisco, CA     185       109,238       1.4       1990/95       590          
 
Avalon at Sunset Towers
  San Francisco, CA     243       175,511       16.0       1961/96       722          
 
Avalon Foster City
  Foster City, CA     288       222,276       11.0       1973/94       772          
 
Avalon Pacifica
  Pacifica, CA     220       186,785       7.7       1971/95       849          
 
Avalon Towers by the Bay
  San Francisco, CA     226       243,033       1.0       1999       1,075          
 
Crowne Ridge
  San Rafael, CA     254       221,525       21.9       1973/96       872          
San Jose, CA
                                                       
 
Avalon at Blossom Hill
  San Jose, CA     324       322,207       7.5       1995       994          
 
Avalon at Cahill Park
  San Jose, CA     218       218,245       3.8       2002       1,001          
 
Avalon at Creekside
  Mountain View, CA     294       215,680       13.0       1962/97       734          
 
Avalon at Foxchase
  San Jose, CA     396       335,212       12.0       1986/87       844          
 
Avalon at Parkside
  Sunnyvale, CA     192       199,353       8.0       1991/96       1,038          
 
Avalon at Pruneyard
  Campbell, CA     252       197,000       8.5       1966/97       782          
 
Avalon at River Oaks
  San Jose, CA     226       210,050       4.0       1990/96       929          
 
Avalon Campbell
  Campbell, CA     348       326,796       8.0       1995       939          
 
Avalon Cupertino
  Cupertino, CA     311       293,328       8.0       1999       943          
 
Avalon Mountain View
  Mountain View, CA     248       211,552       10.5       1986       853          
 
Avalon on the Alameda
  San Jose, CA     305       299,722       8.9       1999       983          
 
Avalon Rosewalk I & II
  San Jose, CA     456       450,252       16.6       1997/99       987          
 
Avalon Silicon Valley
  Sunnyvale, CA     710       658,591       13.6       1997       928          
 
Avalon Sunnyvale
  Sunnyvale, CA     220       159,653       5.0       1987/95       726          
 
Avalon Towers on the Peninsula
  Mountain View, CA     211       218,392       1.9       2002       1,035          
 
CountryBrook
  San Jose, CA     360       323,012       14.0       1985/96       897          
 
Fairway Glen
  San Jose, CA     144       119,492       6.0       1986       830          
 
San Marino
  San Jose, CA     248       209,465       11.5       1984/88       845          

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                                       
          Physical   Average economic   Average rental rate   Financial
          occupancy at   occupancy   $ per   $ per   reporting cost
          12/31/02   2002   2001   Apt (4)   Sq. Ft.   (5)
         
 
 
 
 
 
 
Avalon Greenbriar
    93.4 %     91.0 %     92.2 %     807       0.81       36,259  
 
Avalon HighGrove
    97.4 %     94.8 %     93.5 %     920       0.81       39,620  
 
Avalon ParcSquare
    96.0 %     95.7 %     94.2 %     1,254       1.17       18,995  
 
Avalon Redmond Place
    89.2 %     94.6 %     94.8 %     1,104       1.13       26,042  
 
Avalon RockMeadow
    95.6 %     93.3 %     92.7 %     1,058       0.84       24,457  
 
Avalon WildReed
    96.6 %     94.4 %     95.9 %     939       0.80       22,956  
 
Avalon WildWood
    95.4 %     94.1 %     96.0% (3)     1,149       0.82       32,865  
 
Avalon Wynhaven
    86.2 %     89.3 %     95.1% (3)     1,287       0.90       52,554  
NORTHERN CALIFORNIA
                                               
Oakland-East Bay, CA
                                               
 
Avalon at Union Square
    99.5 %     94.8 %     95.5 %     1,188       1.56       21,891  
 
Avalon at Willow Creek
    100.0 %     95.8 %     95.3 %     1,371       1.56       34,258  
 
Avalon Dublin
    96.6 %     94.9 %     94.4 %     1,417       1.53       26,742  
 
Avalon Fremont
    96.4 %     93.7 %     95.8 %     1,568       1.46       77,170  
 
Avalon Pleasanton
    96.5 %     95.7 %     92.8 %     1,313       1.52       60,522  
 
Waterford
    94.5 %     92.9 %     94.7 %     1,202       1.34       59,066  
San Francisco, CA
                                               
 
Avalon at Cedar Ridge
    96.9 %     96.6 %     96.5 %     1,475       1.96       25,530  
 
Avalon at Diamond Heights
    98.7 %     92.2 %     95.2 %     1,582       1.82       24,398  
 
Avalon at Nob Hill
    94.1 %     94.3 %     93.7 %     1,503       2.40       27,500  
 
Avalon at Sunset Towers
    95.8 %     95.0 %     96.7 %     1,606       2.11       28,171  
 
Avalon Foster City
    95.8 %     96.6 %     92.1 %     1,457       1.82       42,852  
 
Avalon Pacifica
    97.7 %     95.9 %     97.3 %     1,471       1.66       31,298  
 
Avalon Towers by the Bay
    94.7 %     93.8 %     91.4 %     2,730       2.38       66,882  
 
Crowne Ridge
    92.9 %     93.4 %     97.1 %     1,448       1.55       31,050  
San Jose, CA
                                               
 
Avalon at Blossom Hill
    97.2 %     93.4 %     93.2 %     1,637       1.54       60,886  
 
Avalon at Cahill Park
    92.7 %     39.7% (3)     N/A       1,761       0.70 (3)     52,114  
 
Avalon at Creekside
    98.3 %     96.3 %     95.6 %     1,437       1.89       42,966  
 
Avalon at Foxchase
    97.9 %     94.9 %     95.6 %     1,342       1.50       58,822  
 
Avalon at Parkside
    97.9 %     95.8 %     95.6 %     1,756       1.62       37,853  
 
Avalon at Pruneyard
    98.0 %     94.9 %     95.9 %     1,341       1.63       31,850  
 
Avalon at River Oaks
    96.0 %     93.9 %     93.4 %     1,614       1.63       45,005  
 
Avalon Campbell
    92.5 %     93.1 %     93.1 %     1,594       1.58       60,009  
 
Avalon Cupertino
    95.2 %     93.9 %     96.3 %     1,868       1.86       49,098  
 
Avalon Mountain View
    96.0 %     93.8 %     97.5 %     1,736       1.91       50,512  
 
Avalon on the Alameda
    95.7 %     92.7 %     89.5 %     1,882       1.77       56,426  
 
Avalon Rosewalk I & II
    96.7 %     92.7 %     91.9 %     1,609       1.51       78,210  
 
Avalon Silicon Valley
    94.1 %     92.2 %     91.2 %     1,895       1.88       120,851  
 
Avalon Sunnyvale
    98.2 %     95.2 %     94.9 %     1,429       1.87       34,897  
 
Avalon Towers on the Peninsula
    97.2 %     62.4% (3)     N/A       2,229       1.34 (3)     65,581  
 
CountryBrook
    95.3 %     93.1 %     91.6 %     1,342       1.39       47,792  
 
Fairway Glen
    100.0 %     95.1 %     94.0 %     1,333       1.53       17,128  
 
San Marino
    96.8 %     93.7 %     91.0 %     1,369       1.52       34,065  

13


 

Profile of Current and Development Communities
(Dollars in thousands, except per apartment home data)
                                                               
                          Approx.           Year of   Average        
                  Number of   rentable area           completion/   size        
          City and state   homes   (Sq. Ft.)   Acres   acquisition   (Sq. Ft.)        
         
 
 
 
 
 
       
SOUTHERN CALIFORNIA
                                                       
Los Angeles, CA
                                                       
 
Avalon at Media Center
  Burbank, CA     748       530,114       14.7       1969/97       709          
 
Avalon at Warner Center
  Woodland Hills, CA     227       191,645       6.8       1979/98       844          
 
Avalon Westside Terrace
  Los Angeles, CA     363       229,296       4.8       1966/97       632          
 
Avalon Woodland Hills
  Woodland Hills, CA     663       592,722       18.2       1989/97       894          
 
The Promenade
  Burbank, CA     400       360,587       6.9       1988/2002       923          
Orange County, CA
                                                       
 
Amberway
  Anaheim, CA     272       205,572       9.9       1983/98       756          
 
Avalon at Laguna Niguel
  Laguna Niguel, CA     176       174,848       10.0       1988/98       993          
 
Avalon at Pacific Bay
  Huntington Beach, CA     304       268,000       9.7       1971/97       882          
 
Avalon at South Coast
  Costa Mesa, CA     258       208,890       8.9       1973/96       810          
 
Avalon Huntington Beach
  Huntington Beach, CA     400       353,192       16.4       1972/97       883          
 
Avalon Mission Viejo
  Mission Viejo, CA     166       124,600       7.8       1984/96       751          
 
Avalon Newport
  Costa Mesa, CA     145       120,690       6.6       1956/96       832          
 
Avalon Santa Margarita
  Rancho Santa Margarita, CA   301       229,593       20.0       1990/97       763          
San Diego, CA
                                                       
 
Avalon at Cortez Hill
  San Diego, CA     294       224,840       1.2       1973/98       765          
 
Avalon at Mission Bay
  San Diego, CA     564       402,327       5.7       1969/97       713          
 
Avalon at Mission Ridge
  San Diego, CA     200       208,100       4.0       1960/97       1,041          
 
Avalon at Penasquitos Hills
  San Diego, CA     176       141,120       8.8       1982/97       802          
     
DEVELOPMENT COMMUNITIES
                                                       
 
Avalon at Flanders Hill
  Westborough, MA     280       299,978       62.0       N/A       1,099          
 
Avalon at Gallery Place I
  Washington, DC     203       183,326       0.5       N/A       903          
 
Avalon at Glen Cove South
  Glen Cove, NY     256       270,000       4.0       N/A       1,050          
 
Avalon at Grosvenor Station
  North Bethesda, MD     497       478,530       9.9       N/A       963          
 
Avalon at Mission Bay North
  San Francisco, CA     250       244,224       1.4       N/A       977          
 
Avalon at Newton Highlands
  Newton, MA     294       401,241       7.0       N/A       1,177          
 
Avalon at Rock Spring
  North Bethesda, MD     386       388,480       10.2       N/A       1,006          
 
Avalon at Steven’s Pond
  Saugus, MA     326       360,509       82.0       N/A       1,106          
 
Avalon Darien
  Darien, CT     189       242,311       30.0       N/A       1,282          
 
Avalon Glendale
  Burbank, CA     223       241,712       5.1       N/A       1,084          
 
Avalon on Stamford Harbor
  Stamford, CT     323       336,566       12.1       N/A       1,042          
 
Avalon Traville Phase I
  North Potomac, MD     200       231,800       23.8       N/A       1,159          

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                                       
          Physical   Average economic   Average rental rate   Financial
          occupancy at   occupancy   $ per   $ per   reporting cost
          12/31/02   2002   2001   Apt (4)   Sq. Ft.   (5)
         
 
 
 
 
 
SOUTHERN CALIFORNIA
                                               
Los Angeles, CA
                                               
 
Avalon at Media Center
    94.5 %     90.3% (2)     83.8% (2)     1,127       1.44 (2)     75,508  
 
Avalon at Warner Center
    97.4 %     96.5 %     97.2 %     1,329       1.52       26,414  
 
Avalon Westside Terrace
    95.6 %     92.3 %     95.7 %     1,171       1.71       37,241  
 
Avalon Woodland Hills
    97.6 %     95.4 %     96.1 %     1,273       1.36       71,590  
 
The Promenade
    95.0 %     92.8% (3)     N/A       1,443       1.49 (3)     70,996  
Orange County, CA
                                               
 
Amberway
    96.7 %     95.7 %     93.9 %     1,003       1.27       21,400  
 
Avalon at Laguna Niguel
    99.4 %     96.8 %     96.1 %     1,232       1.20       20,957  
 
Avalon at Pacific Bay
    97.7 %     95.3 %     96.6 %     1,235       1.33       31,941  
 
Avalon at South Coast
    98.8 %     96.5 %     94.8 %     1,137       1.35       24,596  
 
Avalon Huntington Beach
    95.5 %     91.6 %     94.7 %     1,276       1.32       37,192  
 
Avalon Mission Viejo
    98.8 %     95.9 %     96.9 %     1,138       1.45       13,167  
 
Avalon Newport
    100.0 %     97.7 %     97.9 %     1,346       1.58       10,112  
 
Avalon Santa Margarita
    94.0 %     94.4 %     96.0 %     1,153       1.43       23,635  
San Diego, CA
                                               
 
Avalon at Cortez Hill
    96.3 %     92.5 %     84.0 %     1,216       1.47       34,368  
 
Avalon at Mission Bay
    97.0 %     96.2 %     97.1 %     1,242       1.67       66,060  
 
Avalon at Mission Ridge
    97.0 %     96.4 %     97.2 %     1,389       1.29       21,625  
 
Avalon at Penasquitos Hills
    95.5 %     95.2 %     95.9 %     1,105       1.31       14,323  
     
DEVELOPMENT COMMUNITIES
                                               
 
Avalon at Flanders Hill
    N/A       N/A       N/A       N/A       N/A       35,855  
 
Avalon at Gallery Place I
    N/A       N/A       N/A       N/A       N/A       41,414  
 
Avalon at Glen Cove South
    N/A       N/A       N/A       N/A       N/A       16,777  
 
Avalon at Grosvenor Station
    N/A       N/A       N/A       N/A       N/A       40,146  
 
Avalon at Mission Bay North
    N/A       N/A       N/A       N/A       N/A       71,470  
 
Avalon at Newton Highlands
    N/A       N/A       N/A       N/A       N/A       27,629  
 
Avalon at Rock Spring
    N/A       N/A       N/A       N/A       N/A       36,787  
 
Avalon at Steven’s Pond
    N/A       N/A       N/A       N/A       N/A       23,230  
 
Avalon Darien
    N/A       N/A       N/A       N/A       N/A       13,537  
 
Avalon Glendale
    N/A       N/A       N/A       N/A       N/A       17,132  
 
Avalon on Stamford Harbor
    N/A       N/A       N/A       N/A       N/A       61,146  
 
Avalon Traville Phase I
    N/A       N/A       N/A       N/A       N/A       8,882  

(1)   For the purpose of this table, Current Communities excludes communities held by unconsolidated real estate joint ventures.
 
(2)   Represents community which was under redevelopment during the year, resulting in lower average economic occupancy and average rental rate per square foot for the year.
 
(3)   Represents community that completed development or was purchased during the year, which could result in lower average economic occupancy and average rental rate per square foot for the year.
 
(4)   Represents the average rental revenue per occupied apartment home.
 
(5)   Costs are presented in accordance with generally accepted accounting principles. For current Development Communities, cost represents total costs incurred through December 31, 2002.

14


 

Features and Recreational Amenities — Current and Development Communities

                                                                                       
                                                                                  Washer &
          1 BR   2BR   3BR                       dryer
         
 
 
  Studios /                   Parking   hook-ups
          1/1.5 BA   1/1.5 BA   2/2.5/3 BA   2/2.5 BA   3BA   efficiencies   Other   Total   spaces   or units
         
 
 
 
 
 
 
 
 
 
     
CURRENT COMMUNITIES (1)
                                                                               
NORTHEAST
                                                                               
Boston, MA
                                                                               
 
Avalon at Center Place
    103             111       5             6             225       345     All
 
Avalon at Faxon Park
    68             75       28                         171       287     All
 
Avalon at Lexington
    28       24       90       56                         198       355     All
 
Avalon at Prudential Center
    361             237             23       148       12       781       142     None
 
Avalon Essex
    50             62                         42       154       259     All
 
Avalon Estates
    66       16       80                               162       354     All
 
Avalon Ledges
    124             152       28                         304       610     All
 
Avalon Oaks
    60       24       96       24                         204       355     All
 
Avalon Oaks West
    48       12       48       12                         120       233     All
 
Avalon Orchards
    69       12       75                               156       312     All
 
Avalon Summit
    154       61       28       2                         245       328     None
 
Avalon West
    40             55       25                         120       145     All
Fairfield-New Haven, CT
                                                                               
 
Avalon at Greyrock Place
    104       91       99       12                         306       459     All
 
Avalon Corners
    118             77                               195       273     All
 
Avalon Gates
    122             168       50                         340       580     All
 
Avalon Glen
    124             114                               238       400     Most
 
Avalon Haven
    44       60             24                         128       256     All
 
Avalon Lake
    36             46                   24       29       135       382     All
 
Avalon New Canaan
    16             64       24                         104       202     All
 
Avalon Springs
                70       32                         102       153     All
 
Avalon Valley
    106             134       28                         268       626     All
 
Avalon Walk I & II
    272       116       122       74                   180       764       1,528     All
Long Island, NY
                                                                               
 
Avalon Commons
    128       40       112       32                         312       538     All
 
Avalon Court
    172       54       194       44       30                   494       1,110     All
 
Avalon Towers
                37       1       3       1       67       109       198     All
Northern New Jersey
                                                                               
 
Avalon at Edgewater
    158             190       60                         408       872     All
 
Avalon at Florham Park
    46             107       117                         270       611     All
 
Avalon Cove
    190             190       46       2             76       504       464     All
 
Avalon Crest
    96             131       67                   57       351       364     All
 
The Tower at Avalon Cove
    147       24       74       24                         269       263     All
Central New Jersey
                                                                               
 
Avalon at Freehold
    42       41       176       37                         296       611     All
 
Avalon Run East
    64             106       36                         206       345     All
 
Avalon Watch
    252       36       142       82                         512       768     Most

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                                                                       
                                  Large                           Non-           Homes w/
                                  storage or   Balcony,                   direct   Direct   pre-wired
          Vaulted                   walk-in   patio, deck   Built-in           access   access   security
          ceilings   Lofts   Fireplaces   closet   or sunroom   bookcases   Carports   garages   garages   systems
         
 
 
 
 
 
 
 
 
 
     
CURRENT COMMUNITIES (1)
                                                                               
NORTHEAST
                                                                               
Boston, MA
                                                                               
 
Avalon at Center Place
  None   None   None   Half   Some   None   No   No   No   None
 
Avalon at Faxon Park
  Some   Some   Some   All   All   None   No   Yes   No   All
 
Avalon at Lexington
  Some   Some   Some   Most   All   None   Yes   Yes   No   All
 
Avalon at Prudential Center
  None   None   None   Most   Some   None   No   No   No   None
 
Avalon Essex
  None   Some   Some   All   All   None   No   Yes   Yes   All
 
Avalon Estates
  Some   Some   Some   All   All   None   No   Yes   Yes   All
 
Avalon Ledges
  None   Some   Some   All   Some   None   No   Yes   No   All
 
Avalon Oaks
  Some   Some   Some   All   All   None   No   Yes   No   All
 
Avalon Oaks West
  Some   Some   Some   All   All   None   No   Yes   No   All
 
Avalon Orchards
  None   Half   Some   Most   All   None   No   Yes   Yes   All
 
Avalon Summit
  None   None   None   None   All   None   No   Yes   No   None
 
Avalon West
  Some   Some   Some   All   Half   None   No   Yes   Yes   All
Fairfield-New Haven, CT
                                                                               
 
Avalon at Greyrock Place
  None   None   None   All   All   None   No   No   Yes   All
 
Avalon Corners
  Some   Some   Some   All   All   None   No   Yes   No   All
 
Avalon Gates
  Some   Some   None   All   All   None   Yes   Yes   No   All
 
Avalon Glen
  Some   Some   Some   Half   Most   None   Yes   Yes   No   Most
 
Avalon Haven
  None   Some   Some   All   All   None   Yes   Yes   No   All
 
Avalon Lake
  Some   Some   Some   All   All   None   No   Yes   No   All
 
Avalon New Canaan
  None   Some   Some   All   All   None   No   Yes   Yes   All
 
Avalon Springs
  Half   Half   Most   All   All   None   No   No   Yes   All
 
Avalon Valley
  Some   Some   Some   All   All   None   Yes   Yes   No   All
 
Avalon Walk I & II
  Some   Some   Half   All   All   Some   Yes   No   No   Half
Long Island, NY
                                                                               
 
Avalon Commons
  Some   Some   Some   All   All   None   No   Yes   No   All
 
Avalon Court
  Some   Most   Some   All   All   None   No   Yes   Yes   All
 
Avalon Towers
  None   None   None   All   Most   None   No   No   Yes   All
Northern New Jersey
                                                                               
 
Avalon at Edgewater
  None   Some   Some   All   All   None   No   No   Yes   Some
 
Avalon at Florham Park
  Most   None   Some   All   Some   None   No   No   Yes   All
 
Avalon Cove
  Some   Some   Some   All   Most   None   No   Yes   Some   All
 
Avalon Crest
  Some   Some   Some   All   All   None   No   Yes   Yes   All
 
The Tower at Avalon Cove
  None   None   None   Half   Some   None   No   Yes   No   All
Central New Jersey
                                                                               
 
Avalon at Freehold
  Some   Some   Some   All   All   None   No   Yes   No   None
 
Avalon Run East
  Some   Some   Some   All   All   None   Yes   Yes   Yes   All
 
Avalon Watch
  Some   None   Some   All   All   None   No   Yes   No   None

15


 

Features and Recreational Amenities — Current and Development Communities
                                                                                       
                                                                                  Washer &
          1 BR   2BR   3BR                       dryer
         
 
 
  Studios /                   Parking   hook-ups
          1/1.5 BA   1/1.5 BA   2/2.5/3 BA   2/2.5 BA   3BA   efficiencies   Other   Total   spaces   or units
         
 
 
 
 
 
 
 
 
 
New York, NY
                                                                               
 
Avalon Riverview I
    184             114             31       43             372       128     All
 
Avalon Gardens
    208       48       144       104                         504       1,008     All
 
Avalon Green
    25       24       56                               105       179     All
 
Avalon on the Sound
    143             184       22       20       43             412       645     Most
 
Avalon View
    115       47       62       64                         288       576     All
 
Avalon Willow
    150       77                                     227       379     All
 
The Avalon
    55       2       43       10                         110       167     All
MID-ATLANTIC
                                                                               
Baltimore, MD
                                                                               
 
Avalon at Fairway Hills I & II
    283       223       154       60                         720       1,137     All
 
Avalon at Symphony Glen
    86       14       54       20                         174       266     All
 
Avalon Landing
    65       18       57                         18       158       257     All
Washington, DC
                                                                               
 
4100 Massachusetts Avenue
    160       70             3             27       48       308       330     All
 
AutumnWoods
    220       72       96                         32       420       727     All
 
Avalon at Arlington Square I
    211       20       226       53                         510       949     All
 
Avalon at Arlington Square II
    172             116       44                         332       563     All
 
Avalon at Ballston — Vermont & Quincy Towers
    333       37       84                               454       498     All
 
Avalon at Ballston — Washington Towers
    205       28       111                               344       415     All
 
Avalon at Cameron Court
    208             168                         84       460       736     All
 
Avalon at Decoverly
    156             104       64       44                   368       584     All
 
Avalon at Dulles
    104       40       76             16                   236       493     All
 
Avalon at Fair Lakes
    45       12       125       26       26                   234       505     All
 
Avalon at Fox Mill
                92       73                         165       343     All
 
Avalon at Providence Park
    19             112       4                   6       141       287     All
 
Avalon Crescent
    186       26       346                               558       662     All
 
Avalon Crossing
          27       105                               132       224     All
 
Avalon Fields I & II
    74       32       84       32                   66       288       443     All
 
Avalon Knoll
    136       55       81       28                         300       482     All
MIDWEST
                                                                               
Chicago, IL
                                                                               
 
200 Arlington Place
    142       89       148                   30             409       650     All
 
Avalon at Danada Farms
    80       52       134       29                         295       714     All
 
Avalon at Stratford Green
    45       9       108       21                   9       192       437     All
 
Avalon at West Grove
    200       200                                     400       860     None
Minneapolis, MN
                                                                               
 
Avalon at Devonshire
    194             304                               498       498     Most
 
Avalon at Edinburgh
    56             114       26             2             198       210     All
 
Avalon at Town Centre
    104             111       33                         248       250     All
 
Avalon at Town Square
    76             68       12                   4       160       162     All
 
Avalon at Woodbury
    41             147       36                         224       513     All

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                                                                       
                                  Large                           Non-           Homes w/
                                  storage or   Balcony,                   direct   Direct   pre-wired
          Vaulted                   walk-in   patio, deck   Built-in           access   access   security
          ceilings   Lofts   Fireplaces   closet   or sunroom   bookcases   Carports   garages   garages   systems
         
 
 
 
 
 
 
 
 
 
New York, NY
                                                                               
 
Avalon Riverview I
  None   None   None   Most   Some   None   No   Yes   No   Some
 
Avalon Gardens
  Half   Half   Some   All   Most   None   Yes   Yes   Yes   All
 
Avalon Green
  Some   Half   Some   All   All   None   Yes   No   No   All
 
Avalon on the Sound
  None   Some   None   Most   Some   None   No   Yes   No   Some
 
Avalon View
  Some   Some   Some   Most   All   None   Yes   No   No   None
 
Avalon Willow
  Some   Some   None   Most   All   None   No   Yes   Yes   All
 
The Avalon
  Some   Some   Some   Most   Half   None   No   Yes   No   All
MID-ATLANTIC
                                                                               
Baltimore, MD
                                                                               
 
Avalon at Fairway Hills I & II
  Some   None   Some   Some   All   Some   No   No   No   None
 
Avalon at Symphony Glen
  Some   None   Most   All   All   Half   No   No   No   None
 
Avalon Landing
  None   None   Most   Most   All   None   Yes   No   No   None
Washington, DC
                                                                               
 
4100 Massachusetts Avenue
  None   None   Some   Most   All   Some   No   Yes   No   None
 
AutumnWoods
  Some   None   Some   All   All   Some   Yes   No   No   None
 
Avalon at Arlington Square I
  Some   Some   Some   All   Some   Some   No   No   Yes   All
 
Avalon at Arlington Square II
  Some   Some   Some   Some   All   Some   No   No   No   All
 
Avalon at Ballston — Vermont & Quincy Towers
  None   None   None   Most   All   None   No   No   Yes   None
 
Avalon at Ballston — Washington Towers
  None   None   Some   Most   All   None   No   No   Yes   None
 
Avalon at Cameron Court
  Some   Some   Some   All   Most   None   No   Yes   Yes   All
 
Avalon at Decoverly
  Some   Some   Most   Most   All   None   No   No   No   None
 
Avalon at Dulles
  Some   None   Some   All   All   Some   No   No   No   None
 
Avalon at Fair Lakes
  Half   None   Half   All   Most   None   No   Yes   Yes   None
 
Avalon at Fox Mill
  Most   None   Most   All   All   None   No   No   Yes   All
 
Avalon at Providence Park
  None   None   Most   All   All   None   No   No   No   None
 
Avalon Crescent
  Some   Some   Half   Most   All   Some   No   Yes   Yes   All
 
Avalon Crossing
  Some   Some   Half   All   All   Some   No   Yes   Yes   All
 
Avalon Fields I & II
  Some   Some   Half   All   Most   None   No   Yes   No   All
 
Avalon Knoll
  Some   None   Half   All   All   Some   No   No   No   None
MIDWEST
                                                                               
Chicago, IL
                                                                               
 
200 Arlington Place
  None   None   None   All   Some   None   No   Yes   No   None
 
Avalon at Danada Farms
  None   None   Some   All   Some   Some   No   No   Yes   None
 
Avalon at Stratford Green
  None   None   Some   Most   Some   Some   No   Yes   Yes   None
 
Avalon at West Grove
  None   None   None   None   All   None   Yes   No   No   None
Minneapolis, MN
                                                                               
 
Avalon at Devonshire
  Some   None   Some   Most   Most   Some   No   Yes   Yes   None
 
Avalon at Edinburgh
  None   None   Some   Some   All   None   No   Yes   No   None
 
Avalon at Town Centre
  Some   None   Some   Some   All   None   No   Yes   No   None
 
Avalon at Town Square
  Some   None   Some   Some   All   None   No   Yes   No   None
 
Avalon at Woodbury
  None   None   Some   Some   Some   None   No   No   Yes   None

16


 

Features and Recreational Amenities — Current and Development Communities
                                                                                       
                                                                                  Washer &
          1 BR   2BR   3BR                       Parking   dryer
         
 
 
  Studios /                   Parking   hook-ups
          1/1.5 BA   1/1.5 BA   2/2.5/3 BA   2/2.5 BA   3BA   efficiencies   Other   Total   spaces   or units
         
 
 
 
 
 
 
 
 
 
PACIFIC NORTHWEST
                                                                               
Seattle, WA
                                                                               
 
Avalon at Bear Creek
    55       40       110       59                         264       470     All
 
Avalon Bellevue
    110             67                   25             202       304     All
 
Avalon Belltown
    64             20                   16             100       134     All
 
Avalon Brandemoor
    88       109       149       78                         424       732     All
 
Avalon Greenbriar
    16       19       217       169                         421       731     All
 
Avalon HighGrove
    84       119       124       56       8                   391       713     All
 
Avalon ParcSquare
    31       26       55       5       7                   124       196     All
 
Avalon Redmond Place
    76       44       67       35                         222       384     All
 
Avalon RockMeadow
    28       48       86       28       16                   206       308     All
 
Avalon WildReed
    36       60       78       60                         234       462     All
 
Avalon Wildwood
    5             211             17             5       238       16     All
 
Avalon Wynhaven
    3       42       239       13       28             8       333       260     All
NORTHERN CALIFORNIA
                                                                               
Oakland-East Bay, CA
                                                                               
 
Avalon at Union Square
    124       84                                     208       210     None
 
Avalon at Willow Creek
    99             136                               235       240     All
 
Avalon Dublin
    72       8       60       48                   16       204       427     Most
 
Avalon Fremont
    130       81       176             56                   443       830     All
 
Avalon Pleasanton
    238             218                               456       856     All
 
Waterford
    208             336                               544       876     Some
San Francisco, CA
                                                                               
 
Avalon at Cedar Ridge
    117       33       24                   21             195       258     None
 
Avalon at Diamond Heights
    90             49       15                         154       155     None
 
Avalon at Nob Hill
    114             25                   46             185       104     None
 
Avalon at Sunset Towers
    183       20       20                   20             243       244     None
 
Avalon Foster City
    124       123       1                   40             288       490     None
 
Avalon Pacifica
    58       106       56                               220       299     None
 
Avalon Towers by the Bay
    103             120             3                   226       235     All
 
Crowne Ridge
    158       68       24                   4             254       377     Some
San Jose, CA
                                                                               
 
Avalon at Blossom Hill
    90             210             24                   324       562     All
 
Avalon at Cahill Park
    118             94             6                   218       283     All
 
Avalon at Creekside
    158       128                         8             294       376     None
 
Avalon at Foxchase
    168             228                               396       719     All
 
Avalon at Parkside
    60             96       36                         192       192     All
 
Avalon at Pruneyard
    212       40                                     252       395     All
 
Avalon at River Oaks
    100             126                               226       354     All
 
Avalon Campbell
    156             180             12                   348       588     All
 
Avalon Cupertino
    145             152             14                   311       526     All
 
Avalon Mountain View
    108             88       52                         248       248     All
 
Avalon on the Alameda
    113             164             28                   305       558     All
 
Avalon Rosewalk I & II
    168             264             24                   456       648     All
 
Avalon Silicon Valley
    338             336       18       15       3             710       1,400     All
 
Avalon Sunnyvale
    112       10       54                   44             220       394     Some
 
Avalon Towers on the Peninsula
    90             115             6                   211       512     All
 
CountryBrook
    108             252                               360       694     All
 
Fairway Glen
    60             84                               144       226     All
 
San Marino
    103             145                               248       436     All

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                                                                       
                                  Large                           Non-           Homes w/
                                  storage or   Balcony,                   direct   Direct   pre-wired
          Vaulted                   walk-in   patio, deck   Built-in           access   access   security
          ceilings   Lofts   Fireplaces   closet   or sunroom   bookcases   Carports   garages   garages   systems
         
 
 
 
 
 
 
 
 
 
PACIFIC NORTHWEST
                                                                               
Seattle, WA
                                                                               
 
Avalon at Bear Creek
  All   None   Most   All   All   Some   Yes   Yes   Yes   All
 
Avalon Bellevue
  None   Some   Some   All   All   None   No   No   No   None
 
Avalon Belltown
  None   None   None   All   Some   None   No   No   No   Some
 
Avalon Brandemoor
  Some   None   Most   All   All   Some   Yes   Yes   Yes   All
 
Avalon Greenbriar
  Some   None   Most   All   All   Some   Yes   No   No   None
 
Avalon HighGrove
  Some   None   Most   Most   All   Some   Yes   Yes   Yes   All
 
Avalon ParcSquare
  None   None   None   All   All   None   No   No   No   All
 
Avalon Redmond Place
  Some   None   Most   All   All   None   Yes   Yes   No   None
 
Avalon RockMeadow
  Some   None   Most   Most   All   Some   Yes   Yes   Yes   All
 
Avalon WildReed
  Some   None   Most   Most   All   Some   Yes   Yes   No   All
 
Avalon Wildwood
  Some   None   Most   Some   Most   None   No   No   Yes   All
 
Avalon Wynhaven
  Most   Some   Most   All   All   None   Yes   Yes   Yes   All
NORTHERN CALIFORNIA
                                                                               
Oakland-East Bay, CA
                                                                               
 
Avalon at Union Square
  None   None   Most   All   All   None   Yes   No   No   None
 
Avalon at Willow Creek
  None   None   None   All   All   None   Yes   No   No   None
 
Avalon Dublin
  Some   None   Most   All   All   None   No   Yes   No   None
 
Avalon Fremont
  Most   None   Some   Most   All   None   Yes   Yes   No   All
 
Avalon Pleasanton
  Some   None   Most   All   All   None   Yes   Yes   Yes   None
 
Waterford
  Some   None   None   All   All   None   Yes   No   No   None
San Francisco, CA
                                                                               
 
Avalon at Cedar Ridge
  None   Some   None   Some   All   None   Yes   No   Yes   None
 
Avalon at Diamond Heights
  Some   None   None   All   All   None   No   Yes   No   None
 
Avalon at Nob Hill
  None   None   None   None   Some   Most   No   Yes   No   None
 
Avalon at Sunset Towers
  None   None   None   None   Some   None   No   No   Yes   None
 
Avalon Foster City
  None   None   None   Most   Most   None   Yes   No   No   None
 
Avalon Pacifica
  None   None   Some   Some   All   None   Yes   Yes   No   None
 
Avalon Towers by the Bay
  Some   None   Some   Half   Most   None   No   No   Yes   All
 
Crowne Ridge
  Some   None   Some   None   All   None   Yes   No   Yes   None
San Jose, CA
                                                                               
 
Avalon at Blossom Hill
  Some   None   None   Most   All   None   Yes   Yes   No   All
 
Avalon at Cahill Park
  Some   Some   Some   Most   All   None   No   Yes   No   None
 
Avalon at Creekside
  None   None   Some   None   Most   None   Yes   No   No   None
 
Avalon at Foxchase
  Some   None   None   Some   All   None   Yes   No   No   None
 
Avalon at Parkside
  Some   None   Half   All   All   Some   Yes   Yes   No   None
 
Avalon at Pruneyard
  None   None   None   None   Half   None   Yes   Yes   No   None
 
Avalon at River Oaks
  None   None   Most   All   All   None   No   No   Yes   None
 
Avalon Campbell
  Some   None   None   All   All   None   Yes   Yes   No   All
 
Avalon Cupertino
  Some   None   Some   Some   All   Some   No   Yes   No   None
 
Avalon Mountain View
  Some   None   None   Some   All   None   Yes   No   No   None
 
Avalon on the Alameda
  Some   None   Some   All   All   Some   No   Yes   No   All
 
Avalon Rosewalk I & II
  Some   None   Some   Some   All   Most   Yes   Yes   No   All
 
Avalon Silicon Valley
  Some   Some   Some   Most   All   Some   No   Yes   No   None
 
Avalon Sunnyvale
  None   None   None   All   All   None   No   No   Yes   None
 
Avalon Towers on the Peninsula
  None   None   None   Most   All   None   No   Yes   No   None
 
CountryBrook
  Some   None   All   None   All   None   Yes   Yes   No   None
 
Fairway Glen
  Some   None   None   None   All   None   Yes   No   No   Some
 
San Marino
  Some   None   None   Most   All   None   Yes   No   No   None

17


 

Features and Recreational Amenities — Current and Development Communities
                                                                                       
                                                                                  Washer &
          1 BR   2BR   3BR                       Parking   dryer
         
 
 
  Studios /                   Parking   hook-ups
          1/1.5 BA   1/1.5 BA   2/2.5/3 BA   2/2.5 BA   3BA   efficiencies   Other   Total   spaces   or units
         
 
 
 
 
 
 
 
 
 
SOUTHERN CALIFORNIA
                                                                               
Los Angeles, CA
                                                                               
 
Avalon at Media Center
    296       102       117       12             221             748       838     Some
 
Avalon at Warner Center
    88       54       65       20                         227       252     All
 
Avalon Westside Terrace
    126             102                   135             363       487     None
 
Avalon Woodland Hills
    222             441                               663       1,300     Some
 
The Promenade
    153             196       51                         400       720     Some
Orange County, CA
                                                                               
 
Amberway
    114       48       48                   62             272       454     None
 
Avalon at Laguna Niguel
                176                               176       335     None
 
Avalon at Pacific Bay
    144       56       104                               304       478     All
 
Avalon at South Coast
    124             86                   48               258       403     Some
 
Avalon Huntington Beach
          36       324       40                         400       790     None
 
Avalon Mission Viejo
    94       28       44                               166       250     None
 
Avalon Newport
    44       54             35             12             145       235     Most
 
Avalon Santa Margarita
    160             141                               301       523     All
San Diego, CA
                                                                               
 
Avalon at Cortez Hill
    114             83                   97             294       292     None
 
Avalon at Mission Bay
    270       9       165                   120             564       695     None
 
Avalon at Mission Ridge
    18       1       98       83                         200       384     Most
 
Avalon at Penasquitos Hills
    48       48       80                               176       176     All
   
DEVELOPMENT COMMUNITIES
                                                                               
 
Avalon at Flanders Hill
    108             142       30                         280       569     All
 
Avalon at Gallery Place I
    111       77             4             11             203       125     All
 
Avalon at Glen Cove South
    112             91                   53             256       458     All
 
Avalon at Grosvenor Station
    265       33       185       13             1             497       742     All
 
Avalon at Mission Bay North
    148             95       6             1             250       198     All
 
Avalon at Newton Highlands
    90       46       92       56       4       6             294       540     All
 
Avalon at Rock Spring
    178       39       133       36                         386       678     All
 
Avalon at Steven’s Pond
    102             202       22                         326       663     All
 
Avalon Darien
    77             78       32                   2       189       472     All
 
Avalon Glendale
    75             121             27                   223       460     All
 
Avalon on Stamford Harbor
    159             130       20             14             323       543     All
 
Avalon Traville Phase I
    67       16       87       30                         200       431     All

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                                                                       
                                  Large                           Non-           Homes w/
                                  storage or   Balcony,                   direct   Direct   pre-wired
          Vaulted                   walk-in   patio, deck   Built-in           access   access   security
          ceilings   Lofts   Fireplaces   closet   or sunroom   bookcases   Carports   garages   garages   systems
         
 
 
 
 
 
 
 
 
 
SOUTHERN CALIFORNIA
                                                                               
Los Angeles, CA
                                                                               
 
Avalon at Media Center
  None   None   Some   Some   Some   None   Yes   Yes   No   None
 
Avalon at Warner Center
  Some   None   Some   Some   All   None   Yes   No   No   None
 
Avalon Westside Terrace
  None   None   None   None   All   Some   No   No   No   None
 
Avalon Woodland Hills
  None   Some   None   Most   All   None   No   No   No   None
 
The Promenade
  None   Some   All   Some   All   None   No   No   No   None
Orange County, CA
                                                                               
 
Amberway
  Some   None   None   None   All   None   Yes   Yes   No   None
 
Avalon at Laguna Niguel
  Some   None   All   None   Most   None   Yes   No   No   None
 
Avalon at Pacific Bay
  None   None   None   Half   All   None   Yes   Yes   No   None
 
Avalon at South Coast
  Half   None   None   Half   All   None   Yes   Yes   No   None
 
Avalon Huntington Beach
  None   None   None   Most   Most   None   Yes   Yes   No   None
 
Avalon Mission Viejo
  None   None   None   None   All   None   Yes   Yes   No   None
 
Avalon Newport
  Some   None   Some   Most   Most   Some   Yes   Yes   No   None
 
Avalon Santa Margarita
  None   None   None   None   All   None   Yes   Yes   No   None
San Diego, CA
                                                                               
 
Avalon at Cortez Hill
  None   None   None   None   All   None   No   No   Yes   None
 
Avalon at Mission Bay
  None   None   None   Some   All   None   No   Yes   No   None
 
Avalon at Mission Ridge
  None   None   Most   Most   Most   None   No   Yes   No   None
 
Avalon at Penasquitos Hills
  None   None   All   Some   All   All   Yes   No   No   None
   
DEVELOPMENT COMMUNITIES
                                                                               
 
Avalon at Flanders Hill
  None   Some   Some   All   Some   None   No   Yes   Yes   All
 
Avalon at Gallery Place I
  Some   None   None   All   Some   None   No   No   No   None
 
Avalon at Glen Cove South
  None   None   Some   Most   Some   None   No   No   No   Some
 
Avalon at Grosvenor Station
  Some   Some   Some   Most   All   None   No   No   Yes   All
 
Avalon at Mission Bay North
  None   Some   None   All   Some   None   No   Yes   No   None
 
Avalon at Newton Highlands
  Some   Some   Some   Most   Most   None   No   Yes   No   All
 
Avalon at Rock Spring
  Some   Some   Some   Most   Most   Some   No   No   Yes   All
 
Avalon at Steven’s Pond
  Some   Some   Some   All   All   Some   No   Yes   Yes   All
 
Avalon Darien
  Some   Some   Some   Some   All   None   No   No   Yes   All
 
Avalon Glendale
  None   None   Some   All   All   None   No   Yes   No   All
 
Avalon on Stamford Harbor
  Some   Some   Some   Most   All   None   No   No   No   All
 
Avalon Traville Phase I
  Some   Some   Some   Most   All   Some   No   Yes   Yes   None

18


 

Features and Recreational Amenities — Current and Development Communities

                                                                                             
                Community   Building                                                                
        Buildings w/   entrance   entrance   Under-   Aerobics                   Walking /                        
        security   controlled   controlled   ground   dance           Picnic   jogging                   Sauna /
        systems   access   access   parking   studio   Car wash   area   trail           Pool   whirlpool
       
 
 
 
 
 
 
 
         
 
   
CURRENT COMMUNITIES (1)
                                                                                       
NORTHEAST
                                                                                       
Boston, MA
                                                                                       
 
Avalon at Center Place
  None   Yes   Yes   Yes   No   Yes   Yes   No           Yes   No
 
Avalon at Faxon Park
  None   No   Yes   No   No   No   Yes   No           Yes   Yes
 
Avalon at Lexington
  None   No   Yes   No   No   No   Yes   No           Yes   No
 
Avalon at Prudential Center
  None   No   Yes   Yes   No   No   Yes   No           No   No
 
Avalon Essex
  None   No   Yes   No   No   No   Yes   No           Yes   Yes
 
Avalon Estates
  None   No   No   No   No   No   Yes   Yes           Yes   Yes
 
Avalon Ledges
  All   No   Yes   No   No   No   Yes   No           Yes   Yes
 
Avalon Oaks
  None   No   Yes   No   No   No   Yes   No           Yes   Yes
 
Avalon Oaks West
  All   No   Yes   No   No   No   Yes   No           Yes   Yes
 
Avalon Orchards
  None   No   No   No   No   No   Yes   Yes           Yes   Yes
 
Avalon Summit
  None   No   Yes   No   No   No   Yes   No           Yes   No
 
Avalon West
  None   No   Yes   No   No   No   Yes   No           Yes   No
Fairfield-New Haven, CT
                                                                                       
 
Avalon at Greyrock Place
  All   Yes   No   Yes   No   No   Yes   No           Yes   No
 
Avalon Corners
  All   Yes   Yes   Yes   No   No   Yes   No           Yes   No
 
Avalon Gates
  None   Yes   No   No   No   No   Yes   No           Yes   No
 
Avalon Glen
  None   No   Yes   Yes   No   No   No   No           Yes   No
 
Avalon Haven
  None   No   No   No   No   No   Yes   No           Yes   No
 
Avalon Lake
  None   No   No   No   No   No   Yes   No           Yes   No
 
Avalon New Canaan
  All   No   Yes   No   No   No   Yes   Yes           Yes   No
 
Avalon Springs
  All   No   No   No   No   No   Yes   Yes           Yes   No
 
Avalon Valley
  None   No   No   No   No   No   Yes   No           Yes   No
 
Avalon Walk I & II
  None   No   No   No   Yes   No   Yes   Yes           Yes   No
Long Island, NY
                                                                                       
 
Avalon Commons
  All   No   Yes   No   No   No   Yes   No           Yes   No
 
Avalon Court
  All   Yes   Yes   No   No   Yes   Yes   Yes           Yes   No
 
Avalon Towers
  All   No   No   Yes   No   Yes   No   No           Yes   No
Northern New Jersey
                                                                                       
 
Avalon at Edgewater
  All   Yes   Yes   Yes   No   No   No   No           Yes   No
 
Avalon at Florham Park
  None   No   No   No   No   No   No   No           Yes   No
 
Avalon Cove
  All   Yes   Yes   No   No   No   Yes   Yes           Yes   No
 
Avalon Crest
  All   Yes   Yes   No   No   No   No   No           Yes   No
 
The Tower at Avalon Cove
  All   No   Yes   No   No   No   Yes   Yes           Yes   No
Central New Jersey
                                                                                       
 
Avalon at Freehold
  None   No   No   No   No   No   Yes   No           Yes   No
 
Avalon Run East
  None   No   No   No   No   No   Yes   Yes           Yes   No
 
Avalon Watch
  None   No   Yes   No   No   No   Yes   No           Yes   No

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                                                             
                                        Indoor /                                
        Tennis           Fitness   Sand   outdoor   Clubhouse /   Business                
        court   Racquetball   center   volleyball   basketball   clubroom   center   Totlot   Concierge
       
 
 
 
 
 
 
 
 
   
CURRENT COMMUNITIES (1)
                                                                       
NORTHEAST
                                                                       
Boston, MA
                                                                       
 
Avalon at Center Place
  No   No   Yes   No   No   Yes   No   No   Yes
 
Avalon at Faxon Park
  No   No   Yes   No   No   Yes   No   Yes   No
 
Avalon at Lexington
  No   No   Yes   No   Yes   Yes   No   Yes   No
 
Avalon at Prudential Center
  No   No   No   No   No   Yes   No   No   Yes
 
Avalon Essex
  No   No   Yes   No   No   Yes   No   No   No
 
Avalon Estates
  No   No   Yes   No   No   No   Yes   Yes   No
 
Avalon Ledges
  No   No   Yes   No   Yes   Yes   No   Yes   No
 
Avalon Oaks
  No   No   Yes   No   No   Yes   No   Yes   No
 
Avalon Oaks West
  No   No   Yes   No   No   Yes   No   Yes   No
 
Avalon Orchards
  No   No   Yes   No   No   Yes   No   Yes   No
 
Avalon Summit
  No   No   Yes   No   No   No   No   No   No
 
Avalon West
  No   No   No   No   Yes   Yes   No   Yes   No
Fairfield-New Haven, CT
                                                                       
 
Avalon at Greyrock Place
  Yes   No   Yes   No   No   Yes   Yes   Yes   Yes
 
Avalon Corners
  No   No   Yes   No   No   Yes   Yes   No   Yes
 
Avalon Gates
  No   Yes   Yes   Yes   Yes   Yes   No   Yes   No
 
Avalon Glen
  No   Yes   Yes   No   No   Yes   No   No   Yes
 
Avalon Haven
  No   No   Yes   No   No   Yes   No   Yes   No
 
Avalon Lake
  No   No   Yes   No   No   No   No   No   No
 
Avalon New Canaan
  No   No   Yes   No   No   Yes   Yes   Yes   No
 
Avalon Springs
  No   No   Yes   No   No   Yes   No   Yes   No
 
Avalon Valley
  No   No   Yes   No   Yes   Yes   No   Yes   No
 
Avalon Walk I & II
  Yes   Yes   Yes   No   Yes   Yes   No   Yes   No
Long Island, NY
                                                                       
 
Avalon Commons
  No   No   Yes   No   Yes   Yes   Yes   Yes   No
 
Avalon Court
  No   Yes   Yes   No   Yes   Yes   Yes   Yes   No
 
Avalon Towers
  No   No   Yes   No   No   Yes   No   No   Yes
Northern New Jersey
                                                                       
 
Avalon at Edgewater
  No   No   Yes   No   No   Yes   Yes   No   Yes
 
Avalon at Florham Park
  No   No   Yes   No   No   Yes   No   No   No
 
Avalon Cove
  Yes   Yes   Yes   No   Yes   Yes   Yes   Yes   Yes
 
Avalon Crest
  No   No   Yes   No   Yes   Yes   Yes   No   No
 
The Tower at Avalon Cove
  Yes   Yes   Yes   No   Yes   Yes   Yes   Yes   Yes
Central New Jersey
                                                                       
 
Avalon at Freehold
  No   No   Yes   No   No   Yes   Yes   Yes   No
 
Avalon Run East
  No   No   Yes   No   No   Yes   No   Yes   No
 
Avalon Watch
  Yes   Yes   Yes   No   Yes   Yes   No   Yes   No

19


 

Features and Recreational Amenities — Current and Development Communities
                                                                                             
                Community   Building                                                                
        Buildings w/   entrance   entrance   Under-   Aerobics                   Walking /                        
        security   controlled   controlled   ground   dance           Picnic   jogging                   Sauna /
        systems   access   access   parking   studio   Car wash   area   trail           Pool   whirlpool
       
 
 
 
 
 
 
 
         
 
New York, NY
                                                                                       
 
Avalon Riverview I
  All   Yes   Yes   No   No   No   Yes   Yes           No   No
 
Avalon Gardens
  All   No   No   No   No   No   Yes   No           Yes   No
 
Avalon Green
  All   No   No   No   No   No   No   No           Yes   No
 
Avalon on the Sound
  All   Yes   Yes   No   No   No   Yes   Yes           Yes   No
 
Avalon View
  None   No   No   No   No   No   Yes   No           Yes   No
 
Avalon Willow
  All   Yes   Yes   Yes   No   No   Yes   No           Yes   No
 
The Avalon
  All   No   Yes   Yes   No   No   No   No           No   No
MID-ATLANTIC
                                                                                       
Baltimore, MD
                                                                                       
 
Avalon at Fairway Hills I & II
  None   No   No   No   No   Yes   Yes   No           Yes   No
 
Avalon at Symphony Glen
  None   No   No   No   No   Yes   Yes   Yes           Yes   No
 
Avalon Landing
  None   No   No   No   No   Yes   Yes   Yes           Yes   No
Washington, DC
                                                                                       
 
4100 Massachusetts Avenue
  None   Yes   Yes   Yes   No   No   No   Yes           Yes   No
 
AutumnWoods
  None   No   No   No   No   Yes   Yes   Yes           Yes   No
 
Avalon at Arlington Square I
  None   No   Yes   No   No   No   Yes   No           Yes   No
 
Avalon at Arlington Square II
  All   No   Yes   No   No   No   Yes   No           Yes   No
 
Avalon at Ballston — Vermont & Quincy Towers
  None   Yes   Yes   Yes   No   No   Yes   No           Yes   Yes
 
Avalon at Ballston — Washington Towers
  None   Yes   Yes   Yes   No   No   Yes   No           Yes   No
 
Avalon at Cameron Court
  All   Yes   No   No   Yes   Yes   Yes   No           Yes   Yes
 
Avalon at Decoverly
  None   No   No   No   No   Yes   Yes   Yes           Yes   No
 
Avalon at Dulles
  None   No   No   No   No   Yes   No   Yes           Yes   Yes
 
Avalon at Fair Lakes
  None   Yes   No   No   No   Yes   Yes   No           Yes   No
 
Avalon at Fox Mill
  None   No   No   No   No   Yes   Yes   No           Yes   No
 
Avalon at Providence Park
  None   No   No   No   No   Yes   No   No           Yes   No
 
Avalon Crescent
  None   Yes   No   No   Yes   Yes   Yes   Yes           Yes   No
 
Avalon Crossing
  None   Yes   No   No   No   Yes   Yes   No           Yes   No
 
Avalon Fields I & II
  All   No   No   No   No   Yes   Yes   No           Yes   No
 
Avalon Knoll
  None   No   Yes   No   No   Yes   Yes   Yes           Yes   No
MIDWEST
                                                                                       
Chicago, IL
                                                                                       
 
200 Arlington Place
  None   No   Yes   No   No   No   No   No           Yes   No
 
Avalon at Danada Farms
  None   No   No   No   No   No   No   No           Yes   No
 
Avalon at Stratford Green
  None   No   No   No   No   Yes   Yes   Yes           Yes   No
 
Avalon at West Grove
  None   No   Yes   No   No   No   Yes   No           Yes   Yes
Minneapolis, MN
                                               
 
Avalon at Devonshire
  None   No   Yes   Yes   No   Yes   Yes   Yes           Yes   No
 
Avalon at Edinburgh
  None   No   Yes   Yes   No   Yes   Yes   Yes           Yes   Yes
 
Avalon at Town Centre
  None   No   Yes   Yes   No   Yes   Yes   Yes           Yes   Yes
 
Avalon at Town Square
  None   No   Yes   Yes   No   Yes   Yes   Yes           Yes   Yes
 
Avalon at Woodbury
  None   No   No   No   No   No   No   Yes           Yes   No

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                                                             
                                        Indoor /                                
        Tennis           Fitness   Sand   outdoor   Clubhouse /   Business                
        court   Racquetball   center   volleyball   basketball   clubroom   center   Totlot   Concierge
       
 
 
 
 
 
 
 
 
New York, NY
                                                                       
 
Avalon Riverview I
  No   No   Yes   No   No   Yes   Yes   No   Yes
 
Avalon Gardens
  Yes   Yes   Yes   Yes   Yes   Yes   Yes   Yes   Yes
 
Avalon Green
  No   No   No   Yes   No   Yes   No   No   No
 
Avalon on the Sound
  No   No   Yes   No   Yes   Yes   Yes   No   Yes
 
Avalon View
  Yes   No   Yes   No   Yes   Yes   No   Yes   No
 
Avalon Willow
  No   Yes   Yes   No   No   Yes   Yes   No   Yes
 
The Avalon
  No   No   Yes   No   No   Yes   Yes   No   Yes
MID-ATLANTIC
                                                                       
Baltimore, MD
                                                                       
 
Avalon at Fairway Hills I & II
  Yes   Yes   Yes   No   No   Yes   Yes   Yes   No
 
Avalon at Symphony Glen
  No   No   Yes   No   No   Yes   No   Yes   No
 
Avalon Landing
  No   No   Yes   No   No   Yes   No   No   No
Washington, DC
                                                                       
 
4100 Massachusetts Avenue
  No   No   Yes   No   No   Yes   No   No   No
 
AutumnWoods
  Yes   No   Yes   Yes   Yes   Yes   No   Yes   No
 
Avalon at Arlington Square I
  No   No   Yes   No   Yes   Yes   Yes   Yes   No
 
Avalon at Arlington Square II
  No   No   Yes   No   Yes   Yes   Yes   Yes   No
 
Avalon at Ballston — Vermont & Quincy Towers
  No   No   Yes   No   No   Yes   No   No   No
 
Avalon at Ballston — Washington Towers
  Yes   No   Yes   No   No   Yes   No   No   Yes
 
Avalon at Cameron Court
  No   No   Yes   Yes   Yes   Yes   Yes   No   No
 
Avalon at Decoverly
  Yes   Yes   Yes   No   Yes   Yes   No   Yes   No
 
Avalon at Dulles
  Yes   No   Yes   No   No   Yes   No   No   No
 
Avalon at Fair Lakes
  Yes   No   Yes   No   No   Yes   Yes   No   No
 
Avalon at Fox Mill
  No   No   Yes   No   No   Yes   No   Yes   No
 
Avalon at Providence Park
  No   No   Yes   No   No   Yes   Yes   No   No
 
Avalon Crescent
  No   No   Yes   No   No   Yes   Yes   Yes   Yes
 
Avalon Crossing
  No   No   Yes   No   No   Yes   No   Yes   No
 
Avalon Fields I & II
  No   No   Yes   No   No   Yes   No   Yes   No
 
Avalon Knoll
  Yes   No   Yes   No   Yes   No   No   Yes   No
MIDWEST
                                                                       
Chicago, IL
                                                                       
 
200 Arlington Place
  No   No   Yes   No   No   Yes   No   No   No
 
Avalon at Danada Farms
  No   No   Yes   No   No   Yes   Yes   No   Yes
 
Avalon at Stratford Green
  No   No   No   No   No   Yes   No   No   Yes
 
Avalon at West Grove
  No   Yes   Yes   No   No   Yes   Yes   Yes   No
Minneapolis, MN
                                                                       
 
Avalon at Devonshire
  Yes   No   Yes   No   No   Yes   No   No   No
 
Avalon at Edinburgh
  No   No   Yes   No   No   Yes   No   No   No
 
Avalon at Town Centre
  Yes   No   Yes   Yes   No   Yes   No   Yes   No
 
Avalon at Town Square
  Yes   No   Yes   Yes   No   Yes   No   Yes   No
 
Avalon at Woodbury
  No   No   Yes   No   No   No   No   No   No

20


 

Features and Recreational Amenities — Current and Development Communities
                                                                                             
                Community   Building                                                                
        Buildings w/   entrance   entrance   Under-   Aerobics                   Walking /                        
        security   controlled   controlled   ground   dance           Picnic   jogging                   Sauna /
        systems   access   access   parking   studio   Car wash   area   trail           Pool   whirlpool
       
 
 
 
 
 
 
 
         
 
PACIFIC NORTHWEST
                                                                                       
Seattle, WA
                                                                                       
 
Avalon at Bear Creek
  All   Yes   No   No   No   No   Yes   Yes           Yes   Yes
 
Avalon Bellevue
  None   No   Yes   Yes   No   No   No   No           No   No
 
Avalon Belltown
  None   Yes   Yes   Yes   No   No   No   No           No   No
 
Avalon Brandemoor
  All   No   No   No   No   No   Yes   No           Yes   Yes
 
Avalon Greenbriar
  None   No   Yes   No   No   No   Yes   No           Yes   Yes
 
Avalon HighGrove
  None   No   No   No   No   No   No   No           Yes   Yes
 
Avalon ParcSquare
  None   Yes   Yes   Yes   No   No   No   Yes           No   No
 
Avalon Redmond Place
  None   No   No   No   No   Yes   No   Yes           Yes   Yes
 
Avalon RockMeadow
  None   No   No   No   No   No   Yes   No           Yes   Yes
 
Avalon WildReed
  None   No   No   No   No   No   Yes   Yes           Yes   Yes
 
Avalon Wildwood
  All   No   No   No   No   No   No   Yes           Yes   Yes
 
Avalon Wynhaven
  None   No   Yes   Yes   No   No   Yes   Yes           Yes   Yes
NORTHERN CALIFORNIA
                                                                                       
Oakland-East Bay, CA
                                                                                       
 
Avalon at Union Square
  None   Yes   No   No   No   No   No   No           Yes   No
 
Avalon at Willow Creek
  Some   Yes   No   No   No   Yes   Yes   No           Yes   Yes
 
Avalon Dublin
  None   No   No   No   No   Yes   Yes   No           Yes   Yes
 
Avalon Fremont
  All   No   No   Yes   Yes   Yes   No   No           Yes   Yes
 
Avalon Pleasanton
  None   No   No   No   No   Yes   No   No           Yes   Yes
 
Waterford
  Some   Yes   No   No   No   Yes   No   No           Yes   Yes
San Francisco, CA
                                                                                       
 
Avalon at Cedar Ridge
  None   No   No   No   No   No   No   No           Yes   Yes
 
Avalon at Diamond Heights
  None   No   Yes   Yes   No   No   No   No           Yes   Yes
 
Avalon at Nob Hill
  None   Yes   Yes   Yes   No   No   Yes   No           No   No
 
Avalon at Sunset Towers
  All   Yes   Yes   Yes   No   Yes   Yes   No           No   No
 
Avalon Foster City
  Some   No   No   No   No   Yes   No   Yes           Yes   No
 
Avalon Pacifica
  None   No   No   No   No   No   No   No           Yes   No
 
Avalon Towers by the Bay
  None   Yes   Yes   Yes   No   No   No   No           No   Yes
 
Crowne Ridge
  None   No   No   Yes   No   No   No   Yes           Yes   Yes
San Jose, CA
                                                                                       
 
Avalon at Blossom Hill
  None   Yes   Yes   No   No   Yes   No   No           Yes   Yes
 
Avalon at Cahill Park
  All   Yes   Yes   Yes   Yes   No   No   No           Yes   Yes
 
Avalon at Creekside
  Some   No   No   No   No   No   Yes   Yes           Yes   No
 
Avalon at Foxchase
  None   No   No   Yes   No   Yes   No   No           Yes   Yes
 
Avalon at Parkside
  None   No   No   Yes   No   No   Yes   No           Yes   Yes
 
Avalon at Pruneyard
  None   No   No   No   No   No   Yes   No           Yes   Yes
 
Avalon at River Oaks
  None   No   No   No   No   No   Yes   No           Yes   Yes
 
Avalon Campbell
  Some   Yes   Yes   Yes   Yes   No   Yes   Yes           Yes   Yes
 
Avalon Cupertino
  None   Yes   Yes   Yes   No   No   No   No           Yes   Yes
 
Avalon Mountain View
  None   No   No   Yes   No   Yes   Yes   No           Yes   No
 
Avalon on the Alameda
  All   Yes   Yes   Yes   No   No   No   No           Yes   Yes
 
Avalon Rosewalk I & II
  None   Yes   No   No   Yes   No   Yes   Yes           Yes   Yes
 
Avalon Silicon Valley
  Some   Yes   Yes   Yes   Yes   No   Yes   No           Yes   Yes
 
Avalon Sunnyvale
  None   No   No   Yes   Yes   Yes   Yes   No           Yes   Yes
 
Avalon Towers on the Peninsula
  All   Yes   Yes   Yes   No   Yes   Yes   No           Yes   Yes
 
CountryBrook
  None   Yes   No   No   No   Yes   No   No           Yes   Yes
 
Fairway Glen
  Some   No   No   No   No   Yes   Yes   No           Yes   Yes
 
San Marino
  None   Yes   No   No   No   Yes   No   No           Yes   Yes

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                                                             
                                        Indoor /                                
        Tennis           Fitness   Sand   outdoor   Clubhouse /   Business                
        court   Racquetball   center   volleyball   basketball   clubroom   center   Totlot   Concierge
       
 
 
 
 
 
 
 
 
PACIFIC NORTHWEST
                                                                       
Seattle, WA
                                                                       
 
Avalon at Bear Creek
  No   No   Yes   No   No   Yes   Yes   Yes   No
 
Avalon Bellevue
  No   No   Yes   No   No   Yes   Yes   No   Yes
 
Avalon Belltown
  No   No   Yes   No   No   Yes   No   No   No
 
Avalon Brandemoor
  No   No   Yes   No   No   Yes   Yes   Yes   No
 
Avalon Greenbriar
  No   No   Yes   No   Yes   Yes   No   Yes   No
 
Avalon HighGrove
  No   No   Yes   No   No   Yes   Yes   Yes   No
 
Avalon ParcSquare
  No   No   Yes   No   No   Yes   Yes   No   No
 
Avalon Redmond Place
  No   No   Yes   No   No   Yes   No   Yes   No
 
Avalon RockMeadow
  No   No   Yes   No   No   Yes   Yes   Yes   No
 
Avalon WildReed
  No   No   Yes   No   No   Yes   Yes   Yes   No
 
Avalon Wildwood
  No   No   Yes   No   No   Yes   Yes   Yes   No
 
Avalon Wynhaven
  No   No   Yes   No   Yes   Yes   Yes   Yes   No
NORTHERN CALIFORNIA
                                                                       
Oakland-East Bay, CA
                                                                       
 
Avalon at Union Square
  No   No   Yes   No   No   No   No   No   No
 
Avalon at Willow Creek
  No   No   Yes   No   No   No   No   No   No
 
Avalon Dublin
  No   No   Yes   Yes   Yes   No   Yes   No   No
 
Avalon Fremont
  No   No   Yes   No   No   Yes   No   No   No
 
Avalon Pleasanton
  No   No   Yes   No   Yes   No   Yes   Yes   No
 
Waterford
  No   No   Yes   No   Yes   No   No   Yes   No
San Francisco, CA
                                                                       
 
Avalon at Cedar Ridge
  No   No   Yes   No   No   Yes   No   No   No
 
Avalon at Diamond Heights
  No   No   Yes   No   No   Yes   No   No   No
 
Avalon at Nob Hill
  No   No   Yes   No   No   No   No   No   Yes
 
Avalon at Sunset Towers
  No   No   No   No   No   No   No   No   No
 
Avalon Foster City
  No   No   No   No   No   Yes   No   Yes   No
 
Avalon Pacifica
  No   No   Yes   No   No   No   No   No   No
 
Avalon Towers by the Bay
  No   No   Yes   No   No   Yes   Yes   No   Yes
 
Crowne Ridge
  No   No   Yes   No   No   No   Yes   No   No
San Jose, CA
                                                                       
 
Avalon at Blossom Hill
  No   No   Yes   No   No   No   Yes   No   No
 
Avalon at Cahill Park
  No   No   Yes   No   No   Yes   Yes   No   No
 
Avalon at Creekside
  Yes   No   Yes   Yes   Yes   Yes   Yes   No   No
 
Avalon at Foxchase
  No   No   Yes   No   No   No   No   No   No
 
Avalon at Parkside
  No   No   Yes   No   Yes   Yes   Yes   Yes   No
 
Avalon at Pruneyard
  No   No   Yes   Yes   Yes   No   Yes   No   No
 
Avalon at River Oaks
  No   No   Yes   No   No   No   Yes   No   No
 
Avalon Campbell
  No   No   Yes   Yes   No   No   Yes   Yes   No
 
Avalon Cupertino
  No   No   Yes   No   No   No   Yes   No   No
 
Avalon Mountain View
  No   No   Yes   No   No   No   Yes   Yes   No
 
Avalon on the Alameda
  No   No   Yes   No   No   No   No   No   No
 
Avalon Rosewalk I & II
  No   No   Yes   No   No   No   Yes   No   No
 
Avalon Silicon Valley
  Yes   No   Yes   No   Yes   Yes   Yes   Yes   Yes
 
Avalon Sunnyvale
  No   No   Yes   No   No   No   Yes   Yes   No
 
Avalon Towers on the Peninsula
  No   No   Yes   No   No   No   No   No   Yes
 
CountryBrook
  No   No   Yes   No   No   No   No   No   No
 
Fairway Glen
  No   No   Yes   No   No   No   No   Yes   No
 
San Marino
  No   No   Yes   No   No   No   No   Yes   No

21


 

Features and Recreational Amenities — Current and Development Communities
                                                                                             
                Community   Building                                                                
        Buildings w/   entrance   entrance   Under-   Aerobics                   Walking /                        
        security   controlled   controlled   ground   dance           Picnic   jogging                   Sauna /
        systems   access   access   parking   studio   Car wash   area   trail           Pool   whirlpool
       
 
 
 
 
 
 
 
         
 
SOUTHERN CALIFORNIA
                                                                                       
Los Angeles, CA
                                                                                       
 
Avalon at Media Center
  None   No   Yes   No   No   No   Yes   No           Yes   No
 
Avalon at Warner Center
  None   Yes   Yes   No   No   No   No   No           Yes   Yes
 
Avalon Westside Terrace
  None   Yes   Yes   Yes   No   No   No   No           Yes   Yes
 
Avalon Woodland Hills
  None   Yes   No   Yes   No   No   No   No           Yes   Yes
 
The Promenade
  None   Yes   Yes   Yes   No   No   Yes   No           Yes   Yes
Orange County, CA
                                                                                       
 
Amberway
  None   Yes   No   No   No   No   No   No           Yes   Yes
 
Avalon at Laguna Niguel
  None   No   No   Yes   No   No   No   No           Yes   Yes
 
Avalon at Pacific Bay
  None   Yes   No   No   No   No   No   No           Yes   Yes
 
Avalon at South Coast
  None   Yes   No   No   No   Yes   No   No           Yes   Yes
 
Avalon Huntington Beach
  None   Yes   No   No   No   No   Yes   No           Yes   Yes
 
Avalon Mission Viejo
  None   Yes   No   No   No   No   No   Yes           Yes   Yes
 
Avalon Newport
  None   No   No   No   No   Yes   No   No           Yes   Yes
 
Avalon Santa Margarita
  None   No   No   No   No   No   Yes   Yes           Yes   Yes
San Diego, CA
                                                                                       
 
Avalon at Cortez Hill
  All   Yes   Yes   No   No   No   No   Yes           Yes   Yes
 
Avalon at Mission Bay
  None   Yes   Yes   Yes   Yes   Yes   No   No           Yes   Yes
 
Avalon at Mission Ridge
  Some   No   No   No   No   No   Yes   No           Yes   Yes
 
Avalon at Penasquitos Hills
  None   No   No   No   No   No   Yes   Yes           Yes   Yes
   
DEVELOPMENT COMMUNITIES
                                                                                       
 
Avalon at Flanders Hill
  All   No   Yes   No   No   No   Yes   No           Yes   Yes
 
Avalon at Gallery Place I
  All   Yes   Yes   Yes   No   No   No   No           No   No
 
Avalon at Glen Cove South
  Some   Yes   Yes   No   Yes   No   Yes   Yes           Yes   No
 
Avalon at Grosvenor Station
  All   Yes   Yes   Yes   No   Yes   Yes   No           Yes   No
 
Avalon at Mission Bay North
  All   Yes   Yes   Yes   Yes   No   No   No           No   No
 
Avalon at Newton Highlands
  All   No   Yes   Yes   No   No   Yes   Yes           Yes   Yes
 
Avalon at Rock Spring
  None   No   Yes   No   No   No   Yes   No           Yes   No
 
Avalon at Steven’s Pond
  All   No   Yes   No   Yes   No   Yes   No           Yes   Yes
 
Avalon Darien
  None   No   No   No   No   No   Yes   Yes           Yes   No
 
Avalon Glendale
  None   Yes   Yes   Yes   No   No   No   No           Yes   No
 
Avalon on Stamford Harbor
  All   Yes   Yes   Yes   No   No   Yes   Yes           Yes   No
 
Avalon Traville Phase I
  None   No   Yes   No   No   No   Yes   Yes           Yes   No

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                                                             
                                        Indoor /                                
        Tennis           Fitness   Sand   outdoor   Clubhouse /   Business                
        court   Racquetball   center   volleyball   basketball   clubroom   center   Totlot   Concierge
       
 
 
 
 
 
 
 
 
SOUTHERN CALIFORNIA
                                                                       
Los Angeles, CA
                                                                       
 
Avalon at Media Center
  No   No   Yes   No   No   No   Yes   No   No
 
Avalon at Warner Center
  Yes   No   Yes   No   No   No   Yes   No   No
 
Avalon Westside Terrace
  Yes   No   Yes   No   Yes   Yes   Yes   Yes   No
 
Avalon Woodland Hills
  No   No   Yes   No   No   No   Yes   No   No
 
The Promenade
  No   No   Yes   No   No   Yes   Yes   Yes   No
Orange County, CA
                                                                       
 
Amberway
  No   No   Yes   No   No   No   No   No   No
 
Avalon at Laguna Niguel
  No   No   Yes   No   No   No   No   Yes   No
 
Avalon at Pacific Bay
  No   No   Yes   No   No   No   Yes   Yes   No
 
Avalon at South Coast
  Yes   No   Yes   Yes   No   Yes   Yes   No   No
 
Avalon Huntington Beach
  No   No   Yes   No   No   Yes   Yes   Yes   No
 
Avalon Mission Viejo
  No   No   Yes   No   No   No   Yes   No   No
 
Avalon Newport
  No   No   Yes   No   No   No   Yes   No   No
 
Avalon Santa Margarita
  No   No   Yes   No   No   No   No   Yes   No
San Diego, CA
                                                                       
 
Avalon at Cortez Hill
  Yes   No   Yes   No   No   Yes   Yes   No   No
 
Avalon at Mission Bay
  Yes   No   Yes   Yes   Yes   Yes   Yes   No   No
 
Avalon at Mission Ridge
  No   No   Yes   No   No   No   No   Yes   No
 
Avalon at Penasquitos Hills
  Yes   Yes   Yes   Yes   No   No   Yes   Yes   No
   
DEVELOPMENT COMMUNITIES
                                                                       
 
Avalon at Flanders Hill
  No   No   Yes   No   Yes   Yes   No   Yes   No
 
Avalon at Gallery Place I
  No   No   Yes   No   No   No   Yes   No   Yes
 
Avalon at Glen Cove South
  No   No   Yes   No   No   Yes   Yes   No   Yes
 
Avalon at Grosvenor Station
  No   No   Yes   No   No   Yes   Yes   No   Yes
 
Avalon at Mission Bay North
  No   No   Yes   No   No   Yes   No   No   Yes
 
Avalon at Newton Highlands
  No   No   Yes   No   No   Yes   Yes   Yes   Yes
 
Avalon at Rock Spring
  No   No   Yes   No   No   Yes   Yes   Yes   No
 
Avalon at Steven’s Pond
  No   No   Yes   No   Yes   Yes   No   Yes   No
 
Avalon Darien
  No   Yes   Yes   No   No   Yes   Yes   Yes   No
 
Avalon Glendale
  No   No   Yes   No   No   Yes   Yes   No   No
 
Avalon on Stamford Harbor
  No   Yes   Yes   No   Yes   Yes   Yes   No   Yes
 
Avalon Traville Phase I
  No   No   Yes   No   Yes   Yes   Yes   Yes   No

(1)   For the purpose of this table, Current Communities excludes communities held by unconsolidated real estate joint ventures.

22


 

Development Communities

As of February 1, 2003, we had 12 Development Communities under construction. We expect these Development Communities, when completed, to add a total of 3,429 apartment homes to our portfolio for a total capitalized cost, including land acquisition costs, of approximately $645,700,000. 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, construction completion dates or stabilization 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” included elsewhere in this Item 2.

23


 

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

                                                           
                      Total                                
              Number of   budgeted                   Estimated   Estimated
              apartment   cost (1)   Construction   Initial   completion   stabilization
              homes   ($ millions)   start   occupancy (2)   date   date (3)
             
 
 
 
 
 
 
1.
  Avalon on Stamford Harbor
                                               
 
  Stamford, CT     323     $ 60.7       Q3 2000       Q1 2002       Q1 2003       Q3 2003  
 
2.
  Avalon at Mission Bay North
                                               
 
  San Francisco, CA     250       79.5       Q1 2001       Q4 2002       Q2 2003       Q4 2003  
 
3.
  Avalon at Flanders Hill
                                               
 
  Westborough, MA     280       38.4       Q3 2001       Q2 2002       Q1 2003       Q3 2003  
 
4.
  Avalon at Rock Spring (4)                                                
 
  North Bethesda, MD     386       45.9       Q4 2001       Q4 2002       Q3 2003       Q1 2004  
 
5.
  Avalon at Gallery Place I (5)                                                
 
  Washington, DC     203       50.0       Q4 2001       Q2 2003       Q4 2003       Q2 2004  
 
6.
  Avalon Glendale
                                               
 
  Glendale, CA     223       40.4       Q1 2002       Q2 2003       Q1 2004       Q3 2004  
 
7.
  Avalon at Grosvenor Station (6)                                                
 
  North Bethesda, MD     499       82.3       Q1 2002       Q3 2003       Q4 2004       Q2 2005  
 
8.
  Avalon at Newton Highlands (6)                                                
 
  Newton, MA     294       58.7       Q2 2002       Q3 2003       Q1 2004       Q3 2004  
 
9.
  Avalon at Glen Cove South
                                               
 
  Glen Cove, NY     256       62.0       Q3 2002       Q1 2004       Q2 2004       Q4 2004  
10.
  Avalon at Steven's Pond
                                               
 
  Saugus, MA     326       55.4       Q3 2002       Q2 2003       Q2 2004       Q4 2004  
11.
  Avalon Darien
                                               
 
  Darien, CT     189       43.6       Q4 2002       Q4 2003       Q3 2004       Q1 2005  
12.
  Avalon Traville Phase I
                                               
 
  North Potomac, MD     200       28.8       Q4 2002       Q4 2003       Q2 2004       Q4 2004  
 
           
     
                                 
 
  Total     3,429     $ 645.7                                  
 
           
     
                                 

(1)   Total budgeted cost includes all capitalized costs projected to be incurred to develop the respective Development Community, determined in accordance with generally accepted accounting principles (“GAAP”), including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees.
 
(2)   Future initial occupancy dates are estimates.
 
(3)   Stabilized operations is defined as the first full quarter of 95% or greater physical occupancy after completion of construction.
 
(4)   This community is owned by a limited liability company in which we are a majority equity holder. The costs reflected above exclude construction and management fees due to us. This limited liability company is consolidated for financial reporting purposes.
 
(5)   The total budgeted cost for this community is net of approximately $4,000,000 of proceeds that we estimate we will receive upon the sale of transferable development rights associated with the development of the community. These rights do not become transferable until construction completion and there can be no assurance that the projected amount of proceeds will be achieved.
 
(6)   The community is owned by a DownREIT partnership in which one of our wholly-owned subsidiaries is the general partner with a majority equity interest. This partnership is consolidated for financial reporting purposes.

24


 

Redevelopment Communities

As of February 1, 2003, we had two communities under redevelopment. We expect the total budgeted cost to complete these communities, including the cost of acquisition, capital expenditures subsequent to acquisition and redevelopment, to be approximately $197,800,000, of which approximately $28,200,000 is the additional capital invested or expected to be invested during redevelopment and $5,800,000 has been invested since acquisition unrelated to redevelopment. 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 from our budget by a wider range than for a new development community. We cannot assure you that we will meet our schedules for reconstruction completion or restabilized operations, or that we will meet our budgeted costs, either individually or in the aggregate. See the discussion under “Risks of Development and Redevelopment” included elsewhere in this Item 2.

The following presents a summary of these Redevelopment Communities:

                                                         
                    Total cost                        
                ($ millions)                    
               
                   
            Number of
apartment
  Acquisition   Total budgeted   Reconstruction   Reconstruction   Estimated
restabilized
            homes   cost (1)   cost (2)   start   completion (3)   operations (4)
           
 
 
 
 
 
1.
  4100 Massachusetts Avenue                                                
 
  Washington, DC     308     $ 35.7     $ 43.3       Q4 2002       Q2 2004       Q4 2004  
2.
  Avalon at Prudential Center                                                
 
  Boston, MA     781       133.9       154.5       Q4 2000       Q1 2003       Q3 2003  
 
           
     
     
                         
 
  Total     1,089     $ 169.6     $ 197.8                          
 
           
     
     
                         

(1)   Acquisition cost includes capital expenditures subsequent to acquisition unrelated to redevelopment.
 
(2)   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 GAAP.
 
(3)   Reconstruction completion dates are estimates.
 
(4)   Restabilized operations is defined as the first full quarter of 95% or greater physical occupancy after completion of reconstruction.

Development Rights

As of February 1, 2003, we are considering the development of 38 new apartment communities on land that is either owned by us, under contract, subject to a leasehold interest, or for which we hold a purchase option. We generally hold Development Rights through options to acquire land, although for 11 of the Development Rights we currently own the land on which a community would be built if we proceeded with development. The Development Rights range from those beginning design and architectural planning to those that have completed site plans and drawings and can begin construction almost immediately. We estimate that the successful completion of all of these communities would ultimately add 9,950 upscale apartment homes to our portfolio. Substantially all of these apartment homes will offer features like those offered by the communities we currently own. At December 31, 2002, there were cumulative net capitalized costs (including legal fees, design fees and related overhead costs, but excluding land costs) of $31,461,000 relating to Development Rights. In addition, land costs related to the pursuit of Development Rights (consisting of original land and additional carrying costs) of $78,688,000 are reflected as land held for development on the accompanying Consolidated Balance Sheets as of December 31, 2002. These land costs include $19,939,000 associated with two land parcels that were determined not likely to proceed to development and were planned for disposition as of December 31, 2002.

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

25


 

financial, demographic and other analyses. In the event that we do not proceed with a Development Right, we generally would not recover capitalized costs incurred in the pursuit of those communities, unless we were to recover amounts in connection with the sale of land; however we cannot guarantee a recovery. To recognize the possibility of such loss, we recognize a charge to expense to provide an allowance for potentially unrecoverable capitalized pre-development costs. The determination of a charge to expense relative to pursuits involves management judgment regarding the probability that a pursuit will not proceed to development. The amount charged to expense and reflected in operating expenses in the accompanying Consolidated Financial Statements related to possible abandoned pursuits was $2,800,000 and $2,200,000 for the years ended December 31, 2002 and 2001, respectively.

Because we intend to limit the percentage of debt used to finance new developments, other financing alternatives may be required to help finance the development of those Development Rights scheduled to start construction after January 1, 2003.

Although the development of any particular Development Right cannot be assured, we believe that the Development Rights, in the aggregate, present attractive potential opportunities for future development and growth of long-term stockholder value.

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 in the following table.

26


 

The following presents a summary of the 38 Development Rights we are currently pursuing:

                                   
                              Total
                      Estimated   budgeted
                      number   cost
      Location           of homes   ($ millions)
     
         
 
1.
  Plymouth, MA Phase I     (1 )     98     $ 21  
2.
  Milford, CT     (1 )     246       37  
3.
  New York, NY     (2 )     361       138  
4.
  Lawrence, NJ             312       43  
5.
  Danvers & Peabody, MA             387       63  
6.
  Danbury, CT     (1 )     234       36  
7.
  Coram, NY Phase I             298       49  
8.
  Los Angeles, CA     (1 )     309       63  
9.
  Washington, DC     (1 )     144       30  
10.
  Kirkland, WA             211       50  
11.
  Oakland, CA     (1 )     180       40  
12.
  Norwalk, CT             314       63  
13.
  New Rochelle, NY Phase II and III             588       144  
14.
  Hingham, MA             236       44  
15.
  Long Island City, NY Phase II and III             552       162  
16.
  Glen Cove, NY             111       31  
17.
  Plymouth, MA Phase II             72       13  
18.
  North Potomac, MD Phase II     (1 )     320       46  
19.
  Bedford, MA             139       21  
20.
  Quincy, MA     (1 )     156       24  
21.
  Orange, CT     (1 )     168       22  
22.
  Andover, MA             115       21  
23.
  Milford, CT             284       41  
24.
  Seattle, WA     (1 )     154       50  
25.
  Bellevue, WA             368       71  
26.
  Newton, MA             235       60  
27.
  San Francisco, CA             313       100  
28.
  Stratford, CT             146       18  
29.
  Los Angeles, CA             173       47  
30.
  Camarillo, CA     (1 )     249       43  
31.
  Cohasset, MA             200       38  
32.
  Sharon, MA             190       31  
33.
  Greenburgh, NY Phase II             766       139  
34.
  Coram, NY Phase II             152       26  
35.
  Long Beach, CA             299       57  
36.
  Wilton, CT             100       24  
37.
  Yaphank, NY             450       71  
38.
  College Park, MD             320       44  
 
                   
     
 
 
  Total             9,950     $ 2,021  
 
                   
     
 

(1)   We own the land parcel, but construction has not yet begun.
 
(2)   Total budgeted cost for this community includes costs associated with the construction of 89,000 square feet of retail space and 30,000 square feet for a neighborhood facility.

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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:

    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 of development or redevelopment of the community uneconomical;
 
    occupancy rates and rents at a newly completed development 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 results of operations and 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, determined in accordance with GAAP, including:

    land and/or property acquisition costs;
 
    construction or reconstruction costs;
 
    real estate taxes;
 
    capitalized interest;
 
    loan fees;
 
    permits;
 
    professional fees;
 
    allocated development or redevelopment overhead; and
 
    other regulatory fees.

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 you that market rents in effect at the time new development communities or redevelopment communities complete lease-up will be sufficient to fully offset the effects of any increased construction or reconstruction costs.

Capitalized Interest

In accordance with GAAP, we capitalize interest expense during construction or reconstruction until a building obtains a final certificate of occupancy. Interest that is incurred thereafter and allocated to a completed apartment

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home within the community is expensed. Capitalized interest during the years ended December 31, 2002 and 2001 totaled $29,937,000 and $27,635,000, respectively.

Acquisition Activities and Other Recent Developments

Acquisitions of Existing Communities. During the year ended December 31, 2002, we acquired two communities. The Promenade, located in Burbank, California, contains 400 apartment homes and was acquired for a total price of $70,300,000, which includes the assumption of $33,900,000 of floating-rate, tax-exempt debt. Avalon Greyrock, located in Stamford, Connecticut, contains 306 apartment homes and was acquired pursuant to a forward purchase contract agreed to in 1997 with an unaffiliated third party for a total acquisition cost of approximately $69,900,000.

One DownREIT partnership was formed since January 1, 2002 in conjunction with the acquisition of land by that partnership.

Sales of Existing Communities. We seek 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 achieve this increased concentration, we sell assets that do not meet our long term investment criteria and redeploy the proceeds from those sales to develop and redevelop communities. Pending such redeployment, we will generally use the proceeds from the sale of these communities to reduce amounts outstanding under our variable rate unsecured credit facility. On occasion, we will set aside the proceeds from the sale of communities into a cash escrow account to facilitate a nontaxable, like-kind exchange transaction. We sold one community, totaling 277 apartment homes, since January 1, 2002. Net proceeds from the sale of this asset were $78,454,000.

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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 2002, we acquired the following land parcels which are currently held for future development:

                                                         
                    Estimated   Total                        
                    number   budgeted                        
            Gross   of apartment   cost (1)   Date   Construction   Construction
            acres   homes   ($ millions)   acquired   start (2)   completion (2)
           
 
 
 
 
 
1.
  Avalon at Pinehills Phase I     6.0       98     $ 21     September 2002     Q3 2003       Q3 2004  
 
  Plymouth, MA                                                
2.
  Avalon at Milford Phase I     22.0       246       37     December 2002     Q3 2003       Q4 2004  
 
  Milford, CT                                                
3.
  Avalon Traville Phase II     42.0       320       46     October 2002     Q1 2004       Q2 2005  
 
  North Potomac, MD                                                
4.
  Avalon at Faxon West     14.4       156       24     July 2002     Q1 2004       Q1 2005  
 
  Quincy, MA                                                
5.
  Avalon Camarillo     9.6       249       43     November 2002     Q2 2004       Q4 2005  
 
  Camarillo, CA                                                
 
           
     
     
                         
 
  Total     94.0       1,069     $ 171                          
 
           
     
     
                         

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

Insurance and Risk of Uninsured Losses

We carry commercial general liability insurance and property insurance with respect to all of our communities. These policies, and other insurance policies we carry, have policy specifications, insured limits and deductibles that we consider commercially reasonable. There are, however, certain types of losses (such as losses arising from acts of war) that are not insured, in full or in part, because they are either uninsurable or are not economically feasible. If an uninsured property loss or a property loss in excess of insured limits were to occur, we could lose our capital invested in a community, as well as the anticipated future revenues from such community. We would also continue to be obligated to repay any mortgage indebtedness or other obligations related to the community. If an uninsured liability to a third party were to occur, we would incur the cost of defense and settlement with, or court ordered damages to, that third party. A significant uninsured property or liability loss could materially and adversely affect our business and our financial condition and results of operations.

We have noted that the insurance and reinsurance markets have worsened as compared to the prior year, which we believe have resulted in higher insurance costs for the entire real estate sector. Although we will continue to maintain commercially reasonable insurance coverage, we believe that the cost of such coverage will increase at a faster rate than other operating expenses.

Many of our West Coast communities are located in the general vicinity of active earthquake faults. A large concentration of our communities lie near, and thus are susceptible to, the major fault lines in the San Francisco Bay Area, including the San Andreas fault and Hayward fault. We cannot assure you that an earthquake would not cause damage or losses greater than insured levels. In November 2002, we renewed our earthquake insurance. We have in place with respect to communities located in California, for any single occurrence and in the aggregate, $75,000,000 of coverage with a deductible per building equal to five percent of the insured value of that building. The five percent deductible is subject to a minimum of $100,000 per occurrence. Earthquake coverage outside of California is subject to a $100,000,000 limit, except with respect to the state of Washington, for which the limit is $65,000,000. Our earthquake insurance outside of California provides for a $100,000 deductible per occurrence. In

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addition, up to an annual aggregate of $2,000,000, the next $400,000 of loss per occurrence outside California will be treated as an additional deductible.

Our annual general liability policy and workman’s compensation coverage was renewed on August 1, 2002. Although the insurance coverage provided for in the renewal policies did not materially change from the preceding year, the level of our deductible and premiums costs has increased. Including the costs we may incur as a result of deductibles, we expect the cost related to these insurance categories for the policy period from August 1, 2002 to July 31, 2003 to increase approximately $1,200,000 as compared to the prior period.

Our property insurance, which includes the earthquake coverage as previously described and builder’s risk, was renewed on November 1, 2002, with an increase in the annual premium of approximately $1,100,000 over the prior period.

Just as with office buildings, transportation systems and government buildings, there have been recent reports that apartment communities could become targets of terrorism. In November 2002, Congress passed the Terrorism Risk Insurance Act (“TRIA”) which is designed to make terrorism insurance available. In connection with this legislation, we have purchased insurance for property damage due to terrorism up to $200,000,000, with the first $15,000,000 of damage costs payable by us. Our general liability policy provides coverage (subject to deductibles and insured limits) for liability to third parties that result from terrorist acts at our communities. In connection with TRIA, we purchased third party liability terrorism insurance for communities with greater than 24 floors, which were previously excluded under our general liability policy.

We cannot assure that we will have full coverage under our existing policies for property damage or liability to third parties arising as a result of exposure to mold or a claim of exposure to mold at one of our communities. See discussion under “Environmental Matters” included in Item 1 of this report.

In March 2003, we expect to renew our directors and officers insurance (“D&O”). In the past year, the D&O market has experienced increased and high profile claim activity. We estimate that our costs for this insurance will increase approximately 80% at renewal.

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

We are 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

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which we believe we have meritorious defenses and are therefore vigorously defending against, is not covered by liability insurance. However, outstanding litigation matters, individually and in the aggregate, including the matter described below, are not expected to have a material adverse effect on our business or financial condition.

We are currently involved in litigation with York Hunter Construction, Inc. and National Union Fire Insurance Company. The action arises from our October 1999 termination of York Hunter as construction manager under a contract relating to construction of the Avalon Willow community in Mamaroneck, New York, because of alleged failures and deficiencies by York Hunter and its subcontractors in performing under the contract. York Hunter initiated the litigation in October 1999 by filing a complaint against us and other defendants claiming more than $15,000,000 in damages. We have filed counterclaims against York Hunter seeking more than $9,000,000 in compensatory damages, including lost rental income and costs to complete the community. We have also filed a claim against National Union Fire Insurance, which furnished construction and performance bonds to us on behalf of York Hunter. We believe that we have meritorious defenses against all of York Hunter’s claims and are vigorously contesting those claims. We also intend to pursue our counterclaims against York Hunter and National Union Fire Insurance aggressively. The litigation is pending in the Supreme Court of the State of New York, County of Westchester. A trial date has been set for April 2003.

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 2002.

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PART II

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 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 2002 and 2001, as reported by the NYSE. On February 1, 2003 there were 795 holders of record of an aggregate of 68,149,232 shares of our outstanding common stock. The number of holders does not include individuals or entities who beneficially own shares but whose shares are held of record by a broker or clearing agency, but does include each such broker or clearing agency as one recordholder.

                                                 
    2002   2001
   
 
    Sales Price           Sales Price        
   
  Dividends  
  Dividends
    High   Low   declared   High   Low   declared
   
 
 
 
 
 
Quarter ended March 31
  $ 50.660     $ 44.440     $ 0.70     $ 50.000     $ 45.200     $ 0.64  
Quarter ended June 30
  $ 52.650     $ 45.660     $ 0.70     $ 47.450     $ 42.450     $ 0.64  
Quarter ended September 30
  $ 46.150     $ 40.480     $ 0.70     $ 51.900     $ 43.800     $ 0.64  
Quarter ended December 31
  $ 41.830     $ 36.720     $ 0.70     $ 49.700     $ 44.010     $ 0.64  

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 cash 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.

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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. Dollars in thousands, except per share information.

                                           
      Years ended
     
      12-31-02   12-31-01   12-31-00   12-31-99   12-31-98
     
 
 
 
 
Revenue:
                                       
 
Rental income
  $ 630,502     $ 629,545     $ 564,613     $ 497,824     $ 364,522  
 
Management fees
    1,355       1,325       1,051       1,176       1,377  
 
Other income
    7,109       2,953       401       236       (403 )
 
 
   
     
     
     
     
 
 
Total revenue
    638,966       633,823       566,065       499,236       365,496  
 
 
   
     
     
     
     
 
Expenses:
                                       
 
Operating expenses, excluding property taxes
    176,587       159,665       140,633       133,730       102,679  
 
Property taxes
    56,352       51,686       46,409       42,203       31,279  
 
Interest expense
    121,380       103,189       83,582       74,689       54,642  
 
Depreciation expense
    143,782       128,642       120,915       108,367       76,512  
 
General and administrative
    14,332       15,224       13,013       9,592       9,124  
 
Non-recurring items
                      16,782        
 
Impairment loss
    6,800                          
 
 
   
     
     
     
     
 
 
Total expenses
    519,233       458,406       404,552       385,363       274,236  
 
 
   
     
     
     
     
 
Equity in income of unconsolidated entities
    55       856       2,428       2,867       2,638  
Interest income
    3,978       6,823       4,764       7,362       3,508  
Minority interest in consolidated partnerships
    (2,570 )     (597 )     (1,908 )     (1,975 )     (1,770 )
 
 
   
     
     
     
     
 
 
Income before gain on sale of communities and extraordinary item
    121,196       182,499       166,797       122,127       95,636  
Gain on sale of communities
          62,852       40,779       47,093       25,270  
 
 
   
     
     
     
     
 
 
Income from continuing operations before extraordinary item
    121,196       245,351       207,576       169,220       120,906  
Discontinued operations:
                                       
 
Operating income
    3,529       3,646       3,028       3,056       2,874  
 
Gain on sale of communities
    48,893                          
 
 
   
     
     
     
     
 
 
Total discontinued operations
    52,422       3,646       3,028       3,056       2,874  
 
 
   
     
     
     
     
 
 
Income before extraordinary item
    173,618       248,997       210,604       172,276       123,780  
Extraordinary item
                            (245 )
 
 
   
     
     
     
     
 
 
Net income
    173,618       248,997       210,604       172,276       123,535  
 
Dividends attributable to preferred stock
    (17,896 )     (32,497 )     (39,779 )     (39,779 )     (28,132 )
 
 
   
     
     
     
     
 
 
Net income available to common stockholders
  $ 155,722     $ 216,500     $ 170,825     $ 132,497     $ 95,403  
 
 
   
     
     
     
     
 
Per Common Share and Share Information:
                                       
Per common share — basic
                                       
 
Income from continuing operations (net of dividends attributable to preferred stock)
  $ 1.50     $ 3.11     $ 2.53     $ 2.00     $ 1.83  
 
Discontinued operations
  $ 0.76     $ 0.08     $ 0.05     $ 0.05     $ 0.06  
 
Net income available to common stockholders
  $ 2.26     $ 3.19     $ 2.58     $ 2.05     $ 1.89  
 
Weighted average common shares outstanding
    68,772,139       67,842,752       66,309,707       64,724,799       50,387,258  
Per common share — diluted
                                       
 
Income from continuing operations (net of dividends attributable to preferred stock)
  $ 1.49     $ 3.05     $ 2.49     $ 1.98     $ 1.82  
 
Discontinued operations
  $ 0.74     $ 0.07     $ 0.04     $ 0.05     $ 0.06  
 
Net income available to common stockholders
  $ 2.23     $ 3.12     $ 2.53     $ 2.03     $ 1.88  
 
Weighted average common shares and units outstanding
    70,674,211       69,781,719       68,140,998       66,110,664       51,771,247  
Cash dividends declared
  $ 2.80     $ 2.56     $ 2.24     $ 2.06     $ 2.04  

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      Years ended
     
      12-31-02   12-31-01   12-31-00   12-31-99   12-31-98
     
 
 
 
 
Other Information:
                                       
 
Net income
  $ 173,618     $ 248,997     $ 210,604     $ 172,276     $ 123,535  
 
Depreciation — continuing operations
    143,782       128,642       120,915       108,367       76,512  
 
Depreciation — discontinued operations
    695       1,437       1,695       1,392       862  
 
Interest expense — continuing operations
    121,380       103,189       83,582       74,689       54,642  
 
Interest expense — discontinued operations
    2       14       27       10       8  
 
Interest income
    (3,978 )     (6,823 )     (4,764 )     (7,362 )     (3,508 )
 
Non-recurring items
                      16,782        
 
Gain on sale of communities, net of impairment loss on planned dispositions
    (42,093 )     (62,852 )     (40,779 )     (47,093 )     (25,270 )
 
Extraordinary item
                            245  
 
   
     
     
     
     
 
 
Gross EBITDA (1)
  $ 393,406     $ 412,604     $ 371,280     $ 319,061     $ 227,026  
 
   
     
     
     
     
 
 
Funds from Operations (2)
  $ 258,210     $ 283,293     $ 252,013     $ 196,058     $ 148,487  
 
Number of Current Communities (3)
    137       126       126       122       127  
 
Number of apartment homes
    40,179       37,228       37,147       36,008       37,911  
Balance Sheet Information:
                                       
 
Real estate, before accumulated depreciation
  $ 5,369,453     $ 4,837,869     $ 4,535,969     $ 4,266,426     $ 4,006,456  
 
Total assets
  $ 4,950,835     $ 4,664,289     $ 4,397,255     $ 4,154,662     $ 4,005,013  
 
Notes payable and unsecured credit facilities
  $ 2,471,163     $ 2,082,769     $ 1,729,924     $ 1,593,647     $ 1,484,371  
Cash Flow Information:
                                       
 
Net cash flows provided by operating activities
  $ 308,109     $ 320,606     $ 302,083     $ 251,779     $ 192,339  
 
Net cash flows used in investing activities
  $ (440,331 )   $ (270,406 )   $ (258,155 )   $ (236,687 )   $ (566,516 )
 
Net cash flows provided by (used in) financing activities
  $ 72,589     $ (34,444 )   $ 5,685     $ (16,361 )   $ 376,345  

Notes to Selected Financial Data

(1)   Gross EBITDA represents earnings before interest, income taxes, depreciation and amortization, non-recurring items, gain on sale of communities, impairment loss on planned dispositions and extraordinary items. Gross EBITDA is relevant to an understanding of the economics of AvalonBay because it is one indication of cash flow available from continuing operations to service fixed obligations. Gross EBITDA should not be considered as an alternative to operating income (as determined in accordance with generally accepted accounting principles, or “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.
 
(2)   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 Statements of Operations included elsewhere in this report. Consistent with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts®, we calculate FFO as:

    net income or loss computed in accordance with GAAP, except that excluded from net income or loss are gains or losses on sales of property (including any impairment loss on planned dispositions) and extraordinary gains or losses (as defined by GAAP);
 
    plus depreciation of real estate assets; and
 
    after adjustments for unconsolidated partnerships and joint ventures.

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    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 as an indication of performance. FFO should also not be considered an alternative to net cash flows from operating activities, as determined by GAAP, or 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. Calculations for FFO are presented below:

                                         
    Years ended
   
    12-31-02   12-31-01   12-31-00   12-31-99   12-31-98
   
 
 
 
 
Net income
  $ 173,618     $ 248,997     $ 210,604     $ 172,276     $ 123,535  
Dividends attributable to preferred stock
    (17,896 )     (32,497 )     (39,779 )     (39,779 )     (28,132 )
Depreciation — real estate assets
    140,964       125,547       117,721       106,536       74,752  
Depreciation — discontinued operations
    695       1,437       1,695       1,392       862  
Joint venture adjustments
    1,321       1,102       792       751       725  
Minority interest expense
    1,601       1,559       1,759       1,975       1,770  
Gain on sale of communities, net of impairment loss on planned dispositions
    (42,093 )     (62,852 )     (40,779 )     (47,093 )     (25,270 )
Extraordinary items
                            245  
 
   
     
     
     
     
 
Funds from Operations
  $ 258,210     $ 283,293     $ 252,013     $ 196,058     $ 148,487  
 
   
     
     
     
     
 
Net cash provided by operating activities
  $ 308,109     $ 320,606     $ 302,083     $ 251,779     $ 192,339  
 
   
     
     
     
     
 
Net cash used in investing activities
  $ (440,331 )   $ (270,406 )   $ (258,155 )   $ (236,687 )   $ (566,516 )
 
   
     
     
     
     
 
Net cash provided by (used in) financing activities
  $ 72,589     $ (34,444 )   $ 5,685     $ (16,361 )   $ 376,345  
 
   
     
     
     
     
 

(3)   Current Communities consist of all communities other than those which are still under construction and have not received a final certificate of occupancy.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Form 10-K, including the footnotes to our Consolidated Financial Statements which immediately follow, contains “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by our use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “project,” “plan,” “will” and other similar expressions in this Form 10-K, that predict or indicate future events and trends or that do not report 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, occupancy and stabilization of apartment communities;
 
    the pursuit of land on which we are considering future development;
 
    cost, yield and earnings estimates; and
 
    the development of management information systems by companies in which we have an investment and our implementation and use of those 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 because they involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. These risks, uncertainties and other factors may cause our actual results, performance or achievements to differ materially from the anticipated future results, performance or achievements expressed or implied by these forward-looking statements. Some of the factors that could cause our actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements include, but are not limited to, the following:

    we may fail to secure development opportunities due to an inability to reach agreements with third parties or to obtain desired zoning and other local approvals;
 
    we may abandon or defer development opportunities for a number of reasons, including changes in local market conditions which make development less desirable, increases in costs of development 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 and 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 or at all, 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;
 
    we may be unsuccessful in managing our current growth in the number of apartment communities; and
 
    companies developing software applications and ancillary services in which we have invested may be unsuccessful in achieving their business plans or unsuccessful in obtaining additional funding, which could lead to a partial or complete loss of our investment in these companies.

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You should read our Consolidated Financial Statements and notes 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

We are 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 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, long term, the limited new supply of upscale apartment homes and lower housing affordability in these markets will result in larger increases in cash flows relative to other markets over an entire business cycle. However, we are in a period of a business cycle where rents are resetting to lower levels, resulting in a decline in cash flows in 2002 compared to 2001. These barriers-to-entry generally include a difficult and lengthy entitlement process with local jurisdictions and dense urban or suburban areas where zoned and entitled land (“in-fill locations”) is in limited supply. Our markets are located in the Northeast, Mid-Atlantic, Midwest, Pacific Northwest, and Northern and Southern California regions of the United States.

We are a fully-integrated real estate organization with in-house expertise in the following areas:

    development and redevelopment;
 
    construction and reconstruction;
 
    leasing and management;
 
    acquisition and disposition;
 
    financing;
 
    marketing; and
 
    information technologies.

We believe apartment communities present an attractive long-term investment opportunity compared to other real estate investments because a broad potential resident base should result in relatively stable demand over a real estate cycle. We intend to pursue real estate investments in markets where constraints to new supply exist and where new household formations are expected to out-pace multifamily permit activity over the course of the real estate cycle. A number of our markets are experiencing economic contraction due to continuing job losses, particularly in the technology, telecom and financial services sectors. We expect these conditions to continue for most of 2003.

Although we believe we are well-positioned to continue to pursue opportunities to develop and acquire upscale apartment homes based on our in-house capabilities and expertise, we expect to decrease acquisition and development activity during 2003 as compared to prior years and plan to increase disposition activity. The level of disposition, acquisition or development volume is heavily influenced by capital market conditions, including prevailing interest rates. Given current capital market and real estate market conditions, we are evaluating the appropriate allocation of capital investment among development and redevelopment communities, the acquisition of existing communities, and stock redemptions/repurchases. In addition, we expect to increase disposition activity to realize a portion of the value created over the past business cycle as well as to provide additional liquidity. See “Liquidity and Capital Resources” and “Future Financing and Capital Needs.”

Our real estate investments consist primarily of current operating apartment communities, communities in various stages of development, and development rights (i.e., land or land options held for development). Our current operating communities are further distinguished as Established, Other Stabilized, Lease-Up and Redevelopment. A description of these categories and operating performance information can be found in Note 9, “Segment Reporting,” in our Consolidated Financial Statements included in this report.

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On December 31, 2002, we owned or had an ownership interest in these categories as follows:

                       
          Number of   Number of
          communities   apartment homes
         
 
Current Communities
               
 
Established Communities:
               
   
Northeast
    27       7,196  
   
Mid-Atlantic
    18       5,154  
   
Midwest
    9       2,624  
   
Pacific Northwest
    3       907  
   
Northern California
    29       8,601  
   
Southern California
    11       3,404  
 
   
     
 
     
Total Established
    97       27,886  
 
   
     
 
 
Other Stabilized Communities:
               
   
Northeast
    11       3,040  
   
Mid-Atlantic
    2       960  
   
Midwest
           
   
Pacific Northwest
    8       2,152  
   
Northern California
    2       499  
   
Southern California
    6       2,253  
 
   
     
 
     
Total Other Stabilized
    29       8,904  
 
   
     
 
 
Lease-Up Communities
    9       2,300  
 
Redevelopment Communities
    2       1,089  
 
   
     
 
 
Total Current Communities
    137       40,179  
 
   
     
 
Development Communities
    12       3,429  
 
   
     
 
Development Rights
    38       9,950  
 
   
     
 

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Results of Operations and Funds From Operations

A comparison of our operating results for the years 2002, 2001 and 2000 follows (dollars in thousands):

                                                                     
                        Change                   Change
                       
                 
        2002   2001   $   %   2001   2000   $   %
       
 
 
 
 
 
 
 
Revenue:
                                                               
 
Rental income
  $ 630,502     $ 629,545     $ 957       0.2 %   $ 629,545     $ 564,613     $ 64,932       11.5 %
 
Management fees
    1,355       1,325       30       2.3 %     1,325       1,051       274       26.1 %
 
Other income
    7,109       2,953       4,156       140.7 %     2,953       401       2,552       636.4 %
 
   
     
     
     
     
     
     
     
 
   
Total revenue
    638,966       633,823       5,143       0.8 %     633,823       566,065       67,758       12.0 %
 
   
     
     
     
     
     
     
     
 
Expenses:
                                                               
 
Direct property operating expenses,
                                                               
 
excluding property taxes
    144,424       126,698       17,726       14.0 %     126,698       112,522       14,176       12.6 %
 
Property taxes
    56,352       51,686       4,666       9.0 %     51,686       46,409       5,277       11.4 %
 
   
     
     
     
     
     
     
     
 
   
Total community operating expenses
    200,776       178,384       22,392       12.6 %     178,384       158,931       19,453       12.2 %
 
   
     
     
     
     
     
     
     
 
Net operating income
    438,190       455,439       (17,249 )     (3.8 %)     455,439       407,134       48,305       11.9 %
 
 
Property management and other indirect operating expenses
    32,163       32,967       (804 )     (2.4 %)     32,967       28,111       4,856       17.3 %
 
Interest expense
    121,380       103,189       18,191       17.6 %     103,189       83,582       19,607       23.5 %
 
Depreciation expense
    143,782       128,642       15,140       11.8 %     128,642       120,915       7,727       6.4 %
 
General and administrative expense
    14,332       15,224       (892 )     (5.9 %)     15,224       13,013       2,211       17.0 %
 
Impairment loss
    6,800             6,800       100.0 %                        
 
   
     
     
     
     
     
     
     
 
   
Total other expenses
    318,457       280,022       38,435       13.7 %     280,022       245,621       34,401       14.0 %
 
   
     
     
     
     
     
     
     
 
 
Equity in income of unconsolidated entities
    55       856       (801 )     (93.6 %)     856       2,428       (1,572 )     (64.7 %)
 
Interest income
    3,978       6,823       (2,845 )     (41.7 %)     6,823       4,764       2,059       43.2 %
 
Minority interest in consolidated partnerships
    (2,570 )     (597 )     (1,973 )     330.5 %     (597 )     (1,908 )     1,311       (68.7 %)
 
   
     
     
     
     
     
     
     
 
Income before gain on sale of communities
    121,196       182,499       (61,303 )     (33.6 %)     182,499       166,797       15,702       9.4 %
 
Gain on sale of communities
          62,852       (62,852 )     (100.0 %)     62,852       40,779       22,073       54.1 %
 
   
     
     
     
     
     
     
     
 
Income from continuing operations
    121,196       245,351       (124,155 )     (50.6 %)     245,351       207,576       37,775       18.2 %
Discontinued operations:
                                                               
 
Operating income
    3,529       3,646       (117 )     (3.2 %)     3,646       3,028       618       20.4 %
 
Gain on sale of communities
    48,893             48,893       100.0 %                        
 
   
     
     
     
     
     
     
     
 
 
Total discontinued operations
    52,422       3,646       48,776       1,337.8 %     3,646       3,028       618       20.4 %
 
   
     
     
     
     
     
     
     
 
Net income
    173,618       248,997       (75,379 )     (30.3 %)     248,997       210,604       38,393       18.2 %
Dividends attributable to preferred stock
    (17,896 )     (32,497 )     14,601       (44.9 %)     (32,497 )     (39,779 )     7,282       (18.3 %)
 
   
     
     
     
     
     
     
     
 
Net income available to common stockholders
  $ 155,722     $ 216,500     $ (60,778 )     (28.1 %)   $ 216,500     $ 170,825     $ 45,675       26.7 %
 
   
     
     
     
     
     
     
     
 

Net income available to common stockholders decreased $60,778,000 (28.1%) to $155,722,000 in 2002. This decrease is primarily attributable to fewer gains on sales of communities in 2002, coupled with a decline in net operating income due to deteriorating market conditions in several of our principal markets and increases in interest and depreciation expenses. Net income available to common stockholders increased by $45,675,000 (26.7%) to $216,500,000 in 2001 due to additional net operating income from newly developed and redeveloped communities, as well as growth in net operating income from Established Communities and increased gain on sale of communities.

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Net operating income (“NOI”) is calculated at the community level and represents total revenue less direct property operating expenses, including property taxes, and excludes property management and other indirect operating expenses, interest expense, depreciation expense, general and administrative expense and impairment losses. We believe that NOI is an appropriate supplemental measure of our operating performance because it helps investors to understand the recurring operations of our real estate portfolio, as well as provide insight into how management evaluates operations on a segment basis. NOI does not represent cash generated from operating activities in accordance with generally accepted accounting principles (“GAAP”). Therefore, it should not be considered an alternative to net income as an indication of our performance. NOI should also not be considered an alternative to net cash flows from operating activities, as determined by GAAP, as a measure of liquidity. Additionally, it is not necessarily indicative of cash available to fund cash needs. A calculation of NOI, along with a reconciliation to net income, is provided in the preceding table.

The NOI decrease of $17,249,000 for the year ended December 31, 2002 and the increase of $48,305,000 for the year ended December 31, 2001 as compared to the prior years consist of changes in the following categories:

                 
    2002   2001
    Increase (Decrease)   Increase (Decrease)
   
 
Established Communities
  $ (36,680,000 )   $ 21,783,000  
Other Stabilized Communities
    10,830,000       23,267,000  
Communities sold
    (13,037,000 )     (12,841,000 )
Development and Redevelopment Communities
    21,638,000       16,096,000  
 
   
     
 
Total NOI
  $ (17,249,000 )   $ 48,305,000  
 
   
     
 

The NOI decrease in Established Communities in 2002 was largely due to the effects of the weakened economy in many of our submarkets. Strong single family home sales, partially fueled by a low mortgage rate environment, in addition to continuing job losses in many of our submarkets, have aggravated a weak demand environment, causing market rental rates and occupancies to decline. We currently expect to continue to experience weak demand during most of 2003. We also anticipate that any growth or improvement that we may experience in late 2003 will be at a slower rate than that experienced by the overall market and economy, if any, due to the types of industries (technology, telecom, financial services) that make up a large proportion of the jobs in our markets.

Rental income increased due to rental income generated from acquired and newly developed communities offset by a decline in occupancies and effective rental rates for Established Communities.

      Overall Portfolio – The weighted average number of occupied apartment homes increased to 34,888 apartment homes for 2002 compared to 34,417 apartment homes for 2001 and 33,976 in 2000. This change in 2002 is primarily the result of increased homes available from acquired and newly developed communities, offset by occupancy declines related to the weakened demand in certain of our submarkets. The weighted average monthly revenue per occupied apartment home decreased to $1,522 in 2002 compared to $1,543 in 2001 and $1,402 in 2000.
 
      Established Communities – Rental revenue decreased $30,679,000 (6.1%) in 2002 and increased by $26,268,000 (6.6%) in 2001. The decrease in 2002 is due to both declining effective rental rates and declining economic occupancy. The increase in 2001 is due to market conditions during the year that allowed for higher average rents partially offset by lower economic occupancy. For 2002, the weighted average monthly revenue per occupied apartment home decreased (4.1%) to $1,511 compared to $1,576 for 2001, partially due to increased concessions granted in 2002. The average economic occupancy decreased from 95.5% in 2001 to 93.5% for 2002. Economic

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      occupancy takes into account the fact that apartment homes of different sizes and locations within a community have different economic impacts on a community’s gross revenue. Economic occupancy is defined as gross potential revenue less vacancy loss as a percentage of gross potential revenue. Gross potential revenue is determined by valuing occupied homes at contract rates and vacant homes at market rents.

Although most of our markets have experienced weak demand, we have observed the most significant declines in average rental rates and occupancy during 2002 in certain Northern California and Northeast submarkets. Northern California, which accounts for approximately 32.0% of current Established Community rental revenue, experienced a decline in rental revenue in 2002, partially related to job losses in the technology sector. Although economic occupancy remained flat in Northern California in 2002 as compared to 2001, average rental rates dropped 12.6% from $1,788 to $1,562 for those same periods.

The Northeast region also accounts for approximately 32.0% of current Established Community rental revenue and has been experiencing a decline in rental revenue, primarily the result of job losses in the financial services sector. Economic occupancy decreased in the Northeast, from 96.9% in 2001 to 92.6% for 2002, while average rental rates improved slightly during 2002.

Other income increased primarily due to the recognition of $5,800,000 and $2,500,000 in 2002 and 2001, respectively, of business interruption insurance related to the settlement of a fire insurance claim that occurred during the construction of Avalon at Edgewater. In addition, we recognized $711,000 in the first quarter of 2002 in construction management fees in connection with the redevelopment of a community owned by a limited liability company in which we have a membership interest.

Direct property operating expenses, excluding property taxes increased due to the addition of newly developed, redeveloped and acquired apartment homes coupled with increased insurance, marketing and bad debt. Insurance expense has increased over the past two years, particularly during 2001 as the insurance and reinsurance markets deteriorated, resulting in higher insurance costs for the entire real estate sector. We renewed our general liability policy on August 1, 2002 and our property coverage on November 1, 2002. See “Insurance and Risk of Uninsured Losses” for a discussion of our insurance policies and related coverage. 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. Marketing initiatives have been expanded in response to the weak demand, and bad debt expense has increased as a direct result of continuing job losses and the weakened economy.

      For Established Communities, direct property operating expenses, excluding property taxes, increased $5,579,000 (6.1%) to $97,082,000 due to the increases in insurance, marketing and bad debt expenses discussed above. During 2001, operating expenses increased $3,559,000 (4.8%) due to increases in insurance, utilities, marketing and office and administration expenses.

Property taxes increased due to higher assessments and the addition of newly developed and redeveloped apartment homes. Property taxes on Development and Redevelopment Communities are capitalized while the community is under construction. We begin to expense these costs as homes within the community receive a final certificate of occupancy.

      For Established Communities, the increases in property taxes in 2002 and 2001 of $550,000 and $969,000, respectively, were primarily due to higher assessments throughout all regions.

Property management and other indirect operating expenses decreased in 2002 and increased in 2001 as a result of executive separation costs that were recognized in 2001 but not in 2002 or 2000. The decrease in 2002 is partially offset by increases in unallocated central marketing costs and abandoned pursuit costs. Similar to the community level, central marketing initiatives have been expanded in response to the weak demand. Abandoned pursuit costs increased $600,000 from $2,200,000 in 2001 to $2,800,000 in 2002 related to development rights which may not be developed as planned.

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Interest expense increased in 2002 due to the issuance of $750,000,000 of unsecured notes between September 2001 and December 2002, partially offset by the repayment of $100,000,000 of unsecured notes in September 2002 and overall lower interest rates on both short-term and long-term borrowings. In addition, higher average outstanding balances on our unsecured credit facility resulted in higher interest expense between years. Interest expense increased in 2001 due to the issuance of $650,000,000 of unsecured notes during 2000 and 2001.

Depreciation expense increased primarily related to acquisitions and completion of development or redevelopment activities. We expect depreciation expense to continue to increase as we complete additional development and redevelopment communities, partially offset by the elimination of depreciation of communities that are sold or designated as held for sale during 2003.

General and administrative expense decreased in 2002 and increased in 2001 as a result of additional compensation expense recognized in the fourth quarter of 2001 due to the retirement of a senior executive. Unfilled positions and lower incentive compensation also contributed to the decrease in 2002.

Impairment loss of $6,800,000 was recorded during 2002 related to two land parcels that as of December 31, 2002 were determined not likely to proceed to development and therefore were planned for disposition. This loss was recorded to reflect the parcels at fair market value (based on their entitlement status as of December 31, 2002), less estimated selling costs. In February 2003, we won an appeal regarding the entitlement status of one of these parcels. If we decide to continue with the planned disposition, this change in entitlement status may increase the potential value of the land and therefore decrease the previously estimated loss that would be recognized at the date of disposal. However, we are currently reevaluating our plans for this parcel, which may result in 2003 in the partial recovery of the impairment loss recognized in 2002, if we decide to hold the land for development.

Equity in income of unconsolidated entities decreased during 2002 primarily due to losses recorded for an investment in a technology company accounted for under the equity method. During 2002 and 2001, we recorded losses of $3,166,000 and $1,730,000, respectively, related to this investment, bringing the carrying value of this investment to zero as of December 31, 2002. In addition, a $934,000 valuation allowance was recorded during 2001 for an investment in a different technology company which contributed to the decrease in 2001 over the prior year period.

Interest income during 2002 decreased due to lower average cash balances invested and lower interest rates. The increase in interest income during 2001 resulted from higher average cash balances invested.

Gain on sale of communities, including discontinued operations, of $48,893,000, $62,852,000 and $40,779,000 were realized in 2002, 2001 and 2000, respectively. These gains on the sale of communities are the result of our strategy to sell communities that do not meet our long-term strategic objectives and redeploy the proceeds to current Development and Redevelopment Communities. The amount of gains realized depend on many factors, including the number of communities sold, the size and carrying value of those communities, and the market conditions in the local area. In 2003, we expect to increase our disposition activity as compared to 2002.

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Funds from Operations

We consider Funds from Operations (“FFO”) to be an appropriate supplemental 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 in order to understand our operating results, FFO should be examined with net income as presented in the Consolidated Statements of Operations and Other Comprehensive Income included elsewhere in this report. Consistent with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts®, we calculate FFO as:

    net income or loss computed in accordance with GAAP, except that excluded from net income or loss are gains or losses on sales of property (including any impairment loss on planned dispositions) and extraordinary gains or losses (as defined by GAAP);
 
    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.

The following is a reconciliation of net income to FFO and a presentation of GAAP based cash flow metrics (dollars in thousands):

                           
      Years ended
     
      2002   2001   2000
     
 
 
Funds from Operations
                       
Net income
  $ 173,618     $ 248,997     $ 210,604  
Dividends attributable to preferred stock
    (17,896 )     (32,497 )     (39,779 )
Depreciation — real estate assets
    140,964       125,547       117,721  
Depreciation — discontinued operations
    695       1,437       1,695  
Joint venture adjustments
    1,321       1,102       792  
Minority interest expense
    1,601       1,559       1,759  
Gain on sale of communities, net of impairment loss on planned dispositions
    (42,093 )     (62,852 )     (40,779 )
 
   
     
     
 
 
Funds from Operations
  $ 258,210     $ 283,293     $ 252,013  
 
   
     
     
 
GAAP based Cash Flow Metrics
                       
Net cash provided by operating activities
  $ 308,109     $ 320,606     $ 302,083  
 
   
     
     
 
Net cash used in investing activities
  $ (440,331 )   $ (270,406 )   $ (258,155 )
 
   
     
     
 
Net cash provided by (used in) financing activities
  $ 72,589     $ (34,444 )   $ 5,685  
 
   
     
     
 

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.

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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 replacement purposes. For Established and Other Stabilized Communities, we recorded non-revenue generating capitalized expenditures of approximately $302 per apartment home in 2002 and $251 per apartment home in 2001. The average maintenance costs charged to expense, including carpet and appliance replacements, related to these communities was $1,224 per apartment home in 2002 and $1,196 in 2001. We anticipate that capitalized costs per apartment home will gradually increase as the average age of our communities increases. We expect expensed maintenance costs to increase as the average age of our communities increases, and to fluctuate with changes in turnover.

We have expanded our Consolidated Statements of Cash Flows included elsewhere in this report to include additional information on capital expenditures. For the years ended December 31, 2002 and 2001, the amounts capitalized (excluding land costs) related to (i) acquisitions, development and redevelopment were $457,851,000 and $401,359,000, respectively, (ii) revenue generating expenditures, such as water sub-metering equipment and cable installations were $697,000 and $1,675,000, respectively, and (iii) non-revenue generating expenditures were $11,375,000 and $12,234,000, respectively.

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. Changes in the capital markets environment affect our plans for undertaking construction and development as well as acquisition and disposition activity.

Cash and cash equivalents totaled $13,357,000 at December 31, 2002, a decrease of $59,633,000 for the year. The following discussion relates to changes in cash due to operating, investing and financing activities, which are presented in our Consolidated Statements of Cash Flows included in this report.

Operating Activities – Net cash provided by operating activities decreased to $308,109,000 in 2002 from $320,606,000 in 2001 primarily due to the decline in operating income from Established Communities and the loss of operating income from communities sold during 2002 and 2001, partially offset by additional operating income from newly developed and redeveloped communities.

Investing Activities – Net cash used in investing activities of $440,331,000 in 2002 related to investments in assets through development, redevelopment and acquisition of apartment communities, partially offset by proceeds from the sales of apartment communities.

45


 

    During 2002, we invested $545,202,000 in the purchase and development of real estate and capital expenditures.

    We began the development of seven new communities. These communities, if developed as expected, will contain a total of 1,987 apartment homes, and the total investment, including land acquisition costs, is projected to be approximately $371,200,000. We also completed the development of ten new communities containing a total of 2,521 apartment homes for a total investment, including land acquisition cost, of $466,600,000.
 
    We completed the redevelopment of two communities containing 1,116 apartment homes for a total investment in redevelopment (excluding acquisition costs) of $44,200,000.
 
    We acquired two communities containing 706 apartment homes for a total investment of $140,200,000, including the assumption of $33,900,000 in debt.
 
    We had capital expenditures relating to current communities’ real estate assets of $10,930,000 and non-real estate capital expenditures of $1,142,000.

    The development and redevelopment of communities involve risks that the investment will fail to perform in accordance with expectations. See “Risks of Development and Redevelopment” in Item 2 of this report for our discussion of these and other risks inherent in developing or redeveloping communities.
 
    We sold one community during 2002, generating net proceeds of $78,454,000. These proceeds are being used to develop and redevelop communities currently under construction and reconstruction, as well as to repay and redeem certain debt and equity securities, as discussed below.

Financing Activities – Net cash provided by financing activities totaled $72,589,000 for the year ended December 31, 2002, primarily due to the issuance of unsecured notes and an increase in borrowings under our unsecured credit facility, partially offset by dividends paid, common stock repurchases, and the redemption of the Series C Preferred Stock. See Note 3, “Notes Payable, Unsecured Notes and Credit Facility,” and Note 4, “Stockholders’ Equity,” in our Consolidated Financial Statements, for additional information.

We regularly review our short and long-term liquidity needs, the adequacy of Funds from Operations, as defined above, 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 and maturity payments;
 
    the distributions required with respect to preferred stock;
 
    the minimum dividend payments required to maintain our REIT qualification under the Internal Revenue Code of 1986;
 
    opportunities for the acquisition of improved property; 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, proceeds from asset dispositions and borrowing capacity under the unsecured credit facility.

One of our principal long-term liquidity needs is the repayment of medium and long-term debt at the time that such debt matures. For unsecured notes, we anticipate that no significant portion of the principal of these notes will be repaid prior to maturity. On January 15, 2003, $50,000,000 in unsecured notes matured and was paid, including the balance of accrued interest. During the remainder of 2003, we have

46


 

$100,000,000 in maturing unsecured notes. 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 by uncollateralized private or public debt offerings, additional debt financing that is collateralized by mortgages on individual communities or groups of communities, draws on our credit facility or by additional equity offerings. We also anticipate having retained cash flow available 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.

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. From January 1, 2000 through February 1, 2003, we issued $1,100,000,000 of unsecured notes through public offerings. We expect this source of capital, together with cash flow from operating activities, dispositions, and other sources of capital, to remain available to meet our capital needs, for the foreseeable future, although no assurance can be provided that the debt capital markets will remain available or that such debt will be available on attractive terms.

Variable Rate Unsecured Credit Facility

Our unsecured revolving credit facility is furnished by a syndicate of banks and provides up to $500,000,000 in short-term credit. Under the terms of the credit facility, if we elect to increase the facility up to $650,000,000, and one or more banks (from the syndicate or otherwise) voluntarily agree to provide the additional commitment, then we will be able to increase the facility up to $650,000,000, and no member of the syndicate of banks can prohibit such increase; such an increase in the facility will only be effective to the extent banks (from the syndicate or otherwise) choose to commit to lend additional funds. We pay participating banks, in the aggregate, an annual facility fee of $750,000 in equal quarterly installments. The unsecured credit facility bears interest at varying levels based on the London Interbank Offered Rate (“LIBOR”), rating levels achieved on our unsecured notes and on a maturity schedule selected by us. The current stated pricing is LIBOR plus 0.60% per annum (1.94% on February 28, 2003). Pricing could vary if there is a change in rating by either of the two leading national rating agencies; a change in rating of one level would impact the unsecured credit facility pricing by 0.05% to 0.15%. 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 credit 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 0.34% for amounts most recently borrowed under the competitive bid option. The existing facility matures in May 2005 assuming exercise of a one-year renewal at our option. At February 28, 2003, $155,470,000 was outstanding, $15,529,000 was used to provide letters of credit and $329,001,000 was available for borrowing under the unsecured credit facility.

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 $166,000,000 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.

Future Financing and Capital Needs

As of December 31, 2002, we had 12 new communities under construction, for which a total estimated cost of $254,146,000 remained to be invested. In addition, we had two communities under reconstruction, for which a total estimated cost of $7,656,000 remained to be invested.

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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 current $500,000,000 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 development costs related to pursuing development rights from retained operating cash and borrowings under the unsecured credit 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. Before planned reconstruction activity or the construction of a development right begins, we intend to arrange adequate financing to complete these undertakings, although we cannot assure you that we will be able to obtain such financing. In the event that financing cannot be obtained, we may have to abandon development rights, write-off associated pursuit costs that were capitalized and/or forego reconstruction activity. In such instances, we will not realize the increased revenues and earnings that we expected from such pursuits.

Our liquidity could be adversely impacted by expanding development and acquisition activities and/or reduced capital (as compared to prior years) available from asset sales. To meet the balance of our liquidity needs under such conditions, we would need to arrange additional capacity under our existing unsecured credit 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 material adverse impact on our operating results and financial condition, including the abandonment of development pursuits.

It is our policy to sell assets that do not meet our long-term investment criteria when market conditions are favorable, and to redeploy the proceeds. When we decide to sell a community, we generally solicit competing bids from unrelated parties for these individual assets and consider the sales price and tax ramifications of each proposal. We intend to actively seek buyers for communities that we determine to hold for sale. We expect to accelerate our disposition program during 2003 in response to current and anticipated real estate and capital markets conditions. However, we cannot assure you that assets can be sold on terms that we consider satisfactory or that market conditions will continue to make the sale of assets an appealing strategy. Because the proceeds from the sale of communities may not be immediately redeployed into revenue generating assets, the immediate effect of a sale of a community is to reduce total revenues, total expenses and funds from operations. Therefore, an acceleration of our disposition program in 2003 may adversely impact total revenues and funds from operations. As of February 28, 2003, we have six communities classified as held for sale under GAAP. We are actively pursuing the disposition of these communities and expect to close during the first and second quarters of 2003. However, we cannot assure you that these communities will be sold as planned.

We have minority interest investments in three technology companies, including Constellation Real Technologies LLC, (“Constellation”), an entity formed by a number of real estate investment trusts and real estate operating companies for the purpose of investing in multi-sector real estate technology opportunities. Our original commitment to Constellation was $4,000,000 but, as a result of an agreement among the members reducing the commitment due from each member, our commitment is currently $2,600,000, of which we have contributed $959,000 to date. The remaining unfunded commitment of $1,641,000 is expected to be funded over the next five years. In January 2002, we invested an additional $2,300,000 in Realeum, Inc., (“Realeum”), a company involved in the development and deployment of a property management and leasing automation system. Pursuant to an agreement with Realeum, we utilize the property management and leasing automation system in exchange for payments under a licensing

48


 

arrangement. Realeum is negotiating licensing arrangements with other real estate companies that we are unaffiliated with. If unsuccessful in negotiating additional licensing agreements, Realeum may be required to obtain additional sources of funding. Our third technology investment is in Rent.com, an internet-based rental housing information provider. We have no obligation to contribute additional funds to these technology investments, other than the commitment to Constellation as previously described.

Debt Maturities

The following table details debt maturities for the next five years, excluding the unsecured credit facility for debt outstanding at December 31, 2002 (dollars in thousands):

                                     
        All-In   Principal   Balance Outstanding
        interest   maturity  
Community   rate (1)   date   12-31-01   12-31-02

 
 
 
 
Tax-Exempt Bonds
                               
 
Fixed Rate
                               
   
Avalon at Foxchase I
    5.88 %   Nov-2007   $ 16,800     $ 16,800  (2)
   
Avalon at Foxchase II
    5.88 %   Nov-2007     9,600       9,600  (2)
   
Fairway Glen
    5.88 %   Nov-2007     9,580       9,580  (2)
   
CountryBrook
    6.30 %   Mar-2012     18,577       18,124  
   
Waterford
    5.88 %   Aug-2014     33,100       33,100  (2)
   
Avalon at Mountain View
    5.88 %   Mar-2017     18,300       18,300  (2)
   
Avalon at Dulles
    7.04 %   Jul-2024     12,360       12,360  
   
Avalon at Symphony Glen
    7.00 %   Jul-2024     9,780       9,780  
   
Avalon View
    7.55 %   Aug-2024     18,115       17,743  
   
Avalon at Lexington
    6.56 %   Feb-2025     14,073       13,784  
   
Avalon at Nob Hill
    5.80 %   Jun-2025     19,745       19,457  (2)
   
Avalon Campbell
    6.48 %   Jun-2025     36,386       35,749  (2)
   
Avalon Pacifica
    6.48 %   Jun-2025     16,505       16,216  (2)
   
Avalon Knoll
    6.95 %   Jun-2026     13,193       12,978  
   
Avalon Landing
    6.85 %   Jun-2026     6,525       6,417  
   
Avalon Fields
    7.05 %   May-2027     11,454       11,286  
   
Avalon West
    7.73 %   Dec-2036     8,522       8,461  
   
Avalon Oaks
    7.45 %   Feb-2041     17,718       17,628  
 
                   
     
 
 
                    290,333       287,363  
 
Variable Rate
                               
   
Avalon at Laguna Niguel
          Mar-2009     10,400       10,400  
   
The Promenade
          Jan-2010           33,670  
   
Avalon at Mission Viejo
          Jun-2025     7,256       7,151  (3)
   
Avalon Devonshire
          Dec-2025     27,305       27,305  
   
Avalon Greenbriar
          May-2026     18,755       18,755  
   
Avalon at Fairway Hills I
          Jun-2026     11,500       11,500  
 
                   
     
 
 
                    75,216       108,781  
Conventional Loans (4)
                               
 
Fixed Rate
                               
   
$100 Million unsecured notes
    7.375 %   Sep-2002     100,000        
   
$50 Million unsecured notes
    6.25 %   Jan-2003     50,000       50,000  
   
$100 Million unsecured notes
    6.50 %   Jul-2003     100,000       100,000  
   
$125 Million unsecured notes
    6.58 %   Feb-2004     125,000       125,000  
   
$100 Million unsecured notes
    6.625 %   Jan-2005     100,000       100,000  
   
$50 Million unsecured notes
    6.50 %   Jan-2005     50,000       50,000  
   
$150 Million unsecured notes
    6.80 %   Jul-2006     150,000       150,000  
   
$150 Million unsecured notes
    5.00 %   Aug-2007           150,000  
   
$110 Million unsecured notes
    6.875 %   Dec-2007     110,000       110,000  
   
$50 Million unsecured notes
    6.625 %   Jan-2008     50,000       50,000  
   
$150 Million unsecured notes
    8.25 %   Jul-2008     150,000       150,000  
   
$150 Million unsecured notes
    7.50 %   Aug-2009     150,000       150,000  
   
$200 Million unsecured notes
    7.50 %   Dec-2010     200,000       200,000  
   
$300 Million unsecured notes
    6.625 %   Sep-2011     300,000       300,000  
   
$50 Million unsecured notes
    6.625 %   Sep-2011           50,000  
   
$250 Million unsecured notes
    6.125 %   Nov-2012           250,000  
   
Avalon at Pruneyard
    7.25 %   May-2004     12,870       12,870  
   
Avalon Walk II
    8.93 %   Aug-2004     12,036       11,748  
 
                   
     
 
 
                    1,659,906       2,009,618  
 
Variable Rate
                               
   
Avalon on the Sound
            2003       57,314       36,089  
 
                   
     
 
Total indebtedness — excluding unsecured credit facility
                  $ 2,082,769     $ 2,441,851  
 
                   
     
 


[Additional columns below]

[Continued from above table, first column(s) repeated]
                                                     
        Scheduled Maturities
       
Community   2003   2004   2005   2006   2007   Thereafter

 
 
 
 
 
 
Tax-Exempt Bonds
                                               
 
Fixed Rate
                                               
   
Avalon at Foxchase I
  $     $     $     $     $ 16,800     $  
   
Avalon at Foxchase II
                            9,600        
   
Fairway Glen
                            9,580        
   
CountryBrook
    496       528       562       599       638       15,301  
   
Waterford
                                  33,100  
   
Avalon at Mountain View
                                  18,300  
   
Avalon at Dulles
                                  12,360  
   
Avalon at Symphony Glen
                                  9,780  
   
Avalon View
    398       425       455       485       518       15,462  
   
Avalon at Lexington
    307       326       347       368       391       12,045  
   
Avalon at Nob Hill
    308       331       355       380       408       17,675  
   
Avalon Campbell
    684       733       786       843       904       31,799  
   
Avalon Pacifica
    310       332       356       382       410       14,426  
   
Avalon Knoll
    229       246       263       282       302       11,656  
   
Avalon Landing
    116       124       132       142       152       5,751  
   
Avalon Fields
    181       193       207       222       239       10,244  
   
Avalon West
    65       70       75       80       85       8,086  
   
Avalon Oaks
    98       104       112       120       128       17,066  
   
 
   
     
     
     
     
     
 
 
    3,192       3,412       3,650       3,903       40,155       233,051  
 
Variable Rate
                                               
   
Avalon at Laguna Niguel
                                  10,400  
   
The Promenade
    485       522       562       605       652       30,844  
   
Avalon at Mission Viejo
    112       121       129       139       149       6,501  
   
Avalon Devonshire
                                  27,305  
   
Avalon Greenbriar
                                  18,755  
   
Avalon at Fairway Hills I
                                  11,500  
   
 
   
     
     
     
     
     
 
 
    597       643       691       744       801       105,305  
Conventional Loans (4)
                                               
 
Fixed Rate
                                               
   
$100 Million unsecured notes
                                   
   
$50 Million unsecured notes
    50,000                                
   
$100 Million unsecured notes
    100,000                                
   
$125 Million unsecured notes
          125,000                          
   
$100 Million unsecured notes
                100,000                    
   
$50 Million unsecured notes
                50,000                    
   
$150 Million unsecured notes
                      150,000              
   
$150 Million unsecured notes
                            150,000        
   
$110 Million unsecured notes
                            110,000        
   
$50 Million unsecured notes
                                  50,000  
   
$150 Million unsecured notes
                                  150,000  
   
$150 Million unsecured notes
                                  150,000  
   
$200 Million unsecured notes
                                  200,000  
   
$300 Million unsecured notes
                                  300,000  
   
$50 Million unsecured notes
                                  50,000  
   
$250 Million unsecured notes
                                  250,000  
   
Avalon at Pruneyard
          12,870                          
   
Avalon Walk II
    315       11,433                          
   
 
   
     
     
     
     
     
 
 
    150,315       149,303       150,000       150,000       260,000       1,150,000  
 
Variable Rate
                                               
   
Avalon on the Sound
    36,089                                
   
 
   
     
     
     
     
     
 
Total indebtedness — excluding unsecured credit facility
  $ 190,193     $ 153,358     $ 154,341     $ 154,647     $ 300,956     $ 1,488,356  
   
 
   
     
     
     
     
     
 

(1)   Includes credit enhancement fees, facility fees, trustees, etc.
 
(2)   Financed by variable rate tax exempt debt, but interest rate is effectively fixed at the rate indicated through a swap agreement. The weighted average maturity of these swap agreements is 3.6 years.
 
(3)   Financed by variable rate tax exempt debt, but interest rate is capped through an interest rate cap agreement. The remaining term of this interest rate cap agreement is 4.7 years.
 
(4)   Balances outstanding as of December 31, 2002 do not include $342 of debt premium reflected in unsecured notes on our Consolidated Balance Sheets included elsewhere in this report.

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Stock Repurchase Program

In July 2002 we announced that our Board of Directors had authorized a common stock repurchase program. Under this program, we may acquire shares of our common stock in open market or negotiated transactions up to an aggregate purchase price of $100,000,000. Actual purchases of stock will vary with market conditions. The size of the stock repurchase program was designed so that retained cash flow, as well as the proceeds from sales of existing apartment communities and a reduction in planned acquisitions, will provide the source of funding for the program, with our unsecured credit facility providing temporary funding as needed. Through February 28, 2003, we have acquired 2,042,600 shares at an aggregate cost of $77,381,000 under this program.

Redemption of Preferred Stock

In July 2002, we redeemed all 2,300,000 outstanding shares of our 8.50% Series C Cumulative Redeemable Preferred Stock at a price of $25.00 per share, plus $0.1417 in accrued and unpaid dividends, for an aggregate redemption price of $57,826,000, including accrued dividends of $326,000. The redemption price was funded in part by the sale on July 11, 2002 of 592,000 shares of Series I Cumulative Redeemable Preferred Stock through a private placement to an institutional investor for a net purchase price of $14,504,000. The dividend rate on such shares was initially equal to 3.36% per annum (three month LIBOR plus 1.5%) of the liquidation preference. As permitted under the terms of such preferred stock, we redeemed all of the Series I Cumulative Redeemable Preferred Stock on August 29, 2002 for an aggregate redemption price of $14,609,000 including accrued dividends of $68,000.

As of February 1, 2003, we have the following series of redeemable preferred stock outstanding at an aggregate stated value of $181,692,500. These series have no stated maturity and are not subject to any sinking fund or mandatory redemptions. As these series become redeemable, we will evaluate the requirements necessary for such redemptions as well as the cost-effectiveness based on the existing market conditions.

                                 
    Shares outstanding   Payable   Annual   Liquidation   Non-redeemable
Series   February 1, 2003   quarterly   rate   preference   prior to

 
 
 
 
 
D     3,267,700     March, June, September,
December
    8.00 %   $ 25     December 15, 2002 —
Currently Redeemable
                                 
H     4,000,000     March, June, September,
December
    8.70 %   $ 25     October 15, 2008

On February 18, 2003, we gave notice of our intent to redeem all 3,267,700 outstanding shares of our 8.00% Series D Cumulative Redeemable Preferred Stock. We anticipate closing this redemption on March 20, 2003 at a price of $25.00 per share, plus $0.0167 in accrued and unpaid dividends, for an aggregate redemption price of $81,747,000, including accrued dividends of $55,000. This redemption will be funded by the sale of shares of Series J Cumulative Redeemable Preferred Stock through a private placement to an institutional investor. The dividend rate on such shares will initially be based on three month LIBOR plus 1.5%. The Series J Cumulative Redeemable Preferred Stock will be redeemable at any time at our option.

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Inflation and Deflation

Substantially all of our apartment leases are for a term of one year or less. In the event of significant inflation, 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 and therefore expose us to the effect of a decline in market rents. In a deflationary rent environment, as is currently being experienced, we are exposed to declining rents more quickly under these shorter-term leases.

Critical Accounting Policies

Our accounting policies are in conformity with GAAP. The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments 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. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied resulting in a different presentation of our financial statements. Below is a discussion of accounting policies which we consider critical in that they may require complex judgment in their application or require estimates about matters which are inherently uncertain. Additional discussion of accounting policies which we consider significant, including further discussion of the critical accounting policies described below, can be found in the Notes to our Consolidated Financial Statements.

Real Estate Development Rights

We capitalize pre-development costs incurred in pursuit of new development opportunities for which we currently believe future development is probable. These costs include legal fees, design fees and related overhead costs. The accompanying Consolidated Financial Statements include a charge to expense to provide an allowance for potentially unrecoverable capitalized pre-development costs. The determination of the charge to expense involves management judgement regarding the probability that a pursuit will not proceed to development.

Revenue Recognition

Rental income related to leases is recognized on an accrual basis when due from residents in accordance with SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements.” In accordance with our standard lease terms, rental payments are generally due on a monthly basis. Any cash concessions given at the inception of the lease are amortized over the approximate life of the lease – generally one year.

Real Estate

If there is an event or change in circumstance that indicates an impairment in the value of a community, our policy is to assess the impairment 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 the carrying amount is in excess of the estimated projected operating cash flows of the community, we would recognize an impairment loss equivalent to an amount required to adjust the carrying amount to its estimated fair market value.

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Discontinued Operations

On January 1, 2002, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which requires that the assets and liabilities and the results of operations of any communities which have been sold during 2002, or otherwise qualify as held for sale as of December 31, 2002, be presented as discontinued operations in our Consolidated Financial Statements in both current and prior periods presented. The community specific components of net income that are presented as discontinued operations include net operating income, depreciation and interest expense. In addition, the net gain or loss (including any impairment loss) on the eventual disposal of communities held for sale is presented as discontinued operations when recognized. Real estate assets held for sale are measured at the lower of the carrying amount or the fair value less the cost to sell, and are presented separately in our Consolidated Balance Sheets. Subsequent to classification of a community as held for sale, no further depreciation is recorded on the assets.

Investments in Technology Companies

We account for our investments in technology companies in accordance with Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” If there is an event or change in circumstance that indicates a loss in the value of an investment, our policy is to record the loss and reduce the value of the investment to its fair value. A loss in value would be indicated if we could not recover the carrying value of the investment or if the investee could not sustain an earnings capacity that would justify the carrying amount of the investment. Due to the nature of these investments, an impairment in value can be difficult to determine.

Stock-Based Compensation

During the periods presented in this report, we applied APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, in accounting for our employee stock options. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. See Note 10, “Stock-Based Compensation Plans,” in our Consolidated Financial Statements for information regarding the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

Legal Contingencies

We are subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are frequently covered by insurance. While the resolution of these matters cannot be predicted with certainty, we believe the final outcome of such matters will not have a material adverse effect on our financial position or the results of operations. Once it has been determined that a loss is probable to occur, the estimated amount of the loss is recorded in the financial statements. Both the amount of the loss and the point at which its occurrence is considered probable can be difficult to determine.

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. We monitor interest rate fluctuations 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 borrowings under our variable rate unsecured credit facility as well as outstanding bonds with variable interest rates. We had

52


 

$173,840,000 and $125,274,000 in variable rate debt outstanding as of December 31, 2002 and 2001, respectively. If interest rates on the variable rate debt had been 100 basis points higher throughout 2002 and 2001, our annual interest costs would have increased by approximately $2,557,000 and $1,500,000, respectively, based on balances outstanding during the applicable years.

We currently use interest rate swap agreements to reduce the impact of interest rate fluctuations on certain variable rate indebtedness. Under swap agreements,

    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
 
    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, 2002, the effect of swap agreements is to fix the interest rate on approximately $166,000,000 of our variable rate tax-exempt debt. Furthermore, a swap agreement to fix the interest rate on approximately $22,500,000 of unconsolidated variable rate debt exists as of December 31, 2002. The swap agreements on the consolidated variable rate tax-exempt debt 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. Because the counterparties providing the swap agreements are major financial institutions which have an A+ or better credit rating 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.

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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

As discussed more fully in 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 14, 2003, during 2002 the Company dismissed Arthur Andersen LLP and engaged Ernst & Young LLP to be the Company’s principal independent public accountant.

PART III

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 14, 2003.

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 14, 2003.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

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 14, 2003.

The Company maintains the 1994 Stock Incentive Plan (the “1994 Plan”) and the 1996 Non-Qualified Employee Stock Purchase Plan (the “ESPP”), pursuant to which common stock or other equity awards may be issued or granted to eligible persons.

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The following table gives information about equity awards under the Company’s 1994 Plan and ESPP as of December 31, 2002:

                           
      (a)   (b)   (c)
              Number of securities
              remaining available for
      Number of securities to be   Weighted-average   future issuance under equity
      issued upon exercise of   exercise price of   compensation plans
      outstanding options,   outstanding options,   (excluding securities
Plan category   warrants and rights   warrants and rights   reflected in column (a))
   
 
 
Equity compensation
                       
plans approved by
                       
security holders (1)
    3,245,145 (2) (3)   $ 39.05 (3) (4)     1,415,862 (5)
 
Equity compensation
                       
plans not approved by
                       
security holders(6)
          n/a       702,342  
 
   
     
     
 
 
Total
    3,245,145     $ 39.05 (3) (4)     2,118,204  
 
   
     
     
 

(1) Consists of the 1994 Plan.

(2) Includes 79,138 deferred units granted under the 1994 Plan, which, subject to vesting requirements, will convert in the future to common stock on a one-for-one basis, but does not include 199,127 shares of restricted stock that are outstanding and that are already reflected in the Company’s outstanding shares.

(3) Does not include outstanding options to acquire 640,506 shares, at a weighted-average exercise price of $35.27 per share, that were assumed, in connection with the 1998 merger of Avalon Properties, Inc. with and into the Company, under the Avalon Properties, Inc. 1995 Equity Incentive Plan and the Avalon Properties, Inc. 1993 Stock Option and Incentive Plan.

(4) Excludes deferred units granted under the 1994 Plan, which, subject to vesting requirements, will convert in the future to common stock on a one-for-one basis.

(5) The 1994 Plan incorporates an evergreen formula pursuant to which the aggregate number of shares reserved for issuance under the 1994 Plan will increase annually. On each January 1, the aggregate number of shares reserved for issuance under the 1994 Plan will increase by a number of shares equal to a percentage (ranging from 0.48% to 1.00%) of all outstanding shares of Common Stock at the end of the year. The exact percentage used is determined based on the percentage of all awards made under the 1994 Plan during the calendar year that were in the form of stock options with an exercise price equal to the fair market value of a share of Common Stock on the date of the grant. In accordance with this procedure, on January 1, 2003, the maximum number of shares remaining available for future issuance under the 1994 Plan was increased by 664,115 to 2,079,977.

(6) Consists of the ESPP.

The ESPP, which was adopted by the Board of Directors on October 29, 1996, has not been approved by our shareholders. A further description of the ESPP appears in Note 10, “Stock-Based Compensation Plans,” of our Consolidated Financial Statements included in this report.

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 14, 2003.

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ITEM 14. CONTROLS AND PROCEDURES

(a)  Evaluation of Disclosure Controls and Procedures.

Within the 90 days prior to the date of this report, the Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. We continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

(b)  Changes in Internal Controls.

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls, subsequent to the date of their evaluation.

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PART IV

ITEM 15.      EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K

15(a)(1)        Financial Statements

Index to Financial Statements

Consolidated Financial Statements and Financial Statement Schedule:

     
Report of Independent Auditors   F-1
 
Consolidated Balance Sheets as of December 31, 2002 and 2001   F-2
 
Consolidated Statements of Operations and Other Comprehensive Income for
      the years ended December 31, 2002, 2001 and 2000
  F-3
 
Consolidated Statements of Stockholders’ Equity for
      the years ended December 31, 2002, 2001, and 2000
  F-4
 
Consolidated Statements of Cash Flows for
      the years ended December 31, 2002, and 2000
  F-5
 
Notes to Consolidated Financial Statements   F-7
 
15(a)(2)        Financial Statement Schedule    
 
Schedule III – Real Estate and Accumulated Depreciation   F-30
 
15(a)(3)        Exhibits    
 
The exhibits listed on the accompanying Index to Exhibits are filed as a part of this report.    
 
15(b)            Reports on Form 8-K    
 
None.    

 

 

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INDEX TO EXHIBITS

         
EXHIBIT        
NO.       DESCRIPTION
         
3(i).1     Articles of Amendment and Restatement of Articles of Incorporation of 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 the Company’s Current Report on Form 8-K filed 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(i).4     Articles Supplementary of the Company relating to its Series I Cumulative Redeemable Preferred Stock. (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed July 15, 2002.)
         
3(ii)     Amended and Restated Bylaws of the Company, as adopted by the Board of Directors on February 13, 2003. (Filed herewith.)
         
4.1     Indenture of Avalon Properties, Inc. (hereinafter referred to as “Avalon Properties”) dated as of September18, 1995. (Incorporated by reference to Avalon Properties’ Registration Statement on Form S-3 (33-95412), filed on August 4, 1995.)
         
4.2     First Supplemental Indenture of Avalon Properties dated as of September 18, 1995. (Incorporated by reference to Exhibit 4.2 to Form 10-K of the Company filed March 26, 2002.)
         
4.3     Second Supplemental Indenture of Avalon Properties dated as of December 16, 1997. (Filed herewith.)
         
4.4     Third Supplemental Indenture of Avalon Properties dated as of January 22, 1998. (Filed herewith.)
         
4.5     Indenture, dated as of January 16, 1998, between the Company and State Street Bank and Trust Company, as Trustee. (Filed herewith.)
         
4.6     First Supplemental Indenture, dated as of January 20, 1998, between the Company and the Trustee. (Filed herewith.)
         
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 the Company’s Current Report on Form 8-K filed July 9, 1998.)
         
4.8     Amended and Restated Third Supplemental Indenture, dated as of July 10, 2000 between the Company and the Trustee, including forms of Floating Rate Note and Fixed Rate Note. (Incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed July 11, 2000.)

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EXHIBIT        
NO.       DESCRIPTION
         
4.9     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.)
         
4.10     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.)
         
4.11     Shareholder Rights Agreement (Expired), 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); 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); Amendment No. 2 to the Rights Agreement, dated January 4, 2002, between the Company and the Rights Agent (Incorporated by reference to Exhibit 4.3 to Form 8-K of the Company filed January 7, 2000). The Shareholder Rights Agreement, as amended, expired on March 31, 2002.
         
10.1     Distribution Agreement, dated December 21, 1998, among AvalonBay Communities, Inc. (the “Company”) and the Agents, including Administrative Procedures, relating to the MTNs. (Incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed December 21, 1998.)
         
10.2     First Amendment, dated as of June 27, 2000, to Distribution Agreement, dated December 21, 1998, among the Company and the Agents. (Incorporated by reference to Exhibit 1.2 to the Company’s Current Report on Form 8-K filed July 11, 2000.)
         
10.3     Second Amendment, dated as of August 31, 2001, to Distribution Agreement, dated December 21, 1998, among the Company and the Agents. (Incorporated by reference to Exhibit 1.3 to the Company’s Current Report on Form 8-K filed September 4, 2001.)
         
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 January 10, 2003, between the Company and Bryce Blair. (Filed herewith.)
         
10.6+     Employment Agreement, dated as of February 26, 2001, between the Company and Timothy J. Naughton. (Incorporated by reference to Exhibit 10.5 to Form 10-K of the Company filed March 29, 2001.)
         
10.7+     Employment Agreement, dated as of September 10, 2001, between the Company and Leo S. Horey. (Incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company filed November 14, 2001.)

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EXHIBIT        
NO.       DESCRIPTION
         
10.8+     Employment Agreement, dated as of December 31, 2001, between the Company and Samuel B. Fuller. (Incorporated by reference to Exhibit 10.9 to Form 10-K of the Company filed March 26, 2002.)
         
10.9+     Letter Agreement regarding departure, dated February 26, 2001, by and between the Company and Robert H. Slater. (Incorporated by reference to Exhibit 10.8 to Form 10-K of the Company filed March 29, 2001.)
         
10.10+     Mutual Release and Separation Agreement, dated as of March 24, 2000, between the Company and Gilbert M. Meyer. (Incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company filed May 15, 2000.)
         
10.11+     Retirement Agreement, dated as of March 24, 2000, between the Company and Gilbert M. Meyer. (Incorporated by reference to Exhibit 10.2 to Form 10-Q of the Company filed May 15, 2000.)
         
10.12+     Consulting Agreement, dated as of March 24, 2000, between the Company and Gilbert M. Meyer. (Incorporated by reference to Exhibit 10.3 to Form 10-Q of the Company filed May 15, 2000.)
         
10.13+     Avalon Properties, Inc. 1993 Stock Option and Incentive Plan. (Incorporated by reference to Exhibit 10.14 to Form 10-K of the Company filed March 29, 2001.)
         
10.14+     Avalon Properties, Inc. 1995 Equity Incentive Plan. (Incorporated by reference to Exhibit 10.15 to Form 10-K of the Company filed March 29, 2001.)
         
10.15+     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 August 16, 1999.)
         
10.16+     AvalonBay Communities, Inc. 1994 Stock Incentive Plan, as amended and restated in full on May 8, 2001. (Incorporated by reference to Exhibit B to the Company’s Schedule 14A filed March 30, 2001.)
         
10.17+     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.)
         
10.18+     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. 19+     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 March 31, 1999.)
         
10.20+     The Company’s Officer Severance Plan. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 11, 2000.)
         
10.21     Revolving Loan Agreement, dated as of May 24, 2001, among the Company, as Borrower, The Chase Manhattan Bank, as a Bank, Co-Agent and Syndication Agent, Fleet National Bank, as a Bank and Co-Agent, Bank of America, N.A., First Union National Bank and Citicorp Real Estate,

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EXHIBIT        
NO.       DESCRIPTION
         
        Inc., each as a Bank and Documentation Agent, the other banks signatory thereto, each as a Bank, J.P. Morgan Securities, Inc., as Sole Bookrunner and Lead Arranger, and Fleet National Bank, as Administrative Agent. (Incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company filed August 14, 2001.)
         
12.1     Statements re: Computation of Ratios. (Filed herewith.)
         
21.1     Schedule of Subsidiaries of the Company. (Filed herewith.)
         
23.1     Consent of Ernst & Young LLP. (Filed herewith.)
         
99.1     Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer). (Filed herewith.)
         
99.2     Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer). (Filed herewith.)

     + 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.

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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.
 
Date: March 11, 2003   By:    /s/ Bryce Blair
     
Bryce Blair, Chairman of the Board, Chief Executive Officer and
President

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.

       
Date: March 11, 2003   By:    /s/ Bryce Blair
     
Bryce Blair, Chairman of the Board, Chief Executive Officer and
President
(Principal Executive Officer)
 
Date: March 11, 2003   By:    /s/ Thomas J. Sargeant
     
Thomas J. Sargeant, Executive VP and Chief Financial Officer
(Principal Financial and Accounting Officer)
 
Date: March 11, 2003   By:    /s/ Bruce A. Choate
     
Bruce A. Choate, Director
 
Date: March 11, 2003   By:    /s/ John J. Healy, Jr.
     
John J. Healy, Jr., Director
 
Date: March 11, 2003   By:    /s/ Gilbert M. Meyer
     
Gilbert M. Meyer, Director
 
Date: March 11, 2003   By:    /s/ Charles D. Peebler, Jr.
     
Charles D. Peebler, Jr., Director
 
Date: March 11, 2003   By:    /s/ Lance R. Primis
     
Lance R. Primis, Director
 
Date: March 11, 2003   By:    /s/ Allan D. Schuster
     
Allan D. Schuster, Director
 
Date: March 11, 2003   By:    /s/ Amy P. Williams
     
Amy P. Williams, Director

62


 

Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

CERTIFICATION

     I, Bryce Blair, certify that:

  1.   I have reviewed this annual report on Form 10-K of AvalonBay Communities, Inc.;
 
  2.   Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
 
  3.   Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
 
  4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
 
  a)   Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
 
  b)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
 
  c)   Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
  5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
  a)   All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
  6.   The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

     
Date: March 11, 2003    
 
    /s/ Bryce Blair

Bryce Blair
Chairman of the Board, Chief Executive Officer and President

63


 

CERTIFICATION

     I, Thomas J. Sargeant, certify that:

  1.   I have reviewed this annual report on Form 10-K of AvalonBay Communities, Inc.;
 
  2.   Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
 
  3.   Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
 
  4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
 
  a)   Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
 
  b)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
 
  c)   Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
  5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
  a)   All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
  6.   The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

     
Date: March 11, 2003    
 
    /s/ Thomas J. Sargeant

Thomas J. Sargeant
Executive Vice President – Chief Financial Officer

64


 

Report of Independent Auditors

To the Board of Directors and Stockholders of
AvalonBay Communities, Inc.:

We have audited the accompanying consolidated balance sheets of AvalonBay Communities, Inc. (the “Company”) as of December 31, 2002 and 2001, and the related consolidated statements of operations and other comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of AvalonBay Communities, Inc. at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, in 2002 the Company adopted Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” In addition, as discussed in Note 5 to the consolidated financial statements, in 2001 the Company changed its method of accounting for derivative instruments and hedging activities.
 
 

/s/ Ernst & Young LLP                        
 

McLean, Virginia
January 21, 2003

F-1


 

AVALONBAY COMMUNITIES, INC.

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
                         
            12-31-02   12-31-01
           
 
ASSETS
               
Real estate:
               
 
Land, including land held for development
  $ 929,397     $ 821,808  
 
Buildings and improvements
    3,999,826       3,432,330  
 
Furniture, fixtures and equipment
    127,643       112,378  
 
   
     
 
 
    5,056,866       4,366,516  
 
Less accumulated depreciation
    (584,022 )     (440,259 )
 
   
     
 
 
Net operating real estate
    4,472,844       3,926,257  
 
Construction in progress (including land)
    312,587       433,944  
 
Real estate assets held for sale, net
          30,642  
 
   
     
 
       
Total real estate, net
    4,785,431       4,390,843  
 
               
Cash and cash equivalents
    13,357       72,990  
Cash in escrow
    10,239       49,965  
Resident security deposits
    21,839       20,370  
Investments in unconsolidated real estate entities
    14,591       15,066  
Deferred financing costs, net
    20,424       20,357  
Deferred development costs, net
    31,461       26,038  
Participating mortgage notes
    21,483       21,483  
Prepaid expenses and other assets
    32,010       47,177  
 
   
     
 
       
Total assets
  $ 4,950,835     $ 4,664,289  
 
   
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Unsecured notes
  $ 1,985,342     $ 1,635,000  
Variable rate unsecured credit facility
    28,970        
Mortgage notes payable
    456,851       447,769  
Dividends payable
    51,553       49,007  
Payables for construction
    29,768       43,656  
Accrued expenses and other liabilities
    51,652       51,627  
Accrued interest payable
    42,954       38,841  
Resident security deposits
    31,762       28,641  
 
   
     
 
       
Total liabilities
    2,678,852       2,294,541  
 
   
     
 
 
               
Minority interest of unitholders in consolidated partnerships
    77,443       55,193  
 
Commitments and contingencies
               
 
Stockholders’ equity:
               
   
Preferred stock, $.01 par value; $25 liquidation preference; 50,000,000 shares authorized at both December 31, 2002 and 2001; 7,267,700 and 9,567,700 shares issued and outstanding at December 31, 2002 and December 31, 2001, respectively.
    73       96  
   
Common stock, $.01 par value; 140,000,000 shares authorized at both December 31, 2002 and 2001; 68,202,926 and 68,713,384 shares issued and outstanding at December 31, 2002 and December 31, 2001, respectively.
    682       687  
   
Additional paid-in capital
    2,266,130       2,333,241  
   
Deferred compensation
    (7,855 )     (7,489 )
   
Dividends in excess of accumulated earnings
    (51,850 )     (3,497 )
   
Accumulated other comprehensive loss
    (12,640 )     (8,483 )
 
   
     
 
       
Total stockholders’ equity
    2,194,540       2,314,555  
 
   
     
 
       
Total liabilities and stockholders’ equity
  $ 4,950,835     $ 4,664,289  
 
   
     
 

See accompanying notes to Consolidated Financial Statements.

F-2


 

AVALONBAY COMMUNITIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME
(Dollars in thousands, except per share data)
                                 
            For the year ended
           
            12-31-02   12-31-01   12-31-00
           
 
 
Revenue:
                       
 
Rental income
  $ 630,502     $ 629,545     $ 564,613  
 
Management fees
    1,355       1,325       1,051  
 
Other income
    7,109       2,953       401  
 
   
     
     
 
       
Total revenue
    638,966       633,823       566,065  
 
   
     
     
 
Expenses:
                       
 
Operating expenses, excluding property taxes
    176,587       159,665       140,633  
 
Property taxes
    56,352       51,686       46,409  
 
Interest expense
    121,380       103,189       83,582  
 
Depreciation expense
    143,782       128,642       120,915  
 
General and administrative expense
    14,332       15,224       13,013  
 
Impairment loss
    6,800              
 
   
     
     
 
       
Total expenses
    519,233       458,406       404,552  
 
   
     
     
 
Equity in income of unconsolidated entities
    55       856       2,428  
Interest income
    3,978       6,823       4,764  
Minority interest in consolidated partnerships
    (2,570 )     (597 )     (1,908 )
 
   
     
     
 
Income before gain on sale of communities
    121,196       182,499       166,797  
Gain on sale of communities
          62,852       40,779  
 
   
     
     
 
Income from continuing operations
    121,196       245,351       207,576  
Discontinued operations:
                       
 
Operating income
    3,529       3,646       3,028  
 
Gain on sale of communities
    48,893              
 
   
     
     
 
Total discontinued operations
    52,422       3,646       3,028  
 
   
     
     
 
Net income
    173,618       248,997       210,604  
Dividends attributable to preferred stock
    (17,896 )     (32,497 )     (39,779 )
 
   
     
     
 
Net income available to common stockholders
  $ 155,722     $ 216,500     $ 170,825  
 
   
     
     
 
Other comprehensive loss:
                       
 
Cumulative effect of change in accounting principle
          (6,412 )      
 
Unrealized loss on cash flow hedges
    (4,157 )     (2,071 )      
 
   
     
     
 
Other comprehensive loss
    (4,157 )     (8,483 )      
 
   
     
     
 
Comprehensive income
  $ 151,565     $ 208,017     $ 170,825  
 
   
     
     
 
Earnings per common share — basic:
                       
   
Income from continuing operations
      (net of dividends attributable to preferred stock)
  $ 1.50     $ 3.11     $ 2.53  
   
Discontinued operations
    0.76       0.08       0.05  
 
   
     
     
 
     
Net income available to common stockholders
  $ 2.26     $ 3.19     $ 2.58  
 
   
     
     
 
Earnings per common share — diluted:
                       
   
Income from continuing operations
      (net of dividends attributable to preferred stock)
  $ 1.49     $ 3.05     $ 2.49  
   
Discontinued operations
    0.74       0.07       0.04  
 
   
     
     
 
     
Net income available to common stockholders
  $ 2.23     $ 3.12     $ 2.53  
 
   
     
     
 

See accompanying notes to Consolidated Financial Statements.

F-3


 

AVALONBAY COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars in thousands, except share data)
                                         
    Shares issued   Amount        
   
 
  Additional
    Preferred   Common   Preferred   Common   paid-in
    stock   stock   stock   stock   capital
   
 
 
 
 
Balance at December 31, 1999
    18,322,700       65,758,009     $         183     $         658     $ 2,442,510  
Net income
                             
Dividends declared to common and preferred stockholders
                             
Issuance of common stock
          1,433,533             14       50,523  
Amortization of deferred compensation
                             
 
   
     
     
     
     
 
Balance at December 31, 2000
    18,322,700       67,191,542       183       672       2,493,033  
 
Cumulative effect of change in accounting principle
                             
Net income
                             
Unrealized loss on cash flow hedges
                             
Dividends declared to common and preferred stockholders
                             
Issuance of common stock
          1,521,842             15       59,116  
Redemption of preferred stock
    (8,755,000 )           (87 )           (218,908 )
Amortization of deferred compensation
                             
 
   
     
     
     
     
 
Balance at December 31, 2001
    9,567,700       68,713,384       96       687       2,333,241  
 
Net income
                             
Unrealized loss on cash flow hedges
                             
Dividends declared to common and preferred stockholders
                             
Issuance of common stock, net of withholdings
          771,142             8       28,795  
Repurchase of common stock, including repurchase costs of $39
          (1,281,600 )           (13 )     (38,281 )
Issuance of preferred stock, net of offering costs of $407
                6             14,387  
Redemption of preferred stock
    (2,300,000 )           (29 )           (72,012 )
Amortization of deferred compensation
                             
 
   
     
     
     
     
 
Stockholders’ equity, December 31, 2002
    7,267,700       68,202,926     $ 73     $ 682     $ 2,266,130  
 
   
     
     
     
     
 

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                 
            Dividends in   Accumulated        
            excess of   other        
    Deferred   accumulated   comprehensive   Stockholders'
    compensation   earnings   loss   equity
   
 
 
 
Balance at December 31, 1999
  $ (3,559 )   $ (69,507 )   $     $ 2,370,285  
Net income
          210,604             210,604  
Dividends declared to common and preferred stockholders
          (188,942 )           (188,942 )
Issuance of common stock
    (3,408 )                 47,129  
Amortization of deferred compensation
    3,417                   3,417  
 
   
     
     
     
 
Balance at December 31, 2000
    (3,550 )     (47,845 )           2,442,493  
 
Cumulative effect of change in accounting principle
                (6,412 )     (6,412 )
Net income
          248,997             248,997  
Unrealized loss on cash flow hedges
                (2,071 )     (2,071 )
Dividends declared to common and preferred stockholders
          (204,649 )           (204,649 )
Issuance of common stock
    (7,545 )                 51,586  
Redemption of preferred stock
                      (218,995 )
Amortization of deferred compensation
    3,606                   3,606  
 
   
     
     
     
 
Balance at December 31, 2001
    (7,489 )     (3,497 )     (8,483 )     2,314,555  
 
Net income
          173,618             173,618  
Unrealized loss on cash flow hedges
                (4,157 )     (4,157 )
Dividends declared to common and preferred stockholders
          (209,996 )           (209,996 )
Issuance of common stock, net of withholdings
    (4,463 )     (508 )           23,832  
Repurchase of common stock, including repurchase costs of $39
          (11,467 )           (49,761 )
Issuance of preferred stock, net of offering costs of $407
                      14,393  
Redemption of preferred stock
                      (72,041 )
Amortization of deferred compensation
    4,097                   4,097  
 
   
     
     
     
 
Stockholders’ equity, December 31, 2002
  $ (7,855 )   $ (51,850 )   $ (12,640 )   $ 2,194,540  
 
   
     
     
     
 

See accompanying notes to Consolidated Financial Statements.

F-4


 

AVALONBAY COMMUNITIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
                               
          For the year ended
         
          12-31-02   12-31-01   12-31-00
         
 
 
Cash flows from operating activities:
                       
 
Net income
  $ 173,618     $ 248,997     $ 210,604  
 
Adjustments to reconcile net income to cash provided by operating activities:
                       
   
Depreciation expense
    143,782       128,642       120,915  
   
Depreciation expense from discontinued operations
    695       1,437       1,695  
   
Amortization of deferred financing costs
    3,913       3,716       2,924  
   
Amortization of deferred compensation
    4,097       3,606       3,417  
   
Income allocated to minority interest in consolidated partnerships
    2,570       597       1,908  
   
Gain on sale of communities, net of impairment loss on planned dispositions
    (42,093 )     (62,852 )     (40,779 )
   
Decrease (increase) in cash in operating escrows
    (104 )     41       1,144  
   
Decrease (increase) in resident security deposits, prepaid expenses and other assets
    18,644       (8,503 )     (15,438 )
   
Increase in accrued expenses, other liabilities and accrued interest payable
    2,987       4,925       15,693  
 
   
     
     
 
   
Net cash provided by operating activities
    308,109       320,606       302,083  
 
   
     
     
 
Cash flows used in investing activities:
                       
 
Development/redevelopment of real estate assets including land acquisitions and deferred development costs
    (426,830 )     (353,351 )     (171,985 )
 
Acquisition of real estate assets
    (106,300 )     (129,300 )     (252,400 )
 
Capital expenditures — current real estate assets
    (10,930 )     (9,649 )     (15,209 )
 
Capital expenditures — non-real estate assets
    (1,142 )     (4,183 )     (1,359 )
 
Proceeds from sale of communities, net of selling costs
    78,454       238,545       156,086  
 
Increase (decrease) in payables for construction
    (13,888 )     23,656       1,123  
 
Decrease (increase) in cash in section 1031 exchange escrows
    39,830       (33,273 )     (9,076 )
 
Decrease (increase) in investments in unconsolidated real estate entities
    475       (2,851 )     34,665  
 
   
     
     
 
   
Net cash used in investing activities
    (440,331 )     (270,406 )     (258,155 )
 
   
     
     
 
Cash flows from financing activities:
                       
 
Issuance of common stock
    22,296       50,912       36,203  
 
Repurchase of common stock
    (49,761 )            
 
Issuance of preferred stock, net of related costs
    14,393              
 
Redemption of preferred stock and related costs
    (72,041 )     (218,995 )      
 
Dividends paid
    (207,450 )     (203,214 )     (185,509 )
 
Net borrowings (repayments) under unsecured credit facility
    28,970             (178,600 )
 
Issuance of mortgage notes payable
          75,110        
 
Repayments of mortgage notes payable
    (24,818 )     (22,265 )     (35,123 )
 
Proceeds from sale of unsecured notes, net of repayments
    350,342       300,000       350,000  
 
Payment of deferred financing costs
    (3,980 )     (8,808 )     (4,428 )
 
Redemption of units for cash by minority partners
    (1,663 )     (864 )      
 
Contributions from (distributions to) minority partners
    16,301       (6,320 )     23,142  
 
   
     
     
 
   
Net cash provided by (used in) financing activities
    72,589       (34,444 )     5,685  
 
   
     
     
 
   
Net increase (decrease) in cash and cash equivalents
    (59,633 )     15,756       49,613  
Cash and cash equivalents, beginning of year
    72,990       57,234       7,621  
 
   
     
     
 
Cash and cash equivalents, end of year
  $ 13,357     $ 72,990     $ 57,234  
 
   
     
     
 
Cash paid during year for interest, net of amount capitalized
  $ 108,903     $ 88,996     $ 72,712  
 
   
     
     
 

See accompanying notes to Consolidated Financial Statements.

F-5


 

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

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

During the year ended December 31, 2002:

    The Company issued 102,756 units of limited partnership interest in DownREIT partnerships valued at $5,000 in connection with the formation of a DownREIT partnership and the acquisition by that partnership of land. See Note 1, “Organization and Significant Accounting Policies,” of the Consolidated Financial Statements for a description of DownREIT partnerships.
 
    As described in Note 4, “Stockholders’ Equity,” of the Consolidated Financial Statements, 144,718 shares of common stock were issued, 34,876 shares were withheld to satisfy employees’ tax withholding and other liabilities and 2,818 shares were forfeited, for a net value of $5,999.
 
    The Company assumed $33,900 in variable rate, tax-exempt debt related to the acquisition of one community.
 
    The Company recorded a liability and a corresponding charge to other comprehensive loss of $4,157 to adjust the Company’s Hedged Derivatives (as defined in Note 5, “Derivative Instruments and Hedging Activities,” of the Consolidated Financial Statements) to their fair value.
 
    Common and preferred dividends declared but not paid totaled $51,553.

During the year ended December 31, 2001:

    762 units of limited partnership, valued at $36, were presented for redemption to the DownREIT partnership that issued such units and were acquired by the Company in exchange for an equal number of shares of the Company’s common stock.
 
    The Company issued 619 units of limited partnership in DownREIT partnerships valued at $30 as consideration for acquisitions of apartment communities that were acquired pursuant to the terms of a forward purchase contract agreed to in 1997 with an unaffiliated party. In addition, the Company issued 256,940 units of limited partnership in a DownREIT partnership valued at $12,274 in connection with the formation of a DownREIT partnership and the acquisition by that partnership of land.
 
    186,877 shares of common stock were issued at a value of $8,570 and 19,646 shares were forfeited at a value of $235.
 
    $67 of deferred stock units were converted into 1,803 shares of common stock.
 
    The Company recorded a liability and a corresponding charge to other comprehensive loss of $8,483 to adjust the Company’s Hedged Derivatives to their fair value.
 
    Common and preferred dividends declared but not paid were $49,007.

During the year ended December 31, 2000:

    1,520 units of limited partnership in DownREIT partnerships, valued at $60, were issued in connection with an acquisition for cash and units pursuant to a forward purchase contract agreed to in 1997 with an unaffiliated party.
 
    304,602 units of limited partnership in DownREIT partnerships, valued at $10,926, were exchanged for an equal number of shares of the Company’s common stock.
 
    139,336 shares of common stock were issued at a value of $4,703 and 50,310 shares were forfeited at a value of $1,668.
 
    Real estate assets valued at $5,394 were contributed to a limited liability company in exchange for a 25% membership interest.
 
    Common and preferred dividends declared but not paid totaled $47,572.

F-6


 

AVALONBAY COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

1. Organization and Significant Accounting Policies

Organization

AvalonBay Communities, Inc. (the “Company,” which term, unless the context otherwise requires, refers 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 upscale apartment communities in high barrier-to-entry markets of the United States. These markets are located in the Northeast, Mid-Atlantic, Midwest, Pacific Northwest, and Northern and Southern California regions of the country.

At December 31, 2002, the Company owned or held a direct or indirect ownership interest in 137 operating apartment communities containing 40,179 apartment homes in eleven states and the District of Columbia, of which two communities containing 1,089 apartment homes were under reconstruction. In addition, the Company owned or held a direct or indirect ownership interest in 12 communities under construction that are expected to contain an aggregate of 3,429 apartment homes when completed. The Company also owned a direct or indirect ownership interest in rights to develop an additional 38 communities that, if developed in the manner expected, will contain an estimated 9,950 apartment homes.

Principles of Consolidation

The Company is the surviving corporation from the merger (the “Merger”) of Bay Apartment Communities, Inc. (“Bay”) and Avalon Properties, Inc. (“Avalon”) on June 4, 1998, in which Avalon shareholders received 0.7683 of a 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. Consequently, Bay’s assets were 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. In connection with the Merger, the Company changed its name from Bay Apartment Communities, Inc. to AvalonBay Communities, Inc.

The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly-owned partnerships and certain joint venture partnerships in addition to subsidiary partnerships structured as DownREITs. All significant intercompany balances and transactions have been eliminated in consolidation.

In each of the partnerships structured as DownREITs, either the Company or one of the Company’s 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 an initial distribution before any distribution is made to the general partner. Although the partnership agreements for each of the DownREITs are different, generally the distributions per unit paid to the holders of units of limited partnership interests have approximated the Company’s current common stock dividend per share. 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 the Company’s common stock on the date of redemption. In lieu of a cash redemption of a limited partner’s unit, the Company may elect to acquire any unit presented for redemption for one share of common stock.

The Company accounts for investments in unconsolidated entities in accordance with Accounting Principles Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock,” and Statement of Position (“SOP”) 78-9, “Accounting for Investments in Real Estate Ventures.” The Company uses the equity

F-7


 

method to account for investments in which it owns greater than 20% of the equity value or has significant and disproportionate influence over that entity. Investments in which the Company owns 20% or less of the equity value and does not have significant and disproportionate influence are accounted for using the cost method. If there is an event or change in circumstance that indicates a loss in the value of an investment, the Company’s policy is to record the loss and reduce the value of the investment to its fair value. A loss in value would be indicated if the Company could not recover the carrying value of the investment or if the investee could not sustain an earnings capacity that would justify the carrying amount of the investment. The Company did not recognize an impairment loss on any of its investments in unconsolidated entities during the year ended December 31, 2002. However, during the year ended December 31, 2001, the Company recorded an impairment loss of $934 related to a technology investment in which the Company no longer owns an equity interest.

Revenue Recognition

Rental income related to leases is recognized on an accrual basis when due from residents in accordance with SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements.” In accordance with the Company’s standard lease terms, rental payments are generally due on a monthly basis. Any cash concessions given at the inception of the lease are amortized over the approximate life of the lease, which is generally one year.

The following reconciles total revenue in conformity with generally accepted accounting principles (“GAAP”) to total revenue adjusted to state concessions on a cash basis for the years ended December 31, 2002, 2001 and 2000:

                         
    For the year ended
   
    12-31-02   12-31-01   12-31-00
   
 
 
Total revenue (GAAP basis)
  $ 638,966     $ 633,823     $ 566,065  
Concessions amortized
    11,044       4,005       3,043  
Concessions granted
    (17,356 )     (6,362 )     (2,349 )
 
   
     
     
 
Total revenue adjusted to state concessions on a cash basis
  $ 632,654     $ 631,466     $ 566,759  
 
   
     
     
 

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 Company’s policy with respect to capital expenditures is generally to capitalize only non-recurring expenditures. Improvements and upgrades are capitalized only if the item exceeds $15, extends the useful life of the asset and is not related to making an apartment home ready for the next resident. Purchases of personal property, such as computers and furniture, are capitalized only if the item is a new addition. The Company generally expenses purchases of personal property made for replacement purposes.

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 apartment homes (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.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects,” the Company capitalizes pre-development costs incurred in pursuit of new development opportunities for which the Company currently believes future development is probable. Future development of these communities is dependent upon various factors, including zoning and

F-8


 

regulatory approval, rental market conditions, construction costs and availability of capital. A charge to expense is included in operating expenses, excluding property taxes on the accompanying Consolidated Statements of Operations and Other Comprehensive Income to provide an allowance for potentially unrecoverable deferred development costs.

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 (primarily 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 an operating 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 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 2002, 2001 or 2000 on any of its operating communities. However, the Company recognized an impairment loss in 2002 related to land planned for disposition as of December 31, 2002. See Note 7, “Discontinued Operations – Real Estate Assets Held for Sale” of the Consolidated Financial Statements.

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 must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its adjusted taxable income to stockholders. As a REIT, the Company generally will not be subject to corporate level federal income tax on taxable income it distributes currently to its stockholders. Management believes that all such conditions for the avoidance of income taxes have been met for the periods presented. Accordingly, no provision for federal and state income taxes has been made. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income. In addition, taxable income from non-REIT activities managed through taxable REIT subsidiaries is subject to federal, state and local income taxes.

F-9


 

The following reconciles net income available to common stockholders to taxable net income for the years ended December 31, 2002, 2001 and 2000:

                           
      2002   2001   2000
      Estimate   Actual   Actual
     
 
 
Net income available to common stockholders
  $ 155,722     $ 216,500     $ 170,825  
Dividends attributable to Preferred Stock, not deductible for tax
    17,896       32,497       39,779  
GAAP gain on sale of communities less than (in excess of) tax gain
    5,164       (21,223 )     (15,146 )
Depreciation/Amortization timing differences on real estate
    (5,893 )     (4,899 )     (826 )
Tax compensation expense in excess of GAAP
    (8,568 )     (11,129 )     (5,873 )
Other adjustments
    1,395       (124 )     (1,157 )
 
   
     
     
 
 
Taxable net income
  $ 165,716     $ 211,622     $ 187,602  
 
   
     
     
 

The following summarizes the tax components of the Company’s common and preferred dividends declared for the years ended December 31, 2002, 2001 and 2000:

                         
    2002   2001   2000
   
 
 
Ordinary income
    74 %     80 %     86 %
20% capital gain
    23 %     14 %     9 %
Unrecaptured §1250 gain
    3 %     6 %     5 %

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. Accumulated amortization of deferred financing costs was $15,765 and $11,916 at December 31, 2002 and 2001, respectively.

Cash, Cash Equivalents and Cash in Escrow

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.

Interest Rate Contracts

The Company utilizes derivative financial instruments to manage interest rate risk and has designated these financial instruments as hedges under the guidance of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 138, “Accounting for Certain Instruments and Certain Hedging Activities, an Amendment of Statement No. 133.” For fair value hedge transactions, changes in the fair value of the derivative instrument and changes in the fair value of the hedged item due to the risk being hedged are recognized in current period earnings. For cash flow hedge transactions, changes in the fair value of the derivative instrument are reported in other comprehensive income. For cash flow hedges where the changes in the fair value of the derivative exceeds the change in fair value of the hedged item, the ineffective portion is recognized in current period earnings. Derivatives which are not part of a hedge relationship are recorded at fair value through earnings. As of December 31, 2002, the Company has approximately $166,000 in variable rate tax-exempt debt subject to cash flow hedges. See Note 5, “Derivative Instruments and Hedging Activities,” of the Consolidated Financial Statements.

F-10


 

Comprehensive Income

Comprehensive income, which is defined as all changes in equity during each period except for those resulting from investments by or distributions to shareholders, is displayed in the accompanying Consolidated Statements of Stockholders’ Equity. Accumulated other comprehensive loss reflects the changes in the fair value of effective cash flow hedges.

Earnings per Common Share

In accordance with the provisions of SFAS No. 128, “Earnings per Share,” basic earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis. The Company’s earnings per common share are determined as follows:

                         
    For the year ended
   
    12-31-02   12-31-01   12-31-00
   
 
 
Basic and Diluted shares outstanding
                       
Weighted average common shares — basic
    68,772,139       67,842,752       66,309,707  
Weighted average DownREIT units outstanding
    988,747       682,134       861,755  
Effect of dilutive securities
    913,325       1,256,833       969,536  
 
   
     
     
 
Weighted average common shares and DownREIT units — diluted
    70,674,211       69,781,719       68,140,998  
 
   
     
     
 
Calculation of Earnings per Share — Basic
                       
Net income available to common stockholders
  $ 155,722     $ 216,500     $ 170,825  
 
   
     
     
 
Weighted average common shares — basic
    68,772,139       67,842,752       66,309,707  
 
   
     
     
 
Earnings per common share — basic
  $ 2.26     $ 3.19     $ 2.58  
 
   
     
     
 
Calculation of Earnings per Share — Diluted
                       
Net income available to common stockholders
  $ 155,722     $ 216,500     $ 170,825  
Add: Minority interest of DownREIT unitholders in consolidated partnerships
    1,601       1,559       1,759  
 
   
     
     
 
Adjusted net income available to common stockholders
  $ 157,323     $ 218,059     $ 172,584  
 
   
     
     
 
Weighted average common shares and DownREIT units — diluted
    70,674,211       69,781,719       68,140,998  
 
   
     
     
 
Earnings per common share — diluted
  $ 2.23     $ 3.12     $ 2.53  
 
   
     
     
 

For each of the years presented, certain options to purchase shares of common stock were outstanding, 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 for the period. The number of options not included totaled 1,410,397, 18,269 and 7,500 in 2002, 2001 and 2000, respectively.

In 2002, 42,697 units of limited partnership (“DownREIT units”) were presented for redemption and were purchased by the Company for $1,663. In addition, the Company issued 102,756 DownREIT units valued at $5,000 in connection with the acquisition of land. In 2001, 762 DownREIT units, valued at $36, were exchanged for an equal number of shares of the Company’s common stock, and 22,076 DownREIT units were presented for redemption and purchased by the Company for $864. The Company also issued 257,559 DownREIT units valued at $12,304 as consideration for acquisitions of apartment communities and land. In 2000, 1,520 DownREIT units, valued at $60, were issued as partial consideration for the acquisition of an apartment community. In addition, 304,602 DownREIT units, valued at $10,926, were exchanged for an equal number of shares of the Company’s common stock.

F-11


 

Stock-Based Compensation

During the years ended December 31, 2002, 2001 and 2000, the Company applied the intrinsic value method as provided in APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, in accounting for its employee stock options. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. See Note 10, “Stock-Based Compensation Plans,” for information regarding the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

Business Interruption Insurance

During 2000, a fire occurred at one of the Company’s development communities, which was under construction and unoccupied at the time. The Company had property damage and business interruption insurance which covered this event. Business interruption insurance proceeds of $5,800 and $2,500 are included in other income in the accompanying Consolidated Statements of Operations and Other Comprehensive Income for the years ended December 31, 2002 and 2001, respectively. This settlement was finalized in 2002.

Executive Separation Costs

In February 2001, the Company announced certain management changes including the departure of a senior executive who became entitled to severance benefits in accordance with the terms of his employment agreement with the Company. The Company recorded a charge of approximately $2,500 in the first quarter of 2001 related to the costs associated with such departure.

In December 2001, a senior executive of the Company retired from his management position. Upon retirement, the Company recognized compensation expense of approximately $784, relating to the accelerated vesting of restricted stock grants.

Recently Issued Accounting Standards

In May 2002, SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections” was issued. SFAS No. 145, among other items, rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishments of Debt,” which provided that gains and losses from early debt retirements be treated as extraordinary items. Under SFAS No. 145, gains and losses from early debt retirements will only be treated as extraordinary items if they meet the criteria for extraordinary items under APB No. 30. This statement is effective for fiscal years beginning after May 15, 2002. The Company will adopt this pronouncement effective January 1, 2003, but does not expect it to have a material impact on its financial condition or results of operations.

In June 2002, SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” was issued. This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” Under SFAS No. 146, a liability for costs associated with exit or disposal activities is only to be recognized when the liability is incurred and the definition of a liability under Concepts Statement No. 6 is met, rather than at the date of an entity’s commitment to an exit or disposal plan. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. The Company will adopt this pronouncement effective January 1, 2003, but does not expect it to have a material impact on its financial condition or results of operations.

In November 2002, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Direct Guarantees of Indebtedness of Others.” FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company will apply the initial recognition and initial measurement provisions of FIN 45 on a prospective basis for any guarantees issued or modified after December 31, 2002, but

F-12


 

does not expect the adoption of FIN 45 to have a material impact on its financial condition or results of operations.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” which amends SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 on both an annual and interim basis to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002 while the interim disclosure provisions are effective for interim periods beginning after December 15, 2002.

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities,” which changes the guidelines for consolidation of and disclosure related to unconsolidated entities, if those unconsolidated entities qualify as variable interest entities, as defined in FIN 46. The provisions of FIN 46 are to be applied effective immediately for variable interest entities created after January 31, 2003, and effective July 1, 2003 for variable interest entities created prior to February 1, 2003. If it is reasonably possible that an enterprise will consolidate or disclose information about a variable interest entity when FIN 46 becomes effective, the enterprise should make certain disclosures in all financial statements initially issued after January 31, 2003, regardless of the date on which the variable interest entity was created. The Company does not believe that it is reasonably possible that the adoption of FIN 46 will result in the consolidation of any previously unconsolidated entities. The adoption of FIN 46 may result in additional disclosure about a limited number of investments in variable interest entities, but such disclosure is not expected to be material.

Use of Estimates

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

Discontinued Operations

On January 1, 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” which requires that the assets and liabilities and the results of operations of any communities which have been sold during 2002, or otherwise qualify as held for sale as of December 31, 2002, be presented as discontinued operations in the Company’s Consolidated Financial Statements in both current and prior periods presented. The community specific components of net income that are presented as discontinued operations include net operating income, depreciation and interest expense. In addition, the net gain or loss (including any impairment loss) on the eventual disposal of communities held for sale will be presented as discontinued operations when recognized. This change in presentation will not have any impact on the Company’s financial condition or results of operations. Real estate assets held for sale will continue to be measured at the lower of the carrying amount or the fair value less the cost to sell, and are presented separately in the accompanying Consolidated Balance Sheets. Subsequent to classification of a community as held for sale, no further depreciation is recorded on the assets.

Reclassifications

Certain reclassifications have been made to amounts in prior years’ financial statements to conform with current year presentations.

2. Interest Capitalized

Capitalized interest associated with communities under development or redevelopment totaled $29,937, $27,635 and $18,328 for the years ended December 31, 2002, 2001 and 2000, respectively.

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3. Notes Payable, Unsecured Notes and Credit Facility

The Company’s mortgage notes payable, unsecured notes and variable rate unsecured credit facility as of December 31, 2002 and 2001 are summarized as follows:

                   
      12-31-02   12-31-01
     
 
Fixed rate unsecured notes (1)
  $ 1,985,342     $ 1,635,000  
Fixed rate mortgage notes payable — conventional and tax-exempt (2)
    311,981       322,495  
Variable rate mortgage notes payable — tax-exempt
    108,781       67,960  
 
   
     
 
 
Total notes payable and unsecured notes
    2,406,104       2,025,455  
Variable rate secured short-term construction loan
    36,089       57,314  
Variable rate unsecured credit facility
    28,970        
 
   
     
 
 
Total mortgage notes payable, unsecured notes and unsecured credit facility
  $ 2,471,163     $ 2,082,769  
 
   
     
 

(1)   Balance at December 31, 2002 includes $342 of debt premium received at issuance of unsecured notes.
 
(2)   Includes approximately $166,000 of variable rate notes in both years effectively fixed through Hedged Derivatives, as described in Note 5, “Derivative Instruments and Hedging Activities,” of the Consolidated Financial Statements.

During the year ended December 31, 2002, the Company assumed $33,900 in variable rate, tax-exempt debt related to a community acquisition and repaid $21,225 related to a short-term construction loan, in addition to normal monthly principal and interest payments. In the aggregate, mortgage notes payable, excluding the short-term construction loan, mature at various dates from May 2004 through February 2041 and are collateralized by certain apartment communities. As of December 31, 2002, the Company has guaranteed approximately $149,000 of mortgage notes payable held by subsidiaries; all such mortgage notes payable are consolidated for financial reporting purposes. The weighted average interest rate of the Company’s fixed rate mortgage notes payable (conventional and tax-exempt) was 6.6% and 6.7% at December 31, 2002 and 2001, respectively. The weighted average interest rate of the Company’s variable rate mortgage notes payable and its unsecured credit facility (as discussed below), including the effect of certain financing related fees, was 3.5% and 3.1% at December 31, 2002 and 2001, respectively.

During the year ended December 31, 2002, the Company issued $450,000 in additional unsecured notes. The Company repaid $100,000 of previously issued unsecured notes pursuant to their scheduled maturity, and no prepayment fees were incurred. 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.

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Scheduled payments and maturities of mortgage notes payable and unsecured notes outstanding at December 31, 2002 are as follows:

                                   
      Secured notes   Secured notes   Unsecured notes   Interest rate of
Year   payments   maturities   maturities   unsecured notes

 
 
 
 
 
2003
  $ 4,104     $ 36,089     $ 50,000       6.250 %
 
                    100,000       6.500 %
 
2004
    4,055       24,106       125,000       6.580 %
 
2005
    4,341             100,000       6.625 %
 
                    50,000       6.500 %
 
2006
    4,647             150,000       6.800 %
 
2007
    4,976       35,980       110,000       6.875 %
 
                    150,000       5.000 %
 
2008
    5,327             50,000       6.625 %
 
                    150,000       8.250 %
 
2009
    5,704       10,400       150,000       7.500 %
 
2010
    5,293       29,388       200,000       7.500 %
 
2011
    5,664             300,000       6.625 %
 
                    50,000       6.625 %
 
2012
    5,401       12,095       250,000       6.125 %
Thereafter
    123,425       135,856                
 
   
     
     
         
 
  $ 172,937     $ 283,914     $ 1,985,000          
 
   
     
     
         

The Company has a $500,000 revolving variable rate unsecured credit facility with J.P. Morgan Chase and Fleet National Bank serving as co-agents for a syndicate of commercial banks, which had $28,970 and $0 outstanding and $79,999 and $85,420 in letters of credit on December 31, 2002 and 2001, respectively. Under the terms of the unsecured credit facility, if the Company elects to increase the facility up to $650,000, and one or more banks (from the syndicate or otherwise) voluntarily agree to provide the additional commitment, then the Company will be able to increase the facility up to $650,000, and no member of the syndicate of banks can prohibit such increase; such an increase in the facility will only be effective to the extent banks (from the syndicate or otherwise) choose to commit to lend additional funds. The Company pays participating banks, in the aggregate, an annual facility fee of $750 in equal quarterly installments. The unsecured credit facility bears interest at varying levels based on the London Interbank Offered Rate (“LIBOR”), rating levels achieved on the Company’s unsecured notes and on a maturity schedule selected by the Company. The current stated pricing is LIBOR plus 0.60% per annum (1.98% on December 31, 2002). Pricing could vary if there is a change in rating by either of the two leading national rating agencies; a change in rating of one level would impact the unsecured credit facility pricing by 0.05% to 0.15%. In addition, the unsecured credit 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 credit facility for up to $400,000. The Company is subject to certain customary covenants under the unsecured credit 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 existing facility matures in May 2005 assuming exercise of a one-year renewal option by the Company.

F-15


 

4. Stockholders’ Equity

As of both December 31, 2002 and 2001, the Company had authorized for issuance 140,000,000 and 50,000,000 shares of common and preferred stock, respectively. Dividends on all series of issued 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 $25.00 per share, plus all accrued and unpaid dividends, if any. In July 2002, the Company redeemed all 2,300,000 outstanding shares of its 8.50% Series C Cumulative Redeemable Preferred Stock at a price of $25.00 per share, plus $0.1417 in accrued and unpaid dividends, for an aggregate redemption price of $57,826, including accrued dividends of $326. The redemption price was funded in part by the sale on July 11, 2002 of 592,000 shares of Series I Cumulative Redeemable Preferred Stock through a private placement to an institutional investor for a net purchase price of $14,504. The dividend rate on such shares was initially equal to 3.36% per annum (three month LIBOR plus 1.5%) of the liquidation preference. As permitted under the terms of such preferred stock, the Company redeemed all of the Series I Cumulative Redeemable Preferred Stock on August 29, 2002 for an aggregate redemption price of $14,609 including accrued dividends of $68. The series of preferred stock outstanding have no stated maturity and are not subject to any sinking fund or mandatory redemptions. Preferred stock outstanding as of December 31, 2002 were as follows:

                                 
    Shares outstanding   Payable   Annual   Liquidation   Non-redeemable
Series   December 31, 2002   quarterly   rate   preference   prior to

 
 
 
 
 
D     3,267,700     March, June, September,
December
    8.00 %   $ 25     December 15, 2002 —
Currently Redeemable
                                 
H     4,000,000     March, June, September,
December
    8.70 %   $ 25     October 15, 2008

During the year ended December 31, 2002, the Company (i) issued 664,118 shares of common stock in connection with stock options exercised, (ii) issued 144,718 common shares in connection with stock grants to employees of which 80% are restricted, (iii) had forfeitures of 2,818 shares of restricted stock grants to employees and (iv) withheld 34,876 shares to satisfy employees’ tax withholding and other liabilities.

In addition, the Company announced in July 2002 that its Board of Directors had authorized a common stock repurchase program. Under this program, the Company may acquire shares of its common stock in open market or negotiated transactions up to an aggregate purchase price of $100,000. Actual purchases of stock will vary with market conditions. The size of the stock repurchase program was designed so that retained cash flow, as well as the proceeds from sales of existing apartment communities and a reduction in planned acquisitions, will provide the source of funding for the program, with the Company’s unsecured credit facility providing temporary funding as needed. As of December 31, 2002, the Company had repurchased 1,281,600 shares of common stock at an aggregate cost of $49,722 through this program.

Dividends per common share for the years ended December 31, 2002, 2001 and 2000 were $2.80, $2.56 and $2.24 per share, respectively. In 2002, dividends for preferred shares redeemed during the year were $0.92 per share and dividends for all non-redeemed preferred shares were $2.10 per share. In 2001, dividends for preferred shares redeemed during the year were $1.41 per share and dividends for all non-redeemed preferred shares were $2.10 per share. Dividends were $2.17 per preferred share in 2000.

5. Derivative Instruments and Hedging Activities

The Company has historically used interest rate swap and cap agreements (collectively, the “Hedged Derivatives”) to reduce the impact of interest rate fluctuations on its variable rate tax-exempt bonds. The Company has not entered into any interest rate hedge agreements or treasury locks for its conventional unsecured debt and does not hold interest rate hedge agreements for trading or other speculative purposes. As of December 31, 2002, the effect of Hedged Derivatives is to fix approximately $166,000 of the Company’s tax-exempt debt at a weighted average interest rate of 5.9% with an average maturity of 3.7 years. In addition, a Hedged Derivative exists to fix the interest rate on approximately $22,500 of the Company’s unconsolidated variable rate debt as of December 31, 2002. These Hedged

F-16


 

Derivatives are accounted for in accordance with SFAS No. 133, which as amended, was adopted by the Company on January 1, 2001. SFAS No. 133 requires that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value, with changes in fair value recognized currently in earnings unless specific hedge accounting criteria are met.

The Company has determined that its Hedged Derivatives qualify as effective cash-flow hedges under SFAS No. 133, resulting in the Company recording all changes in the fair value of the Hedged Derivatives in other comprehensive income. Amounts recorded in other comprehensive income will be reclassified into earnings in the period in which earnings are affected by the hedged cash flows. At January 1, 2001, in accordance with the transition provisions of SFAS No. 133, the Company recorded a cumulative effect adjustment of $6,412 to other comprehensive loss to recognize at fair value all of the derivatives that are designated as cash flow hedging instruments. During the years ended December 31, 2002 and 2001, the Company recorded additional unrealized losses to other comprehensive loss of $4,157 and $2,599, respectively, to adjust the Hedged Derivatives to their fair value. In addition, a Swap Agreement with a fair value of $528 was transferred in connection with the sale of a community during the first quarter of 2001. The estimated amount, included in accumulated other comprehensive loss as of December 31, 2002, expected to be reclassified into earnings within the next twelve months to offset the variability of cash flows during this period is not material.

The Company assesses, both at inception and on an on-going basis, the effectiveness of all hedges in offsetting cash flows of hedged items. Hedge ineffectiveness did not have a material impact on earnings and the Company does not anticipate that it will have a material effect in the future. The fair values of the obligations under the Hedged Derivatives are included in accrued expenses and other liabilities on the accompanying Consolidated Balance Sheets.

By using derivative financial instruments to hedge exposures to changes in interest rates, the Company exposes itself to credit risk and market risk. The credit risk is the risk of a counterparty not performing under the terms of the Hedged Derivatives. The counterparties to these Hedged Derivatives are major financial institutions which have an A+ or better credit rating 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 Hedged Derivatives with any one party. Therefore, the Company believes the likelihood of realizing material losses from counterparty non-performance is remote. Market risk is the adverse effect of the value of financial instruments that results from a change in interest rates. The market risk associated with interest-rate contracts is managed by the establishment and monitoring of parameters that limit the types and degree of market risk that may be undertaken. These risks are managed by the Company’s Chief Financial Officer and Vice President of Finance.

6. Investments in Unconsolidated Entities

Investments in Unconsolidated Real Estate Entities

As of December 31, 2002, the Company had investments in the following unconsolidated real estate entities, which are accounted for under the equity method of accounting, except as described below:

    Falkland Partners, LLC was formed as a general partnership in July 1985 to own and operate Falkland Chase, a 450 apartment-home community located in Silver Spring, Maryland. In 1993, Avalon acquired a 50% ownership and economic interest in the partnership for an investment of $2,200. The Company, as successor by merger to Avalon in 1998, became the managing member of the limited liability company in 2000 after conversion from a general partnership. The Company has responsibility for the day-to-day operations of the Falkland Chase community and is the management agent subject to the terms of a management agreement. As of December 31, 2002, Falkland Chase has $24,695 of tax-exempt floating rate debt outstanding (1.0% as of December 31, 2002), which matures in December 2030.
 
    Town Run Associates was formed as a general partnership in November 1994 to develop, own and operate Avalon Run, a 426 apartment-home community located in Lawrenceville, New Jersey. Since formation of this venture, the Company has invested $1,803 and, following a preferred return on all

F-17


 

      contributed equity (which was achieved in 2002), has a 40% ownership and cash flow interest with a 49% residual economic interest. The Company is responsible for the day-to-day operations of the Avalon Run community and is the management agent subject to the terms of a management agreement. The development of Avalon Run was funded entirely through equity contributions from Avalon as well as the other venture partner, and therefore Avalon Run is not subject to any outstanding debt as of December 31, 2002.
 
    Town Grove, LLC was formed as a limited liability corporation in December 1997 to develop, own and operate Avalon Grove, a 402 apartment-home community located in Stamford, Connecticut. Since formation of this venture, the Company has invested $14,653 and, following a preferred return on all contributed equity (which was achieved in 2002), has a 49% ownership and a 50% cash flow and residual economic interest. The Company is responsible for the day-to-day operations of the Avalon Grove community and is the management agent subject to the terms of a management agreement. The development of Avalon Grove was funded through contributions from the Company and the other venture partner, and therefore Avalon Grove is not subject to any outstanding debt as of December 31, 2002.
 
    Avalon Terrace, LLC — The Company acquired Avalon Bedford, a 388 apartment-home community located in Stamford, Connecticut in December 1998. In May 2000, the Company transferred Avalon Bedford to Avalon Terrace, LLC and subsequently admitted a joint venture partner, while retaining a 25% ownership interest in this limited liability company for an investment of $5,394 and a right to 50% of cash flow distributions after achievement of a threshold return (which was not achieved in 2002). The Company is responsible for the day-to-day operations of the Avalon Bedford community and is the management agent subject to the terms of a management agreement. As of December 31, 2002, Avalon Bedford has $22,500 in variable rate debt outstanding, which came due in November 2002, but was extended until November 2005. The interest rate on this debt is fixed through a Hedged Derivative as discussed in Note 5, “Derivative Instruments and Hedging Activities.”
 
    Arna Valley View Limited Partnership — In connection with the municipal approval process for the development of two consolidated communities, the Company agreed to participate in the formation of a limited partnership in February 1999 to develop, finance, own and operate Arna Valley View, a 101 apartment-home community located in Arlington, Virginia. This community has affordable rents for 100% of apartment homes related to the tax-exempt bond financing and tax credits used to finance construction of the community. A subsidiary of the Company is the general partner of the partnership with a 0.01% ownership interest. The Company is responsible for the day-to-day operations of the community, and is the management agent subject to the terms of a management agreement. As of December 31, 2002, Arna Valley View has $6,150 of variable rate tax-exempt bonds outstanding, which mature in June 2032. In addition, Arna Valley View has $4,134 of 4% fixed rate county bonds outstanding that mature in December 2030. Due to the Company’s limited ownership and investment in this venture, it is accounted for using the cost method.

F-18


 

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

                   
      (Unaudited)
     
      12-31-02   12-31-01
     
 
Assets:
               
Real estate, net
  $ 136,096     $ 136,679  
Other assets
    5,323       10,886  
 
   
     
 
 
Total assets
  $ 141,419     $ 147,565  
 
   
     
 
Liabilities and partners’ equity:
               
Mortgage notes payable
  $ 47,195     $ 47,195  
Other liabilities
    3,820       5,172  
Partners’ equity
    90,404       95,198  
 
   
     
 
 
Total liabilities and partners’ equity
  $ 141,419     $ 147,565  
 
   
     
 

The following is a combined summary of the operating results of the entities accounted for using the equity method, for the years presented:

                           
      For the year ended
      (unaudited)
     
      12-31-02   12-31-01   12-31-00
     
 
 
Rental income
  $ 27,678     $ 28,746     $ 22,653  
Operating and other expenses
    (9,604 )     (9,098 )     (6,295 )
Interest expense, net
    (2,125 )     (2,402 )     (1,209 )
Depreciation expense
    (4,988 )     (4,253 )     (3,287 )
 
   
     
     
 
 
Net income
  $ 10,961     $ 12,993     $ 11,862  
 
   
     
     
 

The financial position and operating results in the preceding tables reflect reclassifications made to amounts in prior years’ financial statements to conform with current year presentations. The Company also holds a 25% limited liability company membership interest in the limited liability company that owns Avalon on the Sound, which is presented on a consolidated basis in the financial statements in accordance with GAAP due to the Company’s control over that entity.

Investments in Unconsolidated Non-Real Estate Entities

At December 31, 2002, the Company holds minority interest investments in five non-real estate entities, three of which are technology companies. Based on ownership and control criteria, the Company accounts for two of these investments using the equity method, with the remaining non-real estate investments accounted for at cost. During the years ended December 31, 2002, 2001 and 2000, the Company recorded losses of $3,166, $1,730 and $719, respectively, related to Realeum, Inc., one of the two investments accounted for under the equity method, bringing the carrying value of this investment to zero as of December 31, 2002. The aggregate carrying value of the Company’s investment in unconsolidated non-real estate entities was $1,855 and $2,737 as of December 31, 2002 and 2001, respectively.

F-19


 

The following is a summary of the Company’s equity in income of unconsolidated entities for the years presented:

                         
    For the year ended
   
    12-31-02   12-31-01   12-31-00
   
 
 
Town Grove, LLC
  $ 1,391     $ 1,977     $ 1,977  
Falkland Partners, LLC
    1,058       924       577  
Town Run Associates
    481       606       555  
Avalon Terrace, LLC
    253       (3 )     38  
Realeum, Inc.
    (3,166 )     (1,730 )     (719 )
Other unconsolidated non-real estate entities
    38       (918 )      
 
   
     
     
 
        Total
  $ 55     $ 856     $ 2,428  
 
   
     
     
 

7. Discontinued Operations – Real Estate Assets Held for Sale

The Company has a policy of disposing of assets that are not consistent with its long-term investment criteria when market conditions are favorable. 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. During the year ended December 31, 2002, the Company sold one community, as summarized below:

                                                 
            Period   Apartment           Gross sales   Net
Community Name   Location   of sale   homes   Debt   price   proceeds

 
 
 
 
 
 
Longwood
  Brookline, MA     4Q02             277     $     $ 80,100     $ 78,454  
 
                   
     
     
     
 
Total of all 2002 asset sales
                    277     $     $ 80,100     $ 78,454  
 
                   
     
     
     
 
Total of all 2001 asset sales
                    2,551     $ 8,145     $ 241,130     $ 230,400  
 
                   
     
     
     
 
Total of all 2000 asset sales
                    1,932     $ 31,694     $ 160,085     $ 124,392  
 
                   
     
     
     
 

As of December 31, 2002, the Company did not have any communities that qualified as held for sale under the provisions of SFAS No. 144. However, as required under SFAS No. 144, the operations for the community sold in 2002 have been presented as discontinued operations. Accordingly, certain reclassifications have been made in prior years to reflect the results of operations for this community as discontinued operations, consistent with current year presentation. The following is a summary of income from discontinued operations for the years presented:

                           
      For the year ended
      (unaudited)
     
      12-31-02   12-31-01   12-31-00
     
 
 
Rental income
  $ 6,707     $ 7,834     $ 7,330  
Operating and other expenses
    (2,481 )     (2,737 )     (2,580 )
Interest expense, net
    (2 )     (14 )     (27 )
Depreciation expense
    (695 )     (1,437 )     (1,695 )
Gain on sale
    48,893              
 
   
     
     
 
 
Income from discontinued operations
  $ 52,422     $ 3,646     $ 3,028  
 
   
     
     
 

In addition, the accompanying Consolidated Balance Sheets include net real estate of $30,642, other assets (excluding net real estate) of $103 and liabilities of $820 as of December 31, 2001 relating to this community.

As of December 31, 2002, the Company has determined that two land parcels with an aggregate carrying value (prior to adjustment) of $26,739 would not likely proceed to development and are planned for disposition. Although these assets do not qualify as held for sale under the provisions of SFAS No. 144, the Company performed an analysis of the carrying value of these assets in connection with this change in anticipated use. As a result, the

F-20


 

Company recorded an impairment loss of $6,800 during the year ended December 31, 2002 to reflect these parcels at fair market value (based on their entitlement status as of December 31, 2002), less estimated selling costs. See Note 14, “Subsequent Events,” of the Consolidated Financial Statements.

8. Commitments and Contingencies

Employment Agreements and Arrangements

As of December 31, 2002, the Company has employment agreements with six executive officers. The employment agreements provide for severance payments and generally also provide for accelerated vesting of stock options and restricted stock 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 current term of these agreements ends on dates that vary between December 2003 and December 2006. The employment agreements provide for one-year automatic renewals (two years in the case of the CEO) after the initial term unless an advance notice of non-renewal is provided by either party. Under five of the agreements, upon a notice of non-renewal by the Company, the officer may terminate his employment and receive a severance payment. Upon a change in control, the agreements provide for an automatic extension of up to three years from the date of the change in control. 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.

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 (other than for cause) within two years of a change in control (as defined) of the Company, such officer will generally receive a cash lump sum payment equal to the sum of such officer’s base salary and cash bonus, as well as accelerated vesting of stock options and restricted stock.

Legal Contingencies

The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are frequently covered by insurance. If it has been determined that a loss is probable to occur, the estimated amount of the loss is expensed in the financial statements. 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. Segment Reporting

The Company’s reportable operating segments include Established Communities, Other Stabilized Communities, and Development/Redevelopment Communities. Annually as of January 1st, the Company determines which of its communities fall into each of these categories and maintains that classification throughout the year for the purpose of reporting segment operations.

    Established Communities (also known as Same Store Communities) are communities where a comparison of operating results from the prior year to the current year is meaningful, as these communities were owned and had stabilized occupancy and costs as of the beginning of the prior year. These communities are divided into geographic regions. For the year 2002, the Established Communities were communities that had stabilized occupancy and costs as of January 1, 2001. A community is considered to have stabilized occupancy at the earlier of (i) attainment of 95% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment.
 
    Other Stabilized Communities includes all other completed communities that have stabilized occupancy, as defined above.

F-21


 

    Development/Redevelopment Communities consists of communities that are under construction and have not received a final certificate of occupancy, communities where substantial redevelopment is in progress or is planned to begin during the current year and communities under lease-up, that have not reached stabilized occupancy, as defined above, as of January 1, 2002.

The primary financial measure for Established and Other Stabilized Communities is Net Operating Income (“NOI”), which is calculated at the community level and represents total revenue less direct property operating expenses, including property taxes, and excludes property management and other indirect operating expenses, interest expense, depreciation expense, general and administrative expense and impairment losses. The primary performance measure for communities under development or redevelopment depends on the stage of completion. While under development, management monitors actual construction costs against budgeted costs as well as lease-up pace and rent levels compared to budget.

The table on the following page provides details of the Company’s segment information as of the dates specified. 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. The accounting policies applicable to the operating segments described above are the same as those described in the summary of significant accounting policies.

F-22


 

                                       
         
          Total           % NOI   Gross
          revenue   NOI   change from prior year   real estate
         
 
 
 
For the year ended December 31, 2002
                               
Segment Results
                               
 
Established
                               
   
Northeast
  $ 151,565     $ 104,782       (8.5 %)   $ 840,939  
   
Mid-Atlantic
    77,811       55,695       (3.6 %)     423,229  
   
Midwest
    32,998       19,665       (5.2 %)     251,590  
   
Pacific Northwest
    10,664       6,550       (12.2 %)     96,738  
   
Northern California
    151,619       110,845       (17.5 %)     1,340,846  
   
Southern California
    48,372       34,505       1.9 %     340,656  
 
   
     
     
     
 
     
Total Established
    473,029       332,042       (9.9 %)     3,293,998  
 
   
     
     
     
 
 
Other Stabilized
    95,009       66,992       n/a       823,242  
 
Development / Redevelopment
    70,928       39,156       n/a       1,143,623  
 
Land Held for Future Development
    n/a       n/a       n/a       78,688  
 
Non-Allocated
    n/a       n/a       n/a       29,902  
 
   
     
     
     
 
     
Total AvalonBay
  $ 638,966     $ 438,190       (3.8 %)   $ 5,369,453  
 
   
     
     
     
 
For the year ended December 31, 2001
                               
Segment Results
                               
 
Established
                               
   
Northeast
  $ 113,564     $ 81,777       8.4 %   $ 570,551  
   
Mid-Atlantic
    81,976       60,256       8.4 %     438,010  
   
Midwest
    21,069       13,089       1.7 %     145,025  
   
Pacific Northwest
    6,784       4,985       3.3 %     60,426  
   
Northern California
    157,736       121,923       6.9 %     1,216,489  
   
Southern California
    42,462       30,188       9.2 %     294,625  
 
   
     
     
     
 
     
Total Established
    423,591       312,218       7.5 %     2,725,126  
 
   
     
     
     
 
 
Other Stabilized
    153,463       108,689       n/a       988,295  
 
Development / Redevelopment
    56,769       34,532       n/a       991,667  
 
Land Held for Future Development
    n/a       n/a       n/a       66,608  
 
Non-Allocated
    n/a       n/a       n/a       28,764  
 
   
     
     
     
 
     
Total AvalonBay
  $ 633,823     $ 455,439       11.9 %   $ 4,800,460  
 
   
     
     
     
 
For the year ended December 31, 2000
                               
Segment Results
                               
 
Established
                               
   
Northeast
  $ 84,764     $ 60,297       6.5 %   $ 444,158  
   
Mid-Atlantic
    68,646       49,694       9.2 %     392,758  
   
Midwest
    20,455       12,869       5.0 %     144,550  
   
Pacific Northwest
    3,778       2,751       17.1 %     34,382  
   
Northern California
    107,342       82,126       15.9 %     938,630  
   
Southern California
    23,458       16,635       11.6 %     158,165  
 
   
     
     
     
 
     
Total Established
    308,443       224,372       10.8 %     2,112,643  
 
   
     
     
     
 
 
Other Stabilized
    198,444       141,270       n/a       1,441,767  
 
Development / Redevelopment
    59,178       41,492       n/a       882,043  
 
Land Held for Future Development
    n/a       n/a       n/a       33,161  
 
Non-Allocated
    n/a       n/a       n/a       24,296  
 
   
     
     
     
 
     
Total AvalonBay
  $ 566,065     $ 407,134       18.7 %   $ 4,493,910  
 
   
     
     
     
 

F-23


 

Operating expenses as reflected on the accompanying Consolidated Statements of Operations and Other Comprehensive Income include $32,163, $32,967 and $28,111 for the years ended December 31, 2002, 2001 and 2000, respectively, of property management and other indirect operating expenses that are not allocated to individual communities. These costs are not reflected in NOI as shown in the above tables. Gross real estate as shown above does not include communities held for sale of $30,642 as reflected on the accompanying Consolidated Balance Sheets as of December 31, 2001. Segment information for the periods ending December 31, 2001 and 2000 have been adjusted for the communities that were designated as held for sale or sold in 2002 as described in Note 7, “Discontinued Operations – Real Estate Assets Held for Sale,” of the Consolidated Financial Statements.

10. Stock-Based Compensation Plans

The Company adopted the 1994 Stock Incentive Plan, as amended and restated on March 31, 2001 (the “1994 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 as a retention incentive for key associates. Individuals who are eligible to participate in the 1994 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 1994 Plan authorizes (i) the grant of stock options that qualify as incentive stock options under Section 422 of the Internal Revenue Code (“ISOs”), (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.

As of December 31, 2002, under the 1994 Plan a maximum of 1,415,862 shares of common stock were available for issuance. On each January 1, the maximum number available for issuance under the 1994 Plan is increased by between 0.48% and 1.00% of the total number of shares of common stock and DownREIT units actually outstanding on such date. On January 1, 2003, the maximum number available for issuance was increased by 664,115 to 2,079,977. Notwithstanding the foregoing, the maximum number of shares of stock for which ISOs may be issued under the 1994 Plan shall not exceed 2,500,000 and no awards shall be granted under the 1994 Plan after May 11, 2011. 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 1994 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 1994 Plan vest over periods (and may be subject to accelerated vesting under certain circumstances) as determined by the Compensation Committee of the Board of Directors and must expire no later than ten years from the date of grant. Options granted to non-employee directors under the 1994 Plan are subject to accelerated vesting under certain limited circumstances, 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 1994 Plan vest over periods (and may be subject to accelerated vesting under certain circumstances) as determined by the Compensation Committee of the Board of Directors. Generally, the restricted stock grants that have been awarded to officers and employees vest over 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. Options to purchase 1,497,504, 2,780,757, and 3,123,713 shares of common stock were available for grant under the 1994 Plan at December 31, 2002, 2001 and 2000, respectively.

Before the Merger, Avalon had adopted its 1995 Equity Incentive Plan (the “Avalon 1995 Incentive Plan”). 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 stock or otherwise terminated (other than by exercise). Options

F-24


 

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 or Avalon 1993 Plan options may exercise their adjusted number of options for the Company’s common stock at the adjusted exercise price. As of June 4, 1998, the date of the Merger, options and other awards ceased to be granted under the Avalon 1993 Plan or 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 or the Avalon 1993 Plan at December 31, 2002, 2001 or 2000.

Information with respect to stock options granted under the 1994 Plan, the Avalon 1995 Incentive Plan and the Avalon 1993 Plan is as follows:

                                     
                Weighted   Avalon 1995   Weighted
                average   and Avalon   average
        1994 Plan   exercise price   1993 Plan   exercise price
        shares   per share   shares   per share
       
 
 
 
Options outstanding, December 31, 1999
    2,033,274     $ 32.63       1,828,337     $ 34.63  
 
Exercised
    (172,376 )     34.78       (327,582 )     28.65  
 
Granted
    631,795       34.56              
 
Forfeited
    (66,736 )     33.50       (16,410 )     35.84  
 
   
     
     
     
 
Options outstanding, December 31, 2000
    2,425,957     $ 32.96       1,484,345     $ 35.94  
 
Exercised
    (367,652 )     33.05       (487,312 )     35.79  
 
Granted
    946,612       45.90              
 
Forfeited
    (111,639 )     40.34       (4,836 )     36.61  
 
   
     
     
     
 
Options outstanding, December 31, 2001
    2,893,278     $ 36.91       992,197     $ 36.03  
 
Exercised
    (281,206 )     31.65       (350,157 )     37.39  
 
Granted
    719,198       45.63              
 
Forfeited
    (165,263 )     42.72       (1,534 )     39.86  
 
   
     
     
     
 
Options outstanding, December 31, 2002
    3,166,007     $ 39.05       640,506     $ 35.27  
 
   
     
     
     
 
   
Options exercisable:
                               
   
December 31, 2000
    1,183,551     $ 32.05       1,313,219     $ 35.71  
 
   
     
     
     
 
   
December 31, 2001
    1,537,194     $ 33.58       976,830     $ 35.99  
 
   
     
     
     
 
   
December 31, 2002
    2,003,395     $ 35.95       640,506     $ 35.27  
 
   
     
     
     
 

For options outstanding at December 31, 2002 under the 1994 Plan, 170,600 options had exercise prices ranging between $18.37 and $29.99 and a weighted average contractual life of 2.2 years, 1,473,010 options had exercise prices ranging between $30.00 and $39.99 and a weighted average contractual life of 6.2 years, and 1,522,397 options had exercise prices ranging between $40.00 and $49.90 and a weighted average contractual life of 8.6 years. Options outstanding at December 31, 2002 for the Avalon 1993 and Avalon 1995 Plans had exercise prices ranging from $26.68 to $39.70 and a weighted average contractual life of 4.1 years.

The Company applies the intrinsic value method as provided in APB Opinion No. 25 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.

F-25


 

The following table illustrates the effect on the Company’s net income available to common stockholders and earnings per share if the Company had applied the fair value recognition provisions as prescribed under SFAS No. 123, “Accounting for Stock-Based Compensation,” to the Plans (unaudited):

                           
      For the year ended
     
      12-31-02   12-31-01   12-31-00
     
 
 
Net income available to common stockholders, as reported
  $ 155,722     $ 216,500     $ 170,825  
Deduct: Total compensation expense determined under fair value based method, net of related tax effects
    (2,904 )     (3,576 )     (2,767 )
 
   
     
     
 
Pro forma net income available to common stockholders
  $ 152,818     $ 212,924     $ 168,058  
 
   
     
     
 
Earnings per share:
                       
 
Basic - as reported
  $ 2.26     $ 3.19     $ 2.58  
 
   
     
     
 
 
Basic - pro forma
  $ 2.22     $ 3.14     $ 2.53  
 
   
     
     
 
 
Diluted - as reported
  $ 2.23     $ 3.12     $ 2.53  
 
   
     
     
 
 
Diluted - pro forma
  $ 2.18     $ 3.07     $ 2.49  
 
   
     
     
 

The fair value of the options granted during 2002 is estimated at $4.52 per share on the date of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield of 6.15%, volatility of 18.9%, risk-free interest rates of 4.81%, actual number of forfeitures, and an expected life of approximately 7 years. The fair value of the options granted during 2001 is estimated at $4.83 per share on the date of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield of 5.58%, volatility of 16.47%, risk-free interest rates of 5.07%, actual number of forfeitures, and an expected life of approximately 3 years. The fair value of the options granted during 2000 is estimated at $3.76 per share on the date of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield of 6.51%, volatility of 15.93%, risk-free interest rates of 6.61%, actual number of forfeitures, and an expected life of approximately 3 years.

In October 1996, the Company adopted the 1996 Non-Qualified Employee Stock Purchase Plan (as amended, the “ESPP”). Initially 1,000,000 shares of common stock were reserved for issuance under this plan. There are currently 702,342 shares remaining available for issuance under the plan. Full-time employees of the Company generally are eligible to participate in the ESPP if, as of the last day of the applicable election period, they have been employed by the Company for at least one month. All other employees of the Company are eligible to participate provided that as of the applicable election period they have been employed by the Company for twelve months. Under the ESPP, eligible employees are permitted to acquire shares of the Company’s common stock through payroll deductions, subject to maximum purchase limitations. The ESPP provides for a series of “purchase periods.” Prior to 2000, there were two purchase periods per year of six months each. Since 2000, there has been one purchase period per year. Beginning in 2003, the purchase period will be a period of seven months beginning each May 1 and ending each November 30. The purchase price for common stock purchased under the plan is 85% of the lesser of the fair market value of the Company’s common stock on the first day of the applicable purchase period or the last day of the applicable purchase period. The offering dates, purchase dates and duration of purchase periods may be changed by the Board of Directors, if the change is announced prior to the beginning of the affected date or purchase period. The Company issued 29,345, 14,917 and 34,055 shares under the ESPP for 2002, 2001 and 2000, respectively.

11. Fair Value of Financial Instruments

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.

F-26


 

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.
 
    Bond indebtedness and notes payable with an aggregate carrying value of $2,442 and $2,083 had an estimated aggregate fair value of $2,639 and $2,191 at December 31, 2002 and 2001, respectively.

12. Related Party Arrangements

Purchase of Mortgage Loan

The Company’s Chairman and CEO, and the Company’s former Chairman and CEO, are partners of an entity that is the general partner of Arbor Commons Associates Limited Partnership (“Arbor Commons Associates”). Arbor Commons Associates owns Avalon Arbor, a 302 apartment home community in Shrewsbury, Massachusetts. Concurrently with its initial public offering in November 1993, Avalon purchased an existing participating mortgage loan made to Arbor Commons Associates that was originated by CIGNA Investments, Inc. The mortgage loan is secured by Arbor Commons Associates’ interest in Avalon Arbor. This loan accrues interest at a fixed rate of 10.2% per annum, payable at 9.0% per annum. The balance of the note receivable at both December 31, 2002 and 2001 was $21,483. The balance of accrued interest on the note receivable as of December 31, 2002 and 2001, respectively, was $4,965 and $5,231, and is included in other assets on the accompanying Consolidated Balance Sheets. Related interest income of $3,091, $3,081 and $3,009 was recorded for the years ended December 31, 2002, 2001 and 2000, respectively. Under the terms of the loan, the Company (as successor to Avalon) receives (as contingent interest) 50% of the cash flow after the 10.2% accrual rate is paid and 50% of the residual profits upon the sale of the community.

Unconsolidated entities

The Company manages several unconsolidated real estate joint venture entities for which it receives management fee revenue. From these entities the Company received management fee revenue of $1,019, $1,011 and $691 in the years ended December 31, 2002, 2001 and 2000, respectively.

Indebtedness of Management

The Company has a recourse loan program under which the Company lends amounts to or on behalf of employees (“Stock Loans”) equivalent to the estimated employees’ tax withholding liabilities related to the vesting of restricted stock under the 1994 Stock Incentive Plan, as amended and restated on March 31, 2001. In accordance with the Sarbanes-Oxley Act of 2002, no loans to senior officers will be renewed and the Company intends to phase out the Stock Loan program for all other participants over a period of approximately one year. The principal balance outstanding under the Stock Loans to employees was $1,133 at both December 31, 2002 and 2001. The balance of accrued interest on the notes receivable was $45 and $100 as of December 31, 2002 and 2001, respectively. Interest income on the notes of $61, $62 and $76 was recorded for the years ended December 31, 2002, 2001 and 2000, respectively. Each Stock Loan is made for a one-year term, is a full personal recourse obligation of the borrower

F-27


 

and is secured by a pledge to the Company of the stock that vested and gave rise to the tax withholding liability for which the loan was made. In addition, dividends on the pledged stock are automatically remitted to the Company and applied toward repayment of the Stock Loan.

Consulting Agreement with Mr. Meyer

In March 2000, the Company and Gilbert M. Meyer announced that Mr. Meyer would retire as Executive Chairman of the Company in May 2000. Although Mr. Meyer ceased his day-to-day involvement with the Company as an executive officer, he continues to serve as a director. In addition, pursuant to a consulting agreement which terminates in May 2003, Mr. Meyer agreed to serve as a consultant to the Company for three years following his retirement for an annual fee of $1,395. In such capacity he responds to requests for assistance or information concerning business matters with which he became familiar while employed and he provides business advice and counsel to the Company with respect to business strategies and acquisitions, dispositions, development and redevelopment of multifamily rental properties.

Director Compensation

The Company’s Stock Incentive Plan provides that directors of the Company who are also employees receive no additional compensation for their services as a director. Under the Stock Incentive Plan, on the fifth business day following each annual meeting of stockholders, each of the Company’s non-employee directors automatically receives options to purchase 7,000 shares of common stock at the last reported sale price of the common stock on the NYSE on such date, and a restricted stock (or deferred stock award) grant of 2,500 shares of common stock. The Company recorded compensation expense relating to these deferred stock awards in the amount of $743, $624 and $525 in the years ended December 31, 2002, 2001 and 2000, respectively. Deferred compensation relating to these deferred stock awards was $757 and $688 on December 31, 2002 and 2001, respectively.

Investment in Realeum, Inc.

As an employee incentive and retention mechanism, the Company arranged for officers of the Company to hold direct or indirect economic interest in Realeum, Inc. Realeum, Inc. is a company involved in the development and deployment of a property management and leasing automation system, in which the Company invested $2,300 in January 2002. The Company currently utilizes this property management and leasing automation system and has paid $480, $80 and $0 to Realeum, Inc. under the terms of its licensing arrangements during the years ended December 31, 2002, 2001 and 2000, respectively.

F-28


 

13. Quarterly Financial Information (Unaudited)

The following summary represents the quarterly results of operations for the years ended December 31, 2002 and 2001:

                                 
    For the three months ended
   
    3-31-02   6-30-02   9-30-02   12-31-02
   
 
 
 
Total revenue
  $ 158,296     $ 158,966     $ 160,358     $ 161,346  
Net income available to common stockholders
  $ 35,690     $ 32,315     $ 24,685     $ 63,033  
Net income per common share — basic
  $ 0.52     $ 0.47     $ 0.36     $ 0.92  
Net income per common share — diluted
  $ 0.51     $ 0.46     $ 0.35     $ 0.91  
                                 
    For the three months ended
   
    3-31-01   6-30-01   9-30-01   12-31-01
   
 
 
 
Total revenue
  $ 153,810     $ 160,368     $ 161,219     $ 158,426  
Net income available to common stockholders
  $ 41,654     $ 39,131     $ 79,229     $ 56,486  
Net income per common share — basic
  $ 0.62     $ 0.58     $ 1.16     $ 0.83  
Net income per common share — diluted
  $ 0.61     $ 0.57     $ 1.14     $ 0.81  

14. Subsequent Events (Unaudited)

As of February 28, 2003, six communities previously held for operating purposes were classified as held for sale under SFAS No. 144. These communities had an aggregate net real estate carrying value of $129,032 and debt of $27,305 as of December 31, 2002. The Company is actively pursuing the disposition of these communities and expects to close during the first and second quarters of 2003.

For the period January 1, 2003 through February 28, 2003, the Company has repurchased an additional 761,000 shares of common stock at an aggregate cost of $27,659 through its common stock repurchase program.

On January 15, 2003, $50,000 in unsecured notes matured and were paid, including the balance of accrued interest.

On February 18, 2003, the Company gave notice of its intent to redeem all 3,267,700 outstanding shares of its 8.00% Series D Cumulative Redeemable Preferred Stock. The closing of this redemption is anticipated on March 20, 2003 at a price of $25.00 per share, plus $0.0167 in accrued and unpaid dividends, for an aggregate redemption price of $81,747, including accrued dividends of $55. This redemption will be funded by the sale of shares of Series J Cumulative Redeemable Preferred Stock through a private placement to an institutional investor. The dividend rate on such shares will initially be based on three month LIBOR plus 1.5%. The Series J Cumulative Redeemable Preferred Stock will be redeemable at any time at the Company’s option.

In February 2003, the Company won an appeal regarding the entitlement status of one of the two land parcels planned for disposition as of December 31, 2002. If the Company decides to continue with the planned disposition, this change in entitlement status may increase the potential value of the land and therefore decrease the previously estimated loss that would be recognized at the date of disposal. However, the Company is currently reevaluating the planned disposal of this parcel, which may result in 2003 in the partial recovery of the impairment loss recognized in 2002, if the Company decides to hold the land for development.

F-29


 

AVALONBAY COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
(Dollars in thousands)

                                                                                 
    Initial Cost                   Total Cost                                        
   
         
                               
            Building /   Costs           Building /                                        
            Construction in   Subsequent to           Construction in                   Total Cost, Net           Year of
            Progress &   Acquisition /           Progress &           Accumulated   of Accumulated           Completion /
    Land   Improvements   Construction   Land   Improvements   Total   Depreciation   Depreciation   Encumbrances   Acquisition
   
 
 
 
 
 
 
 
 
 
Current Communities
                                                                               
Avalon at Center Place
  $     $ 26,816     $ 502     $     $ 27,318     $ 27,318     $ 5,308     $ 22,010     $       1997  
Avalon at Faxon Park
    1,136       14,019       76       1,136       14,095       15,231       2,447       12,784             1998  
Avalon at Lexington
    2,124       12,599       624       2,124       13,223       15,347       3,766       11,581       13,784       1994  
Avalon at Prudential Center
    25,811       103,233       22,769       25,811       126,002       151,813       16,904       134,909             1968/98  
Avalon Essex
    5,230       15,483       824       5,230       16,307       21,537       1,624       19,913             2000  
Avalon Estates
    1,972       18,167       77       1,972       18,244       20,216       1,385       18,831             2001  
Avalon Ledges
    2,627       32,900             2,627       32,900       35,527       640       34,887             2002  
Avalon Oaks
    2,129       18,640       54       2,129       18,694       20,823       2,567       18,256       17,628       1999  
Avalon Oaks West
    3,303       13,316             3,303       13,316       16,619       479       16,140             2002  
Avalon Orchards
    2,975       17,860             2,975       17,860       20,835       495       20,340             2002  
Avalon Summit
    1,743       14,654       351       1,743       15,005       16,748       3,488       13,260             1996  
Avalon West
    943       9,881       97       943       9,978       10,921       2,198       8,723       8,461       1996  
Avalon at Greyrock Place
    13,819       55,846       8       13,819       55,854       69,673       1,156       68,517             2002  
Avalon Corners
    6,305       24,179       1,294       6,305       25,473       31,778       2,931       28,847             2000  
Avalon Gates
    4,414       31,305       381       4,414       31,686       36,100       6,164       29,936             1997  
Avalon Glen
    5,956       23,993       1,346       5,956       25,339       31,295       7,415       23,880             1991  
Avalon Haven
    1,264       11,762       724       1,264       12,486       13,750       1,153       12,597             2000  
Avalon Lake
    3,314       13,139       542       3,314       13,681       16,995       1,772       15,223             1999  
Avalon New Canaan
    8,874       23,176             8,874       23,176       32,050       338       31,712             2002  
Avalon Springs
    2,116       14,512       245       2,116       14,757       16,873       2,969       13,904             1996  
Avalon Valley
    2,277       22,424       1,358       2,277       23,782       26,059       3,067       22,992             1999  
Avalon Walk I & II
    9,102       48,796       1,146       9,102       49,942       59,044       14,246       44,798       11,748       1992/94  
Avalon Commons
    4,679       28,552       62       4,679       28,614       33,293       5,451       27,842             1997  
Avalon Court
    9,228       48,920       1,124       9,228       50,044       59,272       6,901       52,371             1997/2000  
Avalon Towers
    3,118       12,709       1,086       3,118       13,795       16,913       3,423       13,490             1995  
Avalon at Edgewater
    14,529       60,061             14,529       60,061       74,590       2,448       72,142             2002  
Avalon at Florham Park
    6,647       34,639       283       6,647       34,922       41,569       2,758       38,811             2001  
Avalon Cove
    8,760       82,356       837       8,760       83,193       91,953       16,720       75,233             1997  
Avalon Crest
    11,468       44,035       559       11,468       44,594       56,062       5,607       50,455             1998  
The Tower at Avalon Cove
    3,738       45,755       166       3,738       45,921       49,659       5,723       43,936             1999  
Avalon at Freehold
    4,116       30,191             4,116       30,191       34,307       1,107       33,200             2002  
Avalon Run East
    1,579       14,669       24       1,579       14,693       16,272       3,266       13,006             1996  

F-30


 

AVALONBAY COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
(Dollars in thousands)

                                                                                 
    Initial Cost                   Total Cost                                        
   
         
                               
            Building /   Costs           Building /                                        
            Construction in   Subsequent to           Construction in                   Total Cost, Net           Year of
            Progress &   Acquisition /           Progress &           Accumulated   of Accumulated           Completion /
    Land   Improvements   Construction   Land   Improvements   Total   Depreciation   Depreciation   Encumbrances   Acquisition
   
 
 
 
 
 
 
 
 
 
Avalon Watch
    5,585       22,394       1,618       5,585       24,012       29,597       7,489       22,108             1999  
Avalon Riverview I
    3,959       90,086             3,959       90,086       94,045       1,229       92,816             2002  
Avalon Gardens
    8,428       45,706       131       8,428       45,837       54,265       8,018       46,247             1998  
Avalon Green
    1,820       10,525       258       1,820       10,783       12,603       2,843       9,760             1995  
Avalon on the Sound
    717       89,501       1,396       717       90,897       91,614       4,632       86,982       36,089       2001  
Avalon View
    3,529       14,140       621       3,529       14,761       18,290       4,460       13,830       17,743       1993  
Avalon Willow
    6,207       39,852       941       6,207       40,793       47,000       4,533       42,467             2000  
The Avalon
    2,889       28,273       66       2,889       28,339       31,228       3,444       27,784             1999  
Avalon at Fairway Hills I & II
    8,612       34,463       1,780       8,612       36,243       44,855       8,936       35,919       11,500       1987/96  
Avalon at Symphony Glen
    1,594       6,384       1,194       1,594       7,578       9,172       2,409       6,763       9,780       1986  
Avalon Landing
    1,849       7,409       533       1,849       7,942       9,791       2,128       7,663       6,417       1995  
4100 Massachusetts Avenue
    6,848       27,614       1,566       6,848       29,180       36,028       8,257       27,771             1982  
AutumnWoods
    6,096       24,400       432       6,096       24,832       30,928       5,304       25,624             1996  
Avalon at Arlington Square I
    13,453       55,918       307       13,453       56,225       69,678       3,301       66,377             2001  
Avalon at Arlington Square II
    8,588       33,817             8,588       33,817       42,405       670       41,735             2002  
Avalon at Ballston Vermont & Quincy Towers
    9,340       37,360       469       9,340       37,829       47,169       7,649       39,520             1997  
Avalon at Ballston — Washington Towers
    7,291       29,177       891       7,291       30,068       37,359       8,846       28,513             1990  
Avalon at Cameron Court
    10,292       32,931       23       10,292       32,954       43,246       5,716       37,530             1998  
Avalon at Decoverly
    6,157       24,800       815       6,157       25,615       31,772       6,391       25,381             1995  
Avalon at Dulles
    2,302       9,212       650       2,302       9,862       12,164       2,993       9,171       12,360       1986  
Avalon at Fair Lakes
    4,334       19,127       15       4,334       19,142       23,476       3,408       20,068             1998  
Avalon at Fox Mill
    2,713       16,678       122       2,713       16,800       19,513       1,975       17,538             2000  
Avalon at Providence Park
    2,152       8,907       240       2,152       9,147       11,299       1,803       9,496             1997  
Avalon Crescent
    13,851       43,401       31       13,851       43,432       57,283       8,684       48,599             1996  
Avalon Crossing
    2,207       11,683       5       2,207       11,688       13,895       2,596       11,299             1996  
Avalon Fields I & II
    4,047       18,611       42       4,047       18,653       22,700       4,176       18,524       11,286       1998  
Avalon Knoll
    1,528       6,136       945       1,528       7,081       8,609       2,517       6,092       12,978       1985  
200 Arlington Place
    9,728       39,527       707       9,728       40,234       49,962       2,837       47,125             1987/2000  
Avalon at Danada Farms
    7,535       30,444       444       7,535       30,888       38,423       5,320       33,103             1997  
Avalon at Stratford Green
    4,326       17,569       54       4,326       17,623       21,949       3,051       18,898             1997  
Avalon at West Grove
    5,149       20,657       4,109       5,149       24,766       29,915       4,344       25,571             1967  
Avalon at Devonshire
    7,250       29,641       795       7,250       30,436       37,686       5,364       32,322       27,305       1988  
Avalon at Edinburgh
    3,541       14,758       260       3,541       15,018       18,559       2,483       16,076             1992  

F-31


 

AVALONBAY COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
(Dollars in thousands)

                                                                                 
    Initial Cost                   Total Cost                                        
   
         
                               
            Building /   Costs           Building /                                        
            Construction in   Subsequent to           Construction in                   Total Cost, Net           Year of
            Progress &   Acquisition /           Progress &           Accumulated   of Accumulated           Completion /
    Land   Improvements   Construction   Land   Improvements   Total   Depreciation   Depreciation   Encumbrances   Acquisition
   
 
 
 
 
 
 
 
 
 
Avalon at Town Centre
    3,450       14,449       315       3,450       14,764       18,214       2,610       15,604             1986  
Avalon at Town Square
    2,099       8,642       157       2,099       8,799       10,898       1,583       9,315             1986  
Avalon at Woodbury
    5,034       20,857       94       5,034       20,951       25,985       2,550       23,435             1999  
Avalon at Bear Creek
    6,786       27,035       616       6,786       27,651       34,437       4,430       30,007             1998  
Avalon Bellevue
    6,664       23,908       61       6,664       23,969       30,633       1,653       28,980             2001  
Avalon Belltown
    5,644       12,453       182       5,644       12,635       18,279       610       17,669             2001  
Avalon Brandemoor
    8,630       36,679             8,630       36,679       45,309       2,321       42,988             2001  
Avalon Greenbriar
    3,808       21,239       11,212       3,808       32,451       36,259       5,024       31,235       18,755       1987/88  
Avalon HighGrove
    7,569       32,035       16       7,569       32,051       39,620       2,409       37,211             2000  
Avalon ParcSquare
    3,789       15,093       113       3,789       15,206       18,995       1,387       17,608             2000  
Avalon Redmond Place
    4,558       17,504       3,980       4,558       21,484       26,042       3,877       22,165             1991/97  
Avalon RockMeadow
    4,777       19,671       9       4,777       19,680       24,457       1,816       22,641             2000  
Avalon WildReed
    4,253       18,676       27       4,253       18,703       22,956       1,659       21,297             2000  
Avalon WildWood
    6,268       26,597             6,268       26,597       32,865       1,662       31,203             2001  
Avalon Wynhaven
    11,412       41,142             11,412       41,142       52,554       2,674       49,880             2001  
Avalon at Union Square
    4,249       16,820       822       4,249       17,642       21,891       2,844       19,047             1973/96  
Avalon at Willow Creek
    6,581       26,583       1,094       6,581       27,677       34,258       4,480       29,778             1985/94  
Avalon Dublin
    5,276       19,642       1,824       5,276       21,466       26,742       3,446       23,296             1989/97  
Avalon Fremont
    15,016       60,681       1,473       15,016       62,154       77,170       10,102       67,068             1992/94  
Avalon Pleasanton
    11,610       46,552       2,360       11,610       48,912       60,522       7,990       52,532             1988/94  
Waterford
    11,324       45,717       2,025       11,324       47,742       59,066       7,948       51,118       33,100       1985/86  
Avalon at Cedar Ridge
    4,230       9,659       11,641       4,230       21,300       25,530       3,608       21,922             1975/97  
Avalon at Diamond Heights
    4,726       19,130       542       4,726       19,672       24,398       3,191       21,207             1972/94  
Avalon at Nob Hill
    5,403       21,567       530       5,403       22,097       27,500       3,518       23,982       19,457       1990/95  
Avalon at Sunset Towers
    3,561       21,321       3,289       3,561       24,610       28,171       4,375       23,796             1961/96  
Avalon Foster City
    7,852       31,445       3,555       7,852       35,000       42,852       5,389       37,463             1973/94  
Avalon Pacifica
    6,125       24,796       377       6,125       25,173       31,298       4,020       27,278       16,216       1971/95  
Avalon Towers by the Bay
    9,155       57,630       97       9,155       57,727       66,882       6,619       60,263             1999  
Crowne Ridge
    5,982       16,885       8,183       5,982       25,068       31,050       4,070       26,980             1973/96  
Avalon at Blossom Hill
    11,933       48,313       640       11,933       48,953       60,886       7,911       52,975             1995  
Avalon at Cahill Park
    4,760       47,354             4,760       47,354       52,114       723       51,391             2002  
Avalon at Creekside
    6,546       26,301       10,119       6,546       36,420       42,966       5,238       37,728             1962/97  
Avalon at Foxchase I & II
    11,340       45,532       1,950       11,340       47,482       58,822       7,718       51,104       26,400       1986/87  

F-32


 

AVALONBAY COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
(Dollars in thousands)

                                                 
    Initial Cost                   Total Cost        
   
         
            Building /   Costs           Building /        
            Construction in   Subsequent to           Construction in        
            Progress &   Acquisition /           Progress &        
    Land   Improvements   Construction   Land   Improvements   Total
   
 
 
 
 
 
Avalon at Parkside
    7,406       29,823       624       7,406       30,447       37,853  
Avalon at Pruneyard
    3,414       15,469       12,967       3,414       28,436       31,850  
Avalon at River Oaks
    8,904       35,126       975       8,904       36,101       45,005  
Avalon Campbell
    11,830       47,828       351       11,830       48,179       60,009  
Avalon Cupertino
    9,099       39,926       73       9,099       39,999       49,098  
Avalon Mountain View
    9,755       39,393       1,364       9,755       40,757       50,512  
Avalon on the Alameda
    6,119       50,164       143       6,119       50,307       56,426  
Avalon Rosewalk I & II
    15,814       62,028       368       15,814       62,396       78,210  
Avalon Silicon Valley
    20,713       99,304       834       20,713       100,138       120,851  
Avalon Sunnyvale
    6,786       27,388       723       6,786       28,111       34,897  
Avalon Towers on the Peninsula
    9,560       56,021             9,560       56,021       65,581  
CountryBrook
    9,384       34,794       3,614       9,384       38,408       47,792  
Fairway Glen
    3,341       13,338       449       3,341       13,787       17,128  
San Marino
    6,607       26,673       785       6,607       27,458       34,065  
Avalon at Media Center
    22,483       28,104       24,921       22,483       53,025       75,508  
Avalon at Warner Center
    7,045       12,986       6,383       7,045       19,369       26,414  
Avalon Westside Terrace
    5,878       23,708       7,655       5,878       31,363       37,241  
Avalon Woodland Hills
    23,828       40,372       7,390       23,828       47,762       71,590  
The Promenade
    14,052       56,820       124       14,052       56,944       70,996  
Amberway
    10,285       7,249       3,866       10,285       11,115       21,400  
Avalon Laguna Niguel
    656       16,588       3,713       656       20,301       20,957  
Avalon at Pacific Bay
    4,871       19,745       7,325       4,871       27,070       31,941  
Avalon at South Coast
    4,709       16,063       3,824       4,709       19,887       24,596  
Avalon Huntington Beach
    6,663       21,647       8,882       6,663       30,529       37,192  
Avalon Mission Viejo
    2,517       9,257       1,393       2,517       10,650       13,167  
Avalon Newport
    1,975       3,814       4,323       1,975       8,137       10,112  
Avalon Santa Margarita
    4,607       16,911       2,117       4,607       19,028       23,635  
Avalon at Cortez Hill
    2,768       20,134       11,466       2,768       31,600       34,368  
Avalon at Mission Bay
    9,922       40,633       15,505       9,922       56,138       66,060  
Avalon at Mission Ridge
    2,710       10,924       7,991       2,710       18,915       21,625  
Avalon at Penasquitos Hills
    2,760       9,391       2,172       2,760       11,563       14,323  
 
   
 
 
  $ 836,084     $ 3,763,217     $ 267,642     $ 836,084     $ 4,030,859     $ 4,866,943  
 
   
 

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                 
            Total Cost, Net           Year of
    Accumulated   of Accumulated           Completion /
    Depreciation   Depreciation   Encumbrances   Acquisition
   
 
 
 
Avalon at Parkside
    4,857       32,996             1991/96  
Avalon at Pruneyard
    4,521       27,329       12,870       1966/97  
Avalon at River Oaks
    5,704       39,301             1990/96  
Avalon Campbell
    7,672       52,337       35,749       1995  
Avalon Cupertino
    6,645       42,453             1999  
Avalon Mountain View
    6,523       43,989       18,300       1986  
Avalon on the Alameda
    6,828       49,598             1999  
Avalon Rosewalk I & II
    9,434       68,776             1997  
Avalon Silicon Valley
    15,853       104,998             1997  
Avalon Sunnyvale
    4,483       30,414             1987/1995  
Avalon Towers on the Peninsula
    1,666       63,915             2002  
CountryBrook
    6,207       41,585       18,124       1985/96  
Fairway Glen
    2,256       14,872       9,580       1986  
San Marino
    4,401       29,664             1984/88  
Avalon at Media Center
    7,228       68,280             1969/97  
Avalon at Warner Center
    3,440       22,974             1979/98  
Avalon Westside Terrace
    4,961       32,280             1966/97  
Avalon Woodland Hills
    8,610       62,980             1989/97  
The Promenade
    1,041       69,955       33,670       1988/2002  
Amberway
    2,025       19,375             1983/98  
Avalon Laguna Niguel
    3,494       17,463       10,400       1988/98  
Avalon at Pacific Bay
    4,204       27,737             1971/97  
Avalon at South Coast
    3,334       21,262             1973/96  
Avalon Huntington Beach
    5,480       31,712             1972/97  
Avalon Mission Viejo
    1,741       11,426       7,151       1984/96  
Avalon Newport
    1,343       8,769             1956/96  
Avalon Santa Margarita
    3,147       20,488             1990/97  
Avalon at Cortez Hill
    4,470       29,898             1973/98  
Avalon at Mission Bay
    8,240       57,820             1969/97  
Avalon at Mission Ridge
    3,142       18,483             1960/97  
Avalon at Penasquitos Hills
    1,895       12,428             1982/97  
 
   
         
 
  $ 568,022     $ 4,298,921     $ 456,851          
 
   
         

F-33


 

AVALONBAY COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
(Dollars in thousands)

                                                 
    Initial Cost                   Total Cost        
   
         
            Building /   Costs           Building /        
            Construction in   Subsequent to           Construction in        
            Progress &   Acquisition /           Progress &        
    Land   Improvements   Construction   Land   Improvements   Total
   
 
 
 
 
 
Development Communities
                                               
Avalon at Flanders Hill
    2,981       32,874             2,981       32,874       35,855  
Avalon at Gallery Place I
          41,414                   41,414       41,414  
Avalon at Glen Cove South
          16,777                   16,777       16,777  
Avalon at Grosvenor Station
          40,146                   40,146       40,146  
Avalon at Mission Bay North
    461       71,009             461       71,009       71,470  
Avalon at Newton Highlands
          27,629                   27,629       27,629  
Avalon at Rock Spring
    264       36,523             264       36,523       36,787  
Avalon at Steven’s Pond
          23,230                   23,230       23,230  
Avalon Darien
          13,537                   13,537       13,537  
Avalon Glendale
          17,132                   17,132       17,132  
Avalon on Stamford Harbor
    9,348       51,798             9,348       51,798       61,146  
Avalon Traville Phase I
          8,882                   8,882       8,882  
 
   
 
 
  $ 13,054     $ 380,951     $     $ 13,054     $ 380,951     $ 394,005  
 
   
 
Land held for development
    78,688                   78,688             78,688  
Corporate overhead
    1,571       8,242       20,004       1,571       28,246       29,817  
 
   
 
 
  $ 929,397     $ 4,152,410     $ 287,646     $ 929,397     $ 4,440,056     $ 5,369,453  
 
   
 

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                 
            Total Cost, Net           Year of
    Accumulated   of Accumulated           Completion /
    Depreciation   Depreciation   Encumbrances   Acquisition
   
 
 
 
Development Communities
                               
Avalon at Flanders Hill
    359       35,496             N/A  
Avalon at Gallery Place I
          41,414             N/A  
Avalon at Glen Cove South
          16,777             N/A  
Avalon at Grosvenor Station
          40,146             N/A  
Avalon at Mission Bay North
    46       71,424             N/A  
Avalon at Newton Highlands
          27,629             N/A  
Avalon at Rock Spring
    58       36,729             N/A  
Avalon at Steven’s Pond
          23,230             N/A  
Avalon Darien
          13,537             N/A  
Avalon Glendale
          17,132             N/A  
Avalon on Stamford Harbor
    721       60,425             N/A  
Avalon Traville Phase I
          8,882             N/A  
 
   
         
 
  $ 1,184     $ 392,821     $          
 
   
         
Land held for development
          78,688                
Corporate overhead
    14,816       15,001                
 
   
         
 
  $ 584,022     $ 4,785,431     $ 456,851          
 
   
         

F-34


 

AVALONBAY COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2002
(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 $5,400,000 at December 31, 2002.

The changes in total real estate assets for the years ended December 31, 2002, 2001 and 2000 are as follows:

                         
    Years ended December 31,
   
    2002   2001   2000
   
 
 
Balance, beginning of period
  $ 4,837,869     $ 4,535,969     $ 4,266,426  
Acquisitions, Construction Costs and Improvements
    575,879       496,908       393,359  
Dispositions, including impairment loss on planned dispositions
    (44,295 )     (195,008 )     (123,816 )
 
   
     
     
 
Balance, end of period
  $ 5,369,453     $ 4,837,869     $ 4,535,969  
 
   
     
     
 

The changes in accumulated depreciation for the years ended December 31, 2002, 2001 and 2000, are as follows:

                         
    Years ended December 31,
   
    2002   2001   2000
   
 
 
Balance, beginning of period
  $ 447,026     $ 336,010     $ 225,103  
Depreciation, including discontinued operations
    144,477       126,984       119,416  
Dispositions
    (7,481 )     (15,968 )     (8,509 )
 
   
     
     
 
Balance, end of period
  $ 584,022     $ 447,026     $ 336,010  
 
   
     
     
 

 

 

F-35