2 0 0 7 A N N U A L R E P O R T
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7
2900 Eisenhower Avenue
Suite 300 • Alexandria • VA • 22314
www.avalonbay.com
Excellent
Excellent
Execution
Execution
F I N A N C I A L H I G H L I G H T S
TOTAL SHAREHOLDER
RETURN (1)
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20.0%
15.0%
10.0%
5.0%
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%
7
.
4
1
%
0
.
0
1
%
1
.
1
1
%
1
.
4
3-Year
10 Year
AVB Multifamily Sector Avg.
Source: SNL Financial
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NAV PER SHARE GROWTH (2)
30.0%
20.0%
%
4
.
5
2
%
5
.
9
1
%
7
.
5
1
10.0%
%
1
.
6
0%
3-Year
10 Year
AVB Multifamily Sector Avg.
Source: Green Street Advisors, SNL Financial
AvalonBay Communities, Inc. is an equity Real Estate Investment Trust primarily engaged in
developing, redeveloping, acquiring, and managing quality apartment communities in high
barrier-to-entry markets within the United States. Our markets are located in the Northeast,
Mid-Atlantic, Midwest, Pacifi c Northwest, and Northern and Southern California regions.
At year-end 2007, our Total Market Capitalization was $10.6 billion. Over the last ten years,
our Total Shareholder Return averaged 14.7% per year, and the growth rate of our dividend
averaged 7.4% per year during the same time period. Our time-tested strategy is to more deeply
penetrate our chosen markets with a broad range of products and services and an intense focus on
our customer.
AvalonBay Communities common shares are traded on the New York Stock Exchange under
the ticker symbol AVB and were included in the S&P 500 Index in 2007. More information
about AvalonBay may be found on our website at www.avalonbay.com.
FFO PER SHARE GROWTH (3)
PAGE 1, TOP: AVALON DEL REY, CA BOTTOM: AVALON GLEN COVE NORTH, NY
COVER: AVALON RIVERVIEW NORTH, NY:
15.0%
10.0%
%
8
.
2
1
5.0%
0%
%
5
.
6
%
4
.
5
%
6
.
2
3-Year
10 Year
AVB Multifamily Sector Avg.
Source: SNL Financial
See page 12 for notes, page 61 for defi ned terms, and
page 65 for 5 year stock perfomance graph.
AVALONBAY CORPORATE INFORMATION
H EA D QUA RTERS
Washington, DC
2900 Eisenhower Avenue
Suite 300
Alexandria, VA 22314
Phone:
Fax:
(703) 329-6300
(703) 329-1459
REGIONA L OFF ICES
Boston, MA
51 Sleeper Street
Suite 750
Boston, MA 02210
Phone:
Fax:
(617) 654-9500
(617) 426-1610
Chicago, IL
200 North Arlington Heights Road
Suite 15
Arlington Heights, IL 60004
Phone:
Fax:
(847) 342-0065
(847) 342-0075
Fairfi eld-New Haven, CT
1000 Bridgeport Ave
Suite 258
Shelton, CT 06484
Phone:
Fax:
(203) 926-2300
(203) 926-9744
Long Island, NY
135 Pinelawn Road
Suite 130 South
Melville, NY 11747
Phone:
Fax:
(631) 843-0736
(631) 843-0737
Los Angeles, CA
16255 Ventura Boulevard
Suite 950
Encino, CA 91436
Phone:
Fax:
(818) 784-2800
(818) 784-2810
Newport Beach, CA
4440 Von Karman Avenue
Suite 300
Newport Beach, CA 92660
(949) 955-6200
Phone:
(949) 724-9208
Fax:
New York, NY
275 Seventh Avenue
25th Floor
New York, NY 10001
Phone:
Fax:
(212) 370-9269
(212) 370-1511
San Francisco, CA
185 Berry Street
Suite 3500
San Francisco, CA 94107
Phone:
Fax:
(415) 284-9080
(415) 546-4138
San Jose, CA
400 Race Street
Suite 200
San Jose, CA 95126
Phone:
Fax:
(408) 983-1500
(408) 287-9167
Seattle, WA
11808 Northup Way
Suite W311
Bellevue, WA 98005
Phone:
Fax:
(425) 576-2100
(425) 576-8447
Virginia Beach, VA
2901 Sabre Street
Suite 100
Virginia Beach, VA 23452
(757) 631-5000
Phone:
(757) 486-1063
Fax:
Woodbridge, NJ
Woodbridge Place
517 Route One South
Suite 5500
Iselin, NJ 08830
Phone:
Fax:
(732) 404-4800
(732) 283-9101
INV ESTOR REL ATIONS
Investor Relations
AvalonBay Communities, Inc.
2900 Eisenhower Avenue
Suite 300
Alexandria, VA 22314
Phone:
ir@avalonbay.com
(703) 329-6300 ext. 4747
WE BSITE
www.avalonbay.com
TRA NS FER AGE NT
The Bank of New York Mellon
Shareholder Relations Department–12E
P.O. Box 11258
Church Street Station
New York, NY 10286
Phone:
(800) 524-4458
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INDEP E NDEN T AUDI TO RS
Ernst & Young, LLP
8484 Westpark Drive
McLean, VA 22102
Phone:
(703) 747-1000
F ORM 10-K
A copy of the Company’s annual report
on Form 10-K as fi led with the Securities
and Exchange Commission may be
obtained without charge by contacting
Investor Relations.
CE O AN D CFO CE RT IFICATI ON S
In 2007, the Company’s Chief Executive
Offi cer provided to the New York Stock
Exchange the Annual CEO Certifi cation
regarding the Company’s compliance with
the New York Stock Exchange’s corporate
governance listing standards. In addition,
the Company’s CEO and CFO fi led with
the Securities and Exchange Commission
the certifi cations required by Sections 302
and 404 of the Sarbanes-Oxley Act of 2002
regarding the quality of the Company’s
public disclosures in its 2007 annual report
on Form 10-K.
STOCK LISTI NG S
NYSE–AVB
This Annual Report, including the Letter
to Shareholders, contains “forward-looking
statements” within the meaning of the
Securities Act of 1933 and the Securities
Exchange Act of 1934. Please see our
discussion titled “Forward-Looking
Statements” on page 32 of this report for
a discussion regarding risks associated with
these statements. Non-GAAP fi nancial
measures and other terms as used in this
report are defi ned and reconciled beginning
on page 61 in the section titled, “Defi nitions
and Reconciliations of Non-GAAP
Financial Measures and Other Terms.”
For Our
Shareholders
and Our
Customers
Excellent
Execution
Excellent
Execution
For Our
Shareholders
Avalon Chrystie Place, NY
TO OUR SHAREHOLDERS
We enjoyed a number of accomplishments in 2007, accomplishments that became more
meaningful and noteworthy during the year as the public real estate and capital markets
adjusted to refl ect increased uncertainty in the economic outlook.
The year began on a positive note with our entry into the S&P 500 Index and completion
of an opportunistic equity offering. By mid-year, market volatility sparked by the sub-prime
crisis became the tipping point for a global re-pricing of risk. Although our operating funda-
mentals remained solid throughout the year, the impact of this re-pricing was felt by all asset
classes, including public valuation of our apartment assets.
At a time of increased volatility in the fi nancial markets, we remain committed to building
value through Excellent Execution, adjusting our plans to optimize performance in an uncer-
tain market climate. In this letter, we’ll look back at 2007 and forward to 2008 and beyond,
discussing the economic outlook and its impact on the fundamentals of our business that sup-
port earnings growth and mitigate risk. We’ll also highlight Excellent Execution in several areas
of our business which over time have supported a business model that consistently delivers
sector leading operating and investment returns to investors.
2007 IN REVIEW
In last year’s report, Building Value was the theme we established to recognize the multiple
growth platforms – new development, redevelopment, operations, and investment management
– that create value for shareholders. Much was accomplished in 2007 through these platforms:
30.0%
25.0%
15.0%
5.0%
e
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TOTA L SHAREH OLDE R RET URN (1 )
%
1
.
4
2
%
1
.
1
1
%
6
.
6
%
1
.
4
%
1
.
2
1
%
8
.
0
1
%
7
.
4
1
%
0
.
0
1
%
2
.
4
3 year
5 year
10 year
AVB Multifamily Sector Avg.
S&P
Source: SNL Financial
• Net Operating Income (NOI) from our Same Store portfolio
increased 7.2%, driven by revenue growth of 5.5% and modest
expense growth of 2.1%.
• Funds from Operations (FFO) increased 8.7% or 13.4% after
adjusting for land sales. This was our third consecutive year of 10%+
growth in FFO after adjusting for land sales.
• We delivered eight communities containing over 1,700 apartment
homes with a Total Capital Cost of $440 million. Development
underway and in planning grew to $6 billion.
• We selectively sold $275 million in assets, generating an Economic
Gain of $145 million and an 18% Unleveraged IRR on our invest-
ment, confi rming the value created through our investment activities.
2 AvalonBay Communities, Inc.
• We acquired $325 million in new communities, and expanded our redevelopment
activity, completing the renovation of fi ve communities and starting redevelopment of
four communities.
• We completed the initial investment of capital sourced from our discretionary institutional
investment management fund.
These results provide the support for our actions aimed at returning value to our shareholders:
• In 2007, our Board of Directors raised the dividend 9.0% and in February of this year
approved an increase of 5.0% in our dividend. Over the last ten years, our dividend has
increased over 100%, more than twice the Multifamily Sector Average.
• We opportunistically expanded our share repurchasing program, acquiring $300 million
in the latter half of 2007 and early 2008.
Avalon Del Rey, CA
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6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
CO N TROLL ING E XPE NSES (4)
%
3
4
.
%
9
3
.
%
5
2
.
%
3
2
.
%
7
3
.
%
8
1
.
.
%
8
% 2
2
2
.
2004
2005
2006
2007
AVB Multifamily Sector Avg.
Source: Green Street Advisors, SNL Financial
• The strong headwinds faced by the REIT
sector in 2007 were refl ected in our
returns for 2007. We experienced the fi rst
decline in Total Shareholder Return since
2002: -25%. Longer term, Total Shareholder
Return has been outstanding, with average
annual returns of 11%, 24% and 15%
over a 3, 5 and 10 year period, respectively.
These returns refl ect the value and dura-
bility of a business model that has delivered
outsized risk adjusted returns over an entire
business cycle.
And fi nally, AvalonBay was recognized for its success in taking care of the residents who call our
communities their home. We were honored with the “Property Management Company of the
Year” award by the National Association of Home Builders. This award recognizes that fi nancial
success in our industry is built on well managed properties tended by fi rst-class associates pro-
viding an outstanding living experience to our residents.
Turning to the economy and capital markets, weakness in the for-sale housing market is impact-
ing economic growth. Unsold inventory reached record levels and home prices are declining in
most markets. As expected, job growth - a key driver of renter demand - slowed steadily during
2007, driven by the loss of 400,000 jobs in housing related industries.
Avalon Danvers, MA
AvalonBay Communities, Inc. 3
Excellent
Execution
Finding Extraordinary
Opportunities to Create
Unique Communities
The redevelopment of a
prominent historic landmark
on Boston’s North Shore
showcased our develop-
ment talents. By adaptively
reusing the historic build-
ing and adding a variety
of building and apartment
styles targeted to different
demographic segments, we
created both an attractive
community and an attractive
investment. Since comple-
tion, Avalon Danvers has
garnered considerable local,
regional and national atten-
tion and added to our repu-
tation as a market leader.
4 AvalonBay Communities, Inc.
The weakness in housing spread to the capital markets, as rising delinquencies in lower qual-
ity mortgage loans led to a broad re-pricing of risk among many asset classes. The “sub-prime
mortgage” was a new term for many of us - a little known but large segment of the mort-
gage market that became the big story in 2007. Credit markets contracted, liquidity became
constrained and the cost of credit as measured by spreads widened. Our fi nancial fl exibility
enabled us to respond to tightening capital markets by expanding our existing unsecured
credit facility by $350 million to $1 billion, providing additional cost effective capital.
THE APARTMENT MARKET: CURRENT FUNDAMENTALS AND OUTLOOK
Going into 2008, third party forecasts suggest that GDP and job growth will be at levels below
long-term averages. While a slower economy merits caution in our outlook for 2008, other
factors work in favor of apartment demand in our markets:
• We expect the economics of renting vs. buying will continue to favor rental apartments
for the next several years. While falling home prices should marginally improve affordabil-
ity, the cost of home ownership will remain higher in our markets compared to elsewhere
in the U.S. Further, tighter lending restrictions are likely to limit the number of current
renters that are able to qualify for a mortgage and purchase a home.
rent
• Demographic changes will
ensure a steady increase in
new renters, as the age
segments with the greatest
are
to
propensity
expected to grow. According
the National Multi-
Housing Council, demo-
should
graphic
add 150,000 renters annu-
ally over the next fi ve years.
changes
to
ACCELERATING RENTER POPU LATI ON(5)
5
.
6
6
7
.
6
6
7
.
6
6
0
.
6
6
4
.
5
6
6
.
4
6
7
.
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.
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S
U
68
67
66
65
64
63
62
60
59
58
• Apartment
construction
levels will remain at or below
2005 2006 2007 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E
Source: National Multi-Housing Council
historic levels in most of our markets in 2008. Some unsold housing inventory is being
converted to rental housing by their owners. However, this ‘shadow’ supply is less of a factor
in our markets compared to overbuilt markets in the Southwest and Florida, supporting
our strategy of choosing supply-constrained markets.
WILSHIRE
LOS ANGEL ES, CA
AvalonBay Communities, Inc. 5
LYNDHURST
LY NDH URST, NJ
6 AvalonBay Communities, Inc.
DE C LI NI NG H OM E OW N E RSH I P (6)
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(
69.5%
69.0%
68.5%
68.0%
67.5%
67.0%
2000
2001
2002
2003
2004
2005
2006
2007
Source: Census Bureau
• Over the last 24 months,
the homeownership rate
has declined from over
69% to approximately
68% and is predicted
to continue falling. For
in
every 1% decline
home ownership,
an
estimated 500,000 rent-
ers emerge.
RESPONDING TO CHALLENGES AND OPPORTUNITIES:
EXCELLENT EXECUTION
Embedded in our continuous focus on Excellent Execution is the practical reality that what
we do is hard. What follows are examples of value creation through Excellent Execution by
AvalonBay: in our high barrier-to-entry markets, in the diversity of the product we deliver,
in our intense focus on our customer and in our fl exible capital structure, all of which create,
preserve and enhance value.
Excellent Execution in Our High Barrier-to-Entry Markets
The markets in which we operate are very competitive markets to secure land, diffi cult
markets to secure entitlements and expensive markets in which to build. Here are a few
examples of how our development teams around the country respond to the challenges
imposed by our markets:
• In New York City, we acquired a development site with spectacular views along the East
River. The site required a clean-up plan to remove contaminated soil. Executed under
the direction of AvalonBay’s construction division, all excavation and soil removal was
carried out under a tent that covered an area bigger than a football fi eld. Recently
completed, our Avalon Riverview North high-rise community is leasing at rental rates well
above projected levels.
• In the San Francisco Bay Area, we agreed to manage construction of a 1,500-car,
$45 million parking structure for the BART transit agency to secure approval for our
Avalon at Dublin Station apartment community located adjacent to a key BART
station. The challenges imposed by this construction effectively eliminated most of
our competitors, and our efforts directly resulted in our winning control of development
opportunities adjacent to two other BART stations. In total, these three sites represent
$469 million of development opportunities at three of the region’s key transit nodes.
Excellent
Execution
2007 Property Management
Company of the Year
Over the years, we’ve
implemented a series of
initiatives to build a “culture
of service” within both our
communities and the orga-
nization: customer research,
full-service call centers,
advance training for associ-
ates and innovative recruit-
ing. We’re proud AvalonBay
was cited for our ability to
employ “strategic cutting
edge technologies to control
operating expenses”, while
at the same time providing
an unparalleled living expe-
rience for our residents.
AvalonBay Communities, Inc. 7
Excellent
Execution
Focusing on our Customer
To ensure that we continue
delivering great service
to our residents, we have
opened a new, state-of-the-
art Customer Care Center
(CCC). Certain accounting
and administrative func-
tions, once the responsibility
of the Community Manager
at each of our 184 communi-
ties, are being centralized
and transferred to special-
ists at the CCC. This frees up
more time for associates at
our communities to focus
on leasing and meeting
the needs of our residents.
Functions are being trans-
ferred by region and we
expect the CCC to be fully
operational by mid-2009.
8 AvalonBay Communities, Inc.
• Over the years, we’ve built entire utility infrastructures (roads, water treatment plants),
redeveloped hospitals into apartments and built a golf course, marina and ball fi elds as
part of the approval process.
Through Excellent Execution, challenges become opportunities.
Excellent Execution in the Product We Deliver
To meet the needs of our customers, we’ve developed an expertise in both building and oper-
ating a broad range of apartment communities.
• From garden apartments to 50-story high rise buildings, our integrated in-house
construction and development platform allows us to achieve better control over quality, cost
and schedule. Centralized support for design, estimating and purchasing, and established
processes help optimize value creation while mitigating risk. It’s why we have delivered over
$3 billion of new construction within ± 3% of the original budgets over the past ten years.
$600
$300
$450
s
n
o
i
l
l
i
PROV EN TRACK R EC ORD (7)
• A retail component is often
required for new develop-
ment to compete success-
fully in urban markets. By
into our
incorporating
communities quality gro-
cers such as Whole Foods®
and Safeway®, and other
retailers such as Starbucks®
and Panera®, we create
convenience for our resi-
dents and add value to our
the
communities. Over
years, we’ve added experienced retail professionals and new systems to support retail.
($150)
($300)
M
n
$150
i
$
$0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Development Completed Total Capital Cost Over/(Under) Budgeted Cost
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
Excellent Execution through Focus on Our Customer
Our residents pay the highest average rent in our sector and they expect great service. We con-
tinuously seek to improve the way we do business on-site, minimizing administrative effort and
providing more time for customer focused activities:
• Our new Customer Care Center in Virginia Beach, VA is the result of a major initiative to
centralize on-site operations such as processing lease applications, rent checks, invoices,
lease renewals and resident inquiries. Adding other corporate functions in accounting,
payroll and accounts payable adds critical mass in a lower cost location.
BOWERY PLACE
NEW YORK, NY
AvalonBay Communities, Inc. 9
• Using new technology, we implemented an online survey process to gauge resident
satisfaction. We receive real-time feedback from residents at three critical touchpoints
- move-in, renewal and move-out - allowing our onsite teams to address customer
concerns and promptly make changes to our daily operations.
Excellent Execution in Our Capital Structure
Our balance sheet provides fl exibility to match the most attractive source of capital with our
investment activity, as evidenced by these impressive metrics (as of December 31, 2007):
• A Fixed Charge Ratio of 4.1 supports our ability to service debt obligations.
Avalon Centerpoint, MD
• Unencumbered assets exceed 80%, providing fi nancial fl exibility for uncertain capital
market conditions.
• Debt to Total Market Capitalization is just 30%.
• Floating rate debt makes up just 10% of our capital structure, providing modest interest
rate risk while better matching interest rate trends with revenue trends.
• A Dividend Payout Ratio of 74% supports a safe and growing dividend.
Whether through our $1 billion credit facility,
selling assets at attractive prices, or harvesting
value through the sale of partnership interests,
fi nancial fl exibility allows us to access a variety of
capital sources at a time when the capital markets
are volatile and liquidity is constrained.
FL EXIBLE CAPITAL STR UCTURE (8)
Total Fixed-Rate
Debt 20%
Total Variable-Rate
Debt 10%
LOOKING FORWARD
Equity
70%
Excellent Execution is both a timely and timeless
element of our successful strategy of more deeply
penetrating our chosen markets with a broad range of products and services and with an intense
focus on our customer. In a time of increased economic volatility, our plan for 2008 provides
us with the fl exibility to create value from several growth platforms:
Avalon Wilshire, CA
10 AvalonBay Communities, Inc.
• We add value through development. We have $6 billion either under construction or in
planning. With our recent initial development yields approximately 150 basis points
above market Cap Rates, the implied initial profi t margin on our new investment activity
is attractive.
• We add value by redeveloping existing assets. We reorganized our investments and construc-
tion groups to create a team of associates solely dedicated to redeveloping existing assets.
We anticipate 19 communities will be in redevelopment during 2008.
• We add value through our existing portfolio of operating apartments. We anticipate NOI
growth of 3.0% to 4.5% in 2008, providing cash fl ow and value growth from a large base of
stabilized assets.
L ONG - TERM OU TPE RFORMA N CE (1,2,3)
e
t
a
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h
t
w
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r
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l
a
u
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n
A
d
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r
a
e
Y
-
0
1
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
%
5
.
9
1
%
5
.
6
%
6
.
2
%
1
.
6
FFO
NAV
%
7
.
4
1
%
0
.
0
1
Total
Shareholder
Return
AVB Multifamily Sector Avg.
Source: SNL Financial, Green Street Advisors
Our extended track record of out-performance
in such key metrics as NAV, FFO and dividend
growth could only be accomplished through a
sustained level of Excellent Execution. We have a
seasoned management team that understands how
to maximize value during all phases of a real estate
cycle. Our time tested strategy has delivered long-
term performance near the top of the sector in the
most important attributes investors value – earn-
ings growth, NAV, dividends and Total Shareholder
Return. A durable strategy that, through Excellent
Execution, will support value creation for years
to come.
As always, we thank our shareholders for their continued support, our associates for their out-
standing results and our residents for making an AvalonBay community their home.
BRYCE BLAIR
CHAIRMAN & CHIEF EXECUTIVE OFFICER
Avalon Shrewsbury, MA
Avalon on the Sound East, NY
AvalonBay Communities, Inc. 11
NOTES & NON-GAAP FINANCIAL MEASURES AND OTHER TERMS
NOTES
NON-GAAP FINANCIAL MEASURES AND OTHER TERMS
1. Total Shareholder Return: The change in value over the period
stated with all dividends reinvested. Total Shareholder Return
is sometimes presented as the compound annual growth rate.
The Total Shareholder Return for each year within the time-
frame presented may vary.
The following non-GAAP fi nancial measures and other terms, as
used in this Annual Report, including the Letter to Sharehold-
ers, are defi ned and further explained herein on pages 61-65 in
the section titled “Defi nitions and Reconciliations of Non-GAAP
Financial Measures and Other Terms” and in the notes above:
2. Estimated NAV per Share Growth: The compound annual
growth rate of Estimated NAV per Share as estimated by Green
Street Advisors, Inc. during the periods indicated. Estimated
NAV per Share Growth for each year within the timeframe
presented may vary.
3. FFO per Share Growth: The compound annual growth rate of
FFO per Share as reported during the period stated. FFO per
Share Growth for each year within the timeframe presented
may vary.
4. Operating Expense Growth: Operating expense growth for
the same-unit pool was compiled from individual company
documents and published by Green Street Advisors, Inc. Full
year change is based on the average of the four quarters for
each year, to refl ect the changes in properties included in
same-unit results.
5. Accelerating Renter Population: Assumes 60% renter pro-
pensity within 20-34 year old age cohort, per National
Multi-Housing Council estimates.
6. Homeownership Rate: Defi ned as percentage of total occu-
pied U.S. households that are owner-occupied. Latest data as
of Fourth Quarter 2007.
7. Development Completed represents Total Capital Cost of
annual completions.
8. Percentages for Equity and Fixed and Variable Rate Debt
represent the dollar amounts for each as a percentage of the
Company’s Total Market Capitalization at December 31,
2007 (see “Leverage”).
• Net Asset Value (NAV)
• Fixed Charge Coverage (Interest Coverage)
• Funds from Operations (FFO)
• Initial Year Market Capitalization Rate (Cap Rate)
• Leverage
• Multifamily REIT Sector Average
• Net Operating Income (NOI)
• Projected NOI
• Total Capital Cost
• Economic Gain
• Same Store (Established) Communities
• Stabilized/Restabilized Operations
• Dividend Payout Ratio
• Unleveraged IRR
• Stock Performance Graph
FORWARD-LOOKING STATEMENTS
This Annual Report, including the Letter to Shareholders, con-
tains “forward-looking statements” within the meaning of the
Securities Act of 1933 and the Securities Exchange Act of 1934.
Please see our discussion titled “Forward-Looking Statements” on
page 28 of this report for a discussion regarding risks associated
with these statements.
12 AvalonBay Communities, Inc.
2007 FINANCIAL REVIEW
14
16
31
32
33
34
35
37
58
60
61
Selected Financial Data
Management’s Discussion and Analysis
of Financial Condition and Results
of Operations
Quantitative and Qualitative Disclosures
About Market Risk
Consolidated Balance Sheets
Consolidated Statements of Operations
and Other Comprehesive Income
Consolidated Statements of
Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated
Financial Statements
Report of Independent Registered
Public Accounting Firm
Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer
Purchases of Equity Securities
Defi nitions and Reconciliations of
Non-GAAP Financial Measures and
Other Terms
66
AvalonBay Corporate Information
AvalonBay Communities, Inc. 13
AvalonBay Communities, Inc. 13
SELECTED FINANCIAL DATA
The following table provides historical consolidated fi nancial, 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)
12-31-07
12-31-06
12-31-05
12-31-04
12-31-03
Revenue:
Rental and other income
Management, development and other fees
$ 806,599
6,142
$ 715,170
6,259
$ 650,907
4,304
$ 598,656
604
$ 545,794
896
Total revenue
812,741
721,429
655,211
599,260
546,690
For the year ended
Expenses:
Operating expenses, excluding property taxes
Property taxes
Interest expense, net
Depreciation expense
General and administrative expense
Total expenses
Equity in income of unconsolidated entities
Venture partner interest in profi t-sharing
Minority interest in consolidated partnerships
Gain on sale of communities
Income from continuing operations before
cumulative effect of change in accounting principle
Discontinued operations:
Income from discontinued operations
Gain on sale of communities
Total discontinued operations
Income before cumulative effect of
change in accounting principle
242,702
74,912
97,545
179,549
28,494
623,202
59,169
—
(1,585)
545
217,134
66,786
109,184
160,442
24,767
578,313
7,455
—
(573)
13,519
197,990
63,975
125,171
156,455
25,761
569,352
7,198
—
(1,481)
4,479
187,804
57,907
129,106
149,721
18,074
542,612
1,100
(1,178)
(150)
1,138
169,039
52,215
128,183
137,311
14,830
501,578
25,535
(1,688)
(950)
1,234
247,668
163,517
96,055
57,558
69,243
4,005
106,487
110,492
5,618
97,411
103,029
19,126
195,287
214,413
24,387
121,287
145,674
33,504
159,756
193,260
358,160
266,546
310,468
203,232
262,503
Cumulative effect of change in accounting principle
—
—
—
4,547
—
Net income
Dividends attributable to preferred stock
358,160
(8,700)
266,546
(8,700)
310,468
(8,700)
207,779
(8,700)
262,503
(10,744)
Net income available to common stockholders
$ 349,460
$ 257,846
$ 301,768
$ 199,079
$ 251,759
Per Common Share and Share Information:
Earnings per common share—basic:
Income from continuing operations
(net of dividends attributable to preferred stock)
Discontinued operations
$ 3.04
1.40
$ 2.09
1.39
$ 1.20
2.94
$ 0.75
2.03
$ 0.85
2.82
Net income available to common stockholders
$ 4.44
$ 3.48
$ 4.14
$ 2.78
$ 3.67
Weighted average common shares
outstanding—basic
Earnings per common share—diluted:
Income from continuing operations
(net of dividends attributable to preferred stock)
Discontinued operations
78,680,043
74,125,795
72,952,492
71,564,202
68,559,657
$ 3.00
1.38
$ 2.06
1.36
$ 1.18
2.87
$ 0.75
2.00
$ 0.84
2.76
Net income available to common stockholders
$ 4.38
$ 3.42
$ 4.05
$ 2.75
$ 3.60
Weighted average common shares
outstanding—diluted
79,856,927
75,586,898
74,759,318
73,354,956
70,203,467
Cash dividends declared
$ 3.40
$ 3.12
$ 2.84
$ 2.80
$ 2.80
14 AvalonBay Communities, Inc.
For the year ended
(Dollars in thousands, except per share information)
12-31-07
12-31-06
12-31-05
12-31-04
12-31-03
Other Information:
Net income
Depreciation—continuing operations
Depreciation—discontinued operations
Interest expense, net—continuing operations
Interest expense, net—discontinued operations
$ 358,160
179,549
2,176
97,545
687
$ 266,546
160,442
3,687
109,184
1,862
$ 310,468
156,455
6,842
125,171
1,927
$ 207,779
149,721
14,179
129,106
2,522
$ 262,503
137,311
17,414
128,183
4,394
EBITDA(1)
$ 638,117
$ 541,721
$ 600,863
$ 503,307
$ 549,805
Funds from Operations(2)
Number of Current Communities(3)
Number of apartment homes
$ 368,057
163
45,932
$ 320,199
150
43,141
$ 271,096
143
41,412
$ 235,514
138
40,142
$ 222,473
131
38,504
Balance Sheet Information:
Real estate, before accumulated depreciation
Total assets
Notes payable and unsecured credit facilities
Cash Flow Information:
Net cash fl ows provided by operating activities
Net cash fl ows provided by (used in)
investing activities
Net cash fl ows provided by (used in)
fi nancing activities
Notes to Selected Financial Data
$7,556,740
$6,736,484
$3,208,202
$6,615,593
$5,848,507
$2,866,433
$5,940,146
$5,198,598
$2,334,017
$5,734,122
$5,116,019
$2,451,354
$5,468,735
$4,945,585
$2,337,817
$ 455,825
$ 351,660
$ 306,248
$ 275,617
$ 239,677
$ (809,247)
$ (511,371)
$ (19,761)
$ (251,683)
$ 33,935
$ 366,360
$ 162,280
$ (282,293)
$ (29,471)
$ (279,465)
(1) EBITDA is defi ned as net income before interest income and expense, income taxes, depreciation and amortization from both continuing and discontinued
operations. Under this defi nition, EBITDA includes gains on sale of assets and gain on sale of partnership interests. Management generally considers EBITDA
to be an appropriate supplemental measure to net income of our operating performance because it helps investors to understand our ability to incur and service
debt and to make capital expenditures. EBITDA should not be considered as an alternative to net income (as determined in accordance with generally accepted
accounting principles, or “GAAP”), as an indicator of our operating performance, or to cash fl ows from operating activities (as determined in accordance with
GAAP) as a measure of liquidity. Our calculation of EBITDA may not be comparable to EBITDA as calculated by other companies.
(2) We generally consider Funds from Operations, or “FFO,” as defi ned below, to be an appropriate supplemental measure of our operating and fi nancial
performance because, by excluding gains or losses related to dispositions of previously depreciated property and excluding real estate depreciation, which can
vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates, FFO can help one compare the operating
performance of a real estate company between periods or as compared to different companies. We believe that in order to understand our operating results,
FFO should be examined with net income as presented in the Consolidated Statements of Operations and Other Comprehensive Income included elsewhere
in this report.
(3) Current Communities consist of all communities other than those which are still under construction and have not received a certifi cate of occupancy.
Consistent with the defi nition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts® (“NAREIT”), we calculate
FFO as net income or loss computed in accordance with GAAP, adjusted for:
• gains or losses on sales of previously depreciated operating communities;
• extraordinary gains or losses (as defi ned by GAAP);
• cumulative effect of change in accounting principle;
• depreciation of real estate assets; and
• adjustments for unconsolidated partnerships and joint ventures.
FFO does not represent net income in accordance with GAAP, and therefore it should not be considered an alternative to net income, which remains the
primary measure, as an indication of our performance. In addition, FFO as calculated by other REITs may not be comparable to our calculation of FFO.
FFO also does not represent cash generated from operating activities in accordance with GAAP, and therefore should not be considered an alternative to net
cash fl ows from operating activities, as determined by GAAP, as a measure of liquidity. Additionally, it is not necessarily indicative of cash available to fund cash
needs. A presentation of GAAP based cash fl ow metrics is provided in “Cash Flow Information” in the table above.
The following is a reconciliation of net income to FFO (dollars in thousands, except per share data)
For the year ended
(Dollars in thousands, except per share data)
12-31-07
12-31-06
12-31-05
12-31-04
12-31-03
Net income
Dividends attributable to preferred stock
Depreciation—real estate assets,
including discontinued operations and
joint venture adjustments
Minority interest expense,
including discontinued operations
Gain on sale of unconsolidated entities
holding previously depreciated real estate assets
Cumulative effect of change in accounting principle
Gain on sale of previously depreciated
real estate assets
Funds from Operations
attributable to common stockholders
Weighted average common shares
outstanding—diluted
FFO per common share—diluted
$358,160
(8,700)
$266,546
(8,700)
$310,468
(8,700)
$207,779
(8,700)
$262,503
(10,744)
184,731
165,982
163,252
159,221
129,207
280
391
1,363
3,048
1,263
(59,927)
—
(6,609)
—
—
—
—
(4,547)
—
—
(106,487)
(97,411)
(195,287)
(121,287)
(159,756)
$368,057
$320,199
$271,096
$235,514
$222,473
79,856,927
$ 4.61
75,586,898
$ 4.24
74,759,318
$ 3.63
73,354,956
$ 3.21
70,203,467
$ 3.17
AvalonBay Communities, Inc. 15
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help provide an
understanding of our business and results of operations. This MD&A should be read in conjunction with our Consolidated Financial
Statements and the accompanying Notes to Consolidated Financial Statements included elsewhere in this report. This report, including the
following MD&A, contains forward-looking statements regarding future events or trends as described more fully under “Forward-Looking
Statements” included in this report. Actual results or developments could differ materially from those projected in such statements.
Executive Overview
Business Description We are primarily engaged in developing, acquiring, owning and operating apartment communities in high barrier-
to-entry markets of the United States. We believe that apartment communities are an attractive long-term investment opportunity compared
to other real estate investments because a broad potential resident base should help reduce demand volatility over a real estate cycle. However,
throughout the real estate cycle, apartment market fundamentals, and therefore operating cash fl ows, are affected by overall economic
conditions. We seek to create long-term shareholder value by accessing capital on cost effective terms; deploying that capital to develop,
redevelop and acquire apartment communities in high barrier-to-entry markets; operating apartment communities; and selling communities
when they no longer meet our long-term investment strategy or when pricing is attractive. Barriers-to-entry in our markets generally include
a diffi cult and lengthy entitlement process with local jurisdictions and dense urban or suburban areas where zoned and entitled land is in
limited supply.
We regularly evaluate the allocation of our investments by the amount of invested capital and by product type within our individual markets,
which are located in the Northeast, Mid-Atlantic, Midwest, Pacifi c Northwest, and Northern and Southern California regions of the United
States. Our strategy is to more deeply penetrate these markets with a broad range of products and services and an intense focus on our
customer. Our communities are predominately upscale, which generally command among the highest rents in their markets. However, we
also pursue the ownership and operation of apartment communities that target a variety of customer segments and price points, consistent
with our goal of offering a broad range of products and services.
Financial Highlights and Outlook Net income available to common stockholders for the quarter ended December 31, 2007 was
$129,644,000, as compared to $44,138,000 for the quarter ended December 31, 2006, an increase of 193.7%. For the year ended December
31, 2007, net income available to common stockholders was $349,460,000 compared to $257,846,000 for 2006, an increase of 35.5%. These
increases are primarily attributable to an increase in gains from the sale of communities and joint venture real estate investments in 2007 as
compared to 2006 and growth in income from existing and newly developed communities in 2007.
Apartment fundamentals remained positive in 2007 as evidenced by full year-over-year rental revenue growth of 5.5% achieved within our
Established Community portfolio (as defi ned later in this report), comprised of an increase in rental rates of 5.8% and a decrease in occupancy
of 0.3%. This revenue growth combined with constrained expense growth contributed to our Established Community portfolio achieving
year-over-year growth in net operating income (“NOI”) of 7.2% in 2007. For the fourth quarter of 2007, our Established Communities
experienced an increase in rental revenue of 4.4% and a corresponding increase in NOI of 4.9% over the prior year period, evidencing the
moderating, but continued growth in operations.
Projected growth in earnings per share – diluted (“EPS”) in our current fi nancial outlook is expected to be between 48.4% and 94.1% driven
primarily by gains on the sale of communities that may occur under our expanded disposition program. In addition, we expect that our
Established Communities will continue to show revenue and net operating income growth in 2008, but at a lesser rate relative to growth levels
in 2007. Despite third party forecasts of a weaker economic environment, we anticipate positive renter demand resulting from a continued
reduction in homeownership rates and a general increase in the propensity to rent. Declining home ownership rates are the result of a number
of factors, including concerns regarding home prices and economic growth, demographic growth in those age groups that have historically
demonstrated a higher propensity to rent as well as tighter underwriting standards for mortgages. Management expects the level of new rental
completions in the Company’s markets will decline modestly during 2008 from 2007 levels and competition from unsold housing inventory
made available for rent will remain modest relative to more oversupplied residential markets in the U.S. Overall we expect apartment market
fundamentals will be balanced in our markets, supporting moderate growth in earnings. Our current fi nancial outlook provides for 2008
rental growth of 2.5% to 4.0% in our established community portfolio and projected NOI growth of 3.0% to 4.5%
We expect that our development activity will continue to create long-term value. We currently have approximately $2,162,500,000 under
construction (measured by total projected capitalized cost of the communities at completion, including the portions in which joint venture
partners hold an equity or economic interest). For 2008, we expect new development starts in the range of $900,000,000 to $1,100,000,000
measured at projected cost of completion, including projects that may be developed through joint ventures. This is a decrease in new
16 AvalonBay Communities, Inc.
activity from 2007 refl ecting the current economic and capital market conditions. We continue to be selective in pursuing new development
opportunities. Land prices generally have not re-set in most of our markets, but we are seeing construction cost increases stabilizing.
Construction costs for certain materials have begun to decline while prices for other materials remain high given strong global demand. There
is also greater availability of experienced subcontractors and trade professionals as a result of slowing construction in both the condominium
and single-family housing markets. We continue to selectively secure new Development Rights, including the acquisition of land for future
development. We currently have Development Rights for construction of new apartment communities that would, if developed as expected,
total approximately $3,918,000,000 based on total projected capitalized costs at December 31, 2007. We also expect to increase our
redevelopment activities in 2008, for both wholly owned and Fund (as defi ned below) related assets. While current market conditions with
respect to liquidity may impact the types of funding sources used, we believe that our current level of indebtedness, our current ability to
service interest and other fi xed charges and our current limited use of fi nancial encumbrances (such as secured fi nancing) on our assets provide
us with the fi nancial position and fi nancial fl exibility to access the capital necessary to fund our development and redevelopment activities.
We expect to meet these needs from both secured and unsecured debt, as well as asset sales and retained cash.
AvalonBay Value Added Fund, L.P. (the “Fund”) is a discretionary investment fund in which we hold a 15% interest. The Fund has been our
principal vehicle for acquiring apartment communities subject to certain exceptions, since its formation in March 2005. The Fund acquired
seven communities for an aggregate purchase price of $305,450,000 during 2007. As of January 31, 2008, the total amount invested by the
Fund is $779,318,000. Management of the Fund expects to invest approximately $39,000,000 of additional funds to redevelop the assets
acquired, at which time, the Fund will become fully invested. We are exploring various potential sources and vehicles for funding future
acquisitions after the Fund is fully invested.
We continue to see real estate capital fl ows from income investors. In 2007, we completed the disposition of four communities and one
partnership interest for an aggregate gross sales price of $268,096,000. Given the current levels of demand from investors for high quality
multifamily real estate assets, we anticipate increasing our level of disposition activity to a range of $700,000,000 to $1,000,000,000 in 2008.
Actual disposition activity will depend on various factors including market and economic conditions.
Communities Overview Our real estate investments consist primarily of current operating apartment communities, communities in
various stages of development (“Development Communities”) and Development Rights (i.e., land or options to purchase land held for
development). Our current operating communities are further distinguished as Established Communities, Other Stabilized Communities,
Lease-Up Communities and Redevelopment Communities. Established Communities are generally operating communities that are
consolidated for fi nancial reporting purposes and were owned and had stabilized occupancy and operating expenses as of the beginning of
the prior year, which allows the performance of these communities and the markets in which they are located to be compared and monitored
between years. Other Stabilized Communities are generally all other consolidated operating communities that have stabilized occupancy and
operating expenses during the current year, but had not achieved stabilization as of the beginning of the prior year. Lease-Up Communities
consist of communities where construction is complete but stabilization has not been achieved. Redevelopment Communities consist of
communities where substantial redevelopment is in progress or is planned to begin during the current year. A more detailed description
of our reportable segments and other related operating information can be found in Note 9, “Segment Reporting,” of our Consolidated
Financial Statements.
Although each of these categories is important to our business, we generally evaluate overall operating, industry and market trends based
on the operating results of Established Communities, for which a detailed discussion can be found in “Results of Operations” as part of our
discussion of overall operating results. We evaluate our current and future cash needs and future operating potential based on acquisition,
disposition, development, redevelopment and fi nancing activities within Other Stabilized, Redevelopment and Development Communities,
and discussions related to these segments of our business can be found in “Liquidity and Capital Resources.”
The net operating income of our current operating communities, as defi ned later in this report, is one of the fi nancial measures that we use to
evaluate community performance. Net operating income is affected by the demand and supply dynamics within our markets, our rental rates
and occupancy levels, and our ability to control operating costs. Our overall fi nancial performance is also impacted by the general availability
and cost of capital and the performance of newly developed and acquired apartment communities.
As of December 31, 2007, we owned or held a direct or indirect ownership interest in 184 apartment communities containing 52,748
apartment homes in ten states and the District of Columbia, of which 21 communities were under construction and eight communities were
under reconstruction. Of these communities, 23 were owned by entities that were not consolidated for fi nancial reporting purposes, including
20 owned by the Fund. In addition, we owned a direct or indirect ownership interest in Development Rights to develop an additional 48
communities that, if developed in the manner expected, will contain an estimated 13,656 apartment homes.
AvalonBay Communities, Inc. 17
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Results of Operations
Our year-over-year operating performance is primarily affected by individual geographic market conditions and apartment fundamentals
as measured by changes in net operating income of our Established Communities; net operating income derived from acquisitions and
development completions; the loss of net operating income related to disposed communities; and capital market, disposition and fi nancing
activity. A comparison of our operating results for the years 2007, 2006 and 2005 follows:
Change
Change
(Dollars in thousands)
2007
2006
$
%
2006
2005
$
%
Revenue:
Rental and other income
Management, development
and other fees
$806,599 $715,170
$91,429
12.8%
$715,170 $650,907 $ 64,263
9.9%
6,142
6,259
(117)
(1.9%)
6,259
4,304
1,955
45.4%
Total revenue
812,741
721,429
91,312
12.7%
721,429
655,211
66,218
10.1%
Expenses:
Direct property operating expenses,
excluding property taxes
Property taxes
192,338
74,912
175,927
66,786
16,411
8,126
9.3%
12.2%
175,927
66,786
161,913
63,975
14,014
2,811
Total community operating expenses
267,250
242,713
24,537
10.1%
242,713
225,888
16,825
8.7%
4.4%
7.4%
Corporate-level property management
and other indirect operating expenses
Investments and investment
management
Interest expense, net
Depreciation expense
General and administrative expense
38,627
34,177
4,450
13.0%
34,177
31,243
2,934
9.4%
11,737
97,545
179,549
28,494
7,030
109,184
160,442
24,767
4,707
(11,639)
19,107
3,727
67.0%
(10.7%)
11.9%
15.0%
7,030
109,184
160,442
24,767
4,834
125,171
156,455
25,761
2,196
(15,987)
3,987
(994)
45.4%
(12.8%)
2.5%
(3.9%)
Total other expenses
355,952
335,600
20,352
6.1%
335,600
343,464
(7,864)
(2.3%)
Equity in income of
unconsolidated entities
Minority interest in
consolidated partnerships
Gain on sale of land
Income from continuing operations
Discontinued operations:
Income from discontinued operations
Gain on sale of communities
59,169
7,455
51,714
693.7%
7,455
7,198
257
3.6%
(1,585)
545
(573)
13,519
(1,012) 176.6%
(96.0%)
(12,974)
(573)
13,519
(1,481)
4,479
908
(61.3%)
9,040 201.8%
247,668
163,517
84,151
51.5%
163,517
96,055
67,462
70.2%
4,005
106,487
5,618
97,411
(1,613)
9,076
(28.7%)
9.3%
5,618
97,411
19,126
195,287
(13,508)
(97,876)
(70.6%)
(50.1%)
Total discontinued operations
110,492
103,029
7,463
7.2%
103,029
214,413
(111,384)
(51.9%)
Net income
Dividends attributable to
preferred stock
Net income available to
common stockholders
358,160
266,546
91,614
34.4%
266,546
310,468
(43,922)
(14.1%)
(8,700)
(8,700)
—
—
(8,700)
(8,700)
—
—
$349,460 $257,846
$91,614
35.5%
$257,846 $301,768 $(43,922)
(14.6%)
Net income available to common stockholders increased $91,614,000 or 35.5%, to $349,460,000 in 2007 due primarily to sales of
consolidated operating communities and investments in unconsolidated entities and related gains occurring in 2007 combined with growth
in net operating income from Established Communities and contributions to net operating income from newly developed communities in
2007. Net income available to common stockholders decreased $43,922,000, or 14.6%, to $257,846,000 in 2006, primarily attributable to
reduced asset sales and the related gains, partially offset by growth in net operating income from Established Communities and contributions
to net operating income from newly developed communities.
Net operating income (“NOI”) is considered by management to be an important and appropriate supplemental performance measure to
net income because it helps both investors and management to understand the core operations of a community or communities prior to the
allocation of any corporate-level or fi nancing-related costs. NOI refl ects the operating performance of a community and allows for an easy
comparison of the operating performance of individual assets or groups of assets. In addition, because prospective buyers of real estate have
different fi nancing and overhead structures, with varying marginal impacts to overhead by acquiring real estate, NOI is considered by many
in the real estate industry to be a useful measure for determining the value of a real estate asset or group of assets. We defi ne NOI as total
property revenue less direct property operating expenses, including property taxes.
18 AvalonBay Communities, Inc.
NOI does not represent cash generated from operating activities in accordance with U.S. generally accepted accounting principles (“GAAP”).
Therefore, NOI should not be considered an alternative to net income as an indication of our performance. NOI should also not be
considered an alternative to net cash fl ow from operating activities, as determined by GAAP, as a measure of liquidity, nor is NOI necessarily
indicative of cash available to fund cash needs. A calculation of NOI for the years ended December 31, 2007, 2006 and 2005, along with
reconciliation to net income for each year, is as follows:
(Dollars in thousands)
12-31-07
12-31-06
12-31-05
For the year ended
Net income
Indirect operating expenses, net of corporate income
Investments and investment management
Interest expense, net
General and administrative expense
Equity in income of unconsolidated entities
Minority interest in consolidated partnerships
Depreciation expense
Gain on sale of real estate assets
Income from discontinued operations
$358,160
31,285
11,737
97,545
28,494
(59,169)
1,585
179,549
(107,032)
(4,005)
$266,546
28,811
7,030
109,184
24,767
(7,455)
573
160,442
(110,930)
(5,618)
$310,468
26,675
4,834
125,171
25,761
(7,198)
1,481
156,455
(199,766)
(19,126)
Net operating income
$538,149
$473,350
$424,755
The NOI increases in both 2007 and 2006, as compared to the prior year period, consist of changes in the following categories:
(Dollars in thousands)
Established Communities
Other Stabilized Communities
Development and Redevelopment Communities
Total
2007
Increase
$29,866
10,185
24,748
$64,799
2006
Increase
$32,083
5,379
11,133
$48,595
The NOI increases in Established Communities in 2007 were largely due to continued favorable apartment market fundamentals. During
2007, we continued to focus on rental rate growth, while maintaining occupancy of at least 95% in all regions. We anticipate that increases in
rental rates and overall rental revenue growth will moderate in 2008 as compared to 2007, as we expect a slower rate of job growth (demand)
and a decline in new rental completions in our markets (supply). We expect revenue growth from our Established Communities of 2.5%
to 4.0% in 2008 as compared to 2007. In addition, we continue to monitor and manage operating expenses to constrain expense growth.
We expect operating expenses at our Established Communities to increase by 2.0% to 3.0% in 2008 as compared to 2007 from increasing
property tax, labor and utility expenses. Overall, we anticipate growth in NOI from our Established Communities of 3.0% to 4.5% in 2008
as compared to 2007.
The Company has given projected NOI growth in 2008 only for Established Communities and not on a company-wide basis. The Company
believes that NOI growth of the Established Communities assists investors in understanding management’s estimate of the likely contribution
to operations from Established Communities. However, the Company has not provided a projection of NOI growth on a company-wide
basis due to the diffi culty in projecting the timing of new development starts, dispositions and acquisitions, as well as the complexities
involved in projecting the allocation of corporate-level property management overhead, general and administrative costs and interest expense
to communities not yet developed, disposed or acquired. NOI growth expected from Established Communities is not a projection of the
Company’s projected consolidated fi nancial performance or projected cash fl ow.
Rental and other income increased in 2007 as compared to the prior year due to increased rental rates for our Established Communities,
coupled with additional rental income generated from newly developed communities.
Overall Portfolio — The weighted average number of occupied apartment homes increased to 38,436 apartment homes for 2007 as compared
to 37,716 apartment homes for 2006 and 36,520 apartment homes for 2005. This change is primarily the result of increased homes available
from newly developed and acquired communities, partially offset by communities sold in 2007 and 2006. The weighted average monthly
revenue per occupied apartment home increased to $1,767 in 2007 as compared to $1,610 in 2006 and $1,516 in 2005.
Established Communities — Rental revenue increased $34,257,000, or 5.5%, for 2007 and increased $35,871,000, or 6.8% in 2006. These
increases are due to increased average rental rates, partially offset by decreased economic occupancy. For 2007, the weighted average monthly
revenue per occupied apartment home increased 5.8% to $1,795 compared to $1,697 in 2006, primarily due to increased market rents and
the decrease in the amortization of concessions. The higher amortization recognized in 2006 was due to the higher levels of concessions
granted in periods prior to 2006. The average economic occupancy decreased 0.3% to 96.3% in 2007. Economic occupancy takes into
AvalonBay Communities, Inc. 19
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 defi ned as gross potential revenue less vacancy loss, as a percentage of gross potential revenue. Gross
potential revenue is determined by valuing occupied homes at leased rates and vacant homes at market rents.
We experienced increases in Established Communities’ rental revenue in all six of our regions in 2007 as compared to 2006. The largest
increases in rental revenue were in the Pacifi c Northwest, Northern California and the Mid-Atlantic, with increases of 11.1%, 8.6% and 5.9%,
respectively, between years. The Northeast and Northern California regions comprise the majority of our Established Community revenue,
and therefore are discussed in more detail below.
Northern California, which represented approximately 24.6% of Established Community rental revenue during 2007, experienced
an increase in rental revenue of 8.6% in 2007 as compared to 2006. Average rental rates increased by 8.3% to $1,699, and economic
occupancy increased 0.3% to 97.0% in 2007. Apartment fundamentals remain strong in Northern California. We expect Northern
California to see continued but moderating revenue growth during 2008 at growth levels in excess of those expected in other markets.
The Northeast region, which accounted for approximately 42.3% of Established Community rental revenue during 2007, experienced
an increase in rental revenue of 3.2% in 2007 as compared to 2006. Average rental rates increased 3.5% to $2,129, and economic
occupancy decreased 0.3% to 96.2% in 2007. We expect overall apartment fundamentals in the Northeast region will be balanced
during 2008, with slower job growth and except in the Boston area, minimal net new rental supply. Supply-demand fundamentals for
New York City and surrounding areas should remain healthy, although changes in employment levels in the fi nancial services industry
could cause economic growth to decelerate. Boston will continue to lag the region in revenue growth, as we expect the net new supply
from apartment deliveries will outpace improvement in the region’s economy. These factors support our expectation for moderate rental
rate growth in 2008.
In accordance with GAAP, cash concessions are amortized as an offset to rental revenue over the approximate lease term, which is generally one
year. As a supplemental measure, we also present rental revenue with concessions stated on a cash basis to help investors evaluate the impact of
both current and historical concessions on GAAP based rental revenue and to more readily enable comparisons to revenue as reported by other
companies. Rental revenue with concessions stated on a cash basis also allows investors to understand historical trends in cash concessions, as
well as current rental market conditions.
The following table reconciles total rental revenue in conformity with GAAP to total rental revenue adjusted to state concessions on a cash
basis for our Established Communities for the years ended December 31, 2007 and 2006 (dollars in thousands). Information for the year
ended December 31, 2005 is not presented, as Established Community classifi cation is not comparable prior to January 1, 2006. See Note 9,
“Segment Reporting,” of our Consolidated Financial Statements.
(Dollars in thousands)
Rental revenue (GAAP basis)
Concessions amortized
Concessions granted
Rental revenue adjusted to state concessions on a cash basis
Year-over-year % change—GAAP revenue
Year-over-year % change—cash concession based revenue
For the year ended
12-31-07
12-31-06
$652,129
6,119
(6,234)
$617,872
12,336
(6,236)
$652,014
$623,972
5.5%
4.5%
n/a
n/a
Management, development and other fees decreased $117,000, or 1.9% in 2007 and increased $1,955,000 or 45.4% in 2006. The
decrease in 2007 was due to lower development and redevelopment management fees, coupled with the loss of fees due to the disposition of
our interest in a joint venture, partially offset by increased property management fees from the Fund, as additional communities are acquired.
The increase in 2006 over 2005 was due to a full year of management fees from the Fund, which was formed in March 2005.
Direct property operating expenses, excluding property taxes increased $16,411,000 or 9.3% and $14,014,000 or 8.7% in 2007 and
2006, respectively, primarily due to the addition of recently developed and acquired apartment homes coupled with expense growth in our
Established Communities.
For Established Communities, direct property operating expenses, excluding property taxes, increased $1,661,000, or 1.1%, and $3,030,000,
or 2.4%, to $148,628,000 and $131,106,000 in 2007 and 2006, respectively, due primarily to increases in other maintenance, marketing and
landscaping expenses offset by lower utility and redecorating costs.
Property taxes increased $8,126,000 or 12.2% and $2,811,000 or 4.4% in 2007 and 2006, respectively, due to overall higher assessments
and the addition of newly developed and redeveloped apartment homes. Property taxes are impacted by the size and timing of successful tax
appeals in both years.
20 AvalonBay Communities, Inc.
For Established Communities, property taxes increased by $2,618,000, or 4.5%, and $721,000, or 1.4% in 2007 and 2006, respectively, due
to higher assessments throughout all regions. Year over year changes are impacted by the size and timing of successful tax appeals. Overall,
we expect property taxes in 2008 to increase from 2007 levels due to increased valuations and the addition of newly developed communities.
Despite the potential decreases in real estate property values for tax purposes, there is generally a lag to the ultimate recognition of any savings
in the real estate tax assessments. In addition, property tax increases are limited by law (Proposition 13) for communities in California. We
evaluate property tax increases internally, as well as engage third-party consultants, and appeal increases when appropriate.
Corporate-level property management and other indirect operating expenses increased by $4,450,000, or 13.0% and $2,934,000, or
9.4%, in 2007 and 2006, respectively, over the prior year periods due primarily to increased costs relating to corporate initiatives focused
on increasing effi ciency and enhancing controls at our operating communities, coupled with increased compensation and relocation costs.
The 2007 expense includes the set up costs related to the offi ce in Virginia Beach, Virginia that we opened in 2007. This offi ce will be
used to centralize certain community-related accounting, administrative and customer service functions. The transition began during the
third quarter of 2007, when certain community-related accounting functions were relocated to our Virginia Beach offi ce and is expected
to continue through the end of 2008. Expenses in this category increased in 2006, primarily due to the addition of recently developed and
acquired apartment homes coupled with expense growth in our Established Communities.
Investments and investment management refl ects the costs incurred for investment acquisitions, investment management and abandoned
pursuit costs, which include costs incurred for development pursuits not yet considered probable for development, as well as the abandonment
or impairment of development pursuits, acquisition pursuits and disposition pursuits. Investments and investment management costs
increased in 2007 as compared to 2006 due primarily to increased abandoned pursuit costs. Abandoned pursuit costs were $6,974,000 in
2007, $2,115,000 in 2006 and $816,000 in 2005. Abandoned pursuit costs can be volatile, and the costs incurred in any given period may
vary signifi cantly in future periods.
Interest expense, net decreased $11,639,000 or 10.7% in 2007 and $15,987,000 or 12.8% in 2006 due primarily to higher levels of
capitalized interest in connection with our increased development activity and increased interest income, partially offset by an increase in the
average outstanding balance on our unsecured credit facility. Interest income increased in 2007 due to higher invested cash balances from our
January 2007 equity offering as well as increases in the interest rate earned on cash deposits, offset partially by interest income in 2006 from
an escrow funded from a disposition in 2005 that was used in a tax-deferred exchange.
Depreciation expense increased $19,107,000 or 11.9% in 2007 and $3,987,000 or 2.5% in 2006 primarily due to the completion of
development and redevelopment activities, primarily offset by the loss of depreciation from assets sold.
General and administrative expense (“G&A”) increased $3,727,000 or 15.0% in 2007 primarily due to increased compensation
costs. G&A expenses decreased $994,000 or 3.9% in 2006 primarily due to the incurrence in 2005 of the following: (i) separation costs
of approximately $2,100,000 due to the departure of a senior executive; (ii) the accrual of costs related to various litigation matters of
approximately $1,500,000; and (iii) increased board of director fees due to the acceleration of equity awards with the resignation of a director
due to disability in 2005, partially offset by higher compensation costs in 2006.
Gain on sale of land in 2007 decreased from 2006 due to the volume and size of land parcels sold in each year. The increase in 2006 from
2005 is due to larger gains on sales in 2006.
Equity in income of unconsolidated entities in 2007 increased from 2006 due primarily to the recognition in 2007 of approximately
$60,000,000 in gains from the disposition of two investments, partially offset by losses (after depreciation) associated with two unconsolidated
investments and the consolidation in 2007 of a community that was not consolidated as of December 31, 2006.
Minority interest in consolidated partnerships increased in 2007 as compared to 2006 due to the recognition of the sale of a 70% joint
venture partner interest in one of our consolidated communities (See Note 6, “Investment in Real Estate Entities”). This increase was partially
offset by the conversion and redemption of limited partnership units, thereby reducing outside ownership interests and the allocation of net
income to outside ownership interests. The year over year decrease in 2006 was due to the conversion of limited partnership units, reducing
the outside ownership interests.
Income from discontinued operations represents the net income generated by communities sold or qualifying as discontinued operations
during the period from January 1, 2006 through December 31, 2007. It decreased in 2007 and 2006 due to fewer communities sold or
classifi ed as discontinued operations. See Note 7, “Real Estate Disposition Activities,” of our Consolidated Financial Statements.
Gain on sale of communities increased in 2007 due to the higher volume of dispositions in 2007. The decrease in 2006 as compared to
2005 is due to the volume and size of dispositions in the respective years relative to our basis in the assets. The amount of gain realized in any
given reporting period depends on many factors, including the number of communities sold, the size and carrying value of those communities
and the sales prices, which are driven by local and national market conditions.
AvalonBay Communities, Inc. 21
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Funds from Operations Attributable to Common Stockholders (“FFO”)
FFO is considered by management to be an appropriate supplemental measure of our operating and fi nancial performance. In calculating
FFO, we exclude gains or losses related to dispositions of previously depreciated property and exclude real estate depreciation, which can
vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates. FFO can help one
compare the operating performance of a real estate company between periods or as compared to different companies. We believe that in
order to understand our operating results, FFO should be examined with net income as presented in our Consolidated Financial Statements
included elsewhere this report. For a more detailed discussion and presentation of FFO, see “Selected Financial Data,” included elsewhere in
this report.
Liquidity and Capital Resources
Factors affecting our liquidity and capital resources are our cash fl ows from operations, fi nancing activities and investing activities, as well
as general economic and market conditions. Operating cash fl ow has historically been determined by: (i) the number of apartment homes
currently owned, (ii) rental rates, (iii) occupancy levels and (iv) operating expenses with respect to apartment homes. The timing, source
and amount of cash fl ows provided by fi nancing activities and used in investing activities are sensitive to the capital markets environment,
particularly to changes in interest rates. The timing and type of capital markets activity in which we engage, as well as our plans for development,
redevelopment, acquisition and disposition activity, are affected by changes in the capital markets environment, such as changes in interest
rates or the availability of cost-effective capital.
We regularly review our liquidity needs, the adequacy of cash fl ows from operations, 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;
• preferred stock dividends and DownREIT partnership unit distributions;
• the minimum dividend payments on our common stock required to maintain our REIT qualifi cation under the Internal Revenue
Code of 1986;
• development and redevelopment activity in which we are currently engaged; and
• capital calls for the Fund, as required.
Increased capital market volatility in 2007 and constrained liquidity suggest that our liquidity needs may be met in 2008 from sources that
differ from historical sources. Increased use of secured debt and increased asset sales relative to our recent activity are expected for 2008.
Although general market liquidity is constrained, we anticipate that we can satisfy these needs from a combination of cash fl ow provided by
operating activities, proceeds from asset dispositions and borrowing capacity under our variable rate unsecured credit facility, as well as secured
fi nancings and other public or private sources of liquidity.
Cash and cash equivalents totaled $21,222,000 at December 31, 2007, an increase of $12,938,000 from $8,284,000 at December 31, 2006.
The following discussion relates to changes in cash due to operating, investing and fi nancing activities, which are presented in our Consolidated
Statements of Cash Flows included elsewhere in this report.
Operating Activities — Net cash provided by operating activities increased to $455,825,000 in 2007 from $351,660,000 in 2006. The
increase was driven primarily by the additional NOI from our Established Communities’ operations, as well as NOI from recently developed
communities.
Investing Activities — Net cash used in investing activities of $809,247,000 in 2007 related to investments in assets through the development
and redevelopment of apartment communities, the acquisition of a community, and the acquisition of 17 land parcels, partially offset by
proceeds from the disposition of a land parcel, four communities and a partnership interest in an unconsolidated real estate investment.
During 2007, we invested $1,141,706,000 in the purchase and development of the following real estate and capital expenditures:
• We completed the development of eight communities containing a total of 1,749 apartment homes for a total capitalized cost,
including land acquisition cost, of $440,700,000.
• We acquired 17 parcels of land in connection with Development Rights, for an aggregate purchase price of $311,691,000.
• We had capital expenditures relating to current communities’ real estate assets of $13,851,000 and non-real estate capital expenditures
of $1,424,000.
• We commenced the development of 12 communities which are expected to contain a total of 3,412 apartment homes for an expected
aggregate total capital cost of $1,279,800,000.
22 AvalonBay Communities, Inc.
Financing Activities — Net cash provided by fi nancing activities totaled $366,360,000 in 2007. The net cash infl ow is due primarily to the
proceeds from the issuance of 4,600,000 shares of the Company’s common stock at $129.30 per share, borrowings of $514,500,000 under
our unsecured credit facility and the issuance of two mortgage notes for approximately $59,126,000, offset by the repurchase of 2,480,616
shares of our common stock at an average price of $103.95 per share, the repayment of mortgage notes of approximately $27,256,000, the
repayment of unsecured notes at maturity of approximately $260,000,000 and dividend payments of $268,966,000.
Variable Rate Unsecured Credit Facility
In November 2007 we increased our borrowing capacity under our existing revolving variable
rate unsecured credit facility from $650,000,000 to $1,000,000,000. The facility is with a syndicate of commercial banks, to whom we pay,
in the aggregate, an annual facility fee of approximately $1,250,000. The unsecured credit facility bears interest at varying levels based on
the London Interbank Offered Rate (“LIBOR”), our credit rating and on a maturity schedule selected by us. The current stated pricing is
LIBOR plus 0.40% per annum (3.54% on January 31, 2008). The spread over LIBOR can vary from LIBOR plus 0.325% to LIBOR plus
1.00% based on our credit rating. In addition, a competitive bid option is available for borrowings of up to $422,500,000. 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. We had no outstanding balance under this
competitive bid option at January 31, 2008. We are subject to and currently in compliance with certain customary covenants under the
unsecured credit facility, including, but not limited to, maintaining certain maximum leverage ratios, a minimum fi xed charges coverage ratio
and minimum unencumbered assets and equity levels. The credit facility matures in November 2011, assuming our exercise of a one-year
renewal option. At January 31, 2008, $733,500,000 was outstanding on the credit facility, $57,000,000 was used to provide letters of credit
and $209,361,000 was available for borrowing under the unsecured credit facility.
Future Financing and Capital Needs — Debt Maturities One of our principal long-term liquidity needs is the repayment of long-term
debt at the time that such debt matures. For unsecured notes, we anticipate that no signifi cant portion of the principal of these notes will be
repaid prior to maturity. If we do not have funds on hand suffi cient to repay our indebtedness as it becomes due, it will be necessary for us
to refi nance the debt. This refi nancing may be accomplished by uncollateralized private or public debt offerings, additional debt fi nancing
that is collateralized by mortgages on individual communities or groups of communities, draws on our unsecured credit facility or by equity
offerings. Although we believe we will have the capacity to meet our long-term liquidity needs, we cannot assure you that additional debt
fi nancing or debt or equity offerings will be available or, if available, that they will be on terms we consider satisfactory.
The following fi nancing activity occurred during the year ended December 31, 2007:
• we issued $16,926,000 of variable rate mortgage debt for an operating community in June, maturing in May 2012;
• we repaid $15,980,000 of mortgage debt, secured by the assets of an operating community in July;
• we assumed $3,941,000 of fi xed rate mortgage debt in conjunction with the acquisition of an operating community in July 2007 and
subsequently defeased the note in December 2007;
• we issued $100,000,000 of variable rate, tax-exempt debt for a development community in June, maturing in November 2040;
• we repaid $150,000,000 in previously issued unsecured notes in August 2007, along with any unpaid interest, pursuant to their
scheduled maturity;
• we issued $42,200,000 of fi xed rate, tax-exempt mortgage debt for an operating community in September 2007, maturing in June
2047;
• we were relieved of our obligations associated with $8,116,000 in mortgage debt in conjunction with the disposition of the associated
operating community in September 2007;
• we repaid $110,000,000 in previously issued unsecured notes in December 2007, along with any unpaid interest, pursuant to their
scheduled maturity;
• we borrowed $514,500,000 under our unsecured credit facility;
• we increased our borrowing capacity under our unsecured credit facility by $350,000,000, to $1,000,000,000;
• we issued 4,600,000 shares of common stock at $129.30 per share for net proceeds of approximately $594,000,000 in conjunction
with the inclusion of our common stock in the S&P 500 index in January 2007; and
• we repurchased 2,480,616 shares of our common stock at an average price of $103.95 per share, for a total approximate purchase
price of $257,854,000.
In February 2008, the Board of Directors authorized a further increase of $200,000,000 in the common stock repurchase program, increasing
the total amount the Company can acquire to $500,000,000, of which approximately $300,000,000 has been used to repurchase our
common stock as of January 31, 2008. The decision to use the additional share repurchase authorization will depend on current capital market
conditions and liquidity, our share price relative to the net asset value per share and other uses of capital, including development.
AvalonBay Communities, Inc. 23
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The table below details debt maturities for the next fi ve years, excluding our unsecured credit facility, and amounts outstanding related to
communities classifi ed as held for sale, for debt outstanding at December 31, 2007 (dollars in thousands, except footnotes).
Community
Tax-exempt bonds
Fixed rate
CountryBrook
Avalon at Symphony Glen
Avalon at Lexington
Avalon at Nob Hill
Avalon Campbell
Avalon Pacifi ca
Avalon Knoll
Avalon Landing
Avalon Fields
Avalon Oaks
Avalon Oaks West
Avalon at Chestnut Hill
Variable rate(3)
The Promenade
Waterford
Avalon at Mountain View
Avalon at Foxchase I
Avalon at Foxchase II
Avalon at Mission Viejo
Avalon at Nob Hill
Avalon Campbell
Avalon Pacifi ca
Avalon at Fairway Hills I
Bowery Place I
Bowery Place II
Avalon Acton
Morningside Park
Conventional loans(6)
Fixed rate
$150 million unsecured notes
$110 million unsecured notes
$50 million unsecured notes
$150 million unsecured notes
$150 million unsecured notes
$200 million unsecured notes
$300 million unsecured notes
$50 million unsecured notes
$250 million unsecured notes
$250 million unsecured notes
$100 million unsecured notes
$150 million unsecured notes
$250 million unsecured notes
Wheaton Development Right
4600 Eisenhower Avenue
Twinbrook Development Right
Tysons West Development Right
Avalon Orchards
Variable rate(3)
Avalon Ledges
Avalon at Flanders Hill
Avalon at Newton Highlands
Avalon at Crane Brook
Avalon at Bedford Center
Total indebtedness—excluding
unsecured credit facility
All-In
interest
rate(1)
Principal
maturity
date
Balance outstanding
12-31-07
12-31-06
2008
2009
Scheduled maturities
2011
2010
2012 Thereafter
6.30% Mar-2012
Jul-2024
4.90%
Feb-2025
6.55%
Jun-2025
5.80%
Jun-2025
6.48%
Jun-2025
6.48%
Jun-2026
6.95%
6.85%
Jun-2026
7.55% May-2027
Jul-2041
7.45%
Apr-2043
7.48%
Oct-2047
5.82%
4.88%
3.50%
3.50%
3.50%
3.50%
3.98%
3.46%
3.46%
3.46%
4.33%
3.31%
3.34%
4.14%
6.63%
Oct-2010
Jul-2014
Feb-2017
Nov-2017
Nov-2017
Jun-2025
Jun-2025
Jun-2025
Jun-2025
Jun-2026
Nov-2037
Nov-2039
Jul-2040
Nov-2040
Aug-2007
5.18%
Dec-2007
7.13%
Jan-2008
6.63%
Jul-2008
8.38%
Aug-2009
7.63%
Dec-2010
7.66%
Sep-2011
6.79%
Sep-2011
6.31%
Jan-2012
5.73%
6.26%
Nov-2012
5.11% Mar-2013
Apr-2014
5.52%
Sep-2016
5.89%
Oct-2008
6.99%
Apr-2009
8.08%
Oct-2011
7.25%
Jul-2028
5.55%
Jul-2033
7.65%
5.68% May-2009
5.68% May-2009
5.62%
Dec-2009
5.59% Mar-2011
5.62% May-2012
$ 15,990 $ 15,356
9,780
12,078
9,780
12,467
18,116
32,776
14,867
11,957
5,903
10,483
17,205
17,036
—
$ 676
—
413
—
—
—
324
162
256
137
125
314
$ 719
—
439
—
—
—
347
173
275
147
133
331
$ 766 $ 816 $ 12,379 $ —
9,780
9,739
—
31,877
14,460
9,788
4,821
8,743
16,288
16,205
40,399
—
526
—
—
—
426
212
339
180
162
388
—
466
—
—
—
371
185
295
157
142
349
—
495
—
—
—
398
198
316
168
152
368
—(2)
31,877(2)
14,460(2)
11,654
5,751
10,224
17,077
16,919
42,149
166,580
187,325
2,407
2,564
2,731
2,911
14,612
162,100
31,495
33,100
18,300
16,800
9,600
7,635
2,684
6,024
2,733
11,500
93,800
48,500
45,000
—
30,844
33,100(4)
18,300(4)
16,800(4)
9,600(4)
7,635(4)
20,800(4)
6,923(2)
3,140(2)
11,500
93,800(5)
48,500(5)
45,000(5)
100,000
701
—
—
—
—
—
—
—
—
—
521
—
—
—
755
—
—
—
—
—
—
—
—
—
576
—
—
—
327,171
445,942
1,222
1,331
$ 150,000 $ —
—
50,000(7)
146,000
150,000
200,000
300,000
50,000
250,000
250,000
100,000
150,000
250,000
4,432
4,293
8,007
6,381
19,612
110,000
50,000
146,000
150,000
200,000
300,000
50,000
250,000
250,000
100,000
150,000
250,000
4,514
4,402
8,200
6,535
19,883
$ —
—
50,000
146,000
—
—
—
—
—
—
—
—
—
4,432
118
207
162
290
$ —
—
—
—
150,000
—
—
—
—
—
—
—
—
—
4,175
222
173
311
29,388
—
—
—
—
—
—
—
—
—
636
270
—
138
30,432
—
—
—
—
—
—
—
—
—
—
703
298
—
302
—
—
—
—
—
—
—
—
—
—
777
329
—
340
—
33,100
18,300
16,800
9,600
7,635
20,800
6,923
3,140
11,500
90,587
47,603
45,000
99,220
1,303
1,446
410,208
$ — $ — $ — $ —
—
—
—
—
—
—
—
—
—
100,000
150,000
250,000
—
—
—
5,466
17,939
—
—
—
—
200,000
—
—
—
—
—
—
—
—
—
239
183
333
—
—
—
—
—
300,000
50,000
—
—
—
—
—
—
—
7,339
193
357
—
—
—
—
—
—
—
250,000
250,000
—
—
—
—
—
—
204
382
2,199,534
1,938,725
201,209
154,881
200,755
357,889
500,586
523,405
18,635
21,245
37,650
33,535
—
111,065
17,990
20,510
36,335
32,560
16,816(4)
124,211
688
784
1,397
1,045
468
4,382
17,302
19,726
34,938
1,106
497
73,569
—
—
—
1,169
527
1,696
—
—
—
29,240
560
29,800
—
—
—
—
14,764
14,764
—
—
—
—
—
—
$2,804,350 $2,696,203
$209,220
$232,345
$235,614 $391,903 $531,408 $1,095,713
(1) Includes credit enhancement fees, facility fees, trustees’ fees and other fees.
(2) Financed by variable rate, tax-exempt debt, but the interest rate on a portion of this debt is effectively fi xed at December 31, 2007 and December 31, 2006
through a swap agreement. The portion of the debt fi xed through a swap agreement decreases (and therefore the variable portion of the debt increases)
monthly as payments are made to a principal reserve fund.
(3) Variable rates are given as of December 31, 2007.
(4) Financed by variable rate debt, but interest rate is capped through an interest rate protection agreement.
(5) Represents full amount of the debt as of December 31, 2007. Actual amounts drawn on the debt as of December 31, 2007 are $87,519,000 for Bowery
Place I, $34,323,000 for Bowery Place II, $12,156,000 for Avalon Acton and $0 for Morningside Park.
(6) Balances outstanding represent total amounts due at maturity, and are not net of $2,501 of debt discount as of December 31, 2007 and $2,922 of debt
discount as of December 31, 2006, as refl ected in unsecured notes on our Consolidated Balance Sheets included elsewhere in this report.
(7) These notes were repaid at their scheduled maturity in January 2008.
24 AvalonBay Communities, Inc.
Future Financing and Capital Needs — Portfolio and Other Activity As of December 31, 2007, we had 21 new communities under
construction, for which a total estimated cost of $943,679,000 remained to be invested. In addition, we had eight communities which we
own, or in which we have a direct or indirect interest, under reconstruction, for which a total estimated cost of $53,836,000 remained to be
invested. Substantially all of the capital expenditures necessary to complete the communities currently under construction and reconstruction,
as well as development costs related to pursuing Development Rights, will be funded from:
• cash currently on hand invested in highly liquid overnight money market funds and repurchase agreements, and short-term investment
vehicles;
• the remaining capacity under our current $1,000,000,000 unsecured credit facility;
• the net proceeds from sales of existing communities;
• retained operating cash;
• the issuance of debt or equity securities; and/or
• private equity funding.
Before planned reconstruction activity, including reconstruction activity related to communities acquired by the Fund as discussed below,
or the construction of a Development Right begins, we intend to arrange adequate fi nancing to complete these undertakings, although we
cannot assure you that we will be able to obtain such fi nancing. In the event that fi nancing cannot be obtained, we may have to abandon
Development Rights, write-off associated pre-development costs that were capitalized and/or forego reconstruction activity. In such instances,
we will not realize the increased revenues and earnings that we expected from such Development Rights or reconstruction activity and
signifi cant losses could be incurred.
We have invested in the Fund, a private, discretionary investment vehicle that acquires and operates apartment communities in our markets.
The Fund has invested $777,568,000 as of December 31, 2007. Management of the Fund expects to invest approximately $46,000,000
of additional funds to redevelop the assets acquired, at which time the Fund will become fully invested. The Fund has nine institutional
investors, including us, with a combined capital equity commitment of $330,000,000. A signifi cant portion of the investments made in the
Fund by its investors have been made through AvalonBay Value Added Fund, Inc., a Maryland corporation that qualifi es as a REIT under the
Internal Revenue Code (the “Fund REIT”). A wholly-owned subsidiary of the Company is the general partner of the Fund and has committed
$50,000,000 to the Fund and the Fund REIT (of which approximately $32,035,000 has been invested as of January 31, 2008) representing a
15.2% combined general partner and limited partner equity interest. As of January 31, 2008, the Fund has committed to invest approximately
$818,367,000. We are exploring various potential sources for funding future acquisitions after the Fund is fully invested.
From time to time we use joint ventures to hold or develop individual real estate assets. We generally employ joint ventures primarily to
mitigate asset concentration or market risk or secondarily as a source of liquidity. We may also use joint ventures related to mixed-use land
development opportunities where our partners bring development and operational expertise to the venture. Each joint venture or partnership
agreement has been and will continue to be individually negotiated, and our ability to operate and/or dispose of a community in our sole
discretion may be limited to varying degrees depending on the terms of the joint venture or partnership agreement. We cannot assure you that
we will achieve our objectives through joint ventures.
In evaluating our allocation of capital within our markets, we sell assets that do not meet our long-term investment criteria or when capital and
real estate markets allow us to realize a portion of the value created over the past business cycle and redeploy the proceeds from those sales to
develop and redevelop communities. In response to real estate and capital markets conditions, we sold four communities and one partnership
interest in an unconsolidated entitiy for an aggregate sales price of $268,096,000 from January 1, 2007 through January 31, 2008. Because
the proceeds from the sale of communities may not be immediately redeployed into revenue generating assets, the immediate effect of a sale
of a community for a gain is to increase net income, but reduce future total revenues, total expenses and NOI. However, we believe that the
absence of future cash fl ows from communities sold will have a minimal impact on our ability to fund future liquidity and capital resource
needs. During 2008, we intend to dispose of between $700,000,000 and $1,000,000,000 in assets. However, actual disposition volume will
depend on market conditions and other variables, which are subject to change in 2008.
AvalonBay Communities, Inc. 25
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Off Balance Sheet Arrangements
In addition to the investment interests in consolidated and unconsolidated real estate entities, we have certain off-balance sheet arrangements
with the entities in which we invest. Additional discussion of these entities can be found in Note 6, “Investments in Real Estate Entities,” and
Note 8, “Commitments and Contingencies,” of our Consolidated Financial Statements located elsewhere in this report.
• CVP I, LLC has outstanding tax-exempt, variable rate bonds maturing in November 2036 in the amount of $117,000,000, which
have permanent credit enhancement. We have agreed to guarantee, under limited circumstances, the repayment to the credit enhancer
of any advances it may make in fulfi llment of CVP I, LLC’s repayment obligations under the bonds. We have also guaranteed to
the credit enhancer that CVP I, LLC will obtain a fi nal certifi cate of occupancy for the project (Chrystie Place in New York City)
overall once tenant improvements related to a retail tenant are complete, which is expected in the fi rst half of 2008. Our 80% partner
in this venture has agreed that it will reimburse us its pro rata share of any amounts paid relative to these guaranteed obligations.
The estimated fair value of, and our obligation under these guarantees, both at inception and as of December 31, 2007 were not
signifi cant. As a result we have not recorded any obligation associated with these guarantees at December 31, 2007.
• MVP I, LLC executed a construction loan in the amount of $94,000,000 to fi nance the development of Avalon at Mission Bay
North II. In conjunction with the construction management services that the Company provided to MVP I, LLC, the Company
provided a construction completion guarantee to the construction loan lender in order to fulfi ll their standard fi nancing requirements
related to construction fi nancing. In the fourth quarter of 2007, all of the lender’s standard completion requirements were satisfi ed
and the obligation of the Company under this guarantee terminated. In December 2007, MVP I, LLC repaid the construction loan,
concurrently executing a seven-year, fi xed rate conventional loan.
• The Fund has 20 loans secured by individual assets with amounts outstanding in the aggregate of $447,166,000. These mortgage
loans have varying maturity dates (or dates after which the loans can be prepaid), ranging from October 2011 to September 2016.
These mortgage loans are secured by the underlying real estate. In addition, the Fund had amounts outstanding of $47,400,000 as of
December 31, 2007 under its credit facilities, all of which is under an unsecured facility maturing in December 2008. The Fund did
not have any amounts outstanding at December 31, 2007 under the Fund's credit facility secured by uncalled capital commitments
that matured in January 2008. The mortgage loans and the credit facility are payable by the Fund with operating cash fl ow from the
underlying real estate, and the credit facility is secured by capital commitments. We have not guaranteed the debt of the Fund, nor do
we have any obligation to fund this debt should the Fund be unable to do so.
• In addition, as part of the formation of the Fund, we have provided to one of the limited partners a guarantee. The guarantee provides
that if, upon fi nal liquidation of the Fund, the total amount of all distributions to that partner during the life of the Fund (whether
from operating cash fl ow or property sales) does not equal a minimum of the total capital contributions made by that partner, then we
will pay the partner an amount equal to the shortfall, but in no event more than 10% of the total capital contributions made by the
partner (maximum of approximately $6,510,000 as of December 31, 2007). As of December 31, 2007, the fair value of the real estate
assets owned by the Fund is considered adequate to cover such potential payment to that partner under a liquidation scenario. The
estimated fair value of, and our obligation under this guarantee, both at inception and as of December 31, 2007 was not signifi cant
and therefore we have not recorded any obligation for this guarantee as of December 31, 2007.
• In connection with the pursuit of a Development Right in Pleasant Hill, California, $125,000,000 in bond fi nancing was issued by
the Contra Costa County Redevelopment Agency (the “Agency”) in connection with the possible future construction of a multifamily
rental community by PHVP I, LLC. The bond proceeds were immediately invested in their entirety in a guaranteed investment
contract (“GIC”) administered by a trustee. This Development Right is planned as a mixed-use development, with residential, for-
sale, retail and offi ce components. The bond proceeds will remain in the GIC until August 2008, at which time a loan will be made
to PHVP I, LLC to fund construction of the multifamily portion of the development, or the bonds will be redeemed by the Agency.
We are currently in discussions to extend both the term until the bond fi nancing proceeds must be used for development of the
multifamily portion of the project, and the GIC until August 2008, when construction of the multifamily portion of the development
is now expected to begin. Although we do not have any equity or economic interest in PHVP I, LLC at this time, we do have an
option to make a capital contribution to PHVP I, LLC in exchange for a 99% general partner interest in the entity. Should we decide
not to exercise this option, bond proceeds will be released from escrow, the bonds will be redeemed without penalty and a loan will
not be made to PHVP I, LLC. The bonds are payable from the proceeds of the GIC and are non-recourse to both PHVP I, LLC and
to us. There is no loan payable outstanding by PHVP I, LLC as of December 31, 2007.
26 AvalonBay Communities, Inc.
• In addition, as part of providing construction management services to PHVP I, LLC for the construction of a public garage, we have
provided a construction completion guarantee to the related lender in order to fulfi ll their standard fi nancing requirements related
to the garage construction fi nancing. Our obligations under this guarantee will terminate following construction completion of the
garage once all of the lender’s standard completion requirements have been satisfi ed, which we currently expect to occur in the fi rst
half of 2008. In the third quarter of 2006, signifi cant modifi cations were requested by the local transit authority to change the garage
structure design. We do not believe that the requested design changes impact the construction schedule. However, it is expected that
these changes will increase the original budget by an amount up to $5,000,000. We believe that substantially all potential additional
amounts are reimbursable from unrelated third parties. At this time we do not believe that it is probable that we will incur any
additional costs. The estimated fair value of, and our obligation under this guarantee, both at inception and as of December 31, 2007
was not signifi cant and therefore we have not recorded any obligation for this guarantee as of December 31, 2007.
• In the fourth quarter of 2006, we admitted a 70% venture partner to the Avalon Del Rey Apartments, LLC for an investment of
$49,000,000, including the assumption of debt. In conjunction with this investment, we provided an operating guarantee to the joint
venture partner which stated that if the initial year return earned by the joint venture partner was less than a threshold return of 7% on
its initial equity investment, we would pay the joint venture partner an amount equal to the shortfall, up to the 7% threshold return
required. In the fourth quarter of 2007, the initial year return earned by the joint venture partner was determined to be in excess of
the guarantee threshold thereby satisfying all provisions of the Company under this guarantee.
There are no other lines of credit, side agreements, fi nancial guarantees or any other derivative fi nancial instruments related to or between our
unconsolidated real estate entities and us. In evaluating our capital structure and overall leverage, management takes into consideration our
proportionate share of this unconsolidated debt.
Contractual Obligations
We currently have contractual obligations consisting primarily of long-term debt obligations and lease obligations for certain land parcels
and regional and administrative offi ce space. During the second quarter of 2007, we entered into an operating lease for 20,000 square feet
of offi ce space in Virginia Beach, Virginia. We began to utilize this space for certain of our community-related accounting and customer
service functions in the third quarter of 2007. There have not been any other material changes outside the ordinary course of business to
our contractual obligations during 2007. Scheduled contractual obligations required for the next fi ve years and thereafter are as follows as of
December 31, 2007 (dollars in thousands):
Total
Less than 1 Year
1–3 Years
3–5 Years More than 5 Years
Payments due by period
Debt Obligations(1)
Operating Lease Obligations(2)
$3,210,703
2,142,739
$723,720
14,412
$467,959
29,108
$923,311
29,268
$1,095,713
2,069,951
Total
$5,353,442
$738,132
$497,067
$952,579
$3,165,664
(1) Includes $514,500 outstanding under our variable rate unsecured credit facility as of December 31, 2007. The table of contractual obligations assumes
repayment of this amount in 2008 - See “Liquidity and Capital Resources.” Amounts exclude interest payable as of December 31, 2007.
(2) Includes land leases expiring between November 2028 and March 2142. Amounts do not include any adjustment for purchase options available under the
land leases.
Infl ation and Defl ation
Substantially all of our apartment leases are for a term of one year or less. In an infl ationary environment, this may allow us to realize increased
rents upon renewal of existing leases or the beginning of new leases. Short-term leases generally minimize our risk from the adverse effects of
infl ation, although these leases generally permit residents to leave at the end of the lease term and therefore expose us to the effect of a decline
in market rents. In a defl ationary rent environment, we may be exposed to declining rents more quickly under these shorter-term leases.
AvalonBay Communities, Inc. 27
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Forward-Looking Statements
This Annual Report contains “forward-looking statements” as that term is defi ned under the Private Securities Litigation Reform Act of 1995.
You can identify forward-looking statements by our use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “project,”
“plan,” “may,” “shall,” “will” and other similar expressions in this Annual Report, that predict or indicate future events and trends and that do not
report historical matters. These statements include, among other things, statements regarding our intent, belief or expectations with respect to:
• our potential development, redevelopment, acquisition or disposition of communities;
• the timing and cost of completion of apartment communities under construction, reconstruction, development or redevelopment;
• the timing of lease-up, occupancy and stabilization of apartment communities;
• the pursuit of land on which we are considering future development;
• the anticipated operating performance of our communities;
• cost, yield and earnings estimates;
• our declaration or payment of distributions;
• our joint venture and discretionary fund activities;
• our policies regarding investments, indebtedness, acquisitions, dispositions, fi nancings and other matters;
• our qualifi cation as a REIT under the Internal Revenue Code;
• the real estate markets in Northern and Southern California and markets in selected states in the Mid-Atlantic, Northeast, Midwest
and Pacifi c Northwest regions of the United States and in general;
• the availability of debt and equity fi nancing;
• interest rates;
• general economic conditions; and
• trends affecting our fi nancial condition or results of operations.
We cannot assure the future results or outcome of the matters described in these statements; rather, these statements merely refl ect 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. These risks, uncertainties and other factors are discussed in our Annual Report on Form
10-K for 2007 in the section titled “Risk Factors” and in other reports and documents fi led with the Securities and Exchange Commission.
In addition, these forward-looking statements represent our estimates and assumptions only as of the date of this report. We do not
undertake a duty to update these forward-looking statements, and therefore they may not represent our estimates and assumptions after the
date of this report.
Some of the factors that could cause our actual results, performance or achievements to differ materially from those expressed or implied by
these forward-looking statements include, but are not limited to, the following:
• we may fail to secure development opportunities due to an inability to reach agreements with third parties to obtain land at attractive
prices or to obtain desired zoning and other local approvals;
• we may abandon or defer development opportunities for a number of reasons, including changes in local market conditions which
make development less desirable, increases in costs of development and increases in the cost of capital, resulting in losses;
• construction costs of a community may exceed our original estimates;
• we may not complete construction and lease-up of communities under development or redevelopment on schedule, resulting in
increased interest costs and construction costs and a decrease in our expected rental revenues;
• occupancy rates and market rents may be adversely affected by competition and local economic and market conditions which are
beyond our control;
• fi nancing may not be available on favorable terms or at all, and our cash fl ows from operations and access to cost effective capital may
be insuffi cient for the development of our pipeline which could limit our pursuit of opportunities;
• our cash fl ows may be insuffi cient to meet required payments of principal and interest, and we may be unable to refi nance existing
indebtedness or the terms of such refi nancing may not be as favorable as the terms of existing indebtedness;
• we may be unsuccessful in our management of the Fund and the Fund REIT; and
• we may be unsuccessful in managing changes in our portfolio composition.
28 AvalonBay Communities, Inc.
Critical Accounting Policies
The preparation of fi nancial statements in conformity with GAAP requires management to use judgment in the application of accounting
policies, including making estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to various
transactions had been different, or different assumptions were made, it is possible that different accounting policies would have been applied,
resulting in different fi nancial results or a different presentation of our fi nancial statements. Below is a discussion of the accounting policies
that we consider critical to an understanding of our fi nancial condition and operating results that may require complex or signifi cant judgment
in their application or require estimates about matters which are inherently uncertain. A discussion of our signifi cant accounting policies,
including further discussion of the accounting policies described below, can be found in Note 1, “Organization and Signifi cant Accounting
Policies” of our Consolidated Financial Statements.
Principles of Consolidation We may enter into various joint venture agreements with unrelated third parties to hold or develop real estate
assets. We must determine for each of these ventures, whether to consolidate the entity or account for our investment under the equity or
cost basis of accounting.
We determine whether to consolidate certain entities based on our rights and obligations under the joint venture agreements, applying the
guidance of FIN 46(R), “Consolidation of Variable Interest Entities” (as revised) and Emerging Issues Task Force Issue No. 04-5, “Determining
Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners
Have Certain Rights.” For investment interests that we do not consolidate, we look to the guidance in AICPA Statement of Position 78-9,
“Accounting for Investments in Real Estate Ventures”, Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting
for Investments in Common Stock”, and Emerging Issues Task Force Topic D-46, “Accounting for Limited Partnership Investments”, to
determine the accounting framework to apply. The application of these rules in evaluating the accounting treatment for each joint venture is
complex and requires substantial management judgment. Therefore, we believe the decision to choose an appropriate accounting framework
is a critical accounting estimate.
If we were to consolidate the joint ventures that we accounted for using the equity method at December 31, 2007, our assets would have
increased by $1,029,093,000 and our liabilities would have increased by $739,806,000. We would be required to consolidate those joint
ventures currently not consolidated for fi nancial reporting purposes if the facts and circumstances changed, including but not limited to the
following reasons, none of which are currently expected to occur:
• For entities not considered to be variable interest entities under FIN 46(R), the nature of the entity changed such that it would be
considered a variable interest entity.
• For entities in which we do not hold a controlling voting and/or variable interest, the contractual arrangement changes resulting in
our investment interest being either a controlling voting and/or variable interest.
We evaluate our accounting for investments on a quarterly basis or when a signifi cant change in the design of an entity occurs.
Cost Capitalization We capitalize costs during the development of assets beginning when we determine that development of a future asset
is probable until the asset, or a portion of the asset, is delivered and is ready for its intended use. For redevelopment efforts, we capitalize
costs beginning either (i) in advance of taking homes out of service when signifi cant renovation of the common area has begun until the
redevelopment is completed, or (ii) when an apartment home is taken out of service for redevelopment until the redevelopment is completed
and the apartment home is available for a new resident. Rental income and operating expenses incurred during the initial lease-up or post-
redevelopment lease-up period are fully recognized as they accrue.
During the development and redevelopment efforts we capitalize all direct and those indirect costs which have been incurred as a result of
the development and redevelopment activities. These costs include interest and related loan fees, property taxes as well as other direct and
indirect costs. Interest is capitalized for any project specifi c fi nancing, as well as for general corporate fi nancing to the extent of our aggregate
investment in the projects. Indirect project costs, which include personnel and offi ce and administrative costs, that are clearly associated with
our development and redevelopment efforts are also capitalized. The estimation of the direct and indirect costs to capitalize as part of our
development and redevelopment activities requires judgment, and as such, we believe cost capitalization to be a critical accounting estimate.
There may be a change in our operating expenses in the event that there are changes in accounting guidance governing capitalization or
changes to development or redevelopment activity. If changes in the accounting guidance limit our ability to capitalize costs or if we reduce our
development and redevelopment activities without a corresponding decrease in indirect project costs, there may be an increase in our operating
expenses. For example, if in 2007 our development activities decreased by 10%, and there were no corresponding decrease in our indirect
project costs, our operating expenses would have increased by $2,748,000.
We capitalize pre-development costs incurred in pursuit of Development Rights for which we currently believe future development is probable.
These costs include legal fees, design fees and related overhead costs. Future development of these pursuits is dependent upon various factors,
including zoning and regulatory approval, rental market conditions, construction costs and availability of capital. Pre-development costs
AvalonBay Communities, Inc. 29
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
incurred in the pursuit of Development Rights for which future development is not yet considered probable are expensed as incurred. In
addition, if the status of a Development Right changes, making future development no longer probable, any capitalized pre-development
costs are written-off with a charge to expense.
Due to the subjectivity in determining whether a pursuit will result in the acquisition or development of an apartment community, and
therefore should be capitalized, the accounting for pursuit costs is a critical accounting estimate. If it were determined that 10% of our
capitalized pursuits were no longer probable of occurring, net income for the year ended December 31, 2007 would have decreased by
$6,100,000.
Asset Impairment Evaluation We apply the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets”, to determine the need for performing impairment analyses, as well as to measure the loss if an impairment has occurred on a regular
basis, considering qualitative economic factors. Because each asset is unique, requiring signifi cant management judgment, we believe that the
asset impairment evaluation is a critical accounting estimate.
Management judgment is required both to determine if a signifi cant event has occurred, such that an impairment analysis is necessary, as well
as for the assessment and measurement of any potential impairment. To perform the impairment analysis, we must estimate the undiscounted
future cash fl ows associated with the asset, which in the case of an apartment community would be the NOI, as well as potential disposition
proceeds for a given asset. Forecasting cash fl ows requires assumptions about such variables as the estimated holding period, rental rates,
occupancy and operating expenses during the holding period as well as disposition proceeds. In addition, when an impairment has occurred, we
must estimate the discount factor, or market capitalization rate to apply to the undiscounted cash fl ows to derive the fair value of the position.
The market capitalization rate is infl uenced by many factors, including national and local economic conditions, as well as the location and
quality of the asset.
Changes in the future cash fl ows associated with an asset have a direct, linear relationship to the fair value of the position. For example, if
there is a 10% decline in the estimated NOI for a community, there would be a corresponding decrease in the fair value of that asset of
10%. Changes in the market capitalization rate have an inverse relationship with the fair value of an asset, with a decrease in the market
capitalization rate resulting in an increase in the fair value of the asset. For example, an asset that is valued at $80,000,000 when using a fi ve
percent market capitalization rate will increase in value to $100,000,000 if the market capitalization rate decreases by one percent to four
percent, and to $133,000,000 if the market capitalization rate decreases by two percent, to a three percent market capitalization rate.
For the year ended December 31, 2007, we did not recognize any impairment in value associated with our investments or long-lived assets.
We cannot predict the occurrence of future events that may cause an impairment assessment to be performed.
REIT Status We are a Maryland corporation that has elected to be treated, for federal income tax purposes, as a REIT. We elected to be
taxed as a REIT under the Internal Revenue Code of 1986 (“the Code”), as amended, for the year ended December 31, 1994 and have 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, we generally will not be subject to corporate level federal income tax on taxable income if we distribute 100% of taxable income to
our stockholders over time periods allowed under the Code. If we fail to qualify as a REIT in any taxable year, we will be subject to federal
and state income taxes at regular corporate rates (subject to any applicable alternative minimum tax) and may not be able to elect to qualify
as a REIT for four subsequent taxable years. For example, if we failed to qualify as a REIT in 2007, our net income would have decreased by
approximately $119,800,000.
Our qualifi cation as a REIT requires management to exercise signifi cant judgment and consideration with respect to operational matters and
accounting treatment. Therefore, we believe our REIT status is a critical accounting estimate.
30 AvalonBay Communities, Inc.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain fi nancial market risks, the most predominant being interest rate risk. We monitor interest rate risk as an integral part
of our overall risk management program, which recognizes the unpredictability of fi nancial markets and seeks to reduce the potentially adverse
effect on our results of operations. The effect of interest rate fl uctuations historically has been small relative to other factors affecting operating
results, such as rental rates and occupancy. The specifi c 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, primarily associated with short-term interest rates such as LIBOR. We had
$1,084,653,000 and $426,795,000 in variable rate debt outstanding (excluding variable rate debt effectively fi xed through swap agreements)
as of December 31, 2007 and 2006, respectively. If interest rates on the variable rate debt had been 100 basis points higher throughout 2007
and 2006, our annual interest costs would have increased by approximately $6,417,000 and $3,027,000, respectively, based on balances
outstanding during the applicable years.
We currently use interest rate protection agreements (consisting of interest rate swap and interest rate cap agreements) to reduce the impact of
interest rate fl uctuations on certain variable rate indebtedness, not for trading or speculative purposes. Under swap agreements:
• we agree to pay to a counterparty the interest that would have been incurred on a fi xed principal amount at a fi xed interest rate
(generally, the interest rate on a particular treasury bond on the date the agreement is entered into, plus a fi xed increment); and
• the counterparty agrees to pay to us the interest that would have been incurred on the same principal amount at an assumed fl oating
interest rate tied to a particular market index.
As of December 31, 2007, the effect of interest rate swap agreements is to fi x the interest rate on approximately $46,340,000 of our variable
rate, tax-exempt debt. The interest rate protection provided by certain swap agreements on the consolidated variable rate, tax-exempt debt
was not electively entered into by us but, rather, was a requirement of either the bond issuer or the credit enhancement provider related to
certain tax-exempt bond fi nancings. Had these swap agreements not been in place during 2007 and 2006, our annual interest costs would
have been approximately $931,000 and $1,182,000 lower, respectively, based on balances outstanding and reported interest rates during the
applicable years. Additionally, if the variable interest rates on this debt had been 100 basis points higher throughout 2007 and 2006 and
these swap agreements had not been in place, our annual interest costs would have been approximately $248,000 lower in 2007 and $37,000
higher in 2006.
Because the counterparties providing the swap agreements are major fi nancial institutions which have an A+ or better credit rating by the
Standard & Poor’s Ratings Group and the interest rates fi xed by the swap agreements are signifi cantly 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.
In addition, changes in interest rates affect the fair value of our fi xed rate debt, computed using a discounted cash fl ow model considering
our current market yields, which impacts the fair value of our aggregate indebtedness. Debt securities and notes payable (excluding amounts
outstanding under our variable rate unsecured credit facility) with an aggregate carrying value of $2,696,203,000 at December 31, 2007 had an
estimated aggregate fair value of $2,756,890,000 at December 31, 2007. Fixed rate debt (excluding our variable rate debt effectively fi xed through
swap agreements) represented $2,079,713,000 of the carrying value and $2,140,400,000 of the fair value at December 31, 2007. If interest rates
had been 100 basis points higher as of December 31, 2007, the fair value of this fi xed rate debt would have decreased by $84,459,000.
We do not have any exposure to foreign currency or equity price risk, and our exposure to commodity price risk is insignifi cant.
AvalonBay Communities, Inc. 31
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
12-31-07
12-31-06
ASSETS
Real estate:
Land
Buildings and improvements
Furniture, fi xtures and equipment
Less accumulated depreciation
Net operating real estate
Construction in progress, including land
Land held for development
Operating real estate assets held for sale, net
Total real estate, net
Cash and cash equivalents
Cash in escrow
Resident security deposits
Investments in unconsolidated real estate entities
Deferred fi nancing costs, net
Deferred development costs
Prepaid expenses and other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Unsecured notes, net
Variable rate unsecured credit facility
Mortgage notes payable
Dividends payable
Payables for construction
Accrued expenses and other liabilities
Accrued interest payable
Resident security deposits
Liabilities related to real estate assets held for sale
Total liabilities
Minority interest of unitholders in consolidated partnerships
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value; $25 liquidation preference; 50,000,000 shares
authorized at both December 31, 2007 and 2006; 4,000,000 shares issued
and outstanding at both December 31, 2007 and 2006
Common stock, $0.01 par value; 140,000,000 shares authorized at both December 31, 2007
and 2006; 77,318,611 and 74,668,372 shares issued and outstanding at
December 31, 2007 and 2006, respectively
Additional paid-in capital
Accumulated earnings less dividends
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to Consolidated Financial Statements.
$1,024,111
5,130,872
160,330
6,315,313
(1,259,558)
5,055,755
953,004
288,423
—
$ 943,724
4,501,494
141,303
5,586,521
(1,080,313)
4,506,208
641,781
202,314
160,059
6,297,182
5,510,362
21,222
189,171
29,542
57,990
28,177
60,996
52,204
8,284
135,917
26,429
42,724
26,140
39,365
59,286
$6,736,484
$5,848,507
$1,893,499
514,500
800,203
67,909
91,580
237,932
38,578
42,477
—
$2,153,078
—
648,350
60,417
59,232
192,022
37,189
37,654
69,100
3,686,678
3,257,042
23,152
—
18,311
—
40
40
773
3,026,708
2,499
(3,366)
747
2,482,516
93,430
(3,579)
3,026,654
2,573,154
$6,736,484
$5,848,507
32 AvalonBay Communities, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME
(Dollars in thousands, except per share data)
12-31-07
12-31-06
12-31-05
For the year ended
Revenue:
Rental and other income
Management, development and other fees
Total revenue
Expenses:
Operating expenses, excluding property taxes
Property taxes
Interest expense, net
Depreciation expense
General and administrative expense
Total expenses
Equity in income of unconsolidated entities
Minority interest in consolidated partnerships
Gain on sale of land
Income from continuing operations
Discontinued operations:
Income from discontinued operations
Gain on sale of communities
Total discontinued operations
Net income
Dividends attributable to preferred stock
$806,599
6,142
812,741
$715,170
6,259
721,429
$650,907
4,304
655,211
242,702
74,912
97,545
179,549
28,494
623,202
59,169
(1,585)
545
217,134
66,786
109,184
160,442
24,767
578,313
7,455
(573)
13,519
247,668
163,517
4,005
106,487
110,492
358,160
(8,700)
5,618
97,411
103,029
266,546
(8,700)
197,990
63,975
125,171
156,455
25,761
569,352
7,198
(1,481)
4,479
96,055
19,126
195,287
214,413
310,468
(8,700)
Net income available to common stockholders
$349,460
$257,846
$301,768
Other comprehensive income:
Unrealized gain on cash fl ow hedges
Comprehensive income
Earnings per common share—basic:
Income from continuing operations
(net of dividends attributable to preferred stock)
Discontinued operations
Net income available to common stockholders
Earnings per common share—diluted:
Income from continuing operations
(net of dividends attributable to preferred stock)
Discontinued operations
Net income available to common stockholders
See accompanying notes to Consolidated Financial Statements.
213
891
2,626
$349,673
$258,737
$304,394
$ 3.04
1.40
$ 4.44
$ 3.00
1.38
$ 4.38
$ 2.09
1.39
$ 3.48
$ 2.06
1.36
$ 3.42
$ 1.20
2.94
$ 4.14
$ 1.18
2.87
$ 4.05
AvalonBay Communities, Inc. 33
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Shares issued
Preferred
stock
Common
stock
Preferred
stock
Common
stock
Additional
paid-in
capital
Accumulated
earnings
less
dividends
Accumulated
other
comprehensive
loss
Total
stockholders’
equity
4,000,000
—
72,582,076
—
$40
—
$726
—
$2,380,852
—
$(21,159)
310,468
$(7,096)
—
$2,353,363
310,468
(Dollars in thousands)
Balance at December 31, 2004
Net income
Unrealized gain on
cash fl ow hedges
Change in redemption value
of minority interest
Dividends declared to common
and preferred stockholders
Issuance of common stock
Amortization of
deferred compensation
—
—
—
—
—
—
—
—
1,080,972
—
Balance at December 31, 2005
4,000,000
73,663,048
Net income
Unrealized gain on
cash fl ow hedges
Change in redemption value
of minority interest
Dividends declared to common
and preferred stockholders
Issuance of common stock
Amortization of
deferred compensation
—
—
—
—
—
—
—
—
—
—
1,005,324
—
Balance at December 31, 2006
4,000,000
74,668,372
Net income
Unrealized gain on
cash fl ow hedges
Change in redemption value
of minority interest
Dividends declared to common
and preferred stockholders
Issuance of common stock
Purchase of common stock
Amortization of
deferred compensation
—
—
—
—
—
—
—
—
—
—
—
—
5,130,855
—
(2,480,616) —
—
—
—
—
—
40
—
—
—
—
—
—
40
—
—
—
—
—
—
11
—
—
—
—
—
—
40,378
(216,982)
(377)
8,338
—
2,626
2,626
—
—
—
—
—
(216,982)
40,012
8,338
737
2,429,568
71,950
(4,470)
2,497,825
—
266,546
—
266,546
—
891
891
(2,593)
—
38,839
(241,155)
(1,318)
14,109
—
—
—
—
—
(2,593)
(241,155)
37,531
14,109
747
2,482,516
93,430
(3,579)
2,573,154
—
358,160
—
358,160
—
213
213
—
—
—
—
(6,124)
—
619,359
(93,501)
(276,823)
(1,741)
(164,403)
—
—
—
—
—
(6,124)
(276,823)
617,669
(257,929)
18,334
—
—
—
—
10
—
—
—
—
—
51
(25)
—
—
—
18,334
—
Balance at December 31, 2007
4,000,000
77,318,611
$40
$773
$3,026,708
$ 2,499
$(3,366)
$3,026,654
See accompanying notes to Consolidated Financial Statements.
34 AvalonBay Communities, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
12-31-07
12-31-06
12-31-05
For the year ended
Cash fl ows from operating activities:
Net income
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation expense
Depreciation expense from discontinued operations
Amortization of deferred fi nancing costs and debt premium/discount
Amortization of stock-based compensation
Income allocated to minority interest in consolidated partnerships
Equity in income of unconsolidated entities, net of eliminations
Return on investment of unconsolidated entities
Gain on sale of real estate assets
Increase in cash in operating escrows
Decrease (increase) in resident security deposits,
prepaid expenses and other assets
Increase in accrued expenses, other liabilities
and accrued interest payable
Net cash provided by operating activities
Cash fl ows from investing activities:
Development/redevelopment of real estate assets including
land acquisitions and deferred development costs
Acquisition of real estate assets, including partner equity interest
Capital expenditures—existing real estate assets
Capital expenditures—non-real estate assets
Proceeds from sale of real estate and technology investments,
including reimbursement for Fund communities, net of selling costs
Increase in payables for construction
Decrease (increase) in cash in construction escrows
Increase in investments in unconsolidated real estate entities
$358,160
$266,546
$310,468
179,549
2,176
4,934
14,353
1,585
(58,122)
130
(107,032)
(7,403)
160,442
3,687
4,474
10,095
573
(6,480)
298
(110,930)
(844)
156,454
6,842
4,022
4,292
1,481
(6,565)
330
(199,766)
(4,344)
8,747
(4,381)
8,547
58,748
455,825
28,180
351,660
24,487
306,248
(1,112,590)
(13,841)
(13,851)
(1,424)
261,089
32,348
54,149
(15,127)
(735,167)
(74,924)
(21,289)
(957)
272,223
34,542
19,572
(5,371)
Net cash used in investing activities
(809,247)
(511,371)
Cash fl ows from fi nancing activities:
Issuance of common stock
Repurchase of common stock
Dividends paid
Net borrowings (repayments) under unsecured credit facility
Issuance of mortgage notes payable and draws on construction loans
Repayments of mortgage notes payable
Issuance (repayment) of unsecured notes
Payment of deferred fi nancing costs
Redemption of units for cash by minority partners
Contributions from minority and profi t-sharing partners
Distributions to DownREIT partnership unitholders
Distributions to joint venture and profi t-sharing partners
621,029
(257,929)
(268,966)
514,500
59,126
(27,256)
(260,000)
(6,550)
(6,851)
1,333
(280)
(1,796)
26,551
—
(234,958)
(66,800)
113,849
(6,827)
343,743
(12,698)
(80)
—
(392)
(108)
Net cash provided by (used in) fi nancing activities
366,360
162,280
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Cash paid during year for interest, net of amount capitalized
See accompanying notes to Consolidated Financial Statements.
12,938
8,284
$ 21,222
$ 98,594
2,569
5,715
$ 8,284
$102,640
(382,871)
(57,415)
(17,570)
(1,520)
469,292
5,198
(21,784)
(13,091)
(19,761)
36,611
—
(215,391)
(35,200)
26,269
(41,932)
(50,000)
(1,292)
(50)
—
(1,194)
(114)
(282,293)
4,194
1,521
$ 5,715
$121,526
AvalonBay Communities, Inc. 35
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Supplemental disclosures of non-cash investing and fi nancing activities (dollars in thousands):
During the year ended December 31, 2007:
• As described in Note 4, “Stockholders’ Equity,” 75,231 shares of common stock valued at $10,971 were issued in connection with
stock grants, 2,929 shares valued at $365 were issued through the Company’s dividend reinvestment plan, 41,000 shares valued at
$4,381 were withheld to satisfy employees’ tax withholding and other liabilities and 8,609 shares valued at $231 were forfeited, for a
net value of $6,724. In addition, the Company granted 331,356 options for common stock, net of forfeitures, at a value of $7,518.
• 19,231 units of limited partnership, valued at $887, were presented for redemption to the DownREIT partnerships that issued such
units and were acquired by the Company in exchange for an equal number of shares of the Company’s common stock.
• The Company recorded a decrease to other liabilities and a corresponding gain to other comprehensive income of $213 to adjust the
Company’s Hedging Derivatives (as defi ned in Note 5, “Derivative Instruments and Hedging Activities”) to their fair value.
• The Company issued $100,000 of variable-rate tax-exempt debt relating to Avalon Morningside Park. The proceeds were placed in
an escrow account until requisitioned for construction funding, none of which has been drawn for use in the development of the
community.
• Common and preferred dividends declared but not paid totaled $67,909.
• The Company recorded an increase of $6,124 to minority interest with a corresponding decrease to accumulated earnings less
dividends to adjust the redemption value associated with a put option held by a joint venture partner. This put option allows our
partner to put their interest in the investment to the Company at the future fair market value.
During the year ended December 31, 2006:
• As described in Note 4, “Stockholders’ Equity,” 122,172 shares of common stock valued at $12,568 were issued in connection with
stock grants, 2,306 shares valued at $256 were issued through the Company’s dividend reinvestment plan, 47,111 shares valued at
$3,449 were withheld to satisfy employees’ tax withholding and other liabilities and 5,910 shares valued at $193 were forfeited, for a
net value of $9,182. In addition, the Company granted 849,769 options for common stock, net of forfeitures, at a value of $9,946.
• 308,345 units of limited partnership, valued at $14,166, were presented for redemption to the DownREIT partnerships that issued
such units and were acquired by the Company in exchange for an equal number of shares of the Company’s common stock.
• The Company issued $187,300 of variable rate, tax-exempt debt, of which $107,451 in proceeds were not received, but placed in an
escrow until requisitioned for construction funding.
• The Company recorded a decrease to other liabilities and a corresponding gain to other comprehensive income of $891 to adjust the
Company’s Hedging Derivatives (as defi ned in Note 5, “Derivative Instruments and Hedging Activities”) to their fair value.
• The Company recorded an increase of $2,593 to minority interest with a corresponding decrease to accumulated earnings less
dividends to adjust the redemption value associated with a put option held by a joint venture partner. This put option allows our
partner to put their interest in the investment to the Company at the future fair market value.
• Common and preferred dividends declared but not paid totaled $60,417.
During the year ended December 31, 2005:
• 165,790 shares of common stock were issued in connection with stock grants, 1,295 shares were issued through the Company’s
dividend reinvestment plan, 8,971 shares were issued to a member of the Board of Directors in fulfi llment of a deferred stock award,
50,916 shares were withheld to satisfy employees’ tax withholding and other liabilities and 9,965 shares were forfeited, for a net value
of $9,317. In addition, the Company granted 696,484 options for common stock, net of forfeitures, at a value of $4,521.
• 49,263 units of limited partnership, valued at $2,202, were presented for redemption to the DownREIT partnerships that issued such
units and were acquired by the Company in exchange for an equal number of shares of the Company’s common stock.
• The Company deconsolidated mortgage notes payable in the aggregate amount of $24,869 upon admittance of outside investors into
the Fund (as defi ned in Note 6, “Investments in Unconsolidated Entities”).
• The Company assumed fi xed rate debt of $4,566 as part of the acquisition of an improved land parcel.
• The Company recorded a decrease to other liabilities and a corresponding gain to other comprehensive income of $2,626 to adjust
the Company’s Hedging Derivatives to their fair value.
• Common and preferred dividends declared but not paid totaled $54,476.
36 AvalonBay Communities, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. Organization and Signifi cant 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 (“the Code”), as amended. The Company focuses on the ownership and operation of
apartment communities in high barrier-to-entry markets of the United States. These markets are located in the Northeast, Mid-Atlantic,
Midwest, Pacifi c Northwest, and Northern and Southern California regions of the country.
At December 31, 2007, the Company owned or held a direct or indirect ownership interest in 163 operating apartment communities
containing 45,932 apartment homes in ten states and the District of Columbia, of which eight communities containing 2,231 apartment
homes were under reconstruction. The operations of 139 of these communities, containing 40,509 apartment homes are consolidated for
fi nancial reporting purposes. In addition, the Company owned or held a direct or indirect ownership interest in 21 communities under
construction that are expected to contain an aggregate of 6,816 apartment homes when completed. The Company also owned or held a direct
or indirect ownership interest in rights to develop an additional 48 communities that, if developed as expected, will contain an estimated
13,656 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 fi nancial 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 fi nancial statements of Avalon. Consequently, Bay’s assets were recorded in the historical fi nancial
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, certain
joint venture partnerships, subsidiary partnerships structured as DownREITs and any variable interest entities consolidated under FASB
Interpretation No. 46 (“FIN 46(R)”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” as revised in December
2003. All signifi cant intercompany balances and transactions have been eliminated in consolidation.
The Company assesses consolidation of variable interest entities under the guidance of FIN 46(R). The Company accounts for joint venture
entities and subsidiary partnerships, including those structured as DownREITs, that are not variable interest entities, in accordance with
EITF Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or
Similar Entity When the Limited Partners Have Certain Rights,” Statement of Position (“SOP”) 78-9, “Accounting for Investments in Real
Estate Ventures,” Accounting Principles Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for Investments in Common
Stock” and EITF Topic D-46, “Accounting for Limited Partnership Investments.” The Company uses EITF Issue No. 04-5 to evaluate the
partnership of each joint venture entity and determine whether control over the partnership, as defi ned by the EITF, lies with the general
partner, or the limited partners, when the limited partners have certain rights. The general partner in a limited partnership is presumed to
control that limited partnership, unless that presumption is overcome by the limited partners having either: (i) the substantive ability, either
by a single limited partner or through a simple majority vote, to dissolve the limited partnership or otherwise remove the general partner
without cause; or (ii) substantive participating rights. If the Company is the general partner and has control over the partnership, or if the
Company’s limited partnership ownership includes the ability to dissolve the partnership, or has substantive participating rights, as discussed
above, the Company consolidates the investments. If the Company is not the general partner, or the Company’s partnership interest does not
contain either of the above terms which overcome the presumption of control in a limited partnership residing with the general partner, the
Company then looks to the guidance in SOP 78-9, APB No. 18 and EITF Topic D-46 to determine the accounting framework to apply. The
Company generally uses the equity method to account for these investments unless its ownership interest is so minor that it has virtually no
infl uence over the partnership’s operating and fi nancial policies. Investments in which the Company has little or no infl uence are accounted
for using the cost method.
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 of current cash fl ow 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.
The holders of units of limited partnership interests have the right to present all or some of their units for redemption for a cash amount as
determined by the applicable partnership agreement and based on the fair value of the Company’s common stock. In lieu of cash redemption,
the Company may elect to exchange such units for an equal number of shares of the Company’s common stock.
AvalonBay Communities, Inc. 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In conjunction with the acquisition and development of investments in unconsolidated entities, the Company may incur costs in excess of its
equity in the underlying assets. These costs are capitalized and depreciated over the life of the underlying assets to the extent that the Company
expects to recover the costs.
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 years ended December 31, 2007, 2006 or 2005.
Revenue and Gain Recognition Rental income related to leases is recognized on an accrual basis when due from residents in accordance
with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition,” and Statement of Financial Accounting Standards (“SFAS”) No. 13,
“Accounting for Leases.” 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 Company accounts for sales of real estate assets and the related gain recognition in accordance with SFAS No. 66, “Accounting for Sales
of Real Estate.”
Real Estate Operating real estate assets are stated at cost and consist of land, buildings and improvements, furniture, fi xtures and equipment,
and other costs incurred during their development, redevelopment and acquisition. Signifi cant expenditures which improve or extend the life
of an asset are capitalized. 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 and
exceeds $2.5. 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 the Company has determined that development of the future asset is probable and ends when the asset, or a
portion of an asset, is delivered and is ready for its intended use. For redevelopment efforts, we capitalize costs beginning either (i) in advance
of taking homes out of service when signifi cant renovation of the common area has begun until the redevelopment is completed, or (ii) when
an apartment home is taken out-of-service for redevelopment until the redevelopment is completed and the apartment home is available for
a new resident. Rental income and operating costs incurred during the initial lease-up or post-redevelopment lease-up period are recognized
as they accrue.
In accordance with 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 (“Development Rights”). Future development of these Development Rights is dependent upon various factors, including zoning
and regulatory approval, rental market conditions, construction costs and availability of capital. Pre-development costs incurred in the pursuit
of Development Rights for which future development is not yet considered probable are expensed as incurred. In addition, if the status of
a Development Right changes, making future development by the Company no longer probable, any capitalized pre-development costs
are written-off with a charge to expense. The Company expensed costs related to abandoned pursuits, which includes the abandonment or
impairment of Development Rights, acquisition pursuits and disposition pursuits, in the amounts of $6,974 in 2007, $2,115 in 2006 and
$816 in 2005. These costs are included in operating expenses, excluding property taxes on the accompanying Consolidated Statements of
Operations and Other Comprehensive Income. Abandoned pursuit costs can vary greatly, and the costs incurred in any given period may be
signifi cantly different in future years.
The Company owns land improved with offi ce buildings and industrial space occupied by unrelated third parties in connection with fi ve
Development Rights. The Company intends to manage the current improvements until such time as all tenant obligations have been satisfi ed
or eliminated through negotiation, and construction of new apartment communities is ready to begin. As provided under the guidance of
SFAS No. 67, the revenue from incidental operations received from the current improvements in excess of any incremental costs are being
recorded as a reduction of total capitalized costs of the Development Right and not as part of net income.
In connection with the acquisition of an operating community, the Company performs a valuation, allocating to each asset and liability
acquired in such transaction, their estimated fair values at the date of acquisition in accordance with SFAS No. 141, “Business Combinations.”
The purchase price allocations to tangible assets, such as land, buildings and improvements, and furniture, fi xtures and equipment, are
refl ected in real estate assets and depreciated over their estimated useful lives. Any purchase price allocation to intangible assets, such as
in-place leases, is included in prepaid expenses and other assets on the accompanying Consolidated Balance Sheets and amortized over the
average remaining lease term of the acquired leases. The fair value of acquired in-place leases is determined based on the estimated cost to
replace such leases, including foregone rents during an assumed re-lease period, as well as the impact on projected cash fl ow of acquired leases
with leased rents above or below current market rents.
38 AvalonBay Communities, Inc.
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, fi xtures 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.
It is the Company’s policy to perform a quarterly qualitative analysis to determine if there are changes in circumstances that suggest the
carrying value of a long-lived asset may not be recoverable. If there is an event or change in circumstance that indicates an impairment in the
value of an operating community, the Company compares the current and projected operating cash fl ow 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 fl ow 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 did not recognize an impairment loss on any of its operating communities
during the years ended December 31, 2007, 2006 or 2005.
Income Taxes The Company elected to be taxed as a REIT under the Code, 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 if it distributes 100% of the taxable
income over the time period allowed under the Code 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
qualifi es 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.
The following reconciles net income available to common stockholders to taxable net income for the years ended December 31, 2007, 2006
and 2005:
(Unaudited)
Net income available to common stockholders
Dividends attributable to preferred stock,
not deductible for tax
GAAP gain on sale of communities less than tax gain
Depreciation/Amortization timing differences on real estate
Tax compensation expense in excess of GAAP
Other adjustments
Taxable net income
2007
Estimate
2006
Actual
2005
Actual
$349,460
$257,846
$301,768
8,700
11,808
(49,971)
(29,067)
12,259
8,700
7,242
(21,974)
(26,540)
13,335
8,700
9,345
(13,503)
(18,969)
8,423
$303,189
$238,609
$295,764
The following summarizes the tax components of the Company’s common and preferred dividends declared for the years ended December 31, 2007,
2006 and 2005:
(Unaudited)
Ordinary income
15% capital gain
Unrecaptured §1250 gain
2007
35%
54%
11%
2006
48%
43%
9%
2005
9%
77%
14%
Deferred Financing Costs Deferred fi nancing costs include fees and other expenditures necessary to obtain debt fi nancing 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 fi nancing costs are written-off when debt is retired before the maturity date. Accumulated
amortization of deferred fi nancing costs was $19,368 at December 31, 2007 and was $16,179 at December 31, 2006.
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. Cash in escrow consists primarily of construction fi nancing proceeds that are restricted for
use in the construction of a specifi c community. The majority of the Company’s cash, cash equivalents and cash in escrows are held at major
commercial banks.
Interest Rate Contracts The Company utilizes derivative fi nancial instruments to manage interest rate risk and generally designates
these fi nancial instruments as cash fl ow hedges under the guidance of SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” as amended. This statement requires that derivatives be recorded on the balance sheet as either an asset or liability measured at its
AvalonBay Communities, Inc. 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
fair value, with changes in fair value recognized currently in earnings unless specifi c hedge accounting criteria are met. For cash fl ow hedge
relationships, changes in the fair value of the derivative instrument that are deemed effective at offsetting the risk being hedged are reported
in other comprehensive income. For cash fl ow hedges where the cumulative changes in the fair value of the derivative exceed the cumulative
changes in fair value of the hedged item, the ineffective portion is recognized in current period earnings. As of December 31, 2007 and
December 31, 2006, the Company had approximately $213,108 and $262,000, respectively, in variable rate debt subject to cash fl ow hedges.
As of December 31, 2007, the Company did not apply hedge accounting for an additional $92,400 in variable rate debt which is subject to
interest rate caps. See Note 5, “Derivative Instruments and Hedging Activities,” for further discussion of derivative fi nancial instruments.
Comprehensive Income Comprehensive income, as refl ected on the Consolidated Statements of Operations and Other Comprehensive
Income, is defi ned as all changes in equity during each period except for those resulting from investments by or distributions to shareholders.
Accumulated other comprehensive loss as refl ected on the Consolidated Statements of Stockholders’ Equity refl ects the effective portion of
the cumulative changes in the fair value of derivatives in qualifying cash fl ow hedge relationships.
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 stockholders 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:
Basic and diluted shares outstanding
Weighted average common shares—basic
Weighted average DownREIT units outstanding
Effect of dilutive securities
Weighted average common shares—diluted
Calculation of Earnings per Share—basic
Net income available to common stockholders
Weighted average common shares—basic
Earnings per common share—basic
Calculation of Earnings per Share—diluted
Net income available to common stockholders
Add: Minority interest of DownREIT unitholders
in consolidated partnerships, including discontinued operations
For the year ended
12-31-07
12-31-06
12-31-05
78,680,043
105,859
1,071,025
74,125,795
172,255
1,288,848
72,952,492
474,440
1,332,386
79,856,927
75,586,898
74,759,318
$ 349,460
$ 257,846
$ 301,768
78,680,043
74,125,795
72,952,492
$ 4.44
$ 3.48
$ 4.14
$ 349,460
$ 257,846
$ 301,768
280
391
1,363
Adjusted net income available to common stockholders
$ 349,740
$ 258,237
$ 303,131
Weighted average common shares—diluted
Earnings per common share—diluted
79,856,927
75,586,898
74,759,318
$ 4.38
$ 3.42
$ 4.05
Certain options to purchase shares of common stock in the amounts of 335,856 and 3,000 were outstanding during the years ended
December 31, 2007 and December 31, 2006, respectively, but were not included in the computation of diluted earnings per share because in
applying the treasury stock method under the provisions of SFAS No. 123(R), “Share Based Payments,” as discussed below, such options are
anti-dilutive. Employee options to purchase shares of common stock of 4,500 were outstanding during the year ended December 31, 2005,
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 and therefore, are anti-dilutive.
Stock-Based Compensation Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and
Disclosure – an amendment of FASB Statement No. 123,” prospectively to all employee awards granted, modifi ed, or settled on or after
January 1, 2003. Awards under the Company’s stock option plans vest over a three-year period. Therefore, the cost related to stock-based
employee compensation for employee stock options included in the determination of net income for the years ended December 31, 2007 and
2006 is the same as the cost that would have been recognized if the fair value based method had been applied to all awards since the original
effective date of SFAS No. 123. However, the cost related to stock-based employee compensation for employee stock options included in
the determination of net income for the year ended December 31, 2005 is less than that which would have been recognized if the fair value
based method had been applied to all awards granted since the original effective date of SFAS No. 123. If the fair value based method had
been applied to all outstanding and unvested awards in the year ended December 31, 2005, net income would have been $112 lower for the
year ended December 31, 2005. There would not have been any material impact on earnings per common share – diluted for the year ended
December 31, 2005.
40 AvalonBay Communities, Inc.
The Company adopted the provisions of SFAS No. 123(R) using the modifi ed prospective transition method on January 1, 2006. The adoption
of SFAS No. 123(R) did not have a material impact on the Company’s fi nancial position or results of operations. However, the adoption of SFAS
No. 123(R) changed the service period for, and timing of, the recognition of compensation cost related to retirement eligibility, which will generally
result in accelerated expense recognition by the Company for its stock-based compensation programs. For the year ended December 31, 2005,
the Company recorded compensation cost over the vesting period, regardless of eligibility for retirement (see Note 8, “Commitments and
Contingencies,” for a discussion of the Company’s retirement plan). If the Company had recorded compensation cost based on retirement
eligibility, the increase to compensation cost during the year ended December 31, 2005 would not have been material.
Under the provisions of SFAS No. 123(R), the Company is required to estimate the forfeiture of stock options and recognize compensation
cost net of the estimated forfeitures. The estimated forfeitures included in compensation cost are adjusted to refl ect actual forfeitures at the
end of the vesting period. Prior to the adoption of SFAS No. 123(R), option forfeitures were recognized as they occurred. The forfeiture rate
at December 31, 2007 was 2.3%. The application of estimated forfeitures did not materially impact compensation expense for the year ended
December 31, 2007 or 2006.
Assets Held for Sale & Discontinued Operations The Company follows SFAS No. 144, “Accounting for the Impairment or Disposal
of Long-Lived Assets” (“SFAS 144”) which requires that the assets and liabilities of any communities which have been sold, or otherwise
qualify as held for sale, be presented separately in the Consolidated Balance Sheets. In addition, the results of operations for those assets
that meet the defi nition of discontinued operations are presented as such in the Company’s Consolidated Statements of Operations and
Other Comprehensive Income. Held for sale and discontinued operations classifi cations are provided in both the current and prior periods
presented. Real estate assets held for sale are measured at the lower of the carrying amount or the fair value less the cost to sell. Both the
real estate assets and corresponding liabilities are presented separately in the accompanying Consolidated Balance Sheets. Subsequent to
classifi cation of a community as held for sale, no further depreciation is recorded. For those assets qualifying for classifi cation as discontinued
operations, the community specifi c components of net income presented as discontinued operations include net operating income, minority
interest expense, depreciation expense and interest expense, net. For periods prior to the asset qualifying for discontinued operations under
SFAS 144, the Company reclassifi ed the results of operations to discontinued operations in accordance with SFAS 144. Subsequent to the
reclassifi cation to discontinued operations, the impact of assets classifi ed as discontinued operations on the Consolidated Statements of
Operations and Other Comprehensive Income will include depreciation. 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. A change in presentation for
held for sale or discontinued operations will not have any impact on the Company’s fi nancial condition or results of operations. The Company
combines the operating, investing and fi nancing portions of cash fl ows attributable to discontinued operations with the respective cash fl ows
from continuing operations on the accompanying Consolidated Statements of Cash Flows.
Use of Estimates The preparation of fi nancial 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 fi nancial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results
could differ from those estimates.
Reclassifi cations Certain reclassifi cations have been made to amounts in prior years’ fi nancial statements to conform to current year
presentations.
Recently Issued Accounting Standards The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109,” (“FIN 48”), on January 1, 2007. The Company did not have
any unrecognized tax benefi ts and there was no material effect on either the fi nancial condition or results of operations of the Company as a
result of implementing FIN 48. We do not believe that there will be any material changes in our unrecognized tax positions over the next 12
months. The Company is subject to examination by the respective taxing authorities for the tax years 2004 through 2006.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which standardizes the defi nition of fair value, establishes
a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements, and accordingly, this statement does not require any new fair value
measurements. SFAS No. 157 is effective for all fi scal years beginning after November 15, 2007. The Company does not believe that the
adoption of SFAS No. 157 will have any material impact on its fi nancial position or results of operations.
In December 2007, the FASB issued Statement No. 141(R), “Business Combinations.” This statement changes the accounting for acquisitions
specifi cally eliminating the step acquisition model, changing the recognition of contingent consideration from being recognized when it is
probable to being recognized at the time of acquisition, disallowing the capitalization of transaction costs and delays when restructurings
related to acquisitions can be recognized. The standard is effective for fi scal years ending after December 15, 2008 and will only impact the
accounting for acquisitions subsequent to adoption of the standard.
In December 2007, the FASB issued Statement No. 160, “Accounting and Reporting of Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51.” Under this statement, noncontrolling interests are considered equity and thus our practice of
AvalonBay Communities, Inc. 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
reporting minority interests in the mezzanine section of the consolidated balance sheet will be eliminated. Also, under the new standard, net
income will encompass the total income of all consolidated subsidiaries and there will be separate disclosure on the face of the consolidated
statement of operations and other comprehensive income of the attribution of that income between controlling and noncontrolling interests.
Last, increases and decreases in noncontrolling interests will be treated as equity transactions. The standard is effective for fi scal years ending
after December 15, 2008.
In December 2007, the FASB ratifi ed the consensus of Emerging Issues Task Force on Issue 07-6 “Accounting for the Sale of Real Estate
Subject to the Requirements of FASB Statement No. 66 (“SFAS 66”) When the Agreement Includes a Buy-Sell Clause” (“EITF 07-6”).
EITF 07-6 addresses the impact of a buy-sell clause contained within a joint venture agreement on a seller’s continuing involvement in
the entity and corresponding ability to recognize profi t on a sale of real estate to the joint venture, in which they retain a partial ownership
interest. In EITF 07-6, the Task Force reached a consensus that a buy-sell clause, in and of itself, does not constitute a prohibited form of
continuing involvement that would preclude partial sales treatment under SFAS 66. However, a buy-sell clause may constitute a prohibited
form of continuing involvement that precludes partial sales treatment if the buyer cannot act independently from the seller or if the seller
is economically compelled to reacquire the other partner’s interest in the jointly owned entity. EITF 07-6 is effective for new arrangements
entered into in fi scal years beginning after December 15, 2007 and interim periods within those fi scal years.
2. Interest Capitalized
The Company capitalizes interest during the development and redevelopment of real estate assets in accordance with SFAS No. 34,
“Capitalization of Interest Cost.” Capitalized interest associated with communities under development or redevelopment totaled $73,118 for
2007, $46,388 for 2006 and $25,284 for 2005.
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, 2007 and December 31, 2006
are summarized below. The following amounts and discussion do not include the mortgage notes related to three communities classifi ed as held
for sale as of December 31, 2006 as shown in the Consolidated Balance Sheets (see Note 7, “Real Estate Disposition Activities”).
Fixed rate unsecured notes(1)
Fixed rate mortgage notes payable—conventional and tax-exempt
Variable rate mortgage notes payable—conventional and tax-exempt
Total notes payable and unsecured notes
Variable rate unsecured credit facility
12-31-07
12-31-06
$1,893,499
230,050
570,153
2,693,702
514,500
$2,153,078
210,114
438,236
2,801,428
—
Total mortgage notes payable, unsecured notes and unsecured credit facility
$3,208,202
$2,801,428
(1) Balances at December 31, 2007 and December 31, 2006 include $2,501 and $2,922 of debt discount, respectively.
The following debt activity occurred during the year ended December 31, 2007:
• we issued $16,926 of variable rate mortgage debt for an operating community in June, maturing in May 2012;
• we repaid $15,980 of mortgage debt, secured by the assets of an operating community in July;
• we assumed $3,941 of fi xed rate mortgage debt in conjunction with the acquisition of an operating community in July 2007 and
subsequently defeased the note in December 2007;
• we issued $100,000 of variable rate, tax-exempt debt for a development community in September, maturing in November 2040;
• we repaid $150,000 in previously issued unsecured notes in August 2007, along with any unpaid interest, pursuant to their scheduled
maturity;
• we issued $42,200 of fi xed rate, tax-exempt mortgage debt for an operating community in September 2007, maturing in October 2047;
• in conjunction with the sale of a community we were relieved of our obligation related to the mortgage note secured by the assets of
the community in the amount of $8,116, as it was assumed by the purchaser in September;
• we repaid $110,000 in previously issued unsecured notes in December 2007, along with any unpaid interest, pursuant to their
scheduled maturity;
• we borrowed $514,500 under our unsecured credit facility; and
• we increased our borrowing capacity under our unsecured credit facility by $350,000, to $1,000,000.
42 AvalonBay Communities, Inc.
In the aggregate, secured notes payable mature at various dates from October 2008 through April 2043 and are secured by certain apartment
communities and improved land parcels (with a net carrying value of $1,202,135 as of December 31, 2007). As of December 31, 2007, the
Company has guaranteed approximately $108,575 of mortgage notes payable held by wholly owned subsidiaries; all such mortgage notes
payable are consolidated for fi nancial reporting purposes. The weighted average interest rate of the Company’s fi xed rate mortgage notes
payable (conventional and tax-exempt) was 6.5% and 6.8% at December 31, 2007 and December 31, 2006, respectively. The weighted
average interest rate of the Company’s variable rate mortgage notes payable and its unsecured credit facility, including the effect of certain
fi nancing related fees, was 5.4% at December 31, 2007 and 5.8% at December 31, 2006.
Scheduled payments and maturities of mortgage notes payable and unsecured notes outstanding at December 31, 2007 are as follows:
Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Thereafter
Secured notes
payments
Secured notes
maturities
Unsecured notes
maturities
Stated interest rate
of unsecured notes
8,788
6,204
6,226
5,324
4,265
4,610
4,988
5,396
5,838
6,328
253,707
$311,674
4,432
76,141
29,388
36,579
27,143
—
33,100
—
—
44,700
237,046
$488,529
50,000
146,000
150,000
200,000
300,000
50,000
250,000
250,000
100,000
150,000
—
250,000
—
—
$1,896,000
6.625%
8.250%
7.500%
7.500%
6.625%
6.625%
6.125%
5.500%
4.950%
5.375%
—
5.750%
—
—
The Company’s unsecured notes contain a number of fi nancial 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.
In November 2007 we increased our borrowing capacity under our existing revolving variable rate unsecured credit facility from $650,000 to
$1,000,000. The facility is with a syndicate of commercial banks, to whom we pay, in the aggregate, an annual facility fee of approximately
$1,250. The Company had $514,500 outstanding under the current credit facility and $61,689 outstanding in letters of credit on
December 31, 2007. At December 31, 2006 there were no amounts outstanding under the current facility and $38,713 outstanding in letters
of credit. 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
0.40% per annum (5.81% at December 31, 2007). The stated spread over LIBOR can vary from LIBOR plus 0.325% to LIBOR plus 1.00%
based on the Company’s credit rating. 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 $422,500. The competitive bid option may result in lower pricing than the stated rate if market conditions allow. The
Company did not have any amounts outstanding under this competitive bid option as of December 31, 2007. The Company is in compliance
with certain customary covenants under the unsecured credit facility, including, but not limited to, maintaining certain maximum leverage
ratios, a minimum fi xed charges coverage ratio and minimum unencumbered assets and equity levels. The credit facility matures in November
2011, assuming exercise of a one-year renewal option by the Company.
4. Stockholders’ Equity
As of both December 31, 2007 and 2006, the Company had authorized for issuance 140,000,000 and 50,000,000 shares of common and
preferred stock, respectively. As of December 31, 2007, the Company has the following series of redeemable preferred stock outstanding at a
stated value of $100,000. This series has no stated maturity and is not subject to any sinking fund or mandatory redemptions.
Series
H
Shares outstanding
December 31, 2006
Payable
quarterly
4,000,000
March, June, September,
December
Annual
rate
8.70%
Liquidation
preference
Non-redeemable
prior to
$25.00
October 15, 2008
AvalonBay Communities, Inc. 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dividends on the 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 above. The preferred stock is not redeemable prior to the date stated in the table above, 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.
During the year ended December 31, 2007, the Company:
(i)
issued 4,600,000 shares of common stock in connection with an equity offering;
(ii)
issued 474,496 shares of common stock in connection with stock options exercised;
(iii)
issued 19,231 shares of common stock to acquire an equal number of DownREIT limited partnership units;
(iv)
issued 2,929 shares through the Company’s dividend reinvestment plan;
(v)
issued 75,231 common shares in connection with stock grants;
(vi)
issued 8,577 common shares through the Company’s employee stock purchase program;
(vii) had 8,609 shares of restricted stock forfeited;
(viii) withheld 41,000 shares to satisfy employees’ tax withholding and other liabilities; and
(ix) purchased 2,480,616 shares through the Company’s stock repurchase program.
In addition, the Company granted 344,429 options for common stock to employees. As required under SFAS No. 123(R), any deferred
compensation related to the Company’s stock option and restricted stock grants during the year ended December 31, 2007 is not refl ected on
the Company’s Consolidated Balance Sheet as of December 31, 2007 and will not be refl ected until earned as compensation cost.
Dividends per common share were $3.40 for the year ended December 31, 2007, $3.12 for the year ended December 31, 2006 and $2.84 for
the year ended December 31, 2005. The average dividend for all non-redeemed preferred shares during 2007, 2006 and 2005 was $2.18 per
share. No preferred shares were redeemed in 2007, 2006 or 2005.
In 2004, the Company resumed its Dividend Reinvestment and Stock Purchase Plan (the “DRIP”). The DRIP allows for holders of the
Company’s common stock or preferred stock to purchase shares of common stock through either reinvested dividends or optional cash
payments. The purchase price per share for newly issued shares of common stock under the DRIP will be equal to the last reported sale price
for a share of the Company’s common stock as reported by the New York Stock Exchange (“NYSE”) on the applicable investment date.
In January 2007, the Company fi led a new shelf registration statement with the Securities and Exchange Commission, allowing the Company to
sell an undetermined number or amount of certain debt and equity securities as defi ned in the prospectus. In addition, in conjunction with its
inclusion in the S&P 500 Index in January 2007, the Company issued 4,600,000 shares of its common stock at $129.30 per share, resulting in
net proceeds in the amount of approximately $594,000.
During 2007, the Company announced that its Board of Directors increased to $300,000 the Company’s common stock repurchase program
for purchases of shares of its common stock in open market or negotiated transactions. From August 1, 2007 to December 31, 2007, the
Company repurchased 2,480,616 shares at an average price of $103.95 per share through this program. The Company did not have any
purchases under this program prior to August 1, 2007.
5. Derivative Instruments and Hedging Activities
The Company enters into interest rate swap and interest rate cap agreements (collectively, the “Hedging Derivatives”) to reduce the impact
of interest rate fl uctuations on its variable rate, tax-exempt bonds and its variable rate conventional secured debt (collectively, the “Hedged
Debt”). The Company has not entered into any interest rate hedge agreements for its conventional unsecured debt and does not enter into
derivative transactions for trading or other speculative purposes. The following table summarizes the consolidated Hedging Derivatives at
December 31, 2007:
(Dollars in thousands)
Notional balance
Weighted average interest rate (1)
Weighted average capped interest rate
Earliest maturity date
Latest maturity date
Estimated fair value, asset/(liability)
(1) For interest rate caps, this represents the weighted average interest rate on the debt.
44 AvalonBay Communities, Inc.
Interest
Rate Caps
$235,973
5.0%
7.5%
May-09
Mar-14
$ 115
Interest
Rate Swaps
$46,337
6.5%
n/a
Jun-10
Jul-10
$ (2,808)
At December 31, 2007, the Company had nine derivatives designated as cash fl ow hedges and four derivatives not designated as hedges.
For the derivative positions that the Company has determined qualify as effective cash fl ow hedges under SFAS No. 133, the Company has
recorded the effective portion of cumulative changes in the fair value of the Hedging Derivatives in other comprehensive income. Amounts
recorded in other comprehensive income will be reclassifi ed into earnings in the periods in which earnings are affected by the hedged cash
fl ow. To adjust the Hedging Derivatives to their fair value, the Company recorded unrealized gains in other comprehensive income of $213,
$891 and $2,626 during the years ended December 31, 2007, 2006 and 2005, respectively. These amounts will be reclassifi ed into earnings
in conjunction with the periodic adjustment of the fl oating rates on the Hedged Debt, in interest expense, net. The amount reclassifi ed into
earnings in 2007, as well as the estimated amount included in accumulated other comprehensive income as of December 31, 2007, expected
to be reclassifi ed into earnings within the next twelve months to offset the variability of cash fl ows of the hedged items during this period are
not material.
The Company assesses both at inception and on an on-going basis, the effectiveness of qualifying cash fl ow hedges. Hedge ineffectiveness,
reported as a component of general and administrative expenses, did not have a material impact on earnings of the Company for any prior
period, and the Company does not anticipate that it will have a material effect in the future. The fair values of the Hedging Derivatives are
included in accrued expenses and other liabilities on the accompanying Consolidated Balance Sheets.
Derivative fi nancial instruments expose the Company to credit risk in the event of nonperformance by the counterparties under the terms
of the Hedging Derivatives. The Company minimizes its credit risk on these transactions by dealing with major, creditworthy fi nancial
institutions which have an A+ or better credit rating by the Standard & Poor’s Ratings Group. As part of its on-going control procedures, the
Company monitors the credit ratings of counterparties and the exposure of the Company to any single entity, thus minimizing credit risk
concentration. The Company believes the likelihood of realizing losses from counterparty non-performance is remote.
6. Investments in Real Estate Entities
Investments in Unconsolidated Real Estate Entities The Company accounts for its investments in unconsolidated real estate entities in
accordance with the literature as discussed in Note 1, “Organization and Signifi cant Accounting Policies”, under Principles of Consolidation.
In October 2007, the Company completed the sale of its partnership interest in Avalon Grove to its third–party venture partner for $63,446
with a gain in accordance with GAAP of $56,320 reported as a component of equity in income of unconsolidated entities on the Consolidated
Statements of Operations and Other Comprehensive Income. Avalon Grove, located in the Fairfi eld-New Haven market of Connecticut,
was previously reported as an unconsolidated real estate investment. The Company will continue to manage this community for a customary
property management fee.
As of December 31, 2007, the Company had investments in the following real estate entities:
• Arna Valley View LP — In connection with the municipal approval process for the development of a consolidated community, the
Company agreed to participate in the formation of a limited partnership in February 1999 to develop, fi nance, 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 fi nancing and tax credits used to fi nance 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, 2007, Arna Valley View has $5,635 of variable rate, tax-exempt bonds outstanding, which mature in June 2032. In
addition, Arna Valley View has $4,938 of 4% fi xed rate county bonds outstanding that mature in December 2030. Arna Valley View’s
debt is neither guaranteed by, nor recoursed to the Company. Due to the Company’s limited ownership in this venture and the terms
of the management agreement regarding the rights of the limited partners, it is accounted for using the cost method.
• CVP I, LLC — In February 2004, the Company entered into a joint venture agreement with an unrelated third-party for the
development of Avalon Chrystie Place, a 361 apartment-home community located in New York, New York, for which construction
was completed in late 2005. The Company has contributed $6,270 to this joint venture and holds a 20% equity interest (with a right
to 50% of distributions after achievement of a threshold return, which was achieved in 2007). The Company is the managing member
of CVP I, LLC, however, property management services at the community are performed by an unrelated third party. In connection
with the construction management services that the Company provided to CVP I, LLC during the development of Avalon Chrystie
Place, the Company provided a construction completion guarantee to the construction loan lender in order to fulfi ll their standard
fi nancing requirements related to the construction fi nancing. Upon completion of the construction of Avalon Chrystie Place in 2006,
the Company was released from all obligations associated with this guarantee.
• As of December 31, 2007, CVP I, LLC has tax-exempt variable rate bonds in the amount of $117,000 outstanding, which have
a permanent credit enhancement and mature in February 2036. The Company has guaranteed, under limited circumstance, the
repayment to the credit enhancer of any advance in fulfi llment of CVP I LLC’s repayment obligations under the bonds. The Company
AvalonBay Communities, Inc. 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
has also guaranteed the credit enhancer that CVP I, LLC will obtain a fi nal certifi cate of occupancy for the project overall once
tenant improvements related to a retail tenant are complete, which is expected in the fi rst half of 2008. The Company’s maximum
obligation under this guarantee at December 31, 2007 was $121,000. The Company’s 80% partner in this venture has agreed that
it will reimburse the Company its pro rata share of any amounts paid relative to these guaranteed obligations. The Company does
not currently expect to incur any liability under either of these guarantees. The estimated fair value of, and the Company’s obligation
under these guarantees, both at inception and as of December 31, 2007 were not signifi cant. As a result the Company has not
recorded any obligation associated with these guarantees at December 31, 2007. This community is unconsolidated for fi nancial
reporting purposes and is accounted for under the equity method.
• Avalon Del Rey Apartments, LLC — In March 2004, the Company entered into an agreement with an unrelated third party which
provided that, upon construction completion, Avalon Del Rey would be owned and operated by a joint venture between the Company
and the third-party. Avalon Del Rey is a 309 apartment-home community located in Los Angeles, California. Construction for Avalon
Del Rey was completed during the third quarter of 2006. During the fourth quarter of 2006, the third-party venture partner invested
$49,000 and was granted a 70% ownership interest in the venture, with the Company retaining a 30% equity interest (see Note 7,
“Real Estate Disposition Activities”). The Company will continue to be responsible for the day-to-day operations of the community
and will be the management agent subject to the terms of a management agreement. Avalon Del Rey Apartments, LLC has a variable
rate $50,000 secured construction loan, of which $40,845 is outstanding as of December 31, 2007 and which matures in September
2009, subject to the exercise of an additional one-year extension option. In conjunction with the construction management services
that the Company provided to Avalon Del Rey Apartments, LLC, the Company has provided a construction completion guarantee to
the construction loan lender in order to fulfi ll their standard fi nancing requirements related to construction fi nancing. Although the
obligation of the Company under this guarantee exists at December 31, 2007, the Company does not have any potential liability at
December 31, 2007, as construction has been completed. This guarantee will terminate following satisfaction of the lender’s standard
completion requirements, which the Company expects to occur in 2008.
• In conjunction with the admittance of the joint venture partner to the LLC, the Company provided the third-party investor an
operating guarantee. This guarantee, which extended for one year, provided that if the one-year return for the initial year of the joint
venture partner’s investment is less than a threshold return of 7% on its initial equity investment, that the Company would pay the
joint venture partner an amount equal to the shortfall, up to the 7% threshold return required. Over the guarantee period, the cash
fl ows and return on investment for Avalon Del Rey exceeded the initial year threshold return required by our joint venture partner,
satisfying all obligations of the Company under this guarantee.
• Concurrent with the satisfaction of the operating guarantee in the fourth quarter of 2007, the Company recognized the sale of the
70% ownership interest in the entity that owns Avalon Del Rey, reporting a gain of $3,607 as a component of equity in income of
unconsolidated entities on the Consolidated Statements of Operations and Other Comprehensive Income. Therefore, in the fourth
quarter of 2007, the Company began to account for its investment in the joint venture under the equity method of accounting.
• Juanita Construction, Inc. — In April 2004, a taxable REIT subsidiary of the Company entered into an agreement to develop Avalon
at Juanita Village, a 211 apartment-home community located in Kirkland, Washington, for which construction was completed in late
2005. Avalon at Juanita Village was developed through Juanita Construction, Inc., a wholly-owned taxable REIT subsidiary and was
sold to a joint venture in the fi rst quarter of 2006, at which point, the subsidiary was reimbursed for all the costs of construction and
retained a promoted residual interest in the profi ts of the joint venture. The third-party joint venture partner received a 100% equity
interest in the joint venture and will control the joint venture. The Company was engaged to manage the community for a property
management fee. This community is unconsolidated for fi nancial reporting purposes effective with the sale to the joint venture.
• Aria at Hathorne LLC — In the second quarter of 2007, a wholly owned taxable REIT subsidiary entered into an LLC agreement
with a joint venture partner to develop 64 for-sale townhomes with a total capital cost of $23,636 in Danvers, Massachusetts. The
homes will be developed during 2008 and 2009 on an outparcel adjacent to our Avalon Danvers rental apartment community. The
outparcel was zoned for for-sale activity, and was contributed to the LLC by the subsidiary of the Company in exchange for a 50%
ownership interest. The LLC has $726 outstanding on a variable rate $5,400 secured construction loan and $2,744 outstanding on a
$3,200 variable rate development loan as of December 31, 2007. The Company’s joint venture partner has provided a payment and
completion guarantee to both the acquisition and development and the construction loan lender. The Company accounts for this
investment under the equity method.
• MVP I, LLC — In December 2004, the Company entered into a joint venture agreement with an unrelated third-party for the
development of Avalon at Mission Bay North II. Construction for Avalon at Mission Bay North II, a 313 apartment-home community
located in San Francisco, California, was completed in December 2006. The Company has contributed $5,902 to this venture and
holds a 25% equity 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. To fund the construction of Avalon at Mission Bay North II, MVP I, LLC
executed a variable rate $94,400 secured construction loan. In conjunction with the construction management services that the
Company provided to MVP I, LLC, the Company provided a construction completion guarantee to the construction loan lender
in order to fulfi ll their standard fi nancing requirements related to construction fi nancing. In the fourth quarter of 2007, all of the
46 AvalonBay Communities, Inc.
lender’s standard completion requirements have been satisfi ed and the obligation of the Company under this guarantee terminated.
In December 2007, MVP I, LLC repaid the construction loan, concurrently executing a seven-year, fi xed rate conventional loan. This
community is unconsolidated for fi nancial reporting purposes and is accounted for under the equity method.
• AvalonBay Value Added Fund, L.P. (the “Fund”) — In March 2005, the Company admitted outside investors into the Fund, a private,
discretionary investment vehicle, which will acquire and operate communities in the Company’s markets. The Fund will serve, until
March 16, 2008 or until 80% of its committed capital is invested, as the principal vehicle through which the Company will acquire
apartment communities, subject to certain exceptions. The Fund has nine institutional investors, including the Company, and a
combined equity capital commitment of $330,000. A signifi cant portion of the investments made in the Fund by its investors are
being made through AvalonBay Value Added Fund, Inc., a Maryland corporation that qualifi es as a REIT under the Internal Revenue
Code (the “Fund REIT”). A wholly-owned subsidiary of the Company is the general partner of the Fund and has committed $50,000
to the Fund and the Fund REIT, representing a 15.2% combined general partner and limited partner equity interest, with $43,399
of this commitment funded as of December 31, 2007. The Fund has invested $777,568 as of December 31, 2007. Management of
the Fund expects to invest approximately $46,000 of additional funds to redevelop the assets acquired, at which time the Fund will
become fully invested. Upon the admittance of the outside investors, the Fund held four communities, containing a total of 879
apartment homes with an aggregate gross real estate value of $112,852, that were acquired in 2004. Prior to the admittance of outside
investors, the Fund was directly or indirectly wholly-owned by the Company, and therefore the revenues and expenses, and assets
and liabilities of these four communities were consolidated in the Company’s results of operations and fi nancial position. However,
upon admittance of the outside investors in March 2005, the Company deconsolidated the revenue and expenses, and assets and
liabilities of these four communities and accounts for its 15.2% equity interest in the Fund under the equity method of accounting.
The Company received net proceeds of $87,948 as reimbursement for acquiring and warehousing these communities. The Company
receives asset management fees, property management fees and redevelopment fees, as well as a promoted interest if certain thresholds
are met (which were not achieved in 2007).
As of December 31, 2007, the Fund owns the following 20 communities, subject to certain mortgage debt. In addition, as of December 31, 2007,
the Fund has $47,400 outstanding under its variable rate credit facility, which matures in January 2008. The Company has not guaranteed
any of the Fund debt, nor does it have any obligation to fund this debt should the Fund be unable to do so.
• Avalon at Redondo Beach, a 105 apartment-home community located in Los Angeles, California. As of December 31, 2007, Avalon
at Redondo Beach has $16,765 in 4.8% fi xed rate debt outstanding, which matures in October 2011;
• Avalon Lakeside, a 204 apartment-home community located in Chicago, Illinois. As of December 31, 2007, Avalon Lakeside has
$12,056 in 5.7% fi xed rate debt outstanding which matures in March 2012;
• Avalon Columbia, a 170 apartment-home community located in Baltimore, Maryland. As of December 31, 2007, Avalon Columbia
has $22,275 in 5.5% fi xed rate debt outstanding, which matures in April 2012;
• Avalon Redmond, a 400 apartment-home community located in Seattle, Washington. As of December 31, 2007, Avalon Redmond
has $36,500 in 5.0% fi xed rate debt outstanding, which matures in July 2012;
• Avalon at Poplar Creek, a 196 apartment-home community located in Chicago, Illinois. As of December 31, 2007, Avalon at Poplar
Creek has $16,500 in 4.8% fi xed rate debt outstanding, which matures in October 2012;
• Avalon Sunset, an 82 apartment-home community located in Los Angeles, California. As of December 31, 2007, Avalon Sunset has
$12,750 in 5.4% fi xed rate debt outstanding, which matures in February 2014;
• Avalon at Civic Center, a 192 apartment-home community located in Norwalk, California. As of December 31, 2007, Avalon at
Civic Center has $23,806 in 5.3% fi xed rate debt outstanding, which matures in August 2013;
• Avalon Paseo Place, a 134 apartment-home community located in Fremont, California. As of December 31, 2007, Avalon Paseo Place
has $11,800 in 5.7% fi xed rate debt outstanding, which matures in November 2013;
• Avalon Yerba Buena, a 160 apartment-home community located in San Francisco, California. As of December 31, 2007, Avalon
Yerba Buena has $41,500 in 5.9% fi xed rate debt outstanding, which matures in March 2014;
• Avalon at Aberdeen Station, a 290 apartment-home community located in Aberdeen, New Jersey. As of December 31, 2007, Avalon
at Aberdeen Station has $34,456 in 5.7% fi xed rate debt outstanding, which matures in September 2013;
• The Springs, a 320 apartment-home community located in Corona, California. As of December 31, 2007, The Springs has $26,000
in 6.1% fi xed rate debt outstanding, which matures in October 2014;
• The Covington, a 256 apartment-home community located in Lombard, Illinois. As of December 31, 2007, The Covington has
$17,243 in 5.4% fi xed rate debt outstanding, which matures in January 2014;
• Avalon Cedar Place, a 156 apartment-home community located in Columbia, Maryland. As of December 31, 2007, Avalon Cedar
Place has $12,000 in 5.7% fi xed rate debt outstanding, which matures in February 2014;
AvalonBay Communities, Inc. 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
• Avalon Centerpoint, a 392 apartment-home community located in Baltimore, Maryland. As of December 31, 2007, Avalon
Centerpoint has $45,000 in 5.7% fi xed rate debt outstanding, which matures in December 2013;
• Middlesex Crossing, a 252 apartment-home community located in Billerica, Massachusetts. As of December 31, 2007, Middlesex
Crossing has $24,100 of 5.5% fi xed rate debt outstanding, which matures in December 2013;
• Avalon Crystal Hill, a 168 apartment-home community located in Ponoma, New York. As of December 31, 2007, Avalon Crystal
Hill has $24,500 of 5.4% fi xed rate debt outstanding, which matures in December 2013;
• Skyway Terrace, a 348 apartment-home community located in San Jose, California. As of December 31, 2007, Skyway Terrace has
$37,500 of 6.1% fi xed rate debt outstanding, which matures in March 2014;
• Avalon Rutherford Station, a 108 apartment-home community located in East Rutherford, New Jersey. As of December 31, 2007,
Avalon Rutherford Station has $20,653 of 6.1% fi xed rate debt outstanding, which matures in September 2016;
• South Hills Apartments, an 85 apartment-home community located in West Covina, California. As of December 31, 2007, South
Hills Apartments has $11,762 of 5.9% fi xed rate debt outstanding, which matures in December 2013; and
• Colonial Towers/South Shore Manor, a 211 apartment-home community located in Weymouth, Massachusetts. Colonial Towers/
South Shore Manor had no debt outstanding at December 31, 2007.
In addition, as part of the formation of the Fund, the Company provided a guarantee to one of the limited partners. The guarantee provides
that, if, upon fi nal liquidation of the Fund, the total amount of all distributions to that partner during the life of the Fund (whether from
operating cash fl ow or property sales) does not equal the total capital contributions made by that partner, then the Company will pay the
partner an amount equal to the shortfall, but in no event more than 10% of the total capital contributions made by the partner (maximum
of approximately $6,510 as of December 31, 2007). As of December 31, 2007, the fair value of the real estate assets owned by the Fund is
considered adequate to cover such potential payment under a liquidation scenario. The estimated fair value of and the Company’s obligation
under this guarantee, both at inception and as of December 31, 2007 was not signifi cant and therefore the Company has not recorded any
obligation for this guarantee as of December 31, 2007.
The following is a combined summary of the fi nancial position of the entities accounted for using the equity method, as of the dates presented:
Assets:
Real estate, net
Other assets
Total assets
Liabilities and partners’ capital:
Mortgage notes payable and credit facility
Other liabilities
Partners’ capital
Total liabilities and partners’ capital
12-31-07
(unaudited)
12-31-06
(unaudited)
$ 997,319
31,774
$1,029,093
$ 719,310
20,496
289,287
$1,029,093
$724,795
55,716
$780,511
$510,784
51,108
218,619
$780,511
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
12-31-07
(unaudited)
12-31-06
(unaudited)
12-31-05
(unaudited)
$ 92,075
(40,090)
—
(40,791)
(26,622)
$(15,428)
$67,207
(30,913)
26,661
(23,545)
(18,054)
$21,356
$35,826
(19,582)
—
(7,648)
(8,482)
$ 114
Rental income
Operating and other expenses
Gain on sale of communities
Interest expense, net
Depreciation expense
Net income (loss)
48 AvalonBay Communities, Inc.
In conjunction with the acquisition and development of the investments in unconsolidated entities, the Company incurred costs in excess
of its equity in the underlying net assets of the respective investments. These costs represent $5,375 at December 31, 2007 and $7,491 at
December 31, 2006 of the respective investment balances.
Investments in Unconsolidated Non-Real Estate Entities
In February 2005, the Company sold its interest in a technology venture
that was accounted for under the cost method. As a result of this transaction, the Company received net proceeds of approximately $6,700
and recognized a gain on the sale of this investment of $6,252, which is refl ected in equity in income of unconsolidated entities on the
accompanying Consolidated Statement of Operations and Other Comprehensive Income for the year ended December 31, 2005. Under the
terms of the sale, certain proceeds were escrowed to secure the purchaser’s rights to indemnifi cation. Any amounts not used for this purpose
were distributed to the former investors in the venture in 2006. For the year ended December 31, 2006, the Company recognized $433 for
the fi nal installment of the gain on this sale upon release of this escrow.
The following is a summary of the Company’s equity in income (loss) of unconsolidated entities for the years presented:
Town Grove, LLC
Avalon Del Rey, LLC
CVP I, LLC
Town Run Associates
Avalon Terrace, LLC(1)
MVP I, LLC
AvalonBay Value Added Fund, L.P.
AvalonBay Redevelopment LLC
Rent.com
Constellation Real Technologies
Total(2)
For the year ended
12-31-07
12-31-06
12-31-05
$57,821
3,616
567
107
22
(1,261)
(1,775)
—
—
72
$59,169
$1,457
—
(68)
298
6,736
(662)
(799)
—
433
60
$7,455
$1,286
—
(339)
266
58
(57)
(341)
73
6,252
—
$7,198
(1) Equity in income from this entity for 2006 includes a gain of $6,609 for the Company’s 25% share of the gain from the fourth quarter disposition of Avalon
Bedford, the sole asset held by Avalon Terrace, LLC.
(2) This table does not include Aria at Hathorne. As a development community, all costs are being capitalized, resulting in no reportable income.
7. Real Estate Disposition Activities
During the year ended December 31, 2007, the Company sold four communities: Avalon View, located in Wappingers Falls, New York, San
Marino, located in San Jose, California, Avalon West, located in Westborough, Massachusetts and Avalon at Stevens Pond, located in Saugus,
Massachusetts. These four communities contained a total of 982 apartment homes and were sold for an aggregate sales price of $204,650.
The Company also sold its interest in Avalon Grove, which contained 402 apartment homes for a sales price of $63,446. The sale of these
communities and partnership interest resulted in a gain in accordance with GAAP of $162,807. Details regarding the community asset sales
are summarized in the following table:
Community Name
Location
Wappingers Falls, NY
San Jose, CA
Westborough, MA
Saugus, MA
Stamford, CT
Avalon View
San Marino
Avalon West
Avalon at Stevens Pond
Avalon Grove(1)
Total of all 2007 asset sales
Total of all 2006 asset sales
Total of all 2005 asset sales
Period
of sale
Q307
Q307
Q307
Q407
Q407
Apartment
homes
288
248
120
326
402
1,384
1,036
1,305
Debt
$ —
—
8,116
—
—
$ 8,116
$37,200
$ —
Gross sales
price
$ 54,000
55,000
18,000
77,650
63,446
$268,096
$261,850
$351,450
Net
proceeds
$ 53,293
54,333
9,585
76,784
63,401
$257,396
$218,492
$344,185
(1) The Company held and sold its 50% ownership interest in the LLC that developed, owned and operated Avalon Grove. The Company will continue to manage
this community for a customary property management fee.
AvalonBay Communities, Inc. 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 2007, the Company had no communities that qualifi ed as discontinued operations or held for sale under the provisions
of SFAS No. 144.
In accordance with the requirements of SFAS No. 144, the operations for any communities sold from January 1, 2005 through
December 31, 2007 and the communities that qualifi ed as discontinued operations as of December 31, 2007 have been presented as
discontinued operations in the accompanying Consolidated Financial Statements. Accordingly, certain reclassifi cations have been made in
prior periods to refl ect discontinued operations consistent with current period presentation.
The following is a summary of income from discontinued operations for the periods presented:
Rental income
Operating and other expenses
Interest expense, net
Depreciation expense
Income from discontinued operations
For the year ended
12-31-07
12-31-06
12-31-05
$10,911
(4,043)
(687)
(2,176)
$4,005
$17,658
(6,491)
(1,862)
(3,687)
$5,618
$42,336
(14,441)
(1,927)
(6,842)
$19,126
The Company’s Consolidated Balance Sheets include other assets (excluding net real estate) of $0 and $3,821 as of December 31, 2007 and
December 31, 2006, respectively, and other liabilities of $0 as of December 31, 2007 and $69,100 as of December 31, 2006, relating to real
estate assets sold or classifi ed as held for sale.
During the year ended December 31, 2007, the Company sold one parcel of land through a taxable REIT subsidiary, located in the Mid-
Atlantic, for a sales price of $5,800, resulting in a gain of $545 under GAAP. The Company had gains on the sales of land parcels of $13,519
in 2006, and $4,479 in 2005.
8. Commitments and Contingencies
Employment Agreements and Arrangements As of December 31, 2007, the Company had employment agreements with four executive
offi cers. The employment agreements provide for severance payments and generally 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 terms of these agreements end on dates that vary between November 2008 and June 2009. The employment
agreements provide for one-year automatic renewals (two years in the case of the Chief Executive Offi cer (“CEO”)) after the initial term
unless an advance notice of non-renewal is provided by either party. Upon a notice of non-renewal by the Company, each of the offi cers 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.
The Company’s stock incentive plan, as described in Note 10, “Stock-Based Compensation Plans,” provides that upon an employee’s
Retirement (as defi ned in the plan documents) from the Company, all outstanding stock options and restricted shares of stock held by the
employee will vest, and the employee will have up to 12 months to exercise any options held upon retirement. Under the plan, Retirement
means a termination of employment, other than for cause, after attainment of age 50, provided that (i) the employee has worked for the
Company for at least 10 years, (ii) the employee’s age at Retirement plus years of employment with the Company equals at least 70, (iii) the
employee provides at least six months written notice of his intent to retire, and (iv) the employee enters into a one year non-compete and
employee non-solicitation agreement.
The Company also has an Offi cer Severance Program (the “Program”) for the benefi t of those offi cers of the Company who do not have
employment agreements. Under the Program, in the event an offi cer who is not otherwise covered by a severance arrangement is terminated
(other than for cause) within two years following a change in control (as defi ned) of the Company, such offi cer will generally receive a
cash lump sum payment equal to the sum of such offi cer’s base salary and cash bonus, as well as accelerated vesting of stock options and
restricted stock. Costs related to the Company’s employment agreements and the Program are accounted for in accordance with SFAS No. 5,
“Accounting for Contingencies,” and therefore are recognized when considered by management to be probable and estimable.
Construction and Development Contingencies
In connection with the pursuit of a Development Right in Pleasant Hill, California,
$125,000 in bond fi nancing was issued by the Contra Costa County Redevelopment Agency (the “Agency”) in connection with the possible
50 AvalonBay Communities, Inc.
future construction of a multifamily rental community by PHVP I, LLC. The bond proceeds were immediately invested in their entirety in
a guaranteed investment contract (“GIC”) administered by a trustee. This Development Right is planned as a mixed-use development, with
residential, for-sale, retail and offi ce components. The bond proceeds will remain in the GIC until June 2008, at which time a loan will be
made to PHVP I, LLC to fund construction of the multifamily portion of the development, or the bonds will be redeemed by the Agency.
Although the Company does not have any equity or economic interest in PHVP I, LLC at this time, the Company holds an option to make
a capital contribution to PHVP I, LLC in exchange for a 99% general partner interest in the entity. Should the Company decide not to
exercise this option, the bonds will be redeemed, and a loan will not be made to PHVP I, LLC. The bonds are payable from the proceeds
of the GIC and are non-recourse to both PHVP I, LLC and to the Company. There is no loan payable outstanding by PHVP I, LLC as of
December 31, 2007.
In addition, as part of providing construction management services to PHVP I, LLC for the construction of a public garage, the Company
has provided a construction completion guarantee to the related lender in order to fulfi ll their standard fi nancing requirements related to
the garage construction fi nancing. The Company’s obligations under this guarantee will terminate following construction completion of the
garage once all of the lender’s standard completion requirements have been satisfi ed, which the Company currently expects to occur in 2008.
In the third quarter of 2006, signifi cant modifi cations were requested by the local transit authority to change the garage structure design. The
Company does not believe that the requested design changes will impact the construction schedule. However, it is expected that these changes
will increase the original budget by an amount up to $5,000. The Company believes that substantially all potential additional amounts are
reimbursable from unrelated third parties. At this time, the Company does not believe that it is probable that it will incur any additional
costs. The estimated fair value of and the Company’s obligation under this guarantee, both at inception and as of December 31, 2007 was not
signifi cant and therefore the Company has not recorded any obligation for this guarantee as of December 31, 2007.
Legal Contingencies The Company is currently involved in litigation alleging that 100 communities currently or formerly owned by
the Company violated the accessibility requirements of the Fair Housing Act and the Americans with Disabilities Act. The lawsuit, Equal
Rights Center v. AvalonBay Communities, Inc., was fi led on September 23, 2005 in the federal district court in Maryland. The plaintiff seeks
compensatory and punitive damages in unspecifi ed amounts as well as injunctive relief (such as modifi cation of existing communities), an
award of attorneys’ fees, expenses and costs of suit. The Company has fi led a motion to dismiss all or parts of the suit, which has not been
ruled on yet by the court. The Company cannot predict or determine the outcome of this lawsuit, nor is it reasonably possible to estimate the
amount of loss, if any, that would be associated with an adverse decision.
During 2006, the Company determined that contaminated soil from imported fi ll was delivered to its Avalon Lyndhurst development site by
third parties. The contaminants exceeded allowable levels for residential use under New Jersey state and local regulations. The remediation
effort is complete. The net cost associated with this remediation effort, after considering insurance proceeds received to date and including
costs associated with construction delays, is approximately $6,000. The Company is pursuing the recovery of these additional net costs from
the third parties involved, but no assurance can be given as to the amount or timing of reimbursements to the Company. The Company
recorded these incremental costs as incurred, and is recording potential recoveries as they become certain or are received. Although the net
costs to complete construction of this community exceeded the original construction budget, the Company has determined that there is not
an impairment in the value of this asset which would require a write down in the carrying value. The Company will continue to review this
assessment based on changes in circumstances or market conditions.
In addition, 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 fi nancial statements. While the resolution of these matters cannot be predicted with certainty, management currently believes the fi nal
outcome of such matters will not have a material adverse effect on the fi nancial position or results of operations of the Company.
Lease Obligations The Company owns 11 apartment communities which are located on land subject to land leases expiring between
November 2028 and March 2142. In addition, the Company leases certain offi ce space. These leases are accounted for as operating leases
under SFAS No. 13, “Accounting for Leases.” These leases have varying escalation terms, and four of these leases have purchase options
exercisable between 2008 and 2095. The Company incurred costs of $15,516, $14,850 and $15,163 in the years ended December 31, 2007,
2006 and 2005, respectively, related to these leases.
The following table details the future minimum lease payments under the Company’s current leases:
Payments due by period
2008
$14,412
2009
$14,537
2010
2011
2012
Thereafter
$14,571
$14,613
$14,655
$2,069,951
AvalonBay Communities, Inc. 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 classifi cation, unless disposition plans regarding a community change, 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 operating expenses
as of the beginning of the prior year. For the year ended December 31, 2007, the Established Communities are communities that
are consolidated for fi nancial reporting purposes, had stabilized occupancy and operating expenses as of January 1, 2006, are not
conducting or planning to conduct substantial redevelopment activities and are not held for sale or planned for disposition within the
current year. A community is considered to have stabilized occupancy at the earlier of (i) attainment of 95% physical occupancy or
(ii) the one-year anniversary of completion of development or redevelopment.
• Other Stabilized Communities includes all other completed communities that have stabilized occupancy, as defi ned above. Other
Stabilized Communities do not include communities that are conducting or planning to conduct substantial redevelopment activities
within the current year.
• Development/Redevelopment Communities consists of communities that are under construction and have not received a fi nal certifi cate
of occupancy, communities where substantial redevelopment is in progress or is planned to begin during the current year and
communities under lease-up, that had not reached stabilized occupancy, as defi ned above, as of January 1, 2007.
In addition, the Company owns land held for future development and has other corporate assets that are not allocated to an operating segment.
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” requires that segment disclosures present the
measure(s) used by the chief operating decision maker for purposes of assessing such segments’ performance. The Company’s chief operating
decision maker is comprised of several members of its executive management team who use net operating income (“NOI”) as the primary
fi nancial measure for Established Communities and Other Stabilized Communities. NOI is defi ned by the Company as total revenue less
direct property operating expenses. Although the Company considers NOI a useful measure of a community’s or communities’ operating
performance, NOI should not be considered an alternative to net income or net cash fl ow from operating activities, as determined in
accordance with GAAP. NOI excludes a number of income and expense categories as detailed in the reconciliation of NOI to net income.
A reconciliation of NOI to net income for the years ended December 31, 2007, 2006 and 2005 is as follows:
Net income
Indirect operating expenses, net of corporate income
Investments and investment management
Interest expense, net
General and administrative expense
Equity in income of unconsolidated entities
Minority interest in consolidated partnerships
Depreciation expense
Gain on sale of real estate assets
Income from discontinued operations
For the year ended
12-31-07
12-31-06
12-31-05
$358,160
31,285
11,737
97,545
28,494
(59,169)
1,585
179,549
(107,032)
(4,005)
$266,546
28,811
7,030
109,184
24,767
(7,455)
573
160,442
(110,930)
(5,618)
$310,468
26,675
4,834
125,171
25,761
(7,198)
1,481
156,455
(199,766)
(19,126)
Net operating income
$538,149
$473,350
$424,755
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.
52 AvalonBay Communities, Inc.
The table below provides details of the Company’s segment information as of the dates specifi ed. The segments are classifi ed 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 Note 1, “Organization and Signifi cant Accounting Policies.”
Segment information for the years ended December 31 2007, 2006 and 2005 has been adjusted for the communities that were sold from
January 1, 2005 through December 31, 2007, or otherwise qualify as discontinued operations as of December 31, 2007, as described in Note
7, “Real Estate Disposition Activities.”
For the year ended December 31, 2007
Established
Northeast
Mid-Atlantic
Midwest
Pacifi c Northwest
Northern California
Southern California
Total Established
Other Stabilized
Development / Redevelopment
Land Held for Future Development
Non-allocated(2)
Total
revenue
NOI
% NOI change
from prior year
Gross
real estate(1)
$276,423
114,144
12,070
33,594
160,442
56,091
652,764
47,857
106,013
n/a
6,107
$184,643
71,882
7,286
23,111
116,516
40,219
443,657
30,325
64,167
n/a
n/a
3.7%
6.4%
2.3%
17.1%
12.6%
5.9%
7.2%
n/a
n/a
n/a
n/a
$1,805,241
690,573
92,879
290,308
1,395,022
349,719
4,623,742
356,038
2,240,744
288,423
47,793
Total
$812,741
$538,149
13.7%
$7,556,740
For the year ended December 31, 2006
Established
Northeast
Mid-Atlantic
Midwest
Pacifi c Northwest
Northern California
Southern California
Total Established
Other Stabilized
Development / Redevelopment
Land Held for Future Development
Non-allocated(2)
$198,062
100,462
11,478
33,103
149,531
57,632
550,268
87,939
76,356
n/a
6,866
$134,001
61,870
7,121
21,819
104,588
41,115
370,514
55,337
47,499
n/a
n/a
5.2%
14.9%
7.4%
13.0%
11.6%
9.3%
9.4%
n/a
n/a
n/a
n/a
$1,232,590
627,789
92,408
316,089
1,406,401
374,606
4,049,883
811,053
1,324,929
202,314
42,437
Total
$721,429
$473,350
11.4%
$6,430,616
For the year ended December 31, 2005
Established
Northeast
Mid-Atlantic
Midwest
Pacifi c Northwest
Northern California
Southern California
Total Established
Other Stabilized
Development / Redevelopment
Land Held for Future Development
Non-allocated(2)
$161,399
68,575
11,113
30,080
143,070
48,800
463,037
71,682
116,144
n/a
4,348
$108,334
48,613
6,627
19,312
97,434
35,319
315,639
35,967
73,149
n/a
n/a
3.8%
3.9%
7.1%
8.0%
3.5%
6.7%
4.4%
n/a
n/a
n/a
n/a
$1,032,589
387,801
91,755
315,331
1,454,734
331,315
3,613,525
636,073
1,158,482
179,739
30,741
Total
$655,211
$424,755
9.3%
$5,618,560
(1) Does not include gross real estate assets held for sale of $0, $184,977 and $321,586 as of December 31, 2007, 2006 and 2005, respectively.
(2) Revenue represents third-party management, accounting and developer fees and miscellaneous income which are not allocated to a reportable segment.
AvalonBay Communities, Inc. 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Stock-Based Compensation Plans
The Company has a stock incentive plan (the “1994 Plan”), which was amended and restated on December 8, 2004, and amended on
February 9, 2006, December 6, 2006 and September 19, 2007. Individuals who are eligible to participate in the 1994 Plan include offi cers,
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 profi tability of the Company and its subsidiaries. The 1994 Plan authorizes (i) the grant of stock options that qualify
as incentive stock options (“ISOs”) under Section 422 of the Internal Revenue Code, (ii) the grant of stock options that do not so qualify,
(iii) grants of shares of restricted and unrestricted common stock, (iv) grants of deferred stock awards, (v) performance share awards entitling
the recipient to acquire shares of common stock and (vi) dividend equivalent rights.
Shares of common stock of 2,160,738, 1,791,861 and 2,066,308 were available for future option or restricted stock grant awards under the
1994 Plan as of December 31, 2007, 2006 and 2005, respectively. Annually on January 1st, 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. 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. Options and restricted stock
granted under the 1994 Plan vest and expire over varying periods, as determined by the Compensation Committee of the Board of Directors.
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, satisfi ed without the issuance of common stock or otherwise terminated (other than by exercise).
Options granted to offi cers, 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 refl ect the equivalent Bay shares and exercise prices based on the 0.7683 share conversion ratio used in the Merger. Offi cers,
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, 2007, 2006 or 2005.
Information with respect to stock options granted under the 1994 Plan, the Avalon 1995 Incentive Plan and the Avalon 1993 Plan is as follows:
1994 Plan
shares
2,276,818
(743,524)
725,988
(29,504)
2,229,778
(592,308)
867,113
(17,344)
2,487,239
(471,024)
344,429
(38,929)
2,321,715
1,158,591
1,041,360
1,230,428
Weighted
average
exercise price
per share
Avalon 1995
and Avalon
1993 Plan
shares
Weighted
average
exercise price
per share
$42.39
41.89
70.09
55.66
$51.40
50.09
99.28
79.72
$69.65
56.57
147.39
110.28
$83.15
$42.45
$47.99
$60.84
186,262
(159,638)
—
—
26,624
(22,384)
—
—
4,240
(3,472)
—
—
768
26,624
4,240
768
$36.23
37.82
—
—
$37.09
37.15
—
—
$36.81
36.86
—
—
$36.61
$37.09
$36.81
$36.61
Options Outstanding, December 31, 2004
Exercised
Granted
Forfeited
Options Outstanding, December 31, 2005
Exercised
Granted
Forfeited
Options Outstanding, December 31, 2006
Exercised
Granted
Forfeited
Options Outstanding, December 31, 2007
Options Exercisable:
December 31, 2005
December 31, 2006
December 31, 2007
54 AvalonBay Communities, Inc.
For options outstanding at December 31, 2007 under the 1994 Plan, 673,426 options had exercise prices ranging between $31.50 and $59.99
and a weighted average remaining contractual life of 4.2 years, 533,560 options had exercise prices ranging between $60.00 and $89.99 and
a weighted average remaining contractual life of 7.1 years, 780,373 options had exercise prices between $90.00 and $119.99 and a weighted
average remaining contractual life of 8.1 years and 334,356 options had exercise prices between $120.00 and $149.99 and a weighted average
remaining contractual life of 9.1 years. Options outstanding and exercisable at December 31, 2007 for the Avalon 1993 and Avalon 1995
Plans had an exercise price of $36.61 and a weighted average contractual life of less than one year with an intrinsic value of $44. Options
outstanding under the 1994 Plan at December 31, 2007 had an intrinsic value of $25,516. Options exercisable at December 31, 2007 under
the 1994 plan had a weighted average contractual life of 5.7 years and an intrinsic value of $40,973. The intrinsic value of options exercised
during 2007, 2006 and 2005 was $17,895, $49,440 and $80,271, respectively.
The weighted average fair value of the options granted during the year ended December 31, 2007 is estimated at $21.83 per share on the
date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield of 4.0% over
the expected life of the option, volatility of 17.32%, risk-free interest rates of 4.73% and an expected life of approximately seven years. The
weighted average fair value of the options granted during 2006 is estimated at $11.47 per share on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions: dividend yield of 5.0% over the expected life of the option, volatility
of 17.61%, risk-free interest rates of 4.55% and an expected life of approximately seven years. The weighted average fair value of the options
granted during 2005 is estimated at $6.40 per share on the date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions: dividend yield of 5.5% over the expected life of the option, volatility of 17.56%, risk-free interest rates of
3.91% and an expected life of approximately seven years. The cost related to stock-based employee compensation for employee stock options
included in the determination of net income is based on estimated forfeitures for the given year. Estimated forfeitures are adjusted to refl ect
actual forfeitures at the end of the vesting period.
The Company issued restricted stock as part of its stock-based compensation plan during the years ended December 31, 2007, 2006 and 2005.
Compensation cost is recognized over the requisite service period, which varies, but does not exceed fi ve years. The fair value of restricted stock
is the closing stock price on the date of the grant. Provisions of SFAS No. 123(R) require the Company to recognize compensation cost taking
into consideration retirement eligibility. The cost related to stock-based compensation for restricted stock included in the determination of
net income is based on actual forfeitures for the given year. Restricted stock awards typically vest over a fi ve-year period with the exception of
accelerated vesting provisions. Restricted stock vesting during 2007 had fair values ranging from $36.66 to $147.75 per share. The total fair
value of shares vested was $8,590, $7,655 and $8,932 for the years ended December 31, 2007, 2006 and 2005, respectively.
Total stock-based compensation cost recognized in income was $13,502, $10,095 and $4,292 for the years ended December 31, 2007, 2006 and
2005, respectively, and total capitalized stock-based compensation cost was $5,106, $4,014 and $4,046 for the years ended December 31, 2007,
2006 and 2005, respectively. At December 31, 2007, there was a total of $8,480 and $10,850 in unrecognized compensation cost for unvested
stock options and unvested restricted stock, respectively. The unrecognized compensation cost for stock options does not take into account
estimated forfeitures. The unrecognized compensation cost for unvested stock options and restricted stock is expected to be recognized over a
weighted average period of 1.6 years and 2.3 years, respectively.
In October 1996, the Company adopted the 1996 Non-Qualifi ed 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 780,735 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 12 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 purchase period is a period of seven months beginning each April 1 and ending each October 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 fi rst 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, if the change is announced prior to the beginning of the affected date or purchase period. The Company issued
8,577 shares, 10,830 shares and 13,372 shares and recognized compensation expense of $158, $173 and $134 under the ESPP for the years
ended December 31, 2007, 2006 and 2005, respectively. The Company accounts for transactions under the ESPP using the fair value method
prescribed under SFAS No. 123(R), as further discussed in Note 1, “Organization and Signifi cant Accounting Policies.”
AvalonBay Communities, Inc. 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Fair Value of Financial Instruments
Cash and cash equivalent balances are held with various fi nancial institutions and may at times exceed the applicable Federal Deposit Insurance
Corporation limit. The Company monitors credit ratings of these fi nancial institutions and the concentration of cash and cash equivalent balances
with any one fi nancial institution and believes the likelihood of realizing material losses from the excess of cash and cash equivalent balances over
insurance limits is remote.
The following estimated fair values of fi nancial instruments were determined by management using available market information and
established valuation methodologies, including discounted cash fl ow. Accordingly, the estimates presented are not necessarily indicative of the
amounts the Company could realize on disposition of the fi nancial 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 and construction 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 outstanding par amount of approximately $2,696,000 and $2,804,000 had
an estimated aggregate fair value of $2,756,890 and $2,910,078 at December 31, 2007 and 2006, respectively.
The Company reports all derivative instruments at fair value in accordance with SFAS No. 133, as amended. See Note 5, “Derivative
Instruments and Hedging Activities,” for further discussion.
12. Related Party Arrangements
Unconsolidated Entities The Company manages unconsolidated real estate entities for which it receives asset management, property
management, development and redevelopment fee revenue. From these entities, the Company received fees of $6,142, $6,259 and $4,304 in
the years ended December 31, 2007, 2006 and 2005, respectively. These fees are included in management, development and other fees on the
accompanying Consolidated Statements of Operations and Other Comprehensive Income.
In addition, in connection with the construction management services that the Company provided to MVP I, LLC, the entity that owns
and developed Avalon at Mission Bay North II, the Company funds certain construction costs that are expected to be reimbursed through
construction fi nancing within 30 to 60 days. Although construction was completed in 2006, fi nal payments to vendors are still being funded.
The accompanying Consolidated Balance Sheets refl ect a receivable in prepaid expenses and other assets in the amounts of $939 as of
December 31, 2007 and $5,654 as of December 31, 2006, from MVP I, LLC.
Director Compensation Directors of the Company who are also employees receive no additional compensation for their services as a
director. Following each annual meeting of stockholders starting with the 2006 annual meeting, non-employee directors receive (i) a number
of shares of restricted stock (or deferred stock awards) having a value of $100 and (ii) a cash payment of $40, payable in quarterly installments
of $10. After September 20, 2007, the cash payment increased to $50, payable in quarterly installments of $12.5. The value of the restricted
stock or deferred stock award will increase to $125 following the 2008 annual meeting. Until the 2007 annual meeting, the number of shares
of restricted stock (or deferred stock awards) was calculated based on the last reported sale price of the common stock on the New York Stock
Exchange (“NYSE”) on the fi fth business day following the prior year’s annual meeting. Following the 2007 annual meeting, the number of
shares of restricted stock (or deferred stock awards) is calculated based on the closing price on the day of the award. Non-employee directors
may elect to receive all or a portion of cash payments in the form of a deferred stock award. In addition, the Lead Independent Director
receives an annual fee of $30 payable in equal monthly installments of $2.5.
The Company recorded non-employee director compensation expense relating to the restricted stock grants and deferred stock awards in the
amount of $855, $1,013 and $966 for the years ended December 31, 2007, 2006 and 2005 as a component of general and administrative
expense. Deferred compensation relating to these restricted stock grants and deferred stock awards was $766 and $778 on December 31, 2007
and December 31, 2006, respectively.
56 AvalonBay Communities, Inc.
13. Quarterly Financial Information (Unaudited)
The following summary represents the quarterly results of operations for the years ended December 31, 2007 and 2006:
Total revenue(1)
Income from continuing operations(1)
Income from discontinued operations(1)
Net income available to common stockholders
Net income per common share—basic(2)
Net income per common share—diluted(2)
Total revenue(1)
Income from continuing operations(1)
Income from discontinued operations(1)
Net income available to common stockholders
Net income per common share—basic
Net income per common share—diluted
For the three months ended
3-31-07
6-30-07
9-30-07
12-31-07
$192,735
$ 45,383
$ 1,137
$ 44,345
$ 0.57
$ 0.56
$199,498
$ 49,319
$ 1,733
$ 48,877
$ 0.62
$ 0.61
$208,123
$ 49,677
$ 79,092
$126,594
$ 1.60
$ 1.58
$212,385
$103,289
$ 28,530
$129,644
$ 1.66
$ 1.64
For the three months ended
3-31-06
6-30-06
9-30-06
12-31-06
$171,284
$ 43,586
$ 67,528
$108,939
$ 1.48
$ 1.45
$176,711
$ 33,833
$ 33,173
$ 64,831
$ 0.87
$ 0.86
$183,646
$ 40,963
$ 1,150
$ 39,938
$ 0.54
$ 0.53
$189,788
$ 45,135
$ 1,178
$ 44,138
$ 0.59
$ 0.58
(1) Amounts may not equal previously reported results due to reclassifi cation between income from continuing operations and income from discontinued
operations.
(2) Amounts may not equal full year results due to rounding.
14. Subsequent Events
In January 2008, the Company repaid $50,000 in previously issued unsecured notes, along with any unpaid interest, pursuant to their
scheduled maturity.
Also in January 2008, the Company purchased an additional 482,100 shares of its common stock in open market transactions under its share
repurchase program at an average price of $87.42.
In February 2008, the Board of Directors of the Company authorized an increase in the Company’s stock repurchase program. The increase
extended the aggregate purchase price of shares acquired in open market or negotiated transactions up to $500,000, of which $200,000
remained available for future purchases as of February 22, 2008.
The Company announced on February 5, 2008 that its Board of Directors declared a dividend for the fi rst quarter of 2008 of $0.8925 per
share of the Company’s common stock (par value $0.01 per share). The declared dividend is a 5.0% or $0.0425 per share increase over the
Company’s prior quarterly dividend of $0.85 per share.
AvalonBay Communities, Inc. 57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
AvalonBay Communities, Inc.:
We have audited the accompanying consolidated balance sheets of AvalonBay Communities, Inc. as of December 31, 2007 and 2006, and
the related consolidated statements of operations and other comprehensive income, stockholders’ equity, and cash fl ows for each of the three
years in the period ended December 31, 2007. Our audits also included the fi nancial statement schedule listed in the Index at Item 15(a)(2).
These fi nancial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these fi nancial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the fi nancial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the fi nancial statements. An
audit also includes assessing the accounting principles used and signifi cant estimates made by management, as well as evaluating the overall
fi nancial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the fi nancial statements referred to above present fairly, in all material respects, the consolidated fi nancial position of AvalonBay
Communities, Inc. at December 31, 2007 and 2006, and the consolidated results of its operations and its cash fl ows for each of the three years
in the period ended December 31, 2007 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related
fi nancial statement schedule, when considered in relation to the basic fi nancial statements taken as a whole, presents fairly in all material
respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), AvalonBay
Communities, Inc.’s internal control over fi nancial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2008
expressed an unqualifi ed opinion thereon.
McLean, Virginia
February 25, 2008
58 AvalonBay Communities, Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders of
AvalonBay Communities, Inc.:
We have audited AvalonBay Communities, Inc.’s internal control over fi nancial reporting as of December 31, 2007, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). AvalonBay Communities, Inc.’s management is responsible for maintaining effective internal control over fi nancial
reporting, and for its assessment of the effectiveness of internal control over fi nancial reporting included in the accompanying Management’s
Report on Internal Control over Financial Reporting in Item 9a. Our responsibility is to express an opinion on the company’s internal control
over fi nancial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over fi nancial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over fi nancial reporting,
assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.
A company’s internal control over fi nancial reporting is a process designed to provide reasonable assurance regarding the reliability of fi nancial
reporting and the preparation of fi nancial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over fi nancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly refl ect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of fi nancial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the fi nancial statements.
Because of its inherent limitations, internal control over fi nancial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, AvalonBay Communities, Inc. maintained, in all material respects, effective internal control over fi nancial reporting as of
December 31, 2007 based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheets of AvalonBay Communities, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of operations
and other comprehensive income, stockholders’ equity, and cash fl ows for each of the three years in the period ended December 31, 2007 of
AvalonBay Communities, Inc. and our report dated February 25, 2008 expressed an unqualifi ed opinion thereon.
McLean, Virginia
February 25, 2008
AvalonBay Communities, Inc. 59
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the NYSE under the ticker symbol AVB. The following table sets forth the quarterly high and low sales
prices per share of our common stock for the years 2007 and 2006, as reported by the NYSE. On January 31, 2008 there were 813 holders
of record of an aggregate of 76,845,045 shares of our outstanding common stock. The number of holders does not include individuals or
entities who benefi cially 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 record holder.
2007
2006
Sales Price
High
Low
Dividends
declared
Sales Price
High
Low
Dividends
declared
Quarter ended March 31
Quarter ended June 30
Quarter ended September 30
Quarter ended December 31
$149.94
$134.62
$128.46
$125.48
$125.30
$115.38
$105.91
$ 88.97
$0.85
$0.85
$0.85
$0.85
$110.45
$112.00
$125.21
$134.60
$ 88.95
$100.50
$110.27
$119.31
$0.78
$0.78
$0.78
$0.78
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 fi nancial 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. In February 2008, we announced that our Board of Directors declared
a dividend on our common stock for the fi rst quarter of 2008 of $0.8925 per share, a 5.0% increase over the previous quarterly dividend of
$0.85 per share. The increased dividend will be payable on April 15, 2008 to all common stockholders of record as of April 1, 2008.
Issuer Purchases of Equity Securities
Period
(a)
Total Number of
Shares Purchased
(1)
(b)
Average Price Paid
per Share
(1)
(c)
Total Number of
Shares Purchased
as Part of
Publicly Announced
Plans or Programs
(2)
(d)
Maximum Dollar Amount
that May Yet be Purchased
Under the Plans
or Programs
(in thousands)
(2)
Month Ended October 31, 2007
Month Ended November 30, 2007
Month Ended December 31, 2007
Month Ended January 31, 2008
—
1,120,900
328,574
483,036
$ —
$100.42
$ 92.88
$ 87.32
—
1,120,900
328,316
482,100
$385,197
$272,639
$242,145
$200,000
(1) Includes shares surrendered to the Company in connection with employee stock option exercises or vesting of restricted stock as payment of exercise price
or as payment of taxes.
(2) On August 8, 2007, we announced that our the Board of Directors voted to increase the aggregate limit of our common stock repurchase program to
$300,000,000. On February 6, 2008, we disclosed that our Board of Directors voted to further increase the authorized limit to $500,000,000. All amounts
presented in the table above include this further increase. In determining whether to repurchase shares, we consider a variety of factors, including our
liquidity needs, the then current market price of our shares and the effect of the share repurchases on our per share earnings and FFO. There is no scheduled
expiration date to this program.
60 AvalonBay Communities, Inc.
DEFINITIONS AND RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES AND OTHER TERMS
This Annual Report, including the Letter to Shareholders, contains certain non-GAAP fi nancial measures and other terms. The defi nition
and calculation of these non-GAAP fi nancial measures and other terms may differ from the defi nitions and methodologies used by other
REITs and, accordingly, may not be comparable. The non-GAAP fi nancial measures referred to below should not be considered an alternative
to net income as an indication of our performance. In addition, these non-GAAP fi nancial measures do not represent cash generated from
operating activities in accordance with GAAP and therefore should not be considered as an alternative measure of liquidity or as indicative of
cash available to fund cash needs.
Net Asset Value (NAV) Per Share
The estimated market value of a company’s assets less the estimated market value of all current and long-term liabilities divided by the number
of outstanding common shares and operating partnership units.
Fixed Charge Coverage (Interest Coverage)
EBITDA from continuing operations, excluding land gains and gain on the sale of investments in real estate joint ventures, divided by the
sum of interest expense, net, and preferred dividends. Interest Coverage is presented by the Company because it provides rating agencies and
investors an additional means of comparing our ability to service debt obligations to that of other companies. EBITDA is defi ned by the
Company as net income before interest income and expense, income taxes, depreciation and amortization.
A reconciliation of EBITDA and a calculation of Interest Coverage for the fourth quarter of 2007 are as follows (dollars in thousands):
Net income
Interest expense, net
Interest expense (discontinued operations)
Depreciation expense
Depreciation expense (discontinued operations)
EBITDA
EBITDA from continuing operations
EBITDA from discontinued operations
EBITDA
EBITDA from continuing operations
Land gains
Gain on the sale of investments in real estate joint ventures
EBITDA from continuing operations, excluding land gains and
gain on sale of investments in real estate joint ventures
Interest expense, net
Dividends attributable to preferred stock
Interest charges
Interest coverage
$131,819
26,262
—
47,179
—
$205,260
$176,730
28,530
$205,260
$176,730
—
(59,927)
$116,803
26,262
2,175
28,437
4.1
Funds From Operations (FFO)
FFO is determined based on a defi nition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts
(“NAREIT”). FFO is calculated by the Company as net income or loss computed in accordance with GAAP, adjusted for gains or losses on
sales of previously depreciated operating communities, extraordinary gains or losses (as defi ned by GAAP), cumulative effect of a change
in accounting principle and depreciation of real estate assets, including adjustments for unconsolidated partnerships and joint ventures.
Management generally considers FFO to be an appropriate supplemental measure of operating performance because, by excluding gains or
losses related to dispositions of previously depreciated operating communities and excluding real estate depreciation (which can vary among
owners of identical assets in similar condition based on historical cost accounting and useful life estimates), FFO can help one compare the
AvalonBay Communities, Inc. 61
operating performance of a company’s real estate between periods or as compared to different companies. A reconciliation of FFO to net
income is as follows:
(Dollars in thousands)
12-31-07
12-31-06
12-31-05
12-31-04
12-31-03
12-31-02
12-31-01
12-31-00
12-31-99
For the Year Ended
Net income
Dividends attributable to preferred stock
Depreciation—real estate assets,
including discontinued operations and
joint venture adjustments
Minority interest expense, including
discontinued operations
Cumulative effect of change in accounting
principle
Gain on sale of unconsolidated entities
Gain on sale of operating communities
Funds from Operations attributable
to common stockholders
Weighted average common shares
outstanding—diluted
EPS—diluted
FFO per common share—diluted
$358,160
(8,700)
$266,546
(8,700)
$310,468
(8,700)
$207,779
(8,700)
$262,503
(10,744)
$173,125
(17,896)
$248,997
(40,035)
$210,604
(39,779)
$172,276
(39,779)
184,731
165,982
163,252
159,221
129,207
143,026
128,086
120,208
108,679
280
391
1,363
3,048
1,263
1,601
1,559
1,759
1,975
—
(59,927)
(106,487)
—
(6,609)
(97,411)
—
—
(195,287)
(4,547)
—
(121,287)
—
—
(159,756)
—
—
(48,893)
—
—
(62,852)
—
—
(40,779)
—
—
(47,093)
$368,057
$320,199
$271,096
$235,514
$222,473
$250,963
$275,755
$252,013
$196,058
79,856,927 75,586,898 74,759,318
73,354,956 70,203,467 70,674,211 69,781,719 68,140,998 66,110,664
$4.38
$4.61
$3.42
$4.24
$4.02
$3.63
$2.75
$3.21
$3.60
$3.17
$2.22
$3.55
$3.02
$3.95
$2.53
$3.70
$2.03
$2.97
Initial Year Market Capitalization Rate (Cap Rate)
Projected NOI of a single community for the fi rst 12 months of operations (assuming no repositioning), less estimates for non-routine
allowance of approximately $200–$300 per apartment home, divided by the gross sales price for the community. Projected NOI, as referred
to above, represents management’s estimate of projected rental revenue minus projected operating expenses before interest, income taxes (if
any), depreciation, amortization and extraordinary items. For this purpose, management’s projection of operating expenses for the community
includes a management fee of 3.0%–3.5%. The Initial Year Market Cap Rate, which may be determined in a different manner by others, is
a measure frequently used in the real estate industry when determining the appropriate purchase price for a property or estimating the value
for a property. Buyers may assign different Initial Year Market Cap Rates to different communities when determining the appropriate value
because they (i) may project different rates of change in operating expenses and capital expenditure estimates and (ii) may project different
rates of change in future rental revenue due to different estimates for changes in rent and occupancy levels. The weighted average Initial Year
Market Cap Rate is weighted based on the gross sales price of each community.
Leverage
Total debt as a percentage of Total Market Capitalization. Total Market Capitalization represents the aggregate of the market value of the
Company’s common stock, the market value of the Company’s operating partnership units outstanding (based on the market value of
the Company’s common stock), the liquidation preference of the Company’s preferred stock and the outstanding principal balance of the
Company’s debt. Management believes that Leverage can be one useful measure of a real estate operating company’s long-term liquidity and
balance sheet strength, because it shows an approximate relationship between a company’s total debt and the current total market value of its
assets based on the current price at which the Company’s common stock trades. Changes in Leverage also can infl uence changes in per share
results. A calculation of Leverage as of December 31, 2007 is as follows (dollars in thousands):
Total debt
Common stock
Preferred stock
Operating partnership units
Total debt
Total Market Capitalization
Debt as % of capitalization
$ 3,210,703
7,278,774
100,000
6,027
3,210,703
10,595,504
30.3%
62 AvalonBay Communities, Inc.
Because Leverage changes with fl uctuations in the Company’s stock price, which occur regularly, the Company’s Leverage may change even
when the Company’s earnings, interest and debt levels remain stable. Investors should also note that the net realizable value of the Company’s
assets in liquidation is not easily determinable and may differ substantially from the Company’s Total Market Capitalization.
Multifamily Sector Average
The multifamily sector average is a weighted average based on Total Capitalization per SNL Financial. The weighted average for Total
Shareholder Return, FFO per Share, Operating Expenses and Common Dividend Growth per Share includes AEC, AIV, BRE, CPT, EQR,
ESS, HME, MAA, PPS and UDR. The weighted average for Estimated NAV per Share Growth includes all companies under Green Street
Advisors, Inc.’s coverage for which data is available during each of the time periods presented and includes AEC, BRE, CPT, EQR, PPS
and UDR.
Net Operating Income (NOI)
Total property revenue less direct property operating expenses (including property taxes), and excludes corporate-level income (including
management, development and other fees), corporate-level property management and other indirect operating expenses, investments
and investment management, net interest expense, general and administrative expense, joint venture income, minority interest expense,
depreciation expense, gain on sale of real estate assets and income from discontinued operations. The Company considers NOI to be an
appropriate supplemental measure to net income of operating performance of a community or communities because it helps both investors
and management to understand the core operations of a community or communities prior to the allocation of corporate-level property
management overhead or general and administrative costs. This is more refl ective of the operating performance of a community, and allows
for an easier comparison of the operating performance of single assets or groups of assets. In addition, because prospective buyers of real estate
have different overhead structures, with varying marginal impact to overhead by acquiring real estate, NOI is considered by many in the real
estate industry to be a useful measure for determining the value of a real estate asset or groups of assets.
A reconciliation of NOI (from continuing operations) to net income is as follows:
(Dollars in thousands)
12-31-07
12-31-06
12-31-05
For the Year Ended
Net income
Indirect operating expenses, net of corporate income
Investments and investment management
Interest expense, net
General and administrative expense
Equity in income of unconsolidated entities
Minority interest in consolidated partnerships
Depreciation expense
Gain on sale of real estate assets
Income from discontinued operations
$358,160
31,285
11,737
97,545
28,494
(59,169)
1,585
179,549
(107,032)
(4,005)
$266,546
28,811
7,030
109,184
24,767
(7,455)
573
160,442
(110,930)
(5,618)
$310,468
26,675
4,834
125,171
25,761
(7,198)
1,481
156,455
(199,766)
(19,126)
Net operating income
$538,149
$473,350
$424,755
NOI as reported by the Company does not include the operating results from discontinued operations (i.e., assets sold during the period
January 1, 2006 through December 31, 2007). A reconciliation of NOI from communities sold or classifi ed as discontinued operations to
net income for these communities is as follows:
(Dollars in thousands)
Income from discontinued operations
Interest expense, net
Depreciation expense
NOI from discontinued operations
NOI from assets sold
NOI from assets held for sale
NOI from discontinued operations
For the Year Ended
12/31/2007
12/31/2006
$4,005
687
2,176
$6,868
$6,868
—
$6,868
$ 5,618
1,862
3,687
$11,167
$11,167
—
$11,167
AvalonBay Communities, Inc. 63
Projected NOI
As used for certain Development and Redevelopment Communities and in calculating the Initial Year Market Cap Rate for dispositions,
represents management’s estimate, as of the date of this annual report (or as of the date of the buyer’s valuation in the case of dispositions),
of projected stabilized rental revenue minus projected stabilized operating expenses. For Development and Redevelopment Communities,
Projected NOI is calculated based on the fi rst year of Stabilized Operations, as defi ned below, following the completion of construction. In
calculating the Initial Year Market Cap Rate, Projected NOI for dispositions is calculated for the fi rst twelve months following the date of the
buyer’s valuation. Projected stabilized rental revenue represents management’s estimate of projected gross potential (based on leased rents for
occupied homes and market rents for vacant homes) minus projected economic vacancy and adjusted for concessions. Projected stabilized
operating expenses do not include interest, income taxes (if any), depreciation or amortization, or any allocation of corporate-level property
management overhead or general and administrative costs. The weighted average Projected NOI as a percentage of Total Capital Cost is
weighted based on the Company’s share of the Total Capital Cost of each community, based on its percentage ownership.
Management believes that Projected NOI of the development and redevelopment communities, on an aggregated weighted average basis, assists
investors in understanding management’s estimate of the likely impact on operations of the Development and Redevelopment Communities
when the assets are complete and achieve stabilized occupancy (before allocation of any corporate-level property management overhead, general
and administrative costs or interest expense). However, the Company does not provide a projection of NOI on a company-wide basis. Given
the different dates and fi scal years for which NOI is projected for these communities, the projected allocation of corporate-level property
management overhead, general and administrative costs and interest expense to communities under development or redevelopment is complex,
impractical to develop, and may not be meaningful. Projected NOI of these communities is not a projection of the Company’s overall fi nancial
performance or cash fl ow. There can be no assurance that the communities under development or redevelopment will achieve the Projected
NOI as described in this annual report.
Total Capital Cost
Includes all capitalized costs projected to be or actually incurred to develop the respective Development or Redevelopment Community,
or Development Right, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits,
professional fees, allocated development overhead and other regulatory fees, all as determined in accordance with GAAP. For Redevelopment
Communities, Total Capital Cost excludes costs incurred prior to the start of redevelopment when indicated. With respect to communities
where development or redevelopment was completed in the current or a prior period, Total Capital Cost refl ects the actual cost incurred,
plus any contingency estimate made by management. Total Capital Cost for communities identifi ed as having joint venture ownership, either
during construction or upon construction completion, represents the total projected joint venture contribution amount. For joint ventures
not in construction, Total Capital Cost is equal to gross real estate cost.
Economic Gain
The gain on sale in accordance with GAAP, less accumulated depreciation through the date of sale and any other non-cash adjustments that
may be required under GAAP accounting. Management generally considers Economic Gain to be an appropriate supplemental measure to
gain on sale in accordance with GAAP because it helps investors understand the relationship between the cash proceeds from a sale and the
cash invested in the sold community. A reconciliation of Economic Gain to gain on sale in accordance with GAAP for the full year 2007 is
presented below:
Number of
Communities Sold(1)
5 Communities, 1 Land Parcel
Gross Sales
Price
$273,896
GAAP Gain
$163,352
Accumulated
Depreciation
and Other
$17,588
Economic
Gain
$145,764
(1) Activity includes amounts related to the disposition of a partnership interest in which the Company held a 50% investment interest. Amounts exclude
dispositions to joint venture entities in which the Company retains an economic interest.
Same Store (Established) Communities
Identifi ed by the Company as 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 Operations, as defi ned below, as of the beginning of the prior year. Therefore, for 2007,
Established Communities are consolidated communities that have Stabilized Operations as of January 1, 2006 and are not conducting or
planning to conduct substantial redevelopment activities within the current year. Established Communities do not include communities that
are currently held for sale or planned for disposition during the current year.
64 AvalonBay Communities, Inc.
Stabilized/Restabilized Operations
The earlier of (i) attainment of 95% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment.
Dividend Payout Ratio
The percentage of earnings paid to shareholders in dividends, calculated as the yearly dividend per share divided by FFO per share. The payout
ratio provides an idea of how well earnings support the dividend payments.
Unleveraged IRR
Refers to the internal rate of return on sold communities calculated by the Company considering the timing and amounts of (i) total revenue
during the period owned by the Company and (ii) the gross sales price net of selling costs, offset by (iii) the undepreciated capital cost of the
communities at the time of sale and (iv) total direct operating expenses during the period owned by the Company. Each of the items (i), (ii),
(iii) and (iv) are calculated in accordance with GAAP.
The calculation of Unleveraged IRR does not include an adjustment for the Company’s general and administrative expense, interest expense,
or corporate-level property management and other indirect operating expenses. Therefore, Unleveraged IRR is not a substitute for net income
as a measure of our performance. Management believes that the Unleveraged IRR achieved during the period a community is owned by
the Company is useful because it is one indication of the gross value created by the Company’s acquisition, development or redevelopment,
management and sale of a community, before the impact of indirect expenses and Company overhead. The Unleveraged IRR achieved on the
communities as cited in this annual report should not be viewed as an indication of the gross value created with respect to other communities
owned by the Company, and the Company does not represent that it will achieve similar Unleveraged IRRs upon the disposition of other
communities. The weighted average Unleveraged IRR for sold communities is weighted based on all cash fl ows over the holding period for
each respective community, including net sales proceeds.
Stock Performance Graph
The stock performance graph provides a comparison, from December 2002 through December 2007, of the cumulative total shareholder
return (assuming reinvestment of dividends) among the Company, the Standard & Poor’s (“S&P”) 500 Index, and a peer group index
composed of 15 publicly-traded apartment REITs, including the Company (the “FTSE NAREIT Apartment REIT Index”) based on an
initial purchase price of $100. The FTSE NAREIT Apartment REIT Index includes only REITs that invest directly or indirectly primarily
in the equity ownership of multifamily residential apartment communities. Upon written request to the Company’s Secretary, the Company
will provide any stockholder with a list of REITs included in the FTSE NAREIT Apartment REIT Index. The historical information set forth
below is not necessarily indicative of future performance. Data for the FTSE NAREIT Apartment REIT Index and the S&P 500 Index were
provided to the Company by NAREIT.
STOCK PERFORMANCE
$500
$400
$300
$200
$100
$0
2002
2003
2004
2005
2006
2007
AVB FTSE NAREIT Apartment REIT Index
S&P 500 Index
Source: NAREIT Benchmarked at 12/02=$100
Dec 2002
Dec 2003
Dec 2004
Dec 2005
Dec 2006
Dec 2007
S&P 500 Index
FTSE NAREIT Apartment REIT Index
AvalonBay
$100
100
100
$129
125
130
$143
169
215
$150
194
264
$173
271
395
$183
202
295
AvalonBay Communities, Inc. 65
AVALONBAY CORPORATE INFORMATION
BOARD OF DIRE CT OR S
Bryce Blair (4)
Chairman and CEO
AvalonBay Communities, Inc.
Bruce A. Choate (2,4,5)
President and CEO
Watson Land Company
John J. Healy, Jr. (3,4)
Founder and President
Hyde Street Holdings, Inc.
Gilbert M. Meyer (4)
Founder and President
Greenbriar Homes Communities, Inc.
Timothy J. Naughton (4)
President
AvalonBay Communities, Inc.
Lance R. Primis (1,5)
Managing Partner
Lance R. Primis and Partners, LLC
Peter S. Rummel (3,4)
Chairman and CEO
The St. Joe Company
H. Jay Sarles (2,3)
Private Investor
Allan D. Schuster (2,4,5)
Private Investor
Amy P. Williams (2,3)
Private Investor
1 Lead Independent Director
2 Audit Committee
3 Compensation Committee
4 Investment and Finance Committee
5 Nominating and Corporate Governance
OFFICERS
Bryce Blair
Chairman and CEO
Timothy J. Naughton
President
Thomas J. Sargeant
Chief Financial Offi cer
Leo S. Horey
Executive Vice President
Property Operations
Charlene Rothkopf
Executive Vice President
Human Resources
David W. Bellman
Senior Vice President
Construction–East Coast, Midwest
Danyell D. Alders
Vice President
Property Operations–Southern CA
Ronald S. Ladell
Vice President
Development–NJ
Sean J. Breslin
Senior Vice President
Redevelopment and Asset
Management–National
Deborah A. Coombs
Senior Vice President
Property Operations–
Northern CA, Pacifi c NW
Jonathan B. Cox
Senior Vice President
Development–
Mid-Atlantic, Mid-West
Lili F. Dunn
Senior Vice President
Investments–National
Frederick S. Harris
Senior Vice President
Development–NY
Tom A. Javits
Senior Vice President
Development–NY
Joanne M. Lockridge
Senior Vice President
Finance, Assistant Treasurer
and Assistant Secretary–National
William M. McLaughlin
Senior Vice President
Development–MA, RI, CT, NJ
J. Richard Morris
Senior Vice President
Construction–National
Kevin P. O’Shea
Senior Vice President
Investment Management–National
Edward M. Schulman
Senior Vice President
General Counsel and
Secretary–National
Bernard J. Ward
Senior Vice President
Property Operations–
East Coast, Mid-Atlantic
Stephen W. Wilson
Senior Vice President
Development–West Coast
Trinity M. Blue
Vice President
Property Operations–Metro NY
Richard A. Borowski
Vice President
Construction–Mid-Atlantic , NJ
Shannon E. Brennan
Vice President
Property Operations–
Mid-Atlantic
Alfred Brockunier III
Vice President
Construction–NY
Ishwar Lal
Vice President
Procurement Design
and Estimating–National
Lyn C. Lansdale
Vice President
Strategic Business Services–National
Sarah K. Mathewson
Vice President
Property Operations–MA, RI
Janice A. Miner
Vice President
Property Operations–CT, NY
Duane W. Carlson
Vice President
Construction–Northern CA
Mike F. Nootens
Vice President
Engineering–National
Darren R. Carrington
Vice President
Investments–CA, Pacifi c NW
Christopher L. Payne
Vice President
Development–Southern CA
Sean M. Clark
Vice President
Development–Southern CA
Walter A. Rebenson
Vice President
Development–Midwest
Scott W. Dale
Vice President
Development–MA
Michael J. Roberts
Vice President
Development–MA
Tsippora Dingott
Vice President
Information Services–National
Robert S. Salkovitz
Vice President
Construction–Southern CA
Mark J. Forlenza
Vice President
Development–CT
Brian E. Fritz
Vice President
Development–WA
Keri A. Shea
Vice President
Finance and Treasurer–National
Mona R. Stahling
Vice President
Operations–National
Patrick J. Gniadek
Vice President
Investments–East Coast, Midwest
B. Kevin Thompson
Vice President
Marketing–National
Karen A. Hollinger
Vice President
Operations–National
Matthew B. Whalen
Vice President
Development–Long Island
Suzanne Jakstavich
Vice President
Human Resources–National
Philip M. Wharton
Vice President
Development–NY
Scott R. Kinter
Vice President
Construction–Northeast
66 AvalonBay Communities, Inc.
F I N A N C I A L H I G H L I G H T S
TOTAL SHAREHOLDER
RETURN (1)
e
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t
w
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G
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A
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20.0%
15.0%
10.0%
5.0%
0%
%
7
.
4
1
%
0
.
0
1
%
1
.
1
1
%
1
.
4
3-Year
10 Year
AVB Multifamily Sector Avg.
Source: SNL Financial
e
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t
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NAV PER SHARE GROWTH (2)
30.0%
20.0%
%
4
.
5
2
%
5
.
9
1
%
7
.
5
1
10.0%
%
1
.
6
0%
3-Year
10 Year
AVB Multifamily Sector Avg.
Source: Green Street Advisors, SNL Financial
AvalonBay Communities, Inc. is an equity Real Estate Investment Trust primarily engaged in
developing, redeveloping, acquiring, and managing quality apartment communities in high
barrier-to-entry markets within the United States. Our markets are located in the Northeast,
Mid-Atlantic, Midwest, Pacifi c Northwest, and Northern and Southern California regions.
At year-end 2007, our Total Market Capitalization was $10.6 billion. Over the last ten years,
our Total Shareholder Return averaged 14.7% per year, and the growth rate of our dividend
averaged 7.4% per year during the same time period. Our time-tested strategy is to more deeply
penetrate our chosen markets with a broad range of products and services and an intense focus on
our customer.
AvalonBay Communities common shares are traded on the New York Stock Exchange under
the ticker symbol AVB and were included in the S&P 500 Index in 2007. More information
about AvalonBay may be found on our website at www.avalonbay.com.
FFO PER SHARE GROWTH (3)
PAGE 1, TOP: AVALON DEL REY, CA BOTTOM: AVALON GLEN COVE NORTH, NY
COVER: AVALON RIVERVIEW NORTH, NY:
15.0%
10.0%
%
8
.
2
1
5.0%
0%
%
5
.
6
%
4
.
5
%
6
.
2
3-Year
10 Year
AVB Multifamily Sector Avg.
Source: SNL Financial
See page 12 for notes, page 61 for defi ned terms, and
page 65 for 5 year stock perfomance graph.
AVALONBAY CORPORATE INFORMATION
H EA D QUA RTERS
Washington, DC
2900 Eisenhower Avenue
Suite 300
Alexandria, VA 22314
Phone:
Fax:
(703) 329-6300
(703) 329-1459
REGIONA L OFF ICES
Boston, MA
51 Sleeper Street
Suite 750
Boston, MA 02210
Phone:
Fax:
(617) 654-9500
(617) 426-1610
Chicago, IL
200 North Arlington Heights Road
Suite 15
Arlington Heights, IL 60004
Phone:
Fax:
(847) 342-0065
(847) 342-0075
Fairfi eld-New Haven, CT
1000 Bridgeport Ave
Suite 258
Shelton, CT 06484
Phone:
Fax:
(203) 926-2300
(203) 926-9744
Long Island, NY
135 Pinelawn Road
Suite 130 South
Melville, NY 11747
Phone:
Fax:
(631) 843-0736
(631) 843-0737
Los Angeles, CA
16255 Ventura Boulevard
Suite 950
Encino, CA 91436
Phone:
Fax:
(818) 784-2800
(818) 784-2810
Newport Beach, CA
4440 Von Karman Avenue
Suite 300
Newport Beach, CA 92660
(949) 955-6200
Phone:
(949) 724-9208
Fax:
New York, NY
275 Seventh Avenue
25th Floor
New York, NY 10001
Phone:
Fax:
(212) 370-9269
(212) 370-1511
San Francisco, CA
185 Berry Street
Suite 3500
San Francisco, CA 94107
Phone:
Fax:
(415) 284-9080
(415) 546-4138
San Jose, CA
400 Race Street
Suite 200
San Jose, CA 95126
Phone:
Fax:
(408) 983-1500
(408) 287-9167
Seattle, WA
11808 Northup Way
Suite W311
Bellevue, WA 98005
Phone:
Fax:
(425) 576-2100
(425) 576-8447
Virginia Beach, VA
2901 Sabre Street
Suite 100
Virginia Beach, VA 23452
(757) 631-5000
Phone:
(757) 486-1063
Fax:
Woodbridge, NJ
Woodbridge Place
517 Route One South
Suite 5500
Iselin, NJ 08830
Phone:
Fax:
(732) 404-4800
(732) 283-9101
INV ESTOR REL ATIONS
Investor Relations
AvalonBay Communities, Inc.
2900 Eisenhower Avenue
Suite 300
Alexandria, VA 22314
Phone:
ir@avalonbay.com
(703) 329-6300 ext. 4747
WE BSITE
www.avalonbay.com
TRA NS FER AGE NT
The Bank of New York Mellon
Shareholder Relations Department–12E
P.O. Box 11258
Church Street Station
New York, NY 10286
Phone:
(800) 524-4458
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INDEP E NDEN T AUDI TO RS
Ernst & Young, LLP
8484 Westpark Drive
McLean, VA 22102
Phone:
(703) 747-1000
F ORM 10-K
A copy of the Company’s annual report
on Form 10-K as fi led with the Securities
and Exchange Commission may be
obtained without charge by contacting
Investor Relations.
CE O AN D CFO CE RT IFICATI ON S
In 2007, the Company’s Chief Executive
Offi cer provided to the New York Stock
Exchange the Annual CEO Certifi cation
regarding the Company’s compliance with
the New York Stock Exchange’s corporate
governance listing standards. In addition,
the Company’s CEO and CFO fi led with
the Securities and Exchange Commission
the certifi cations required by Sections 302
and 404 of the Sarbanes-Oxley Act of 2002
regarding the quality of the Company’s
public disclosures in its 2007 annual report
on Form 10-K.
STOCK LISTI NG S
NYSE–AVB
This Annual Report, including the Letter
to Shareholders, contains “forward-looking
statements” within the meaning of the
Securities Act of 1933 and the Securities
Exchange Act of 1934. Please see our
discussion titled “Forward-Looking
Statements” on page 32 of this report for
a discussion regarding risks associated with
these statements. Non-GAAP fi nancial
measures and other terms as used in this
report are defi ned and reconciled beginning
on page 61 in the section titled, “Defi nitions
and Reconciliations of Non-GAAP
Financial Measures and Other Terms.”
2 0 0 7 A N N U A L R E P O R T
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7
2900 Eisenhower Avenue
Suite 300 • Alexandria • VA • 22314
www.avalonbay.com
Excellent
Excellent
Execution
Execution