You should read our unaudited condensed consolidated financial statements and notes included in this report and the audited financial statements for the year ended December 31, 2000 and the notes included in our annual report on Form 10-K in conjunction with the following discussion. These forward-looking statements represent our estimates and assumptions only as of the date of this report. We do not undertake to update these forward-looking statements, and you should not rely upon them after the date of this report.
AvalonBay is a Maryland corporation that has elected to be treated as a real estate investment trust, or REIT, for federal income tax purposes. We focus on the ownership and operation of upscale apartment communities (which generally command among the highest rents in their submarkets) in high barrier-to-entry markets of the United States. This is because we believe that the limited new supply of upscale apartment homes in these markets helps achieve more predictable growth in cash flows. These barriers-to-entry generally include a difficult and lengthy entitlement process with local jurisdictions and dense in-fill locations where zoned and entitled land is in limited supply. These markets are located in Northern and Southern California and selected states in the Mid-Atlantic, Northeast, Midwest and Pacific Northwest regions of the United States.
We are a fully-integrated real estate organization with in-house expertise in the following areas:
With our expertise and in-house capabilities, we believe we are well-positioned to continue to pursue opportunities to develop and acquire upscale apartment homes in our target markets. Our ability to pursue attractive opportunities, however, may be constrained by capital market conditions that limit the availability of cost effective capital to finance these activities. Recently, we have limited our acquisition activity as compared to prior years due to these capital constraints, and we expect to direct most of our invested capital to new developments and redevelopments, rather than acquisitions, for the foreseeable future. See “Liquidity and Capital Resources” and “Future Financing and Capital Needs.”
We believe apartment communities present an attractive investment opportunity compared to other real estate investments because a broad potential resident base results in relatively stable demand during all phases of a real estate cycle. We intend to pursue appropriate new investments, including both new developments and acquisitions of communities, subject to the availability of cost-effective capital. We intend to pursue these investments in markets where constraints to new supply exist and where new household formations have out-paced multifamily permit activity in recent years.
Our real estate investments as of May 1, 2001 consist primarily of current operating apartment communities, communities in various stages of development, and land or land options held for development. The following is a description of each category:
• 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 operating costs as of the beginning of the prior year. We determine which of our communities fall into the Established Communities category annually on January 1st of each year and maintain that classification throughout the year. For the year 2001, the Established Communities were communities that had stabilized operating costs as of January 1, 2000.
• Other Stabilized Communities are all other completed communities that have stabilized occupancy and are not conducting or planning redevelopment activities. We consider a community to have stabilized occupancy at the earlier of (i) attainment of 95% occupancy or (ii) the one-year anniversary of completion of development or redevelopment. For the year 2001, Other Stabilized Communities therefore include communities that were either acquired or achieved stabilization after January 1, 2000 and that were not conducting or planning to start redevelopment activities within the current year.
• Lease-Up Communities are communities where construction has been complete for less than one year and where occupancy has not reached 95%.
• Redevelopment Communities are communities where substantial redevelopment is in progress or is planned to take place during the current year. Redevelopment is considered substantial when capital invested during the reconstruction effort exceeds the lesser of $5 million or 10% of the community’s acquisition cost.
Development Communities are communities that are under construction and for which a final certificate of occupancy has not been received. These communities may be partially complete and operating.
Development Rights are development opportunities in the early phase of the development process for which we have an option to acquire land, for which we are the buyer under a long-term conditional contract to purchase land or where we own land to develop a new community. We capitalize all related pre-development costs incurred in pursuit of these new developments.
As of March 31, 2001, our communities were classified as follows:
| | Number of
communities
| Number of
apartment homes
|
| | | |
| Current Communities | | |
| | | |
| Established Communities: | | |
| Northern California | 27 | 7,851 |
| Southern California | 11 | 3,112 |
| Mid-Atlantic | 18 | 5,297 |
| Northeast | 20 | 5,416 |
| Midwest | 6 | 1,591 |
| Pacific Northwest | 2
| 486
|
| Total Estabilshed | 84 | 23,753 |
| | | |
| Other Stabilized Communities: | | |
| Northern California | 3 | 1,038 |
| Southern California | 5 | 1,663 |
| Mid-Atlantic | 2 | 615 |
| Northeast | 15 | 4,620 |
| Midwest | 3 | 1,033 |
| Pacific Northwest | 10
| 3,147
|
| Total Other Stabilized | 38 | 12,116 |
| | | |
| Lease-Up Communities | -- | -- |
| | | |
| Redevelopment Communities | 4
| 2,211
|
| Total Current Communities | 126
| 38,080
|
| Development Communities | 13
| 3,692
|
| Development Rights | 34
| 9,639
|
There were no changes to our community portfolios during the month of April. Of the Current Communities as of May 1, 2001, we owned:
• a fee simple, or absolute, ownership interest in 102 operating communities, one of which is on land subject to a 149 year land lease;
• a general partnership interest in four partnerships that each own a fee simple interest in an operating community;
• a general partnership interest in four partnerships structured as “DownREITs,” as described more fully below, that own an aggregate of 18 communities;
• a 100% interest in a senior participating mortgage note secured by one community, which allows us to share in part of the rental income or resale proceeds of the community; and
• a membership interest in a limited liability company that holds a fee simple interest in one Redevelopment Community.
We also hold a fee simple ownership interest in twelve of the Development Communities and a membership interest in a limited liability company that holds a fee simple interest in one Development Community.
In each of the four partnerships structured as DownREITs, either AvalonBay or one of our wholly-owned subsidiaries is the general partner, and there are one or more limited partners whose interest in the partnership is represented by units of limited partnership interest. For each DownREIT partnership, limited partners are entitled to receive distributions before any distribution is made to the general partner. Although the partnership agreements for each of the DownREITs are different, generally the distributions per unit paid to the holders of units of limited partnership interests approximate the current AvalonBay common stock dividend amount. Each DownREIT partnership has been structured so that it is unlikely the limited partners will be entitled to a distribution greater than the initial distribution provided for in the partnership agreement. The holders of units of limited partnership interest have the right to present each unit of limited partnership interest for redemption for cash equal to the fair market value of a share of AvalonBay common stock on the date of redemption. In lieu of cash, we may elect to acquire any unit presented for redemption for one share of our common stock. As of March 31, 2001, there were 671,083 units outstanding. The DownREIT partnerships are consolidated for financial reporting purposes.
At March 31, 2001, we had positioned our portfolio of Stabilized Communities, excluding communities owned by unconsolidated joint ventures, to an average physical occupancy level of 97.0%. Our strategy is to maximize total rental revenue through management of rental rates and occupancy levels. Our strategy of maximizing total rental revenue could lead to lower occupancy levels. Given the current high occupancy level of our portfolio, we believe that any rental revenue and net income gains from our Established Communities would be achieved primarily through higher rental rates and the lower average operating costs per apartment home that result from economies of scale due to national and regional growth of our portfolio.
We elected to be taxed as a REIT for federal income tax purposes for the year ended December 31, 1994 and we have not revoked that election. We were incorporated under the laws of the State of California in 1978, and we were reincorporated in the State of Maryland in July 1995. Our principal executive offices are located at 2900 Eisenhower Avenue, Suite 300, Alexandria, Virginia, 22314, and our telephone number at that location is (703) 329-6300. We also maintain regional offices and administrative or specialty offices in or near the following cities:
• San Jose, California;
• Wilton, Connecticut;
• Boston, Massachusetts;
• Chicago, Illinois;
• Iselin, New Jersey;
• Minneapolis, Minnesota;
• Newport Beach, California;
• New York, New York; and
• Seattle, Washington.
Recent Developments
Sales of Existing Communities. We seek to increase our geographical concentration in selected high barrier-to-entry markets where we believe we can:
• apply sufficient market and management presence to enhance revenue growth;
• reduce operating expenses; and
• leverage management talent.
To effect this increased concentration, we are selling assets in certain submarkets and intend to redeploy the proceeds from those sales to develop and redevelop communities currently under construction or reconstruction. Pending such redeployment, we will generally use the proceeds from the sale of these communities to reduce amounts outstanding under our variable rate unsecured credit facility. On occasion, we will set aside the proceeds from the sale of communities into a cash escrow account to facilitate a like-kind exchange transaction. Accordingly, we sold one community containing 226 apartment homes in connection with our capital redeployment strategy during the three months ended March 31, 2001. Net proceeds from this sale totaled approximately $14,500,000. We intend to dispose of additional assets as described more fully under “Future Financing and Capital Needs.”
Development, Redevelopment and Acquisition Activities. During the three months ended March 31, 2001, we completed the development of one community, Avalon Estates, for a total investment of $20,500,000. This community, which is located in Hull, Massachusetts, contains 162 apartment homes.
We also acquired three communities in the Seattle, Washington area (Avalon Wynhaven, Avalon Brandemoor, and Avalon WildWood) for a total acquisition price of $129,300,000. These communities, which contain an aggregate of 995 apartment homes, were purchased pursuant to a forward purchase contract agreed to in 1997 with an unaffiliated party.
The development and redevelopment of communities involves risks that the investment will fail to perform in accordance with expectations. See “Risks of Development and Redevelopment” for our discussion of these and other risks inherent in developing or redeveloping communities.
In February 2001, we announced the departure of a senior executive. As a result of this departure, we recorded a charge of approximately $2,500,000 during the first quarter of 2001.
Results of Operations and Funds From Operations
A comparison of our operating results for the three months ended March 31, 2001 and March 31, 2000 follows (dollars in thousands):
| | For the three months ended
|
| | 3-31-01
| 3-31-00
| $ Change
| % Change
|
| | | | | |
| Revenue: | | | | |
| Rental income | $155,329 | $134,785 | $20,544 | 15.2% |
| Management fees | 331 | 248 | 83 | 33.5% |
| Other income | 97
| 55
| 42
| 76.4%
|
| Total revenue | 155,757
| 135,088
| 20,669
| 15.3%
|
| Expenses: | | | | |
| Operating expenses, excluding property taxes | 39,800 | 33,338 | 6,462 | 19.4% |
| Property taxes | 12,798
| 11,230
| 1,568
| 14.0%
|
| Total operating expenses | 52,598
| 44,568
| 8,030
| 18.0%
|
| Net Operating Income | 103,159 | 90,520 | 12,639 | 14.0% |
| | | | | |
| Interest expense | 23,124 | 20,067 | 3,057 | 15.2% |
| Depreciation expense | 31,129 | 29,419 | 1,710 | 5.8% |
| General and administrative | 3,805
| 2,947
| 858
| 29.1%
|
| Total other expenses | 58,058
| 52,433
| 5,625
| 10.7%
|
| Equity in income of unconsolidated joint ventures | 106 | 694 | (588) | -84.7% |
| Interest income | 1,816 | 1,020 | 796 | 78.0% |
| Minority interest of unitholders in consolidated partnerships | (325)
| (539)
| 214
| -39.7%
|
| Income before gain on sale of communities | 46,698 | 39,262 | 7,436 | 18.9% |
| Gain on sale of communities | 4,901
| 7,910
| (3,009)
| -38.0%
|
| Net income | 51,599 | 47,172 | 4,427 | 9.4% |
| Preferred dividends | (9,945)
| (9,945)
| --
| 0.0%
|
| Net income available to common stockholders | $41,654
| $37,227
| $4,427
| 11.9%
|
Net income available to common stockholders increased $4,427,000 (11.9%) to $41,654,000 for the three months ended March 31, 2001 compared to $37,227,000 for the preceding year. Excluding separation costs and gain on sale of communities, net income available to common stockholders increased by $9,929,000 for the three months ended March 31, 2001 compared to the same period of the preceding year. The increase in net income, as adjusted, for the three months ended March 31, 2001 is primarily attributable to additional operating income from newly developed and redeveloped communities as well as growth in operating income from Established Communities.
As discussed in “Recent Developments – Sales of Existing Communities” and “Future Financing and Capital Needs,” we funded a portion of our development and redevelopment activities through the sale of assets which do not meet our long-term strategic objectives. The short-term effect of a sale of a community is that net operating income will be negatively impacted because that community’s contribution to net operating income has been eliminated and the development or redevelopment community in which the proceeds from the sale are being invested is not yet complete. Interest expense will also decrease as the proceeds from the sale of communities are initially used to repay amounts outstanding on our unsecured credit facility. The historical effect of this strategy has been that net operating income attributable to newly developed and redeveloped communities is higher than net operating income of assets identified for sale.
The increase in net operating income of $12,639,000 for the three months ended March 31, 2001 as compared to 2000 is attributable to:
• an increase of $7,837,000 related to communities where development activities, redevelopment activities or acquisitions were completed subsequent to January 1, 2000;
• an increase of $9,551,000 related to Established Communities;
• a decrease of $2,649,000 related to communities sold subsequent to January 1, 2000;
• an increase of $393,000 related to all other communities; and
• a decrease of $2,493,000 related to separation costs.
Depreciation expense is impacted by the timing of asset sales, acquisitions and completion of development or redevelopment activities. Gain on sale of communities is impacted by the number of assets sold in a given period, the carrying value of those assets, and the local market conditions in which the individual assets are located.
Rental income increased ($20,544,000 or 15.2%) primarily due to an increase in the weighted average monthly rental income per occupied apartment home and an increase in the weighted average number of occupied apartment homes.
Overall Portfolio - The weighted average number of occupied apartment homes increased to 34,217 apartment homes for the three months ended March 31, 2001 from 33,746 apartment homes for the three months ended March 31, 2000 primarily as a result of development, redevelopment and acquisition of new communities offset by the sale of communities during 2000. For the three months ended March 31, 2001, the weighted average monthly revenue per occupied apartment home increased $183 (13.8%) to $1,511 compared to $1,328 for the same period of the preceding year, which is primarily attributable to increased rental rates from Established Communities. In addition, the development of new apartment communities with higher average rents and the sale of communities with lower average rents favorably impacted average revenue per home. These newly developed apartment communities were funded in part from the proceeds of communities sold in markets where rental rates are lower.
Established Communities - - Rental revenue increases of $11,149,000 (11.8%) are due to market conditions that allowed for higher average rents partially offset by lower economic occupancy levels. For the three months ended March 31, 2001, weighted average monthly revenue per occupied apartment home increased $169 (12.4%) to $1,531 compared to $1,362 for the same period of the preceding year. The average economic occupancy decreased from 97.5% for the three months ended March 31, 2000 to 96.9% for the three months ended March 31, 2001.
Management fees increased ($83,000 or 33.5%) primarily due to receipt of fees pursuant to joint venture arrangements.
Operating expenses, excluding property taxes increased ($6,462,000 or 19.4%) primarily due to the addition of newly developed, redeveloped and acquired apartment homes and separation costs of $2,493,000 due to the departure of a senior executive. Maintenance, insurance and other costs associated with Development and Redevelopment Communities are expensed as communities move from the initial construction and lease-up phase to the stabilized operating phase.
Established Communities - - Operating expenses, excluding property taxes increased $1,309,000 (7.7%) to $18,380,000 for the three months ended March 31, 2001 compared to $17,071,000 for the same period of the preceding year. The increase is primarily the result of higher utilities, insurance, maintenance and redecorating costs.
For the three months ended March 31, economic occupancy decreased in the Northern California region (which accounts for approximately 38.5% of current Established Community rental revenue) from 97.9% in 2000 to 96.7% in 2001 primarily due to softening in certain Northern California sub-markets. We have observed increased volatility in certain Northern California sub-markets over the past two years. Market rental rates increased substantially in 2000, and we believe some reductions in market rental rates will occur in 2001 as market conditions reset to more sustainable levels of growth.
Property taxes increased ($1,568,000 or 14.0%) primarily due to the addition of newly developed, redeveloped or acquired apartment homes, partially offset by the sale of communities. Property taxes on Development and Redevelopment Communities are expensed as communities move from the initial construction and lease-up phase to the stabilized operating phase.
Established Communities - - Property taxes increased $306,000 (3.7%) to $8,505,000 for the three months ended March 31, 2001 compared to $8,199,000 for the same period of the preceding year. The increase is primarily due to higher assessments throughout all regions.
Interest expense increased ($3,057,000 or 15.2%) primarily due to the issuance of $350,000,000 of unsecured notes during the second half of 2000. This reflects our strategy to mitigate the risk of floating rate debt by repaying floating rate debt under the unsecured credit facility (with relatively lower current interest rates) with longer dated fixed rate unsecured debt that has a higher current interest rate.
Depreciation expense increased ($1,710,000 or 5.8%) due to the addition of newly developed, redeveloped and acquired apartment homes, partially offset by the sale of communities.
General and administrative increased ($858,000 or 29.1%) primarily due to an increase in consulting fees as well as compensation expense for a senior officer whose salary was expensed in the current period but capitalized a year ago while he served the company in a different capacity.
Equity in income of unconsolidated joint ventures decreased ($588,000 or 84.7%). The decrease is primarily attributable to a valuation allowance of $310,000 recorded for an investment in a technology company accounted for under the cost method, as well as our pro rata share of losses from a technology investment accounted for under the equity method.
Interest income increased (796,000 or 78.0%) due to an increase in average cash balances invested.
Gain on sale of communities of $4,901,000 for the three months ended March 31, 2001 was attributable to the sale of one community.
Funds from Operations
We consider Funds from Operations, or FFO, to be an appropriate measure of our operating performance because it helps investors understand our ability to incur and service debt and to make capital expenditures. We believe that to understand our operating results, FFO should be examined with net income as presented in the Condensed Consolidated Statements of Operations and Other Comprehensive Income included elsewhere in this report. FFO is determined based on a definition adopted by the Board of Governors of the National Association of Real Estate Investment Trustsâ (NAREIT), and is defined as:
• net income or loss computed in accordance with generally accepted accounting principles (GAAP), except that excluded from net income or loss are gains or losses on sales of property and extraordinary (as defined by GAAP) gains or losses on debt restructuring;
• plus depreciation of real estate assets; and
• after adjustments for unconsolidated partnerships and joint ventures.
FFO does not represent cash generated from operating activities in accordance with GAAP. Therefore it should not be considered an alternative to net income as an indication of our performance. FFO should also not be considered an alternative to net cash flows from operating activities as determined by GAAP as a measure of liquidity. Additionally, it is not necessarily indicative of cash available to fund cash needs. Further, FFO as calculated by other REITs may not be comparable to our calculation of FFO.
For the three months ended March 31, 2001, FFO increased to $67,699,000 from $58,614,000 for the comparable period of the preceding year. This increase is primarily due to the completion of new development and redevelopment communities as well as growth in earnings from Established Communities.
| | For the three months ended
(Dollars in thousands)
|
| | 3-31-01
| 3-31-00
|
| | | |
| Net income | $51,599 | $47,172 |
| Preferred dividends | (9,945) | (9,945) |
| Depreciation - real estate assets | 30,294 | 28,594 |
| Joint venture adjustments | 261 | 194 |
| Minority interest expense | 391 | 509 |
| Gain on sale of communities | (4,901)
| (7,910)
|
| Funds from Operations | $67,699
| $58,614
|
| Net cash provided by operating activities | $64,067
| $(61,029)
|
| Net cash used in investing activities | $(66,765)
| $(45,518)
|
| Net cash provided by (used in) financing activities | $3,115
| $(15,056)
|
Capitalization of Fixed Assets and Community Improvements
Our policy with respect to capital expenditures is generally to capitalize only non-recurring expenditures. We capitalize improvements and upgrades only if the item:
• exceeds $15,000;
• extends the useful life of the asset; and
• is not related to making an apartment home ready for the next resident.
Under this policy, virtually all capitalized costs are non-recurring, as recurring make-ready costs are expensed as incurred. Recurring make-ready costs include the following:
• carpet and appliance replacements;
• floor coverings;
• interior painting; and
• other redecorating costs.
We capitalize purchases of personal property, such as computers and furniture, only if the item is a new addition and the item exceeds $2,500. We generally expense purchases of personal property made for replacement purposes. The application of these policies for the three months ended March 31, 2001 resulted in non-revenue generating capitalized expenditures for Stabilized Communities of approximately $16 per apartment home. For Stabilized Communities, we charged $275 per apartment home to maintenance expense for the three months ended March 31, 2001, including carpet and appliance replacements. We anticipate that capitalized costs per apartment home will gradually increase as the average age of our communities increases.
Liquidity and Capital Resources
Liquidity. The primary source of liquidity is our cash flows from operations. Operating cash flows have historically been determined by:
• the number of apartment homes;
• rental rates;
• occupancy levels; and
• our expenses with respect to these apartment homes.
The timing, source and amount of cash flows provided by financing activities and used in investing activities are sensitive to the capital markets environment, particularly to changes in interest rates that are charged to us as changes in interest rates affect our decision as to whether to issue debt securities, borrow money and invest in real estate. Thus, changes in the capital markets environment affect our plans for the undertaking of construction and development as well as acquisition activity.
Cash and cash equivalents increased $417,000 to $57,651,000 for the three months ended March 31, 2001 compared to an increase in cash and cash equivalents of $455,000 to $8,076,000 for the three months ended March 31, 2000.
Net cash provided by operating activities totaled $64,067,000 for the three months ended March 31, 2001, an increase of $3,038,000 provided over the same period of 2000. The increase was primarily attributable to additional operating income from newly developed and redeveloped communities as well as growth in operating income from Established Communities.
Net cash used in investing activities totaled $66,765,000 for the three months ended March 31, 2001, an increase of $21,247,000 used over the same period of 2000. This increase in expenditures reflects an increase in development, redevelopment and acquisition activity offset by a decrease in proceeds from the sale of communities.
Net cash provided by financing activities totaled $3,115,000 for the three months ended March 31, 2001, an increase of $18,171,000 over the same period of 2000. The increase is primarily due to the issuance of secured notes payable offset by a decrease in the borrowings under our credit facility.
We regularly review our short and long-term liquidity needs and the adequacy of Funds from Operations, as defined above, and other expected liquidity sources to meet these needs. We believe our principal short–term liquidity needs are to fund:
| • | normal recurring operating expenses; |
| • | debt service payments; |
| • | the distributions required with respect to preferred stock; |
| • | the minimum dividend payments required to maintain our REIT qualification under the Internal Revenue Code of 1986; and |
| • | development and redevelopment activity in which we are currently engaged. |
We anticipate that we can fully satisfy these needs from a combination of cash flows provided by operating activities and capacity under the unsecured credit facility.
We believe our principal long-term liquidity needs are the reduction of medium and long-term debt. We anticipate that no significant portion of the principal of any indebtedness will be repaid prior to maturity. If we do not have funds on hand sufficient to repay our indebtedness, it will be necessary for us to refinance this debt. This refinancing may be accomplished through additional debt financing, which may be collateralized by mortgages on individual communities or groups of communities, by uncollateralized private or public debt offerings or by additional equity offerings. We also anticipate having significant retained cash flow in each year so that when a debt obligation matures, some or all of each maturity can be satisfied from this retained cash. Although we believe we will have the capacity to meet our long-term liquidity needs, we cannot assure you that additional debt financing or debt or equity offerings will be available or, if available, that they will be on terms we consider satisfactory.
Capital Resources. We intend to match the long-term nature of our real estate assets with long-term cost effective capital to the extent permitted by prevailing market conditions. We follow a focused strategy to help facilitate uninterrupted access to capital. This strategy includes:
| • | hiring, training and retaining associates with a strong resident service focus, which should lead to higher rents, lower turnover and reduced operating costs; |
| • | managing, acquiring and developing upscale communities in dense locations where the availability of zoned and entitled land is limited to provide consistent, sustained earnings growth; |
| • | operating in markets with growing demand, as measured by household formation and job growth, and high barriers-to-entry. We believe these characteristics generally combine to provide a favorable demand-supply balance, which we believe will create a favorable environment for future rental rate growth while protecting existing and new communities from new supply. We expect this strategy to result in a high level of quality to the revenue stream; |
| • | maintaining a conservative capital structure, largely comprised of equity, and with modest, cost-effective leverage. We generally avoid secured debt except in order to obtain low cost, tax-exempt debt. We believe that such a structure should promote an environment whereby current credit ratings levels can be maintained; |
| • | following accounting practices that provide a high level of quality to reported earnings; and |
| • | providing timely, accurate and detailed disclosures to the investment community. |
We believe these strategies provide a disciplined approach to capital access to help position AvalonBay to fund portfolio growth.
Capital markets conditions over the past several years have limited our access to cost-effective capital. See “Future Financing and Capital Needs” for a discussion of our response to the current capital markets environment.
Variable Rate Unsecured Facility
Our unsecured revolving credit facility is furnished by a consortium of banks and provides $600,000,000 in short-term credit. We pay these banks an annual facility fee of $900,000 in equal quarterly installments. The unsecured credit facility bears interest at varying levels tied to the London Interbank Offered Rate (LIBOR) based on ratings levels achieved on our unsecured notes and on a maturity selected by us. The current stated pricing is LIBOR plus 0.60% per annum. A competitive bid option is available for borrowings of up to $400,000,000. This option allows banks that are part of the lender consortium to bid to provide us loans at a rate that is lower than the stated pricing provided by the unsecured credit facility. The competitive bid option may result in lower pricing if market conditions allow. Pricing under the competitive bid option resulted in average pricing of LIBOR plus 0.50% for balances most recently placed under the competitive bid option. At May 1, 2001, $42,000,000 was outstanding, $82,203,000 was used to provide letters of credit and $475,797,000 was available for borrowing under the unsecured credit facility. The unsecured credit facility matures in July 2001, and the company is currently in the process of negotiating a new facility which it believes will be in place prior to the maturity date of the existing facility. In addition, the Company expects the new facility will have substantially the same terms and conditions as the existing facility. We intend to use borrowings under the unsecured credit facility for:
• capital expenditures;
• construction, development, reconstruction and redevelopment costs;
• acquisitions;
• credit enhancement for tax-exempt bonds; and
• working capital purposes.
Interest Rate Protection Agreements
We are not a party to any long-term interest rate agreements, other than interest rate protection and swap agreements on approximately $168 million of our variable rate tax-exempt indebtedness. We intend, however, to evaluate the need for long-term interest rate protection agreements as interest rate market conditions dictate, and we have engaged a consultant to assist in managing our interest rate risks and exposure.
Future Financing and Capital Needs
As of March 31, 2001, we had 14 new communities under construction either by us or by an unaffiliated third parties with whom we have entered into forward purchase commitments. As of March 31, 2001, a total estimated cost of $455,642,000 remained to be invested in these communities. In addition, we had four other communities under reconstruction, for which an estimated $30,690,000 remained to be invested as of March 31, 2001.
Substantially all of the capital expenditures necessary to complete the communities currently under construction and reconstruction will be funded from:
• the remaining capacity under our current $600,000,000 unsecured credit facility and an anticipated substitute facility;
• the net proceeds from sales of existing communities;
• retained operating cash; and/or
• the issuance of debt or equity securities.
We expect to continue to fund deferred development costs related to future developments from retained operating cash and borrowings under the unsecured credit facility. We believe these sources of capital will be adequate to take the proposed communities to the point in the development cycle where construction can begin.
We have observed and been impacted by a reduction in the availability of cost effective capital since the third quarter of 1998. While the capital market environment has improved, we cannot assure you that cost effective capital will be available to meet future expenditures required to begin planned reconstruction activity or the construction of the Development Rights. Before planned reconstruction activity or the construction of a Development Right begins, we intend to arrange adequate financing to complete these undertakings, although we cannot assure you that we will be able to obtain such financing. In the event that financing cannot be obtained, we may have to abandon Development Rights, writeoff associated pursuit costs and/or forego reconstruction activity. In such instances, we will not realize the increased revenues and earnings that we expected from such pursuits, and the related write-off of costs will increase current period expenses.
Our liquidity could be adversely impacted by expanding development activities and/or reduced capital (as compared to prior years) available from asset sales. To meet the balance of our liquidity needs under such conditions, we would need to arrange additional capacity under our existing unsecured credit facility, sell additional existing communities and/or issue additional debt or equity securities. While we believe we have the financial position to expand our short-term credit capacity and support our capital markets activity, we cannot assure you that we will be successful in completing these arrangements, sales or offerings. The failure to complete these transactions on a cost-effective basis could have a material adverse impact on our operating results and financial condition, including the abandonment of deferred development costs and a resultant charge to earnings.
To increase our concentration of communities in selected high barrier-to-entry markets, we are selling assets which do not meet our long-term strategic objectives and redeploying the proceeds. Under our disposition program, we solicit competing bids from unrelated parties for these individual assets and consider the sales price and tax ramifications of each proposal. We intend to actively seek buyers for communities held for sale. However, we cannot assure you that these assets can be sold on terms that we consider satisfactory.
The assets that we have identified for disposition include land, buildings and improvements and furniture, fixtures and equipment. Total real estate, net of accumulated depreciation, of all communities identified for sale at March 31, 2001 totaled $185,493,000. Certain individual assets are secured by mortgage indebtedness which may be assumed by the purchaser or repaid from our net sales proceeds. Our Consolidated Statements of Operations and Other Comprehensive Income include net income from these communities of $4,044,000 and $2,839,000 for the three months ended March 31, 2001 and 2000, respectively.
Because the proceeds from the sale of communities are used initially to reduce borrowings under our unsecured credit facility, the immediate effect of a sale of a community is to have a negative effect on earnings. This is because the yield on a community that is sold exceeds the interest rate on the borrowings that are repaid from such net proceeds. Therefore, changes in the number and timing of dispositions, and the redeployment of the resulting net proceeds, may have a material and adverse effect on our earnings.
We are a member of Constellation Real Technologies LLC, an entity formed by a number of real estate investment trusts and real estate operating companies for the purpose of investing in multi-sector real estate technology opportunities. Our capital commitment to Constellation Real Technologies is $4.0 million. Although we have made no capital contributions to date, we expect to contribute approximately $910,000 by the end of May 2001.
Debt Maturities
The table on the following page details debt maturities for the next five years, excluding the unsecured credit facility:
| | (Dollars in thousands) |
| Community
| All-In
interest
rate(1)
| Principal
Maturity date
| Balance Outstanding
| Scheduled Maturities
|
| 12-31-00
| 3-31-01
| 2001
| 2002
| 2003
| 2004
| 2005
| Thereafter
|
| Tax-Exempt Bonds | | | | | | | | | | |
| Fixed Rate | | | | | | | | | | |
| Avalon at Foxchase I | 5.88% | Nov-2007 | $16,800 | $16,800 | $-- | $-- | $-- | $-- | $-- | $16,800 |
| Avalon at Foxchase II | 5.88% | Nov-2007 | 9,600 | 9,600 | -- | -- | -- | -- | -- | 9,600 |
| Fairway Glen | 5.88% | Nov-2007 | 9,580 | 9,580 | -- | -- | -- | -- | -- | 9,580 |
| CountryBrook | 7.87% | Mar-2012 | 18,934 | 18,847 | 270 | 386 | 417 | 451 | 488 | 16,835 |
| Waterford | 5.88% | Aug-2014 | 33,100 | 33,100 | -- | -- | -- | -- | -- | 33,100 |
| Avalon at Mountain View | 5.88% | Mar-2017 | 18,300 | 18,300 | -- | -- | -- | -- | -- | 18,300 |
| Avalon at Dulles | 7.04% | Jul-2024 | 12,360 | 12,360 | -- | -- | -- | -- | -- | 12,360 |
| Avalon at Symphony Glen | 7.00% | Jul-2024 | 9,780 | 9,780 | -- | -- | -- | -- | -- | 9,780 |
| Avalon View | 7.55% | Aug-2024 | 18,465 | 18,380 | 265 | 373 | 397 | 425 | 455 | 16,465 |
| Avalon at Lexington | 6.56% | Feb-2025 | 14,347 | 14,279 | 203 | 288 | 307 | 326 | 347 | 12,808 |
| Avalon Oaks | 7.45% | Feb-2041 | -- | 17,533 | 71 | 90 | 97 | 104 | 111 | 17,060 |
| Avalon at Nob Hill | 5.80% | Jun-2025 | 20,013 | 19,947 | 202 | 288 | 308 | 331 | 355 | 18,463 |
| Avalon at Mission Viejo | 5.50% | Jun-2025 | 7,354 | 7,330 | 74 | 105 | 112 | 121 | 129 | 6,789 |
| Avalon Campbell | 6.48% | Jun-2025 | 36,981 | 36,836 | 449 | 637 | 684 | 733 | 786 | 33,547 |
| Avalon Pacifica | 6.48% | Jun-2025 | 16,775 | 16,709 | 204 | 289 | 310 | 332 | 356 | 15,218 |
| Crossbrook | 6.48% | Jun-2025 | 8,156 | --(2) | -- | -- | -- | -- | -- | -- |
| Avalon Knoll | 6.95% | Jun-2026 | 13,393 | 13,344 | 151 | 214 | 230 | 246 | 263 | 12,240 |
| Avalon Landing | 6.85% | Jun-2026 | 6,626 | 6,601 | 76 | 108 | 116 | 124 | 132 | 6,045 |
| Avalon Fields | 7.05% | May-2027 | 11,609 | 11,572 | 120 | 169 | 180 | 193 | 207 | 10,703 |
| Avalon West | 7.73% | Dec-2036 | 8,579
| 8,565
| 43
| 61
| 65
| 70
| 75
| 8,251
|
| | | | 290,752 | 299,463 | 2,128 | 3,008 | 3,223 | 3,456 | 3,704 | 283,944 |
| Variable Rate | | | | | | | | | | |
| Avalon Devonshire | | Dec-2025 | 27,305 | 27,305 | -- | -- | -- | -- | -- | 27,305 |
| Avalon at Fairway Hills I | | Jun-2026 | 11,500 | 11,500 | -- | -- | -- | -- | -- | 11,500 |
| Avalon at Laguna Niguel | | Mar-2009 | 10,400 | 10,400 | -- | -- | -- | -- | -- | 10,400 |
| Avalon Greenbriar | | May-2026 | 18,755
| 18,755
| --
| --
| --
| --
| --
| 18,755
|
| | | | 67,960 | 67,960 | -- | -- | -- | -- | -- | 67,960 |
| Conventional Loans: | | | | | | | | | | |
| Fixed Rate | | | | | | | | | | |
| $100 Million unsecured notes | 7.375% | Sep-2002 | 100,000 | 100,000 | -- | 100,000 | -- | -- | -- | -- |
| $50 Million unsecured notes | 6.25% | Jan-2003 | 50,000 | 50,000 | -- | -- | 50,000 | -- | -- | -- |
| $100 Million unsecured notes | 6.50% | Jul-2003 | 100,000 | 100,000 | -- | -- | 100,000 | -- | -- | -- |
| $125 Million medium-term notes | 6.58% | Feb-2004 | 125,000 | 125,000 | -- | -- | -- | 125,000 | -- | -- |
| $100 Million unsecured notes | 6.625% | Jan-2005 | 100,000 | 100,000 | -- | -- | -- | -- | 100,000 | -- |
| $50 Million unsecured notes | 6.50% | Jan-2005 | 50,000 | 50,000 | -- | -- | -- | -- | 50,000 | -- |
| $150 Million unsecured notes | 6.80% | Jul-2006 | 150,000 | 150,000 | -- | -- | -- | -- | -- | 150,000 |
| $110 Million unsecured notes | 6.875% | Dec-2007 | 110,000 | 110,000 | -- | -- | -- | -- | -- | 110,000 |
| $50 Million unsecured notes | 6.625% | Jan-2008 | 50,000 | 50,000 | -- | -- | -- | -- | -- | 50,000 |
| $150 Million medium-term notes | 8.25% | Jul-2008 | 150,000 | 150,000 | -- | -- | -- | -- | -- | 150,000 |
| $150 Million medium-term notes | 7.50% | Aug-2009 | 150,000 | 150,000 | -- | -- | -- | -- | -- | 150,000 |
| $200 Million medium-term notes | 7.50% | Dec-2010 | 200,000 | 200,000 | -- | -- | -- | -- | -- | 200,000 |
| Avalon Redmond Place | 7.31% | May-2001 | 11,042 | 10,982 | 10,982 | -- | -- | -- | -- | -- |
| Avalon at Pruneyard | 7.25% | May-2004 | 12,870 | 12,870 | -- | -- | -- | 12,870 | -- | -- |
| Avalon Walk II | 8.93% | Aug-2004 | 12,300
| 12,233
| 197
| 288
| 315
| 11,433
| --
| --
|
| | | | 1,371,212 | 1,371,085 | 11,179 | 100,288 | 150,315 | 149,303 | 150,000 | 810,000 |
| Variable Rate | | | | | | | | | | |
| Avalon on the Sound | 7.45% | 2002 | --
| 33,636
|
| 33,636
| --
| --
| --
| --
|
| Total indebtedness - excluding unsecured credit facility | | | $1,729,924
| $1,772,144
| $13,307
| $136,932
| $153,538
| $152,759
| $153,704
| $1,161,904
|
| | | | | | | | | | | |
(1) Includes credit enhancement fees, facility fees, trustees, etc.
(2) The remaining loan balance was repaid in connection with the disposition of the property during 2001.
Announced Redemption of Preferred Stock
On May 11, 2001, the Company published and mailed notice that it will redeem all 4,455,000 outstanding shares of its 9.00% Series F Cumulative Redeemable Preferred Stock (the "Series F Preferred Stock") on June 11, 2001 at a price of $25.00 per share, plus $0.1625 in accrued and unpaid dividends to the redemption date, for an aggregate redemption price of $25.1625 per share of Series F Preferred Stock. The aggregate redemption price for the Series F Preferred Stock does not exceed the aggregate amount of sale proceeds of other capital stock issued since the date of issuance of the Series F Preferred Stock. The Company expects that to the extent cash balances on June 11, 2001 are less than the aggregate redemption price of the Series F Preferred Stock the Company will increase its borrowings under its unsecured credit facility."
Inflation
Substantially all of our leases are for a term of one year or less. This may enable us to realize increased rents upon renewal of existing leases or the beginning of new leases. Short–term leases generally minimize our risk from the adverse effects of inflation, although these leases generally permit residents to leave at the end of the lease term without penalty. We believe that short-term leases, combined with relatively consistent demand, results in rents and cash flow which provide an attractive inflation hedge.
Natural Disasters
Many of our West Coast communities are located in the general vicinity of active earthquake faults. In July 1998, we obtained a seismic risk analysis from an engineering firm which estimated the probable maximum loss (PML) for each of the 60 West Coast communities that we owned at that time and for each of the five West Coast communities under development at that time. To establish a PML, the engineers define a severe earthquake event for the applicable geographic area. The PML is the building damage and business interruption loss that is estimated to have only a 10% probability of being exceeded in a fifty year period in the event of such an earthquake. Because a significant number of our communities are located in the San Francisco Bay Area, the engineers' analysis assumed an earthquake on the Hayward Fault with a Richter Scale magnitude of 7.1. Based on this earthquake scenario, the engineers determined the PML at that time to be $113 million for the 60 West Coast communities that we owned at that time and the five West Coast communities then under development. The actual aggregate PML could be higher or lower as a result of variations in soil classifications and structural vulnerabilities. For each community, the engineers' analysis calculated an individual PML as a percentage of the community's replacement cost and projected revenues. We cannot assure you that:
• an earthquake would not cause damage or losses greater than the PML assessments indicate;
• future PML levels will not be higher than the current PML levels described above for our communities located on the West Coast; or
• acquisitions or developments after July 1998 will not have PML assessments indicating the possibility of greater damage or losses than currently indicated.
In November 2000, we renewed our earthquake insurance, both for physical damage and lost revenue, with respect to all communities we owned at that time and all of the communities then under development. For any single occurrence, we have in place with respect to communities located in California $75 million of coverage with a five percent deductible. The five percent deductible is subject to a minimum of $100,000 per occurrence. Earthquake coverage outside of California is subject to a $200 million limit and a $25,000 deductible per occurrence. In addition, our general liability and property insurance program provides coverage for public liability and fire damage. In the event an uninsured disaster or a loss in excess of insured limits were to occur, we could lose our capital invested in the affected community, as well as anticipated future revenue from that community. We would also continue to be obligated to repay any mortgage indebtedness or other obligations related to the community. Any such loss could materially and adversely affect our business and our financial condition and results of operations.
Development Communities
As of March 31, 2001, we had 13 Development Communities under construction. We expect these Development Communities, when completed, to add a total of 3,692 apartment homes to our portfolio for a total capitalized cost, including land acquisition costs, of approximately $737.6 million. Statements regarding the future development or performance of the Development Communities are forward-looking statements. We cannot assure you that:
• we will complete the Development Communities;
• our budgeted costs or estimates of occupancy rates will be realized;
• our schedule of leasing start dates or construction completion dates will be achieved; or
• future developments will realize returns comparable to our past developments.
You should carefully review the discussion under “Risks of Development and Redevelopment” below.
We hold a fee simple ownership interest in 12 of the Development Communities and a membership interest in a limited liability company that holds a fee simple interest in one Development Community. The following table presents a summary of the Development Communities:
| | | Number of | Budgeted | | | Estimated | Estimated |
| | | apartment | cost (1) | Construction | Initial | completion | stabilization |
| | | homes
| ($ millions)
| start
| occupancy (2)
| date
| date (3)
|
| | | | | | | | |
| 1. | Avalon at Florham Park | | | | | | |
| | Florham Park, NJ | 270 | $41.0 | Q2 1999 | Q1 2000 | Q2 2001 | Q3 2001 |
| 2. | Avalon at Edgewater | | | | | | |
| | Edgewater, NJ | 408 | $75.6 | Q3 1999 | Q3 2001 | Q2 2002 | Q4 2002 |
| 3. | Avalon Bellevue | | | | | | |
| | Bellevue, WA | 202 | $29.9 | Q4 1999 | Q1 2001 | Q2 2001 | Q3 2001 |
| 4. | Avalon at Arlington Square I | | | | | | |
| | Arlington, VA | 510 | $69.9 | Q4 1999 | Q4 2000 | Q4 2001 | Q3 2002 |
| 5. | Avalon on the Sound (4) | | | | | | |
| | New Rochelle, NY | 412 | $92.1 | Q4 1999 | Q2 2001 | Q4 2001 | Q3 2002 |
| 6. | Avalon at Freehold | | | | | | |
| | Freehold, NJ | 296 | $33.1 | Q2 2000 | Q2 2001 | Q4 2001 | Q2 2002 |
| 7. | Avalon Harbor | | | | | | |
| | Stamford, CT | 323 | $60.7 | Q3 2000 | Q1 2002 | Q4 2002 | Q2 2003 |
| 8. | Avalon Belltown | | | | | | |
| | Seattle, WA | 100 | $19.2 | Q3 2000 | Q4 2001 | Q1 2002 | Q3 2002 |
| 9. | Avalon Towers on the Peninsula | | | | | | |
| | Mountain View, CA | 211 | $65.9 | Q3 2000 | Q1 2002 | Q2 2002 | Q4 2002 |
| 10. | Avalon at Cahill Park | | | | | | |
| | San Jose, CA | 218 | $50.5 | Q4 2000 | Q2 2002 | Q3 2002 | Q1 2003 |
| 11. | Avalon Riverview I | | | | | | |
| | Long Island City, NY | 372 | $102.5 | Q4 2000 | Q2 2002 | Q4 2002 | Q2 2003 |
| 12. | Avalon at Mission Bay North | | | | | | |
| | San Francisco, CA | 250 | $79.5 | Q1 2001 | Q4 2002 | Q1 2003 | Q3 2003 |
| 13. | Avalon Oaks West | | | | | | |
| | Wilmington, MA | 120
| $17.7
| Q1 2001 | Q1 2002 | Q2 2002 | Q4 2002 |
| | | | | | | | |
| | Total | 3,692
| $737.6
| | | | |
(1) Total budgeted cost includes all capitalized costs projected to be incurred to develop the respective Development Community, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees determined in accordance with generally accepted accounting principles.
(2) Future initial occupancy dates are estimates.
(3) Stabilized operations is defined as the first full quarter of 95% or greater occupancy after completion of construction.
(4) This community will be developed under a joint venture structure and the joint venture entity (a limited liability company) has obtained third-party debt financing. Our equity funding of the total budgeted costs is expected to be $13.3 million.
Redevelopment Communities
As of March 31, 2001 we had four communities under redevelopment. We expect the total budgeted cost to complete these Redevelopment Communities, including the cost of acquisition and redevelopment, to be approximately $324.6 million, of which approximately $73.5 million is the additional capital invested or expected to be invested above the original purchase cost. Statements regarding the future redevelopment or performance of the Redevelopment Communities are forward-looking statements. We have found that the cost to redevelop an existing apartment community is more difficult to budget than the cost to develop a new community. Accordingly, we expect that actual costs may vary over a wider range than for a new development community. We cannot assure you that we will meet our schedules for redevelopment completion, or that we will meet our budgeted costs, either individually or in the aggregate. See the discussion under “Risks of Development and Redevelopment” below.
The following presents a summary of Redevelopment Communities:
| | | | | | | | |
| | | | Budgeted Cost | | | |
| | |
Number of | ($ millions)
| | |
Estimated |
| | | apartment | Acquisition | Total | Reconstruction | Reconstruction | restabilized |
| | | homes
| cost
| cost (1)
| start
| completion (2)
| operations (3)
|
| | | | | | | | |
| 1. | Avalon at Cortez Hill | | | | | | |
| | San Diego, CA | 294 | $24.4 | $33.8 | Q1 2000 | Q2 2001 | Q3 2001 |
| 2. | Avalon at Media Center | | | | | | |
| | Burbank, CA | 748 | $55.3 | $75.3 | Q1 2000 | Q1 2002 | Q2 2002 |
| 3. | Avalon at Prudential Center | | | | | | |
| | Boston, MA | 781 | $133.9 | $154.5 | Q4 2000 | Q4 2002 | Q2 2003 |
| 4. | Avalon Terrace | | | | | | |
| | Stamford, CT | 388
| $37.5
| $61.0
| Q4 2000 | Q3 2002 | Q1 2003 |
| | | | | | | | |
| | Total | 2,211
| $251.1
| $324.6
| | | |
(1) Total budgeted cost includes all capitalized costs projected to be incurred to redevelop the respective Redevelopment Community,including costs to acquire the community, reconstruction costs, real estate taxes, capitalized interest and loan fees, permits,professional fees, allocated redevelopment overhead and other regulatory fees determined in accordance with GAAP.
(2) Reconstruction completion dates are estimates.
(3) Restabilized operations is defined as the first full quarter of 95% or greater occupancy after completion of reconstruction.
Development Rights
As of March 31, 2001, we are considering the development of 34 new apartment communities. These Development Rights range from land owned or under contract for which design and architectural planning has just begun to land under contract or owned by us with completed site plans and drawings where construction can begin almost immediately. We estimate that the successful completion of all of these communities would ultimately add 9,639 upscale apartment homes to our portfolio. At March 31, 2001, the cumulative capitalized costs incurred in pursuit of the 34 Development Rights, including the cost of land acquired in connection with eight of the Development Rights, was approximately $90.1 million, of which $68.8 million was land. Substantially all of these apartment homes will offer features like those offered by the communities we currently own.
We generally hold Development Rights through options to acquire land. The properties comprising the Development Rights are in different stages of the due diligence and regulatory approval process. The decisions as to which of the Development Rights to pursue, if any, or to continue to pursue once an investment in a Development Right is made are business judgments that we make after we perform financial, demographic and other analysis. Finally, we currently intend to limit the percentage of debt used to finance new developments in order to maintain our general historical practice with respect to the proportion of debt in our capital structure. Therefore, other financing alternatives may be required to finance the development of those Development Rights scheduled to start construction after April 1, 2001. Although the development of any particular Development Right cannot be assured, we believe that the Development Rights, in the aggregate, present attractive potential opportunities for future development and growth of our FFO.
Statements regarding the future development of the Development Rights are forward-looking statements. We cannot assure you that:
• we will succeed in obtaining zoning and other necessary governmental approvals or the financing required to develop these communities, or that we will decide to develop any particular community; or
• if we undertake construction of any particular community, that we will complete construction at the total budgeted cost assumed in the financial projections below.
The following presents a summary of the 34 Development Rights we are currently pursuing:
| | | | | Total |
| | | | Estimated | budgeted |
| | | | number | costs |
| | Location
| | of homes
| ($ millions)
|
| | | | | |
| 1. | Washington, D.C. | (1) | 209 | $43 |
| 2. | Lawrence, NJ | | 312 | 43 |
| 3. | Weymouth, MA | | 304 | 38 |
| 4. | New Canaan, CT | (1) (2) | 104 | 29 |
| 5. | Marlborough, MA | | 156 | 21 |
| 6. | Seattle, WA | | 154 | 50 |
| 7. | Westborough, MA | | 280 | 35 |
| 8. | Darien, CT | (1) | 189 | 38 |
| 9. | North Bethesda, MD | | 386 | 46 |
| 10. | Arlington II, VA | (1) | 332 | 43 |
| 11. | Wilton, CT | | 113 | 23 |
| 12. | Andover, MA | | 140 | 21 |
| 13. | Newton, MA | | 294 | 54 |
| 14. | Oakland, CA | (1) | 176 | 36 |
| 15. | Danbury, CT | | 244 | 29 |
| 16. | Los Angeles, CA | (1) | 309 | 59 |
| 17. | Glendale, CA | | 223 | 49 |
| 18. | San Francisco, CA | | 303 | 106 |
| 19. | Washington, D.C. | (1) | 144 | 30 |
| 20. | Orange, CT | (1) | 168 | 20 |
| 21. | Hingham, MA | | 270 | 44 |
| 22. | Bellevue, WA | | 330 | 61 |
| 23. | Coram, NY | | 450 | 65 |
| 24. | North Potomac, MD | | 520 | 61 |
| 25. | Bedford, MA | | 128 | 18 |
| 26. | Cohasset, MA | | 240 | 38 |
| 27. | New Rochelle, NY Phase II and III | | 588 | 137 |
| 28. | Stratford, CT | | 160 | 18 |
| 29. | Milford, CT | | 310 | 38 |
| 30. | Long Island City, NY Phase II and III | | 539 | 162 |
| 31. | Greenburgh, NY Phase II and III | | 766 | 139 |
| 32. | Florham Park, NJ | | 230 | 46 |
| 33. | Hopewell, NJ Phase I | | 280 | 40 |
| 34. | Hopewell, NJ Phase II | | 288
| 43
|
| | Totals | | 9,639
| $1,723
|
(1) Company owns land, but construction has not yet begun.
(2) The land is currently owned by Town Close Associates Limited Partnership in which we are a majority partner. It is currently anticipated that the land seller will retain a minority limited partner interest.
Risks of Development and Redevelopment
We intend to continue to pursue the development and redevelopment of apartment home communities. Our development and redevelopment activities may be exposed to the following industry risks:
• we may abandon opportunities we have already begun to explore based on further review of, or changes in, financial, demographic, environmental or other factors;
• we may encounter liquidity constraints, including the unavailability of financing on favorable terms for the development or redevelopment of a community;
• we may be unable to obtain, or we may experience delays in obtaining, all necessary zoning, land-use, building, occupancy, and other required governmental permits and authorizations;
• we may incur construction or reconstruction costs for a community that exceed our original estimates due to increased materials, labor or other expenses, which could make completion or redevelopment of the community uneconomical;
• occupancy rates and rents at a newly completed or redeveloped community may fluctuate depending on a number of factors, including market and general economic conditions, and may not be sufficient to make the community profitable; and
• we may be unable to complete construction and lease-up on schedule, resulting in increased debt service expense and construction costs.
The occurrence of any of the events described above could adversely affect our ability to achieve our projected yields on communities under development or redevelopment and could affect our payment of distributions to our stockholders.
Construction costs are projected by us based on market conditions prevailing in the community’s market at the time our budgets are prepared and reflect changes to those market conditions that we anticipated at that time. Although we attempt to anticipate changes in market conditions, we cannot predict with certainty what those changes will be. Construction costs have been increasing and, for some of our Development Communities, the total construction costs have been or are expected to be higher than the original budget. Total budgeted cost includes all capitalized costs projected to be incurred to develop the respective Development or Redevelopment Community, including:
• land and/or property acquisition costs;
• construction costs or reconstruction costs;
• real estate taxes;
• capitalized interest;
• loan fees;
• permits;
• professional fees;
• allocated development or redevelopment overhead; and
• other regulatory fees determined in accordance with generally accepted accounting principles.
We believe that, in the aggregate, we will still achieve our projected yield (i.e., return on invested capital) for those communities experiencing costs in excess of the original budget because of increases in prevailing market rents. We believe that we could experience similar increases in construction costs and market rents with respect to other development communities resulting in total construction costs that exceed original budgets. Likewise, costs to redevelop communities that have been acquired have, in some cases, exceeded our original estimates and similar increases in costs may be experienced in the future. We cannot assure that market rents in effect at the time new development communities or redeveloped communities complete lease-up will be sufficient to fully offset the effects of any increased construction or reconstruction costs.
Capitalized Interest
In accordance with generally accepted accounting principles, we capitalize interest expense during construction or reconstruction until a building obtains a certificate of occupancy. Thereafter, the interest allocated to that completed apartment home within the community is expensed. Capitalized interest totaled $5,597,000 and $3,494,000 for the three months ended March 31, 2001 and 2000, respectively.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our exposures to market risk since December 31, 2000.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in certain ordinary routine litigation incidental to the conduct of our business. In addition, as reported in the Company’s Form 10-K for the year ended December 31, 1999, we are currently involved in litigation with York Hunter Construction, Inc., and National Union Fire Insurance Company. While the outcome of such litigation cannot be predicted with certainty, we do not expect any current litigation, including the litigation with York Hunter and National Union, to have a material effect on our business or financial condition.
Item 2. Changes in Securities
During the three months ended March 31, 2001, the Company issued 762 shares of common stock in exchange for units of limited partnership held by a limited partner of Bay Countrybrook, L.P., a DownREIT partnership subsidiary of the Company. These shares were issued in reliance on an exemption from registration under Section 4(2) of the Securities Act of 1933. The Company is relying on the exemption based upon factual representations received from the limited partner who received these shares.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
At the Company’s 2001 Annual Meeting of Stockholders, held on May 8, 2001, stockholders approved all three proposals set forth in the Company’s proxy statement for such meeting. Specifically, stockholders:
(i) elected the nine nominees who were presented for election as directors;
(ii) approved an amendment to the Company’s 1994 Stock Incentive Plan, as amended and restated; and
(iii) approved a stockholder proposal relating to the Company’s shareholder rights agreement.
Each matter put forth for a vote of stockholders received the affirmative vote of stockholders holding more than a majority of all outstanding shares of common stock.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
3(i).1 — Articles of Amendment and Restatement of Articles of Incorporation of AvalonBay Communities (the “Company”), dated as of June 4, 1998. (Incorporated by reference to Exhibit 3(i).1 to Form 10-Q of the Company filed August 14, 1998.)
3(i).2 — Articles of Amendment, dated as of October 2, 1998. (Incorporated by reference to Exhibit 3.1(ii) to Form 8-K of the Company filed on October 6, 1998.)
3(i).3 — Articles Supplementary, dated as of October 13, 1998, relating to the 8.70% Series H Cumulative Redeemable Preferred Stock. (Incorporated by reference to Exhibit 1 to Form 8-A of the Company filed October 14, 1998.)
3(ii).1 — Bylaws of the Company, as amended and restated, dated as of July 24, 1998. (Incorporated by reference to Exhibit 3(ii).1 to Form 10-Q of the Company filed August 14, 1998.)
3(ii).2 — Amendment to Bylaws of the Company, dated February 10, 1999. (Incorporated by reference to Exhibit 3(ii).2 to Form 10-K of the Company filed March 31, 1999.)
3(ii).3 — Amendment to Bylaws of the Company, dated May 5, 1999. (Incorporated by reference to Exhibit 3(ii).3 to Form 10-Q of the Company filed on August 16, 1999.)
4.1 — Indenture of Avalon Properties, Inc. (hereinafter referred to as “Avalon Properties”) dated as of September 18, 1995. (Incorporated by reference to Form 8-K of Avalon Properties dated September 18, 1995.)
4.2 — First Supplemental Indenture of Avalon Properties dated as of September 18, 1995. (Incorporated by reference to Avalon Properties’ Current Report on Form 8-K dated September 18, 1995.)
4.3 — Second Supplemental Indenture of Avalon Properties dated as of December 16, 1997. (Incorporated by reference to Avalon Properties’ Current Report on Form 8-K filed January 26, 1998.)
4.4 — Third Supplemental Indenture of Avalon Properties dated as of January 22, 1998. (Incorporated by reference to Avalon Properties’ Current Report on Form 8-K filed on January 26, 1998.)
4.5 — Indenture, dated as of January 16, 1998, between the Company and State Street Bank and Trust Company, as Trustee. (Incorporated by reference to Exhibit 4.1 to Form 8-K of the Company filed on January 21, 1998.)
4.6 — First Supplemental Indenture, dated as of January 20, 1998, between the Company and the Trustee. (Incorporated by reference to Exhibit 4.2 to Form 8-K of the Company filed on January 21, 1998.)
4.7 — Second Supplemental Indenture, dated as of July 7, 1998, between the Company and the Trustee. (Incorporated by reference to Exhibit 4.2 to Form 8-K of the Company filed on July 9, 1998.)
4.8 — Third Supplemental Indenture, dated as of December 21, 1998 between the Company and the Trustee, including forms of Floating Rate Note and Fixed Rate Note (Incorporated by reference to Exhibit 4.4 to Form 8-K filed on December 21, 1998.)
4.9 — Amended and Restated Third Supplemental Indenture, dated as of July 10, 2000 between the Company and the Trustee, including forms of Floating Rate Note and Fixed Rate Note. (Incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed on July 11, 2000.)
4.10 — Dividend Reinvestment and Stock Purchase Plan of the Company filed on September 14, 1999. (Incorporated by reference to Form S-3 of the Company, File No. 333-87063.)
4.11 — Amendment to the Company’s Dividend Reinvestment and Stock Purchase Plan filed on December 17, 1999. (Incorporated by reference to the Prospectus Supplement filed pursuant to Rule 424(b)(2) of the Securities Act of 1933 on December 17, 1999.)
4.12 — Shareholder Rights Agreement, dated as of March 9, 1998 (the “Rights Agreement”), between the Company and First Union National Bank (as successor to American Stock Transfer and Trust Company) as Rights Agent (including the form of Rights Certificate as Exhibit B). (Incorporated by reference to Exhibit 4.1 to Form 8-A of the Company filed March 11, 1998.)
4.13 — Amendment No. 1 to the Rights Agreement, dated as of February 28, 2000, between the Company and the Rights Agent. (Incorporated by reference to Exhibit 4.2 of Form 8-A/A of the Company filed February 28, 2000.)
12.1 — Statements re: Computation of Ratios.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AVALONBAY COMMUNITIES, INC.
| Date: | May 14, 2001
| /s/ Bryce Blair
|
| | | Bryce Blair |
| | | President and Chief Executive Officer |
| | | |
| Date: | May 14, 2001
| /s/ Thomas J Sargeant
|
| | | Thomas J. Sargeant |
| | | Executive Vice President, |
| | | Chief Financial Officer and Treasurer |
