Edgar Filing: AVALONBAY COMMUNITIES INC

e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2009

Commission file number 1-12672

AVALONBAY COMMUNITIES, INC.

(Exact name of registrant as specified in its charter)


Maryland		77-0404318
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

2900 Eisenhower Avenue, Suite 300
Alexandria, Virginia 22314
(Address of principal executive offices, including zip code)

(703) 329-6300
(Registrant’s telephone number, including area code)

(Former name, if changed since last report)

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

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

Indicate by check mark whether the Exchange registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o No þ

APPLICABLE ONLY TO CORPORATE ISSUERS

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

79,934,963 shares of common stock, par value $0.01 per share, were outstanding as of July 31, 2009

AVALONBAY COMMUNITIES, INC.
FORM 10-Q
INDEX


	Page

PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets as of June 30, 2009 (unaudited) and December 31, 2008		1

Condensed Consolidated Statements of Operations and Other Comprehensive Income (unaudited) for the three and six months ended June 30, 2009 and 2008		2

Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2009 and 2008		3-4

Notes to Condensed Consolidated Financial Statements (unaudited)		5-25

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		26-51

Item 3. Quantitative and Qualitative Disclosures About Market Risk		52

Item 4. Controls and Procedures		52

PART II — OTHER INFORMATION

Item 1. Legal Proceedings		52-53

Item 1a. Risk Factors		53

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		53

Item 3. Defaults Upon Senior Securities		54

Item 4. Submission of Matters to a Vote of Security Holders		54

Item 5. Other Information		54

Item 6. Exhibits		54-56

SIGNATURES		57

AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)


	6-30-09			12-31-08
	(unaudited)
ASSETS
Real estate:
Land	$	1,212,534		$	1,151,456
Buildings and improvements		5,874,700			5,569,034
Furniture, fixtures and equipment		183,640			175,480

		7,270,874			6,895,970
Less accumulated depreciation		(1,458,917	)		(1,352,744	)

Net operating real estate		5,811,957			5,543,226
Construction in progress, including land		783,934			867,061
Land held for development		225,634			239,456

Total real estate, net		6,821,525			6,649,743

Cash and cash equivalents		215,788			65,706
Cash in escrow		240,276			193,599
Resident security deposits		27,859			29,935
Investments in unconsolidated real estate entities		65,094			55,025
Deferred financing costs, net		34,602			31,374
Deferred development costs		74,764			57,365
Prepaid expenses and other assets		94,410			91,606

Total assets	$	7,574,318		$	7,174,353


LIABILITIES AND STOCKHOLDERS’ EQUITY
Unsecured notes, net	$	1,795,590		$	2,002,965
Variable rate unsecured credit facility		—			124,000
Mortgage notes payable		2,354,298			1,547,492
Dividends payable		71,346			208,209
Payables for construction		55,263			64,363
Accrued expenses and other liabilities		226,577			227,721
Accrued interest payable		34,377			32,651
Resident security deposits		39,436			40,603

Total liabilities		4,576,887			4,248,004


Redeemable noncontrolling interests		6,722			10,234

Stockholders’ equity:
Common stock, $0.01 par value; 140,000,000 shares authorized at both June 30, 2009 and December 31, 2008; 79,931,385 and 77,119,963 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively		799			771
Additional paid-in capital		3,087,770			2,940,499
Accumulated earnings less dividends		(95,725	)		(22,223	)
Accumulated other comprehensive loss		(2,135	)		(2,932	)

Total stockholders’ equity		2,990,709			2,916,115



Total liabilities and stockholders’ equity	$	7,574,318		$	7,174,353

See accompanying notes to Condensed Consolidated Financial Statements.

AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share data)


	For the three months ended					For the six months ended
	6-30-09		6-30-08			6-30-09		6-30-08
Revenue:
Rental and other income	$	220,067	$	209,612		$	438,278	$	412,146
Management, development and other fees		2,077		1,579			3,545		3,217

Total revenue		222,144		211,191			441,823		415,363


Expenses:
Operating expenses, excluding property taxes		68,368		61,145			133,527		120,898
Property taxes		20,731		19,018			42,474		38,015
Interest expense, net		37,385		29,598			66,631		57,258
Depreciation expense		53,737		47,648			106,377		93,589
General and administrative expense		5,390		9,383			12,637		17,503
Impairment loss — land holdings		20,302		—			20,302		—

Total expenses		205,913		166,792			381,948		327,263


Equity in income of unconsolidated entities		492		3,800			3,949		3,833


Income from continuing operations		16,723		48,199			63,824		91,933


Discontinued operations:
Income from discontinued operations		—		5,101			—		9,921
Gain on sale of communities		—		74,139			—		74,139

Total discontinued operations		—		79,240			—		84,060


Net income		16,723		127,439			63,824		175,993
Net loss (income) attributable to redeemable noncontrolling interests		951		(105	)		1,275		(210	)

Net income attributable to the Company		17,674		127,334			65,099		175,783
Dividends attributable to preferred stock		—		(2,175	)		—		(4,350	)


Net income attributable to common stockholders	$	17,674	$	125,159		$	65,099	$	171,433


Other comprehensive income:
Unrealized gain on cash flow hedges		421		774			797		538

Comprehensive income	$	18,095	$	125,933		$	65,896	$	171,971


Earnings per common share — basic:
Income from continuing operations attributable to common stockholders (net of dividends attributable to preferred stock)	$	0.22	$	0.60		$	0.82	$	1.14
Discontinued operations attributable to common stockholders		—		1.03			—		1.09


Net income attributable to common stockholders	$	0.22	$	1.63		$	0.82	$	2.23


Earnings per common share — diluted:
Income from continuing operations attributable to common stockholders, net of preferred stock dividends	$	0.22	$	0.59		$	0.82	$	1.13
Discontinued operations attributable to common stockholders		—		1.02			—		1.08


Net income attributable to common stockholders	$	0.22	$	1.61		$	0.82	$	2.21

See accompanying notes to Condensed Consolidated Financial Statements.

AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)


	For the six months ended
	6-30-09			6-30-08
Cash flows from operating activities:
Net income	$	63,824		$	175,993
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation expense		106,377			93,589
Depreciation expense from discontinued operations		—			4,553
Amortization of deferred financing costs and debt premium/discount		3,598			2,650
Amortization of stock-based compensation		3,638			6,936
Equity in income of unconsolidated entities, net of eliminations		(4,288	)		(3,246	)
Impairment loss — land holdings		20,302			—
Gain on retirement of unsecured notes		(1,062	)		—
Gain on sale of real estate assets		—			(74,139	)
Increase in cash in operating escrows		(775	)		(8,120	)
Increase in resident security deposits, prepaid expenses and other assets		(5,843	)		(16,145	)
Increase (decrease) in accrued expenses, other liabilities and accrued interest payable		3,957			(42,946	)

Net cash provided by operating activities		189,728			139,125


Cash flows from investing activities:
Development/redevelopment of real estate assets including land acquisitions and deferred development costs		(311,577	)		(419,079	)
Capital expenditures — existing real estate assets		(1,708	)		(1,659	)
Capital expenditures — non-real estate assets		(383	)		(2,280	)
Proceeds from sale of real estate communities, net of selling costs		—			148,660
Decrease in payables for construction		(9,100	)		(15,895	)
Decrease in cash in construction escrows		47,413			89,402
Increase in investments in unconsolidated real estate entities		(702	)		(1,900	)

Net cash used in investing activities		(276,057	)		(202,751	)


Cash flows from financing activities:
Issuance of common stock		1,114			3,470
Repurchase of common stock		—			(42,159	)
Dividends paid		(139,928	)		(138,620	)
Net repayments under unsecured credit facility		(124,000	)		(514,500	)
Issuance of mortgage notes payable and draws on construction loans		741,140			525,297
Repayments of mortgage notes payable		(27,774	)		(47,295	)
Issuance of unsecured notes		—			330,000
Repayment of unsecured notes		(206,173	)		(60,000	)
Payment of deferred financing costs		(7,727	)		(5,294	)
Redemption of units for cash by minority partners		(202	)		—
Distributions to DownREIT partnership unitholders		(39	)		(114	)
Distributions to joint venture and profit-sharing partners		—			(96	)

Net cash provided by financing activities		236,411			50,689


Net increase (decrease) in cash and cash equivalents		150,082			(12,937	)

Cash and cash equivalents, beginning of period		65,706			20,284


Cash and cash equivalents, end of period	$	215,788		$	7,347


Cash paid during the period for interest, net of amount capitalized	$	57,402		$	53,609

See accompanying notes to Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

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

During the six months ended June 30, 2009:

•

As described in Note 4, “Stockholders’ Equity,” 2,624,641 shares of common stock valued at $139,058 were issued as part of the special dividend declared in the fourth quarter of 2008, 169,851 shares of common stock valued at $8,360 were issued in connection with stock grants, 5,623 shares valued at $307 were issued through the Company’s dividend reinvestment plan, 30,612 shares valued at $1,327 were withheld to satisfy employees’ tax withholding and other liabilities and 1,031 shares valued at $147 were forfeited, for a net value of $146,251. In addition, the Company granted 344,801 options for common stock at a value of $2,252.

•

The Company recorded a decrease to other liabilities and a corresponding increase to other comprehensive income of $797 to record the impact of the Company’s hedge accounting activity (as described in Note 5, “Derivative Instruments and Hedging Activities”).

•

Common dividends declared but not paid totaled $71,346.

•

The Company recorded a decrease of $2,827 in redeemable noncontrolling interests with a corresponding increase to accumulated earnings less dividends to adjust the redemption value associated with the put options held by joint venture partners and DownREIT partnership units. For further discussion of the nature and valuation of these items, see Note 11, “Fair Value.”

•

In May 2009, the Company obtained $93,440 in variable rate tax-exempt bond financing related to a Development Right, the proceeds of which will be held in escrow until requisitioned for construction funding. This loan provides an option for the Company to request an additional construction loan of up to $83,560 subject to the lender’s discretion.

During the six months ended June 30, 2008:

•

129,513 shares of common stock valued at $11,567 were issued in connection with stock grants, 2,070 shares valued at $181 were issued through the Company’s dividend reinvestment plan, 24,407 shares valued at $1,357 were issued to members of the Board of Directors in fulfillment of a deferred stock award, 1,101 shares valued at $109 were forfeited and 37,992 shares valued at $3,481 were withheld to satisfy employees’ tax withholding and other liabilities, for a net value of $9,515. In addition, the Company granted 401,212 options for common stock, net of forfeitures, at a value of $3,976.

•

The Company recorded an increase to other comprehensive income of $538 to record the impact of the Company’s hedge accounting activity.

•

Common and preferred dividends declared but not paid totaled $70,916.

•

The Company recorded a decrease of $4,065 in redeemable noncontrolling interests with a corresponding increase to accumulated earnings less dividends to adjust the redemption value associated with the put options held by joint venture partners and DownREIT partnership units.

AVALONBAY COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)

1. Organization and Significant Accounting Policies

Organization

AvalonBay Communities, Inc. (the “Company,” which term, unless the context otherwise requires, refers to AvalonBay Communities, Inc. together with its consolidated 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 development, acquisition, ownership and operation of apartment communities in high barrier to entry markets of the United States. These markets are located in the New England, Metro New York/New Jersey, Mid-Atlantic, Midwest, Pacific Northwest, and Northern and Southern California regions of the country.

At June 30, 2009, the Company owned or held a direct or indirect ownership interest in 162 operating apartment communities containing 46,476 apartment homes in ten states and the District of Columbia, of which seven communities containing 2,577 apartment homes were under reconstruction. In addition, the Company owned or held a direct or indirect ownership interest in 12 communities under construction that are expected to contain an aggregate of 4,035 apartment homes when completed. The Company also owned or held a direct or indirect ownership interest in rights to develop an additional 26 communities that, if developed as expected, will contain an estimated 6,688 apartment homes.

During the three months ended June 30, 2009:

•

The Company completed the redevelopment of two communities: Essex Place, located in Peabody, Massachusetts and Avalon Mountain View, located in Mountain View, California. These two communities contain an aggregate of 534 apartment homes and were redeveloped for a total capitalized cost of approximately $18,600, excluding costs incurred prior to redevelopment.

•

The Company commenced the redevelopment of two communities: Avalon Pleasanton, located in Pleasanton, California and Avalon Watch, located in West Windsor, New Jersey. These two communities contain an aggregate of 968 apartment homes and will be redeveloped for an estimated total capitalized cost of $38,300, excluding costs incurred prior to redevelopment.

•

The Company completed a 5.86% fixed rate, pooled secured financing transaction for aggregate borrowing of $741,140. The financing consists of fourteen separate mortgage loans each with a 10-year term. Each loan provides for payment of interest only during the first and second years of the loan term, with payment of principal and interest (based on a 30 year amortization schedule) thereafter and the remaining principal amount and any unpaid interest due at maturity on the tenth anniversary.

•

The Company announced the second and final closing of AvalonBay Value Added Fund II, LP (“Fund II”). In this closing, a new institutional investor was admitted and the Company reduced its net investment and equity interest, resulting in total equity commitments to Fund II increasing by $67,000.

•

Fund II acquired one community, see Note 6, “Investments in Real Estate Entities.”

The interim unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements required by GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited financial statements should be read in conjunction with the financial statements and notes included in the Company’s 2008 Annual Report on Form 10-K. The results of operations for the three and six months ended June 30, 2009 are not necessarily indicative of the operating results for the full year. Management believes the disclosures are adequate to ensure the information presented is not misleading. In the opinion of management, all adjustments and eliminations, consisting only of normal, recurring adjustments necessary for a fair presentation of the financial statements for the interim periods, have been included.

Principles of Consolidation

The accompanying Condensed Consolidated Financial Statements include the accounts of the Company and its wholly owned partnerships, subsidiary companies, 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 significant 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 Emerging Issues Task Force (“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 defined by the EITF, lies with the general partner, or the limited partners, when the limited partners have certain rights. In accordance with EITF Issue No. 04-5, the Company consolidates an investment when both (i) the Company is the general partner, and (ii) the limited partner interests do not overcome the Company’s presumption of control by having either substantive participating rights, the ability to remove the Company as the general partner or the ability to dissolve the partnership. Under all other potential scenarios, including (i) where the Company holds a general partner interest but the presumption of control by the Company is overcome by the limited partner interests as described in the preceding sentence, and (ii) where the Company holds a limited partner interest in a joint venture, the Company determines the accounting framework to apply to the investments in accordance with the guidance in SOP 78-9, APB No. 18 and EITF Topic D-46. The Company generally uses the equity method to account for investments that are not consolidated, unless its ownership interest is so minor that it has virtually no influence over the partnership’s operating and financial policies. Investments in which the Company has little or no influence 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 flow 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. In the six months ended June 30, 2009, the Company redeemed 4,077 operating units for cash.

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.

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, fixtures and equipment, and other costs incurred during their development, redevelopment and acquisition. Significant expenditures which improve or extend the life of an asset are capitalized. Expenditures for maintenance and repairs are charged to expense 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.

Project costs related to the development, construction and redevelopment of real estate projects (including interest and related loan fees, property taxes and other direct costs) are capitalized as a cost of the project. Indirect project costs that relate to several projects are capitalized and allocated to the projects to which they relate. Indirect costs not clearly related to development, construction and redevelopment activity are expensed as incurred. For development, capitalization (i) begins when the Company has determined that development of the future asset is probable, (ii) can be suspended if there is no current development activity underway, but future development is probable and (iii) 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 either (i) in advance of taking homes out of service when significant 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 the 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 of Development Rights, acquisition pursuits and disposition pursuits, in the amounts of $2,281 and $1,829 for the three months ended June 30, 2009 and 2008, respectively and $3,375 and $2,329 for the six months ended June 30, 2009 and 2008, respectively. These costs are included in operating expenses, excluding property taxes on the accompanying Condensed Consolidated Statements of Operations and Other Comprehensive Income. Abandoned pursuit costs can vary greatly, and the costs incurred in any given period may be significantly different in future years.

The Company acquired as Development Rights 11 land parcels improved with office buildings, industrial space and other commercial and residential ventures occupied by unrelated third parties. As of June 30, 2009 the Company is pursuing development of four of these parcels. For the seven parcels of land for which the Company does not intend to pursue development, rental revenue from the incidental operations are recognized as a component of rental and other income. For those land parcels for which the Company intends to pursue development, the Company will manage the current improvements until such time as all tenant obligations have been satisfied 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, its estimated fair value at the date of acquisition in accordance with SFAS No. 141(R), “Business Combinations.” The purchase price allocations to tangible assets, such as land, buildings and improvements, and furniture, fixtures and equipment, are reflected 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 Condensed 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 flow of acquired leases with leased rents above or below current market rents. For acquisitions subsequent to December 31, 2008, all costs incurred with these acquisitions will be expensed. Prior to January 1, 2009, third party costs directly associated with the acquisition were capitalized as part of the purchase price.

Depreciation is calculated on buildings and improvements using the straight-line method over their estimated useful lives, which range from seven to thirty years. Furniture, fixtures and equipment are generally depreciated using the straight-line method over their estimated useful lives, which range from three years (primarily computer-related equipment) to seven years.

Asset Impairment Evaluation

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. The Company applies the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”) for consolidated operating apartment communities, Development Communities and Development Rights to determine the need for performing impairment analyses, as well as to measure the loss if an impairment has occurred, considering quantitative and qualitative economic factors. If an indication of impairment exists, and the Company’s net book value of the related assets are not recoverable based upon an analysis of its estimated undiscounted future cash flows, the assets are written down to their estimated fair value.

The Company also applies the provisions of SFAS No. 144 for assessing the need to perform an impairment analysis and measuring impairment losses on the underlying long-lived assets held by unconsolidated joint venture investments. In addition, if such impairment indicators are present, the Company estimates the fair value of its unconsolidated joint venture investment. If the Company’s carrying value of its unconsolidated joint venture investments exceeds the estimated fair value of the unconsolidated joint venture investment, the Company applies the provisions of APB No. 18 to determine if there has been an other than temporary decline in the value of investments in the Company’s unconsolidated joint ventures.

In the second quarter of 2009, the Company concluded that the continued economic downturn and the related decline in employment levels does not support the development and construction of certain new apartment communities previously in planning. As a result the Company recognized a charge of $20,302 related to the impairment of two land parcels for which the Company no longer intends to pursue development. The Company looked to third-party pricing estimates to determine the fair values of the land parcels considered to be impaired at June 30, 2009. Given the heterogeneous nature of multifamily real estate, the third party values incorporate significant other unobservable inputs and are therefore considered to be Level 3 prices in the fair value hierarchy under SFAS No. 157 “Fair Value Measurements”. In addition, the Company recognized a charge for severance and employment related costs associated with the reduction in planned development activity and general economic conditions of approximately $2,000, reported as a component of general and administrative expense.

Deferred Financing Costs

Deferred financing costs include fees and other expenditures necessary to obtain debt financing and are amortized on a straight-line basis, which approximates the effective interest method, over the shorter of the term of the loan or the related credit enhancement facility, if applicable. Unamortized financing costs are charged to interest expense, net when debt is retired before the maturity date. Accumulated amortization of deferred financing costs was $23,376 at June 30, 2009 and was $24,264 at December 31, 2008.

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 financing proceeds that are restricted for use in the construction of a specific 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 uses derivative financial instruments to manage interest rate risk and generally designates these financial instruments as cash flow hedges under the guidance of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. As of June 30, 2009 and December 31, 2008, the Company had approximately $60,320 and $61,298, respectively, in variable rate debt subject to cash flow hedges. Excluding debt on communities classified as held for sale, the Company did not apply hedge accounting for an additional $145,055 in variable rate debt which is subject to interest rate caps as of June 30, 2009. See Note 5, “Derivative Instruments and Hedging Activities,” for further discussion of derivative financial instruments.

Redeemable Noncontrolling Interests

Redeemable noncontrolling interests are comprised of potential future obligations of the Company, which allow the investors holding the noncontrolling interest to require the Company to purchase their interest. Under EITF Topic D-98, “Classification and Measurement of Redeemable Securities,” the Company classifies obligations under the redeemable noncontrolling interests at fair value, with a corresponding offset for changes in the fair value recorded in accumulated earnings less dividends. Reductions in fair value are recorded only to the extent that the Company has previously recorded increases in fair value above the redeemable noncontrolling interest’s initial basis. The redeemable noncontrolling interests are presented outside of permanent equity as settlement in the Company’s common shares, where permitted, may not be within the Company’s control. The nature and valuation of the Company’s redeemable noncontrolling interests are discussed further in Note 11, “Fair Value”.

Comprehensive Income

Comprehensive income, as reflected on the Condensed Consolidated Statements of Operations and Other Comprehensive Income, is defined as all changes in equity during each period except for those resulting from investments by or distributions to shareholders. Accumulated other comprehensive loss as reflected in Note 4, “Stockholders’ Equity,” reflects the effective portion of the cumulative changes in the fair value of derivatives in qualifying cash flow hedge relationships attributable to controlling interests.

Earnings per Common Share

In accordance with the provisions of SFAS No. 128, “Earnings per Share,” basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted average number of shares outstanding during the period. All outstanding unvested restricted share awards, which contain rights to non-forfeitable dividends, participate in undistributed earnings with common shareholders and, accordingly, are considered participating securities that are included in the two-class method of computing basic earnings per share (“EPS”) under the provisions of FASB Staff Position (“FSP”) EITF 03-6-1, as discussed below. All historical periods presented have been restated in accordance with FSP EITF 03-6-1 resulting in an impact of less than $0.01 for all periods presented. Both the unvested restricted shares and other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis. The Company’s earnings per common share are determined as follows:


	For the three months ended						For the six months ended
	6-30-09			6-30-08			6-30-09			6-30-08
Basic and diluted shares outstanding
Weighted average common shares — basic		79,662,223			76,753,951			79,210,349			76,714,437
Weighted average DownREIT units outstanding		15,888			64,019			17,648			64,019
Effect of dilutive securities		364,183			760,647			670,290			706,267

Weighted average common shares — diluted		80,042,294			77,578,617			79,898,287			77,484,723

Calculation of Earnings per Share — basic
Net income attributable to common stockholders	$	17,674		$	125,159		$	65,099		$	171,433
Net income allocated to unvested restricted shares		(56	)		(406	)		(206	)		(575	)

Net income attributable to common stockholders, adjusted	$	17,618		$	124,753		$	64,893		$	170,858

Weighted average common shares — basic		79,662,223			76,753,951			79,210,349			76,714,437

Earnings per common share — basic	$	0.22		$	1.63		$	0.82		$	2.23

Calculation of Earnings per Share — diluted
Net income attributable to common stockholders	$	17,674		$	125,159		$	65,099		$	171,433
Add: noncontrolling interests of DownREIT unitholders in consolidated partnerships, including discontinued operations		14			57			39			114

Adjusted net income available to common stockholders	$	17,688		$	125,216		$	65,138		$	171,547

Weighted average common shares — diluted		80,042,294			77,578,617			79,898,287			77,484,723

Earnings per common share — diluted	$	0.22		$	1.61		$	0.82		$	2.21

Certain options to purchase shares of common stock in the amounts of 2,368,642 and 1,498,341 were outstanding at June 30, 2009 and 2008, 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.

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 reflect actual forfeitures at the end of the vesting period. The forfeiture rate at June 30, 2009 was 1.7%. The application of estimated forfeitures did not materially impact compensation expense for the three and six months ended June 30, 2009 or 2008.

Legal and Other 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 filed on September 23, 2005 in the federal district court in Maryland. The plaintiff seeks compensatory and punitive damages in unspecified amounts as well as injunctive relief (such as modification of existing communities), an award of attorneys’ fees, expenses and costs of suit. The Company has filed its answer in the lawsuit denying the allegations. In a separate matter related to FHA accessibility matters, on August 13, 2008 the U.S. Attorney’s Office for the Southern District of New York filed a civil lawsuit against the Company and the joint venture in which it has an interest that owns Avalon Chrystie Place. The lawsuit alleges that Avalon Chrystie Place was not designed and constructed in accordance with the accessibility requirements of the FHA. The Company designed and constructed the community to address compliance with New York City’s Local Law 58, which for more than 20 years has been New York City’s code regulating the accessible design and construction of apartments. As there are undetermined questions of law relating to these matters, (such as the applicable statute of limitations, the appropriate remedy if violations occurred, and the legal requirements to meet and demonstrate accessibility under the applicable statutes) and questions of fact (including the cost to remediate, if necessary), the Company cannot predict or determine the outcome of these lawsuits, nor is it reasonably possible at this time to estimate the amount of loss, if any, that would be associated with an adverse decision or settlement.

In addition, the Company is subject to various other 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 and can be reasonably estimated, the estimated amount of the loss is recorded in the financial statements. While the resolution of these other matters cannot be predicted with certainty, management currently believes the final outcome of such matters will not have a material adverse effect on the financial position or results of operations of the Company. In instances where the Company has a gain contingency associated with legal proceedings, the Company records a gain in the financial statements when it is deemed probable to occur, can be reasonably estimated and is considered to be collectible. In connection with the resolution of several pending legal matters related to two former vendors, the Company recognized the receipt of $2,100 in settlement proceeds as a reduction in general and administrative expense for the three and six months ended June 30, 2009.

Assets Held for Sale & Discontinued Operations

The Company follows SFAS No. 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 Condensed Consolidated Balance Sheets. In addition, the results of operations for those assets that meet the definition of discontinued operations are presented as such in the Company’s Condensed Consolidated Statements of Operations and Other Comprehensive Income. Held for sale and discontinued operations classifications 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 Condensed Consolidated Balance Sheets. Subsequent to classification of a community as held for sale, no further depreciation is recorded. For those assets qualifying for classification as discontinued operations, the community specific components of net income presented as discontinued operations include net operating income, depreciation expense and interest expense, net. For periods prior to the asset qualifying for discontinued operations under SFAS No. 144, the Company reclassified the results of operations to discontinued operations in accordance with SFAS No. 144. 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 financial condition or results of operations. The Company combines the operating, investing and financing portions of cash flows attributable to discontinued operations with the respective cash flows from continuing operations on the accompanying Condensed Consolidated Statements of Cash Flows.

Income Taxes

As of June 30, 2009, the Company did not have any unrecognized tax benefits as defined in FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109,” (“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 2005 through 2007.

Use of Estimates

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

Reclassifications

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

Recently Adopted Accounting Standards

In April 2009, the FASB issued FSP FAS No. 107-1 and APB Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS No. 107-1 and APB Opinion No. 28-1”). FSP FAS No. 107-1 and APB Opinion No. 28-1 requires fair value disclosures for financial instruments that are not reflected in the Condensed Consolidated Balance Sheets at fair value. Prior to the issuance of FSP FAS No. 107-1 and APB Opinion No. 28-1, the fair values of those assets and liabilities were disclosed only in the Company’s Annual Report on Form 10-K. With the issuance of FSP FAS No. 107-1 and APB Opinion No. 28-1, the Company will now disclose this

information on a quarterly basis, providing quantitative and qualitative information about fair value estimates for all financial instruments not measured in the Condensed Consolidated Balance Sheets at fair value. The Company has included the required disclosure in this quarterly report. See Note 11, “Fair Value.”

In April 2009, the FASB issued FSP FAS No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS No. 157-4”). FSP FAS No. 157-4 clarifies the methodology used to determine fair value when there is no active market or where the price inputs being used represent distressed sales. FSP FAS No. 157-4 also reaffirms the objective of fair value measurement, as stated in SFAS No. 157, which is to reflect how much an asset would be sold for in an orderly transaction. This pronouncement also reaffirms the need to use judgment to determine if a formerly active market has become inactive, as well as to determine fair values when markets have become inactive. The Company adopted the provisions of FSP FAS No. 157-4 on a prospective basis. The adoption did not have a material impact on the Company’s financial position or results of operations.

In May 2009, the FASB issued Statement No. 165, “Subsequent Events” (“SFAS No. 165”). SFAS No. 165 defines subsequent events as events or transactions that occur after the balance sheet date but before financial statements are issued or available to be issued. Under SFAS No. 165, the requirements for disclosing subsequent events remain unchanged from the previous requirements. However, SFAS No. 165 contains an additional requirement that companies must disclose the date through which subsequent events have been evaluated and the rationale for selecting that date. The Company has adopted the provisions of SFAS No. 165 in this quarterly report. See Note 12, “Subsequent Events.”

Recently Issued Accounting Guidance

In June 2009, the FASB approved the FASB Accounting Standards Codification (the “Codification”). In June 2009, the FASB also issued Statement No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles,” which replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 168 establishes the Codification as the single source of authoritative nongovernmental US GAAP (except for SEC rules and interpretive releases) and will be effective for interim and annual reporting periods ending after September 15, 2009. The Codification is intended to reorganize, rather than change, existing US GAAP. However, all existing accounting standard documents are superseded by the Codification and all accounting literature excluded from the Codification will become nonauthoritative upon the effective date of SFAS No. 168. Accordingly, beginning with the Company’s Form 10-Q for the quarter ending September 30, 2009, all references to currently existing US GAAP will be removed and will be replaced with references to the Codification or plain English explanations of our accounting policies. The Company does not expect that the adoption of the Codification will have a material impact on its financial position or results of operations.

In June 2009, the FASB issued Statement No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”). SFAS No. 167 significantly amends the consolidation guidance applicable to variable interest entities (“VIEs”). SFAS No. 167 modifies the consolidation model to one based on control and economics, and replaces the current quantitative primary beneficiary analysis with a qualitative analysis. The primary beneficiary of a VIE will be the entity that has (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses or receive benefits that could potentially be significant to the VIE. If multiple unrelated parties share such power, as defined, no party will be required to consolidate the VIE. Further, SFAS No. 167 requires continual reconsideration of the primary beneficiary of a VIE and adds an additional reconsideration event for determination of whether an entity is a VIE. SFAS No. 167 also requires expanded disclosures related to VIEs which are largely consistent with the disclosure provisions of FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities,” which the Company adopted in the fourth quarter of 2008. Upon adoption of SFAS No. 167, the provisions of FSP FAS 140-4 and FIN 46(R)-8 will be nullified. SFAS No. 167 is effective as of the beginning of the first fiscal year that begins after November 15, 2009, or January 1, 2010 for the Company. The Company is currently evaluating the impact that adoption of SFAS No. 167 will have on its financial statements.

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 $13,677 and $19,159 for the three months ended June 30, 2009 and 2008, respectively and $26,045 and $38,822 for the six months ended June 30, 2009 and 2008, respectively.

3. Notes Payable, Unsecured Notes and Credit Facility

The Company’s mortgage notes payable, unsecured notes and variable rate unsecured credit facility as of June 30, 2009 and December 31, 2008 are summarized below.


	6-30-09		12-31-08
Fixed rate unsecured notes⁽¹⁾	$	1,571,190	$	1,672,965
Variable rate unsecured notes		224,400		330,000
Fixed rate mortgage notes payable — conventional and tax-exempt		1,635,410		901,181
Variable rate mortgage notes payable — conventional and tax-exempt		718,888		646,311

Total notes payable and unsecured notes		4,149,888		3,550,457
Variable rate unsecured credit facility		—		124,000

Total mortgage notes payable, unsecured notes and unsecured credit facility	$	4,149,888	$	3,674,457


⁽¹⁾		Balances at June 30, 2009 and December 31, 2008 include $1,950 and $2,035 of debt discount, respectively.

The following debt activity occurred during the six months ended June 30, 2009:

•

In January 2009, the Company made a cash tender offer for any and all of its 7.5% medium-term notes due in August 2009 and December 2010. The Company purchased $37,438 principal amount of its $150,000, 7.5% medium-term notes due in August 2009 at par. In addition, the Company purchased $64,423 principal amount of its $200,000, 7.5% medium-term notes due December 2010 at 98% of par, for approximately $63,135, representing a yield to maturity of 8.66%. The Company recorded a gain of approximately $1,062 net of the write-off of related deferred financing costs during the first quarter of 2009 in conjunction with the purchase of the medium-term notes due December 2010 as a reduction in interest expense, net. All of the notes purchased in the tender offer were cancelled. The Company had previously acquired and cancelled an aggregate of $10,000 of the 7.5% medium-term notes due in August 2009.

•

In April 2009, the Company completed a 5.86% fixed rate, pooled secured financing transaction for aggregate borrowing of $741,140. The financing consists of fourteen separate mortgage loans each with a 10-year term. Each loan provides for payment of interest only during the first and second years of the loan term, with payment of principal and interest (based on a 30 year amortization schedule) thereafter and the remaining principal amount and any unpaid interest due at maturity on the tenth anniversary.

•

In April 2009, the Company repaid the $4,143 principal, 8.08% fixed rate loan secured by a real estate asset formerly classified as a Development Right in Alexandria, Virginia pursuant to its scheduled maturity.

•

In May 2009, the Company repaid $19,470 in variable rate debt secured by Avalon at Flanders Hill, located in Westborough, Massachusetts.

•

In May 2009, the Company repaid $105,600 in unsecured debt, representing the first tranche of its $330,000 unsecured variable rate term loan, pursuant to its scheduled maturity.

•

In May 2009, the Company obtained $93,440 in variable rate tax exempt bond financing related to a Development Right, the proceeds of which will be held in escrow until requisitioned for construction funding. This loan provides an option for the Company to request an additional construction loan of up to $83,560 subject to the lender’s discretion.

In the aggregate, secured notes payable mature at various dates from December 2009 through July 2066 and are secured by certain apartment communities and improved land parcels (with a net carrying value of $1,878,726 as of June 30, 2009). As of June 30, 2009, the Company has guaranteed approximately $385,390 of mortgage notes payable held by wholly owned subsidiaries; all such mortgage notes payable are consolidated for financial reporting purposes. The weighted average interest rate of the Company’s fixed rate mortgage notes payable (conventional and

tax-exempt) was 5.8% and 5.7% at June 30, 2009 and December 31, 2008, respectively. The weighted average interest rate of the Company’s variable rate mortgage notes payable, unsecured term loan and its unsecured credit facility, including the effect of certain financing related fees, was 1.8% at June 30, 2009 and 2.9% at December 31, 2008.

Scheduled payments and maturities of mortgage notes payable and unsecured notes outstanding at June 30, 2009 are as follows:


							Stated
					Unsecured		interest rate
	Secured notes		Secured notes		notes		of unsecured
Year	payments ⁽¹⁾		maturities		maturities		notes
2009	$	3,295	$	34,230	$	102,562		7.500	%
2010		6,097		29,388		135,577		7.500	%
						112,200		1.570	%(2)
2011		12,087		36,599		300,000		6.625	%
						50,000		6.625	%
						112,200		1.570	%(2)
2012		14,560		120,601		250,000		6.125	%
						235,000		5.500	%
2013		14,656		318,370		100,000		4.950	%
2014		15,537		33,100		150,000		5.375	%
2015		14,481		365,072		—		—
2016		15,342		—		250,000		5.750	%
2017		16,260		18,300		—		—
2018		17,234		—		—		—
Thereafter		369,114		899,976		—		—


	$	498,663	$	1,855,636	$	1,797,539


(1)		Secured note payments are comprised of the principal pay downs for amortizing mortgage notes.

(2)		The stated interest rate for variable-rate unsecured notes is the rate as of June 30, 2009.

The Company’s unsecured notes are redeemable at our option, in whole or in part, at a redemption price equal to the greater of (i) 100% of their principal amount or (ii) the sum of the present value of the remaining scheduled payments of principal and interest discounted at a rate equal to the yield on U.S. Treasury securities with a comparable maturity plus a spread of 25 basis points, plus accrued and unpaid interest to the redemption date. The Company may also acquire its unsecured notes as part of a tender offer with the redemption terms set in conjunction with the tender offer.

The Company has a variable rate unsecured credit facility (the “Credit Facility”) in the amount of $1,000,000 with a syndicate of commercial banks, to whom the Company pays, in the aggregate, an annual facility fee of approximately $1,250. The Company did not have any amounts outstanding under the Credit Facility and $38,510 outstanding in letters of credit as of June 30, 2009. At December 31, 2008, there was $124,000 outstanding under the Credit Facility and $45,976 outstanding in letters of credit. The Credit Facility bears interest at varying levels based on the London Interbank Offered Rate (“LIBOR”), rating levels achieved on the Company’s unsecured notes and on a maturity schedule selected by the Company. The current stated pricing is LIBOR plus 0.40% per annum (0.71% at June 30, 2009). The stated spread over LIBOR can vary from LIBOR plus 0.325% to LIBOR plus 1.00% based on the Company’s credit ratings. In addition, the 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 Credit Facility for up to $650,000. 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 June 30, 2009. The Credit Facility matures in November 2011, assuming exercise of a one-year renewal option by the Company.

The Company was in compliance at June 30, 2009 with applicable financial and other covenants contained in the Credit Facility, the $224,400 variable rate unsecured term loan and the Company’s unsecured notes.

4. Stockholders’ Equity

The following summarizes the changes in stockholders’ equity for the six months ended June 30, 2009:


					Accumulated			Accumulated
			Additional		earnings			other			Total
	Common		paid-in		less			comprehensive			stockholders’
	stock		capital		dividends			loss			equity
Balance at December 31, 2008	$	771	$	2,940,499	$	(22,223	)	$	(2,932	)	$	2,916,115

Net income attributable to Company common stockholders		—		—		65,099			—			65,099
Unrealized gain on cash flow hedges		—		—		—			797			797
Redeemable noncontrolling interests		—		—		2,827			—			2,827
Dividends declared to common stockholders		—		—		(142,631	)		—			(142,631	)
Issuance of common stock		28		137,975		1,203			—			139,206
Amortization of deferred compensation		—		9,296		—			—			9,296


Balance at June 30, 2009	$	799	$	3,087,770	$	(95,725	)	$	(2,135	)	$	2,990,709

During the six months ended June 30, 2009, the Company:

	(i)		issued 42,950 shares of common stock in connection with stock options exercised;

	(ii)		issued 2,624,641 shares in connection with the dividend declared in December 2008;

	(iii)		issued 5,623 shares through the Company’s dividend reinvestment plan;

	(iv)		issued 169,851 common shares in connection with stock grants;

	(v)		withheld 30,612 shares to satisfy employees’ tax withholding and other liabilities; and

	(vi)		had 1,031 shares of restricted stock forfeited.

In addition, the Company granted 344,801 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 six months ended June 30, 2009 is not reflected on the Company’s Condensed Consolidated Balance Sheet as of June 30, 2009, and will not be reflected until earned as compensation cost.

The Company declared dividends per common share of $0.8925 and $1.785 for the three and six month periods ended June 30, 2008 and 2009. The Company also offers a Dividend Reinvestment and Stock Purchase Plan (the “DRIP”), which allows holders of the Company’s common 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.

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 fluctuations 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 June 30, 2009, excluding derivatives executed to hedge debt on communities classified as held for sale:


	Non-designated
	Hedges			Cash Flow Hedges
	Interest			Interest			Interest
	Rate Caps			Rate Caps			Rate Swaps
Notional balance	$	149,847		$	15,994		$	44,199
Weighted average interest rate (1)		1.7	%		1.9	%		6.5	%
Weighted average capped interest rate		7.0	%		6.0	%		n/a
Earliest maturity date	Dec-09			Jun-12			Jun-10
Latest maturity date	Mar-14			Jun-12			Jun-10
Estimated fair value, asset/(liability)	$	404		$	35		$	(1,890	)


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

Excluding derivatives executed to hedge debt on communities classified as held for sale, the Company had three derivatives designated as cash flow hedges and six derivatives not designated as hedges at June 30, 2009. For the derivative positions that the Company has determined qualify as effective cash flow 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 reclassified into earnings in the periods in which earnings are affected by the hedged cash flow. To adjust the Hedging Derivatives to their fair value and recognize the impact of hedge accounting, the Company recorded an increase in other comprehensive income of $797 during the six months ended June 30, 2009 and an increase of $538 during the six months ended June 30, 2008. Amounts in other comprehensive income will be reclassified into earnings in conjunction with the periodic adjustment of the floating rates on the Hedged Debt, in interest expense, net. The amount reclassified into earnings for the six months ended June 30, 2009, as well as the estimated amount included in accumulated other comprehensive loss as of June 30, 2009, expected to be reclassified into earnings within the next twelve months to offset the variability of cash flows of the hedged items during this period are not material.

The Company assesses both at inception and on an on-going basis, the effectiveness of qualifying cash flow 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 period presented, 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 Condensed Consolidated Balance Sheets.

Derivative financial instruments expose the Company to credit risk in the event of nonperformance by the counterparties under the terms of the Hedging Derivatives. The Company minimizes its credit risk on these transactions by dealing with major, creditworthy financial institutions which have an A+ or better credit rating by the Standard & Poor’s Ratings Group. As part of its on-going control procedures, the Company monitors the credit ratings of counterparties and the exposure of the Company to any single entity, thus minimizing credit risk concentration. The Company believes the likelihood of realizing losses from counterparty non-performance is remote. Refer to Note 11, “Fair Value,” for further discussion of fair value measurements including the Company’s incorporation of credit valuation adjustments under SFAS No. 157.

6. Investments in Real Estate Entities

The Company accounts for its investments in unconsolidated real estate entities in accordance with the literature discussed in Note 1, “Organization and Significant Accounting Policies,” under Principles of Consolidation. During the six months ended June 30, 2009,

in conjunction with the second closing of Fund II, the Company’s equity ownership interest decreased to 31% from 45%. There were no other changes in the Company’s ownership interest in, or presentation of, its investments in unconsolidated real estate entities.

As of June 30, 2009, the Company had investments in the following unconsolidated real estate entities:

•

a 20% limited liability company membership interest (with a right to 50% of distributions after achievement of a threshold return, which was achieved in the first quarter of 2009) in the limited liability company that owns the Avalon Chrystie Place community;

•

a 25% limited liability company membership interest (with a right to 45% of distributions after achievement of a threshold return) in the limited liability company that owns the Avalon at Mission Bay North II community;

•

a 30% limited liability company membership interest (with a right to 45% or the residual distribution after the joint venture partners receive both a return of their initial investment and an achievement of a threshold return on that investment) in the limited liability company that owns the Avalon Del Rey community;

•

a 50% limited liability company membership interest (with a right to 95% of distributions until the Company receives a return of our invested capital and a threshold return thereon) in the limited liability company that is developing for-sale town homes adjacent to the Company’s Avalon Danvers community;

•

a 15.2% combined general partner and indirect limited partner equity interest in the Fund (with the opportunity to receive as much as 20% of the Fund’s distributions in excess of return of capital, as an additional distribution, based on the achievement of certain threshold returns), which owns the following 19 communities: Avalon at Redondo Beach, Avalon Lakeside, Avalon Columbia, Avalon Sunset, Avalon at Poplar Creek, Avalon at Civic Center, Avalon Paseo Place, Avalon Yerba Buena, Avalon at Aberdeen Station, The Springs, Avalon Lombard, Avalon Cedar Place, Avalon Crystal Hill, Middlesex Crossing, Avalon Centerpoint, Skyway Terrace, Avalon Rutherford Station, South Hills Apartments and Weymouth Place; and

•

a 31% combined general partner and indirect limited partner equity interest in Fund II (with the opportunity to receive as much as 20% of Fund II’s distributions in excess of return of capital, as an additional distribution, based on the achievement of certain threshold returns). During the three months ended June 30, 2009, Fund II acquired Verona Apartments located in Bellevue, WA for $33,100. Verona Apartments is a mid-rise style community containing 220 apartment homes.

In addition, as part of the formation of the Fund and Fund II, the Company provided separate and distinct guarantees to one of the limited partners in each of the ventures. These guarantees are specific to the respective fund and any impacts or obligation of the Company to perform under one of the guarantees has no impact on the Company’s obligations with respect to the other guarantee. The guarantees provide that, if, upon final liquidation of the Fund or Fund II, the total amount of all distributions to the guaranteed partner during the life of the respective fund (whether from operating cash flow or property sales) does not equal the total capital contributions made by that partner, then the Company will pay the guaranteed partner an amount equal to the shortfall, but in no event more than 10% of the total capital contributions made by the guaranteed partner (maximum of approximately $7,192 for the Fund and $413 for Fund II as of June 30, 2009). As of June 30, 2009, the expected realizable value of the real estate assets owned by the Fund and Fund II is considered adequate to cover such potential payments under a liquidation scenario. The estimated fair value of and the Company’s obligation under these guarantees, both at inception and as of June 30, 2009, was not significant and therefore the Company has not recorded any obligation for either of these guarantees as of June 30, 2009.

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


	6-30-09		12-31-08
	(unaudited)		(unaudited)
Assets:
Real estate, net	$	1,016,573	$	995,680
Other assets		11,369		12,384


Total assets	$	1,027,942	$	1,008,064


Liabilities and partners’ capital:
Mortgage notes payable and credit facility	$	731,446	$	705,332
Other liabilities		18,775		17,578
Partners’ capital		277,721		285,154


Total liabilities and partners’ capital	$	1,027,942	$	1,008,064

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


	For the three months ended (unaudited)						For the six months ended (unaudited)
	6-30-09			6-30-08			6-30-09			6-30-08
Rental and other income	$	26,613		$	26,845		$	51,769		$	53,464
Operating and other expenses		(13,727	)		(10,679	)		(25,583	)		(21,787	)
Gain on sale of communities		—			25,417			—			25,417
Interest expense, net		(9,279	)		(9,526	)		(18,181	)		(19,641	)
Depreciation expense		(8,222	)		(7,848	)		(16,028	)		(15,879	)


Net loss	$	(4,615	)	$	24,209		$	(8,023	)	$	21,574

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 $11,267 at June 30, 2009 and $4,817 at December 31, 2008 of the respective investment balances.

7. Real Estate Disposition Activities

During the six months ended June 30, 2009, the Company did not sell any communities. As of June 30, 2009, the Company did not have any assets that qualified as discontinued operations and held for sale under the provisions of SFAS No. 144.

In accordance with the requirements of SFAS No. 144, the operations for any real estate assets sold from January 1, 2008 through June 30, 2009 and the real estate assets that qualified as discontinued operations and held for sale as of June 30, 2009 have been presented as such in the accompanying Condensed Consolidated Financial Statements. Accordingly, certain reclassifications have been made in prior periods to reflect discontinued operations consistent with current period presentation.

The following is a summary of income from discontinued operations for the periods presented:


	For the three months ended					For the six months ended
	6-30-09		6-30-08			6-30-09		6-30-08
Rental income	$	—	$	10,625		$	—	$	22,640
Operating and other expenses		—		(3,276	)		—		(7,090	)
Interest expense, net		—		(546	)		—		(1,076	)
Depreciation expense		—		(1,702	)		—		(4,553	)


Income from discontinued operations	$	—	$	5,101		$	—	$	9,921

8. Segment Reporting

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

•

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 2009, the Established Communities are communities that are consolidated for financial reporting purposes, had stabilized occupancy and operating expenses as of January 1, 2008, 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 defined above. Other Stabilized Communities does 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 final certificate of occupancy, communities where the company owns a majority interest and 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 defined above, as of January 1, 2009.

In addition, the Company owns land 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 financial measure for Established Communities and Other Stabilized Communities. NOI is defined by the Company as total revenue less direct property operating expenses. Although the Company considers NOI a useful measure of a community’s or communities’ operating performance, NOI should not be considered an alternative to net income or net cash flow from operating activities, as determined in accordance with GAAP. NOI excludes a number of income and expense categories as detailed in the reconciliation of NOI to net income.

A reconciliation of NOI to net income for the three and six months ended June 30, 2009 and 2008 is as follows:


	For the three months ended						For the six months ended
	6-30-09			6-30-08			6-30-09			6-30-08
Net income	$	16,723		$	127,439		$	63,824		$	175,993
Indirect operating expenses, net of corporate income		7,362			8,893			15,936			17,350
Investments and investment management expense		907			1,195			1,822			2,414
Expensed development and other pursuit costs		2,281			1,829			3,375			2,329
Interest expense, net		37,385			29,598			66,631			57,258
General and administrative expense		5,390			9,383			12,637			17,503
Equity in income of unconsolidated entities		(492	)		(3,800	)		(3,949	)		(3,833	)
Depreciation expense		53,737			47,648			106,377			93,589
Impairment loss — land holdings		20,302			—			20,302			—
Gain on sale of real estate assets		—			(74,139	)		—			(74,139	)
Income from discontinued operations		—			(5,101	)		—			(9,921	)


Net operating income	$	143,595		$	142,945		$	286,955		$	278,543

The primary performance measure for communities under development or redevelopment depends on the stage of completion. While under development, management monitors actual construction costs against budgeted costs as well as lease-up pace and rent levels compared to budget.

The following table provides details of the Company’s segment information as of the dates specified. The segments are classified based on the individual community’s status as of the beginning of the given calendar year. Therefore, each year the composition of communities within each business segment is adjusted. Accordingly, the amounts between years are not directly comparable. The accounting policies applicable to the operating segments described above are the same as those described in Note 1, “Organization and Significant Accounting Policies.” Segment information for the three and six months ended June 30, 2009 and 2008 have been adjusted for the communities that were sold from January 1, 2008 through June 30, 2009, or otherwise qualify as discontinued operations as of June 30, 2009, as described in Note 7, “Real Estate Disposition Activities.”


	For the three months ended									For the six months ended
	Total				% NOI change			Gross		Total				% NOI change			Gross
	revenue		NOI		from prior year			real estate (1)		revenue		NOI		from prior year			real estate (1)
For the period ended June 30, 2009

Established
New England	$	32,680	$	20,575		(8.3	)%	$	916,941	$	65,257	$	40,993		(5.6	)%	$	916,941
Metro NY/NJ		42,072		29,199		(3.5	)%		1,164,447		84,269		57,270		(3.8	)%		1,164,447
Mid-Atlantic/Midwest		32,814		20,533		(3.8	)%		823,222		65,621		41,219		(2.2	)%		823,222
Pacific Northwest		7,172		4,959		(6.8	)%		238,554		14,554		10,173		(3.3	)%		238,554
Northern California		26,065		18,939		(5.1	)%		893,734		53,057		39,237		(1.7	)%		893,734
Southern California		15,776		10,906		(8.6	)%		426,653		31,891		22,252		(7.1	)%		426,653

Total Established		156,579		105,111		(5.5	)%		4,463,551		314,649		211,144		(3.8	)%		4,463,551

Other Stabilized		33,628		21,543		n/a			1,480,954		66,564		42,715		n/a			1,480,954
Development / Redevelopment		29,860		16,941		n/a			2,039,259		57,065		33,096		n/a			2,039,259
Land Held for Future Development		n/a		n/a		n/a			225,634		n/a		n/a		n/a			225,634
Non-allocated (2)		2,077		n/a		n/a			71,044		3,545		n/a		n/a			71,044

Total	$	222,144	$	143,595		0.5	%	$	8,280,442	$	441,823	$	286,955		3.0	%	$	8,280,442


For the period ended June 30, 2008

Established
New England	$	31,939	$	21,233		5.5	%	$	821,922	$	63,374	$	41,130		3.4	%	$	821,922
Metro NY/NJ		36,197		25,265		2.8	%		929,972		71,901		49,531		2.2	%		929,972
Mid-Atlantic/Midwest		31,231		20,250		6.8	%		761,892		61,870		39,874		5.3	%		761,892
Pacific Northwest		5,359		3,904		8.9	%		174,544		10,683		7,727		10.0	%		174,544
Northern California		31,718		23,592		9.6	%		1,037,118		63,181		47,189		10.3	%		1,037,118
Southern California		15,351		11,063		0.8	%		375,561		30,741		22,169		1.3	%		375,561

Total Established		151,795		105,307		5.6	%		4,101,009		301,750		207,620		5.0	%		4,101,009

Other Stabilized		27,888		18,357		n/a			1,010,672		55,030		36,044		n/a			1,010,672
Development / Redevelopment		29,929		19,281		n/a			2,123,734		55,366		34,879		n/a			2,123,734
Land Held for Future Development		n/a		n/a		n/a			310,296		n/a		n/a		n/a			310,296
Non-allocated (2)		1,579		n/a		n/a			47,638		3,217		n/a		n/a			47,638

Total	$	211,191	$	142,945		13.7	%	$	7,593,349	$	415,363	$	278,543		12.7	%	$	7,593,349


(1)		Does not include gross real estate assets held for sale of $0 and $263,768 as of June 30, 2009 and 2008, respectively.

(2)		Revenue represents third-party management, accounting and developer fees and miscellaneous income which are not allocated to a reportable segment.

9. Stock-Based Compensation Plans

On May 21, 2009, the stockholders of the Company, upon the recommendation of the Board of Directors, approved the AvalonBay Communities, Inc. 2009 Stock Option and Incentive Plan (the “2009 Plan”). The 2009 Plan includes an authorization to issue up to 4,199,822 shares of the Company’s common stock, par value $0.01 per share, (2,930,000 newly authorized shares plus 1,269,822 shares that were available for grant as of May 21, 2009 under the Company’s 1994 Stock Option and Incentive Plan (the “1994 Plan”)), pursuant to awards under the 2009 Plan. The 2009 Plan provides for various types of equity awards to employees, officers, non-employee directors and agents of the Company and its subsidiaries. The types of awards that may be granted under the 2009 Plan include restricted and deferred stock, stock options that qualify as incentive stock options (“ISOs”) under Section 422 of the Internal Revenue Code, non-qualified options, and stock appreciation rights. The 2009 Plan will expire on May 21, 2019.

Effective as of the close of business on May 21, 2009, and as part of the proposal to approve the 2009 Plan described above, the Board of Directors terminated the 1994 Plan with respect to new awards. The 1994 Plan provided for the same types of equity awards as the 2009 Plan, and would have expired by its terms on May 8, 2011. Outstanding awards previously granted under the 1994 Plan will not be affected by termination of the 1994 Plan, the terms of which shall continue to govern such previously granted awards. In addition to the 4,199,822 shares available for awards under the 2009 Plan as described above, any awards that were outstanding under the 1994 Plan on May 21, 2009 that are subsequently forfeited, canceled, surrendered or terminated (other than by exercise) will become available for awards under the 2009 Plan.

Information with respect to stock options granted under the 1994 Plan is as follows:


				Weighted
				average
	1994 Plan			exercise price
	shares			per share
Options Outstanding, December 31, 2008		2,623,135		$	83.49
Exercised		(42,950	)		34.05
Granted		344,801			48.60
Forfeited		(13,365	)		103.86

Options Outstanding, June 30, 2009		2,911,621		$	79.99


Options Exercisable:
June 30, 2009		2,187,979		$	80.97

The weighted average fair value of the options granted during the six months ended June 30, 2009 is estimated at $6.53 per share on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield of 8.5% over the expected life of the option, volatility of 36.57%, risk-free interest rate of 2.17% and an expected life of approximately seven years.

At June 30, 2009, the Company had 253,215 outstanding unvested shares granted under restricted stock awards. The Company issued 169,851 shares of restricted stock valued at $8,360 as part of its stock-based compensation plan during the six months ended June 30, 2009. Compensation cost is recognized over the requisite service period, which varies, but does not exceed five 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 five-year period with the exception of accelerated vesting provisions. Restricted stock vesting during the six months ended June 30, 2009 totaled 122,082 shares and had fair values ranging from $48.60 to $147.75 per share. The total fair value of shares vested was $10,103 and $10,422 for the six months ended June 30, 2009 and 2008, respectively.

Total employee stock-based compensation cost recognized in income was $6,212 and $8,705 for the six months ended June 30, 2009 and 2008, respectively, and total capitalized stock-based compensation cost was $3,095 and $2,970 for the six months ended June 30, 2009 and 2008, respectively. At June 30, 2009, there was a total of $3,543 and $9,852 in unrecognized compensation cost for unvested stock options and unvested restricted stock, respectively, which does not include estimated forfeitures. The unrecognized compensation cost for unvested stock options and restricted stock is expected to vest over a weighted average period of 1.71 years and 2.54 years, respectively.

Deferred Stock Performance Plan

In 2008 the Company’s Board of Directors and its Compensation Committee approved a multiyear performance plan (“the 2008 Performance Plan”) and granted awards in connection with this plan with an estimated compensation cost of $8,958 to senior management and other selected officers (“2008 Performance Plan Awards”). The 2008 Performance Plan Awards are initially in the form of deferred stock awards, with no dividend rights, granted under the Company’s 1994 Plan. These deferred stock awards will be forfeited in their entirety unless the Company’s total return to shareholders, consisting of stock price appreciation plus cumulative dividends without reinvestment or compounding over the measurement period, exceeds the thresholds specified in the 2008 Performance Plan. The measurement period of the 2008 Performance Plan began on June 1, 2008 and will end on May 31, 2011, or earlier, upon a change in control of the Company.

Earned deferred stock awards will convert into vested unrestricted common stock (50%), and unvested restricted common stock with a one-year vesting period (50%), subject to earlier forfeiture or acceleration under certain circumstances. Dividends will be paid on both the unrestricted common stock and the restricted common stock. As of June 30, 2009, the Company has reserved 633,179 shares within the 1994 Plan relating to deferred stock awards under the 2008 Performance Plan.

The Company is recognizing compensation expense for the 2008 Performance Plan over the three year measurement period for the 50% of each award which vests at the end of the measurement period. For the remaining 50% of each award, the Company is recognizing compensation expense over the four year period which includes the measurement period as well as the one-year vesting period subsequent to the end of the measurement period. The recognition of compensation cost will take into account actual forfeitures as well as retirement eligibility. During the three months ended June 30, 2009, the Company recognized the compensation expense associated with the 2008 Performance Plan of $439 and capitalized stock-based compensation costs of $249.

10. Related Party Arrangements

Unconsolidated Entities

The Company manages unconsolidated real estate entities for which it receives asset management, property management, development and redevelopment fee revenue. From these entities, the Company received fees of $2,077 and $1,579 in the three months ended June 30, 2009 and 2008, respectively and $3,545 and $3,217 for the six months ended June 30, 2009 and 2008, respectively. These fees are included in management, development and other fees on the accompanying Condensed Consolidated Statements of Operations and Other Comprehensive Income.

Director Compensation

Directors of the Company who are also employees receive no additional compensation for their service as a director. Following each annual meeting of stockholders starting with the 2008 annual meeting, non-employee directors receive (i) a number of shares of restricted stock (or deferred stock awards) having a value of $125 and (ii) a cash payment of $50, payable in quarterly installments of $12.5. 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 $96 and $179 for the three and six months ended June 30, 2009 as a component of general and administrative expense. Deferred compensation relating to these restricted stock grants and deferred stock awards was $458 and $137 on June 30, 2009 and December 31, 2008, respectively.

11. Fair Value

Fair Value Methodology

As a basis for applying a market-based approach in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. The valuation of financial instruments can be determined using widely accepted valuation techniques.

To comply with the provisions of SFAS No. 157, the Company applies widely accepted valuation models such as discounted cash flow analysis on the expected cash flows of each instrument which considers the contractual terms of the instruments, including the period to maturity, and uses observable market-based inputs, including interest rate curves and market prices, as available and applicable. In addition, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements as discussed below. When market-based inputs are not available in valuing the Company’s financial instruments, such as for valuing the redeemable noncontrolling interests, the Company uses unobservable inputs considering the assumptions that market participants would make in deriving the fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on the Company’s estimates of fair value.

Financial Instruments Carried at Fair Value

Derivative Financial Instruments

Currently, the Company uses interest rate swap and interest rate cap agreements to manage its interest rate risk. These instruments are carried at fair value in the Company’s financial statements. See Note 5, “Derivative Instruments and Hedging Activities,” for derivative values at June 30, 2009 and a description of where these amounts are recorded in the financial statements. In adjusting the fair value of its derivative contracts for the effect of counterparty nonperformance risk, the Company has considered the impact of its net position with a given counterparty, as well as any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives use Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. As of June 30, 2009, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined it is not significant. As a result, the Company has determined that its derivative valuations are classified in Level 2 of the fair value hierarchy.

Redeemable Noncontrolling Interests

Redeemable noncontrolling interests are reported at fair value, with reductions in fair value recorded only to the extent that the Company has previously recorded increases in fair value above the redeemable noncontrolling interest initial basis.

•

Puts – The Company provided redemption options (the “Puts”) that allow two of our joint venture partners to require the Company to purchase their interests in the investments at the future fair market value. One Put is payable in cash or, at the Company’s option, common shares of the Company, and the second is payable in cash. The Company determines the fair value of the Puts based on unobservable inputs considering the assumptions that market participants would make in pricing the obligations, including applying discount factors to the estimated future cash flows of the asset underlying the associated joint venture, which in the case of the Puts is the NOI from an apartment community, as well as potential disposition proceeds utilizing market capitalization rates, to derive the fair value of the position. Given the significance of the unobservable inputs, the valuations are classified in Level 3 of the fair value hierarchy. At December 31, 2008, the Puts’ aggregate fair value was $9,057. At June 30, 2009, the aggregate fair value of the Puts was $5,273.

•

DownREIT units – The Company issued units of limited partnership interest in DownREITs which provide the DownREIT limited partners the ability to present all or some of their units for redemption for a cash amount as determined by the applicable partnership

agreement. Under the DownREIT agreements, for each limited partnership unit, the limited partner is entitled to receive cash in the amount equal to the fair value of the Company’s common stock on or about the date of redemption. In lieu of cash redemption, the Company may elect to exchange such units for an equal number of shares in the Company’s common stock. The limited partnership units in DownREITs are valued using the market price of the Company’s common stock, a Level 1 price under the fair value hierarchy. At December 31, 2008, the fair value of the DownREIT units was $1,177. At June 30, 2009, the fair value of the DownREIT units was $859.

Financial Instruments Not Carried at Fair Value

Cash and Cash Equivalents

Cash and cash equivalent balances are held with various financial institutions within principal protected accounts. The Company monitors credit ratings of these financial institutions and the concentration of cash and cash equivalent balances with any one financial institution and believes the likelihood of realizing material losses related to cash and cash equivalent balances is remote. Cash and cash equivalents are carried at their face amounts, which reasonably approximate their fair values.

Other Financial Instruments

Rents receivable, accounts and construction payable and accrued expenses and other liabilities are carried at their face amounts, which reasonably approximate their fair values.

The Company values its bond indebtedness, notes payable and outstanding amounts under the Credit Facility using a discounted cash flow analysis on the expected cash flows of each instrument. This analysis reflects the contractual terms of the instrument, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The process also considers credit valuation adjustments to appropriately reflect the Company’s nonperformance risk. The Company has concluded that the value of its bond indebtedness and notes payable are Level 2 prices as the majority of the inputs used to value its positions fall within Level 2 of the fair value hierarchy. Bond indebtedness, notes payable and outstanding amounts under the Company’s Credit Facility (as applicable) with an aggregate outstanding par amount of approximately $4,152,000 and $3,676,000 had an estimated aggregate fair value of $4,121,585 and $3,612,130 at June 30, 2009 and December 31, 2008, respectively.

12. Subsequent Events

Subsequent events have been evaluated through August 10, 2009, the date the financial statements were issued. Pursuant to the requirements of SFAS 165, there were no events or transactions subsequent to June 30, 2009 that required recognition or disclosure in the financial statements.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help provide an understanding of our business and results of operations. This MD&A should be read in conjunction with our Condensed Consolidated Financial Statements and the accompanying Notes to Condensed Consolidated Financial Statements included elsewhere in this report. This report, including the following MD&A, contains forward-looking statements regarding future events or trends as described more fully under “Forward-Looking Statements” included in this report. Actual results or developments could differ materially from those projected in such statements as a result of the risk factors described in Item 1a, “Risk Factors,” of our Form 10-K for the year ended December 31, 2008 (our “Form 10-K”).

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. Barriers to entry in our markets generally include a difficult and lengthy entitlement process with local jurisdictions and dense urban or suburban areas where zoned and entitled land is in limited supply. We 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 flows, are affected by overall economic conditions, such as the current economic downturn. 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.

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

Second Quarter 2009 Highlights

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Net income attributable to common stockholders for the quarter ended June 30, 2009 was $17,674,000, as compared to $125,159,000 for the quarter ended June 30, 2008, a decrease of 85.9%. The decrease is attributable primarily to gains on assets sold during 2008 not present in 2009, coupled with charges for an impairment of land parcels which we no longer intend to develop, the abandonment of development pursuits and an associated severance charge recognized in the second quarter of 2009.

•

The results for the quarter ended June 30, 2009 reflect the current recessionary environment. Our Established Community portfolio (as defined later in this report) experienced a 5.5% decrease in net operating income (“NOI”) over the comparable period of 2008, driven by a 2.8% decrease in rental revenue and an increase in operating expenses of 3.4%. The rental revenue decline over the comparable period in 2008, attributable primarily to downward pressure on rental rates and increased job losses, was largely consistent with our expectations.

Financial Outlook

During the first six months of 2009, actual job losses materially exceeded those contained in the economic forecasts we used to prepare our initial 2009 financial outlook. Actual job losses nationwide through June 2009 totaled 3.2

million, a 70% increase over assumptions incorporated into the initial 2009 guidance provided in February 2009. We use a composite of third party economic forecasts to develop operating and financial plans, with a particular focus on employment forecasts. Changes in employment conditions have a significant impact on overall demand for rental housing and are highly correlated to changes in revenue growth. A composite of third party economic forecasts now projects a year over year decline in nationwide employment of 5.4 million jobs for 2009 with unemployment peaking between 10.5% to 11.0% by mid-2010.

Based on the revised employment projections, revenue from Established Communities is anticipated to decline by 3.5% to 4.5% for 2009. This compares to the 1.5% to 3.5% decline incorporated into the original financial outlook in February 2009. These projections are based on our outlook for economic conditions for the remainder of 2009, both nationally and in the markets where we operate. There can be no assurance that our outlook for economic conditions and/or their impact on our operating results will be accurate, and actual results could differ materially. Please see “Risk Factors,” “Forward Looking Statements” and other discussions in our Form 10-K for a discussion of factors which could affect our results of operations.

Longer-term, we expect apartment fundamentals to strengthen from a reduction in new supply, favorable demographic trends, declining homeownership and an economic recovery that we expect will eventually produce employment growth. Changes in any of the above factors, including if there is a more prolonged or increased deterioration in economic conditions than we currently expect, could materially change our expectations for the remainder of 2009 and future periods.

During 2009 we continue to benefit from a strong balance sheet that allows us to access capital at relatively attractive rates. In the second quarter of 2009, we successfully completed a 10-year, 5.86% fixed rate pooled financing transaction for $741,140,000. We used these proceeds to fund our development and redevelopment activities, repay secured and unsecured debt, prepay certain secured debt with higher interest costs and for other general corporate purposes. We believe that our overall modest level of secured and unsecured debt will continue to provide us with the financial flexibility to access both public and private capital on attractive terms.

During the second quarter of 2009, we added equity commitments for the AvalonBay Value Added Fund II, LP (“Fund II”), our private discretionary investment vehicle that was originally formed in August of 2008. Fund II now has equity commitments from five institutional investors who, with the Company, collectively committed $400,000,000, of which our commitment is $125,000,000. Total equity commitments to Fund II increased by $67,000,000 as a result of the following:

•

a new institutional investor made an equity commitment of $75,000,000;

•

an existing institutional investor increased its commitment by $17,000,000, based on terms of its existing commitment; and

•

we decreased our commitment by $25,000,000, based on terms of our existing commitment, decreasing our equity interest to approximately 31%.

Fund II will acquire, operate and sometimes redevelop (but not develop) multifamily apartment communities primarily in our current markets with the objective of creating value through redevelopment, enhanced operations and/or improving market fundamentals. Fund II has a term that expires in August 2018, plus two one-year extension options. Fund II will serve as the exclusive vehicle through which we will acquire investment interests in apartment communities until August 2011 or, if earlier, until 90% of the committed capital of Fund II is invested, subject to limited exceptions. We will receive, in addition to any returns on our invested equity, asset management fees, property management fees and redevelopment fees. We will also receive a promoted interest if certain return thresholds are met. Fund II can employ leverage of up to 65%, allowing for an investment capacity of approximately $1,100,000,000. In April 2009, Fund II acquired one community, and as of July 31, 2009, Fund II has invested $33,100,000.

Reduced returns relative to the cost of capital and economic risk have resulted in a reduction in new development activity for 2009. We currently have 12 communities under construction with a total projected capitalized cost of approximately $1,396,400,000. As of June 30, 2009, approximately $1,000,800,000 of this development has been funded, with approximately $395,600,000 remaining to fund. We have arranged $112,000,000 of this required

funding through financing from third-party, tax-exempt and taxable debt. During the six months ended June 30, 2009, we did not start any new developments and we do not anticipate starting any development activity during the third quarter of 2009. If we start any new development activity in the fourth quarter of 2009, we do not expect it will have a significant impact on our liquidity, corporate cash flows or earnings. At June 30, 2009, there were seven communities under redevelopment, with an expected incremental capital investment of approximately $116,500,000, of which approximately $61,200,000 remains to be funded. We expect to maintain our current level of redevelopment activity through the end of 2009, taking the opportunity to reinvest and reposition our assets to meet the needs of our residents and ensure that our assets are competitively positioned when the economy recovers. We believe that we currently have sufficient committed capital to complete the development and redevelopment activities underway and meet other liquidity uses. See the discussion under Liquidity and Capital Resources.

Community Information Overview

Our real estate investments consist primarily of current operating apartment communities, Development Communities and Development Rights both as defined below. Our current operating communities are further distinguished as Established Communities, Other Stabilized Communities, Lease-Up Communities and Redevelopment Communities. The following is a description of each category:

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

•

Established Communities (also known as Same Store Communities) are consolidated communities where a comparison of operating results from the prior year to the current year is meaningful, as these communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior year. For the period ended June 30, 2009, the Established Communities are communities that are consolidated for financial reporting purposes, had stabilized occupancy and operating expenses as of January 1, 2008, 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 are all other completed communities that we own or have a direct or indirect ownership interest in, and that have stabilized occupancy, as defined above. Other Stabilized Communities do not include communities that are conducting or planning to conduct substantial redevelopment activities within the current year.

•

Lease-Up Communities are communities where construction has been complete for less than one year and where physical occupancy has not reached 95%.

•

Redevelopment Communities are communities where the Company owns a majority interest and where substantial redevelopment is in progress or is planned to begin during the current year. Redevelopment is considered substantial when capital invested during the reconstruction effort is expected to exceed either $5,000,000 or 10% of the community’s pre-development basis.

Development Communities are communities that are under construction and for which a certificate of occupancy has not been received. These communities may be partially complete and operating.

Development Rights are development opportunities in the early phase of the development process for which we either have an option to acquire land or enter into a leasehold interest, for which we are the buyer under a long-term conditional contract to purchase land or where we own land to

develop a new community. We capitalize related pre-development costs incurred in pursuit of new developments for which we currently believe future development is probable.

In addition, we own approximately 60,000 square feet of office space in Alexandria, Virginia, for our corporate office, with all other regional and administrative offices leased under operating leases.

As of June 30, 2009, communities that we owned or held a direct or indirect interest in were classified as follows:


	Number of		Number of
	communities		apartment homes
Current Communities

Established Communities:
New England		24		5,807
Metro NY/NJ		19		6,307
Mid-Atlantic/Midwest		17		6,683
Pacific Northwest		8		1,943
Northern California		16		4,624
Southern California		12		3,679

Total Established		96		29,043


Other Stabilized Communities:
New England		11		3,171
Metro NY/NJ		9		2,534
Mid-Atlantic/Midwest		8		2,138
Pacific Northwest		3		653
Northern California		14		3,645
Southern California		8		1,426

Total Other Stabilized		53		13,567


Lease-Up Communities		6		1,289

Redevelopment Communities		7		2,577


Total Current Communities		162		46,476


Development Communities		12		4,035


Development Rights		26		6,688

Results of Operations

Our year-over-year operating performance is primarily affected by geographic market conditions and apartment fundamentals that cause changes in NOI of our Established Communities; NOI derived from acquisitions and development completions; the loss of NOI related to disposed communities; and capital market and financing activity. A comparison of our operating results for the three and six months ended June 30, 2009 and 2008 follows (dollars in thousands):

	For the three months ended											For the six months ended
	6-30-09		6-30-08			$ Change			% Change			6-30-09		6-30-08			$ Change			% Change
Revenue:
Rental and other income	$	220,067	$	209,612		$	10,455			5.0	%	$	438,278	$	412,146		$	26,132			6.3	%
Management, development and other fees		2,077		1,579			498			31.5	%		3,545		3,217			328			10.2	%

Total revenue		222,144		211,191			10,953			5.2	%		441,823		415,363			26,460			6.4	%


Expenses:
Direct property operating expenses, excluding property taxes		55,546		47,650			7,896			16.6	%		108,652		95,587			13,065			13.7	%
Property taxes		20,731		19,018			1,713			9.0	%		42,474		38,015			4,459			11.7	%

Total community operating expenses		76,277		66,668			9,609			14.4	%		151,126		133,602			17,524			13.1	%


Corporate-level property management and other indirect operating expenses		9,634		10,471			(837	)		(8.0	%)		19,678		20,568			(890	)		(4.3	%)
Investments and investment management expense		907		1,195			(288	)		(24.1	%)		1,822		2,414			(592	)		(24.5	%)
Expensed development and other pursuit costs		2,281		1,829			452			24.7	%		3,375		2,329			1,046			44.9	%
Interest expense, net		37,385		29,598			7,787			26.3	%		66,631		57,258			9,373			16.4	%
Depreciation expense		53,737		47,648			6,089			12.8	%		106,377		93,589			12,788			13.7	%
General and administrative expense		5,390		9,383			(3,993	)		(42.6	%)		12,637		17,503			(4,866	)		(27.8	%)
Impairment loss		20,302		—			20,302			N/A			20,302		—			20,302			N/A

Total other expenses		129,636		100,124			29,512			29.5	%		230,822		193,661			37,161			19.2	%


Equity in income of unconsolidated entities		492		3,800			(3,308	)		(87.1	%)		3,949		3,833			116			3.0	%


Income from continuing operations		16,723		48,199			(31,476	)		(65.3	%)		63,824		91,933			(28,109	)		(30.6	%)

Discontinued operations:
Income from discontinued operations		—		5,101			(5,101	)		(100.0	%)		—		9,921			(9,921	)		(100.0	%)
Gain on sale of communities		—		74,139			(74,139	)		(100.0	%)		—		74,139			(74,139	)		(100.0	%)

Total discontinued operations		—		79,240			(79,240	)		(100.0	%)		—		84,060			(84,060	)		(100.0	%)


Net income		16,723		127,439			(110,716	)		(86.9	%)		63,824		175,993			(112,169	)		(63.7	%)
Net loss (income) attributable to redeemable noncontrolling interests		951		(105	)		1,056			N/A			1,275		(210	)		1,485			N/A

Net income attributable to the Company		17,674		127,334			(109,660	)		(86.1	%)		65,099		175,783			(110,684	)		(63.0	%)
Dividends attributable to preferred stock		—		(2,175	)		2,175			(100.0	%)		—		(4,350	)		4,350			(100.0	%)

Net income attributable to common stockholders	$	17,674	$	125,159		$	(107,485	)		(85.9	%)	$	65,099	$	171,433		$	(106,334	)		(62.0	%)

Net income attributable to common stockholders decreased $107,485,000 or 85.9%, to $17,674,000 for the three months ended June 30, 2009 and decreased $106,334,000 or 62.0%, to $65,099,000 for the six months ended June 30, 2009. The decreases are attributable primarily to gains on sale of assets during 2008 not present in 2009, coupled with the charges recognized in the second quarter of 2009 for the impairment of land parcels and abandonment of pursuits for Development Rights which we no longer intend to develop, as well as for severance charges related to the reduction in development activity and general economic conditions.

NOI is considered by management to be an important and appropriate supplemental performance measure to net income because it helps both investors and management to understand the core operations of a community or communities prior to the allocation of any corporate-level or financing-related costs. NOI reflects the operating performance of a community and allows for an easy comparison of the operating performance of individual assets or groups of assets. In addition, because prospective buyers of real estate have different financing and overhead structures, with varying marginal impacts to overhead by acquiring real estate, NOI is considered by many in the real estate industry to be a useful measure for determining the value of a real estate asset or group of assets. We define NOI as total property revenue less direct property operating expenses, including property taxes.

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 flow from operating activities, as determined by GAAP, as a measure of liquidity, nor is NOI necessarily indicative of cash available to fund cash needs. Reconciliations of NOI for the three and six months ended June 30, 2009 and 2008 to net income for each period are as follows (dollars in thousands):


	For the three months ended						For the six months ended
	6-30-09			6-30-08			6-30-09			6-30-08
Net income	$	16,723		$	127,439		$	63,824		$	175,993
Indirect operating expenses, net of corporate income		7,362			8,893			15,936			17,350
Investments and investment management expense		907			1,195			1,822			2,414
Expensed development and other pursuit costs		2,281			1,829			3,375			2,329
Interest expense, net		37,385			29,598			66,631			57,258
General and administrative expense		5,390			9,383			12,637			17,503
Equity in income of unconsolidated entities		(492	)		(3,800	)		(3,949	)		(3,833	)
Depreciation expense		53,737			47,648			106,377			93,589
Impairment loss – land holdings		20,302			—			20,302			—
Gain on sale of real estate assets		—			(74,139	)		—			(74,139	)
Income from discontinued operations		—			(5,101	)		—			(9,921	)


Net operating income	$	143,595		$	142,945		$	286,955		$	278,543

The NOI increase for the three and six months ended June 30, 2009, as compared to the prior year period, consists of changes in the following categories (dollars in thousands):


	For the three months ended			For the six months ended
	6-30-09			6-30-09
Established Communities	$	(6,128	)	$	(8,380	)

Other Stabilized Communities		4,517			13,612

Development and Redevelopment Communities		2,261			3,180


Total	$	650		$	8,412

The NOI decrease for Established Communities in the second quarter and year to date in 2009 as compared to the prior year periods was largely due to the continued challenging economic conditions, including the impact on rental revenue of increased job losses and increased operating expenses. During the six months ended June 30, 2009, we focused on controlling operating expense growth and maintaining occupancy while minimizing the decline in effective rental rates.

Rental and other income increased in the three and six months ended June 30, 2009 as compared to the prior year periods due to additional rental income generated from newly developed communities, partially offset by decreased rental rates and occupancy in our Established Communities.

Overall Portfolio – The weighted average number of occupied apartment homes increased to 39,265 apartment homes for the six months ended June 30, 2009 as compared to 37,597 homes for the prior year period. This change is primarily the result of increased homes available from newly developed communities, partially offset by communities sold during 2008 containing 3,059 apartment homes, as well as declining occupancy levels due to the recession. The weighted average monthly revenue per occupied apartment home decreased to $1,855 for the six months ended June 30, 2009 as compared to $1,925 in the prior year period.

Established Communities – Rental revenue decreased $4,481,000, or 2.8%, for the three months ended June 30, 2009 over the prior year period. Rental revenue decreased $5,578,000, or 1.7%, for the six months ended June 30, 2009 over the prior year period. These decreases are due to a decline in rental rates and economic occupancy. The average economic occupancy decreased 1.0% to 95.4% for the six months ended June 30, 2009. Economic occupancy takes into account the fact that apartment homes of different sizes and locations within a community have different economic impacts on a community’s gross revenue. Economic occupancy is defined as gross potential revenue less vacancy loss, as a percentage of gross potential revenue. Gross potential revenue is determined by valuing occupied homes at leased rates and vacant homes at market rents. For the six months ended June 30, 2009, the weighted average revenue per occupied apartment home decreased 0.7% to $1,891 compared to $1,905 in the prior year period.

Consistent with expected operating results for 2009, we experienced an overall decrease in Established Communities’ rental revenue of 1.7% for the six months ended June 30, 2009 as compared to the prior year period. The decrease in rental revenue was comprised of rental revenue declines in each of our markets as compared to the prior year period. Almost 70% of our Established Community rental revenue is generated by the Metro New York/New Jersey, Mid-Atlantic/Midwest, and New England regions, which are discussed in more detail below.

The Metro New York/New Jersey region, which accounted for approximately 27% of Established Community rental revenue for the six months ended June 30, 2009, experienced a decrease in rental revenue of 2.4% as compared to the prior year period. Economic occupancy decreased 0.8% to 95.4% and average rental rates decreased 1.6% to $2,332 for the six months ended June 30, 2009. We expect net job losses to continue through the second half of 2009, driven by workforce reductions in the financial services sector, resulting in further rental revenue declines.

The New England region accounted for approximately 21% of the Established Community rental revenue for the six months ended June 30, 2009 and experienced a decline in rental revenue of 2.7% over the prior year period. Economic occupancy decreased 1.6% to 95.1% and average rental rates decreased 1.1% to $1,970 for the six months ended June 30, 2009, as compared to the prior year period. The financial services sector is an important economic driver in both the Boston metro area and Fairfield-New Haven, and the impact of cumulative job losses in financial services and other sectors impacted by the recession will result in further rental revenue declines in this region for the balance of 2009.

The Mid-Atlantic/Midwest region, which represented approximately 21% of Established Community rental revenue during the six months ended June 30, 2009, experienced a decrease in rental revenue of 0.1% as compared to the prior year period. For the six months ended June 30, 2009, economic occupancy decreased by 0.2% to 96.3%, offset somewhat by an increase in average rental rates of 0.1% to $1,697. This region benefits from a preponderance of government and government services employment, which serves to stabilize the economy relative to other regions. We expect rental revenue in the Mid-Atlantic/Midwest to decline for the balance of 2009, though at a more moderate pace than our other markets.

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 three and six months ended June 30, 2009 and 2008 (dollars in thousands).


	For the three months ended						For the six months ended
	6-30-09			6-30-08			6-30-09			6-30-08
Rental revenue (GAAP basis)	$	156,457		$	160,938		$	314,430		$	320,008
Concessions amortized		2,182			1,647			4,354			3,283
Concessions granted		(2,231	)		(2,178	)		(4,061	)		(3,467	)

Rental revenue adjusted to state concessions on a cash basis	$	156,408		$	160,407		$	314,723		$	319,824


Year-over-year % change — GAAP revenue					(2.8	%)					(1.7	%)

Year-over-year % change — cash concession based revenue					(2.5	%)					(1.6	%)

In response to recent market conditions, we have relied less on concessions and more on market rent adjustments to attract and retain residents, which minimizes the difference between cash and accrual based revenue.

Direct property operating expenses, excluding property taxes increased $7,896,000, or 16.6% for the three months ended June 30, 2009 and increased $13,065,000, or 13.7% for the six months ended June 30, 2009 as compared to the prior year periods, primarily due to the addition of recently developed apartment homes.

For Established Communities, direct property operating expenses, excluding property taxes, increased approximately $2,347,000, or 6.9% to approximately $36,448,000 for the three months ended June 30, 2009, and increased approximately $2,925,000, or 4.2% for the six months ended June 30, 2009, due primarily to increased administrative and community maintenance related costs, offset partially by a decrease in insurance related expenses. The increase in administrative expense is primarily due to an increase in bad debt, due to a general decline in the economy.

Property taxes increased $1,713,000, or 9.0% and $4,459,000, or 11.7% for the three and six months ended June 30, 2009, due primarily to the addition of newly developed and redeveloped apartment homes. Property tax increases are also impacted by the size and timing of successful tax appeals.

For Established Communities, property taxes decreased by approximately $666,000, or 4.2% and approximately $47,000, or 0.1% for the three and six months ended June 30, 2009 due to a refund received in the current period from the successful appeals of prior year assessments, offset partially by higher assessments throughout all regions. The impact of the current economic environment has not been reflected in current assessments, as there is typically a time lag between a change in the economy affecting property valuations and updated real estate tax assessments. Overall we expect property taxes in 2009 to increase over 2008 due primarily to higher tax rates, without the benefit of lower assessed values. 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 decreased by $837,000 or 8.0% and $890,000 or 4.3% for the three and six months ended June 30, 2009. These decreases were due primarily to decreased compensation costs, offset partially by increased costs associated with corporate initiatives focused on both strategic planning and improving efficiency and enhancing controls at our operating communities.

Expensed development and other pursuit costs primarily reflects the costs incurred for abandoned pursuit costs, which include costs incurred for development pursuits not yet considered probable for development, as well as the abandonment of development pursuits, acquisition pursuits and disposition pursuits. Expensed development and other pursuit costs increased during the three and six months ended June 30, 2009 compared to the prior year period due primarily to increases in abandoned pursuit costs. These costs can be volatile, particularly in periods of economic downturn or when there is limited access to capital, and the costs may vary significantly from period to period.

Interest expense, net increased $7,787,000, or 26.3% and $9,373,000, or 16.4% for the three and six months ended June 30, 2009. This category includes both interest expense and interest income. The increase for the three and six months ended June 30, 2009 is due primarily to a decrease in the allocation of our overall interest expenditures to capitalized interest in 2009 as compared to the prior year period. The decrease in the amount of interest capitalized is attributable to the decrease in variable rates and a decrease in our development pipeline, coupled with the repayment of higher coupon fixed rate notes. In addition, interest expense increased in 2009 as compared to 2008 as a result of the additional secured financing activity that closed throughout both years. These increases are offset somewhat by a decrease in interest costs on our Credit Facility, as defined later in this report, principally due to the decline in amounts outstanding and lower rates in 2009. Our year to date 2009 results also reflect the gain of $1,062,000 associated with the purchase of our medium-term notes at a price of 98% of par in the first quarter of 2009.

Depreciation expense increased $6,089,000, or 12.8% and $12,788,000, or 13.7% in the three and six months ended June 30, 2009 primarily due to the completion of development and redevelopment activities.

General and administrative expense decreased $3,993,000, or 42.6% and $4,866,000, or 27.8% for the three and six months ended June 30, 2009 as compared to the prior year period due to the recognition of legal settlement proceeds, decreases in compensation costs as well as

decreases in taxes associated with gains from an investment in a taxable REIT subsidiary in 2009, partially offset by the recognition of the charge for severance and related costs associated with the reduction in our development activities in 2009.

Impairment loss increased for the three and six months ended June 30, 2009 from the prior year periods due to the recognition of an impairment charge on property owned associated with two former Development Rights in 2009, with no comparable expense in the prior year periods. Like abandoned pursuit costs, these costs can be volatile, particularly in periods of economic downturn or when there is limited access to capital, and the costs may vary significantly from period to period.

Equity in income of unconsolidated entities for the three months ended June 30, 2009 decreased from the prior year period due primarily to the recognition of our portion of the gain from the sale of a community by the Fund in 2008. The increase for the six months ended June 30, 2009 is due to the recognition of our promoted interest in the joint venture that owns Avalon Chrystie Place, offset by the gain from the sale of a community by the Fund in 2008.

Income from discontinued operations represents the net income generated by operating real estate assets sold or qualifying as discontinued operations during the period from January 1, 2008 through June 30, 2009.

Net loss (income) attributable to redeemable noncontrolling interests for the three and six months ended June 30, 2009 resulted in income of $951,000 and $1,275,000, respectively compared to a loss of $105,000 and $210,000, respectively in the three and six months ended June 30, 2008 due to recognition of income for our joint venture partners’ portion of expenses incurred by Fund II, as well as the conversion and redemption of limited partnership units in 2008 and 2009, thereby reducing outside ownership interests and the allocation of net income to outside ownership interests.

Funds from Operations Attributable to Common Stockholders (“FFO”)

FFO is considered by management to be an appropriate supplemental measure of our operating and financial performance. In calculating FFO, we exclude gains or losses related to dispositions of previously depreciated property and exclude real estate depreciation, which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates. FFO can help one compare the operating performance of a real estate company between periods or as compared to different companies. We believe that in order to understand our operating results, FFO should be examined with net income as presented in our Condensed Consolidated Financial Statements included elsewhere this report.

Consistent with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts^â(“NAREIT”), we calculate FFO as net income or loss computed in accordance with GAAP, adjusted for:

•

gains or losses on sales of previously depreciated operating communities;

•

extraordinary gains or losses (as defined by GAAP);

•

depreciation of real estate assets; and

•

adjustments for unconsolidated partnerships and joint ventures.

FFO does not represent net income attributable to the Company in accordance with GAAP, and therefore it should not be considered an alternative to net income, which remains the primary measure of performance. In addition, FFO as calculated by other REITs may not be comparable to our calculation of FFO.

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


	For the three months ended					For the six months ended
	6-30-09		6-30-08			6-30-09		6-30-08
Net income attributable to the Company	$	17,674	$	127,334		$	65,099	$	175,783
Dividends attributable to preferred stock		—		(2,175	)		—		(4,350	)
Depreciation — real estate assets, including discontinued operations and joint venture adjustments		54,126		50,258			107,651		100,044
Distributions to noncontrolling interests, including discontinued operations		14		57			39		114
Gain on sale of unconsolidated entities holding previously depreciated real estate assets		—		(3,483	)		—		(3,483	)
Gain on sale of operating communities		—		(74,139	)		—		(74,139	)


FFO attributable to common stockholders	$	71,814	$	97,852		$	172,789	$	193,969


Weighted average common shares outstanding — diluted		80,042,294		77,578,617			79,898,287		77,484,723
EPS per common share — diluted	$	0.22	$	1.61		$	0.82	$	2.21

FFO per common share — diluted	$	0.90	$	1.26		$	2.16	$	2.50

FFO also does not represent cash generated from operating activities in accordance with GAAP, and therefore should not be considered an alternative to net cash flows from operating activities, as determined by GAAP, as a measure of liquidity. Additionally, it is not necessarily indicative of cash available to fund cash needs.

A presentation of GAAP based cash flow metrics is as follows (dollars in thousands) and a discussion of “Liquidity and Capital Resources” can be found later in this report.


	For the three months ended						For the six months ended
	6-30-09			6-30-08			6-30-09			6-30-08
Net cash provided by operating activities	$	98,907		$	119,548		$	189,728		$	139,125

Net cash used in investing activities	$	(146,376	)	$	(45,806	)	$	(276,057	)	$	(202,751	)

Net cash provided by (used in) financing activities	$	172,922		$	(335,833	)	$	236,411		$	50,689

Liquidity and Capital Resources

Our current liquidity needs result primarily from development and redevelopment expenditures, maturing debt and dividend requirements. Factors affecting our liquidity and capital resources are our cash flows from operations, financing activities and investing activities (including dispositions) as well as general economic and market conditions. Operating cash flow has historically been determined by: (i) the number of apartment homes currently owned, (ii) rental rates, (iii) occupancy levels and (iv) operating expenses with respect to apartment homes. The timing and type of capital markets activity in which we engage, as well as our plans for development, redevelopment, acquisition and disposition activity, are affected by changes in the capital markets environment, such as changes in interest rates or the availability of cost-effective capital.

We regularly review our liquidity needs, the adequacy of cash flows from operations and other expected liquidity sources to meet these needs. We believe our principal short-term liquidity needs are to fund:

•

development and redevelopment activity in which we are currently engaged;

•

the minimum dividend payments on our common stock required to maintain our REIT qualification under the Internal Revenue Code of 1986;

•

debt service and maturity payments;

•

normal recurring operating expenses;

•

DownREIT partnership unit distributions; and

•

capital calls for the Fund and Fund II, as required.

While the constrained capital and credit markets experienced in 2008 continue into 2009, our balance sheet provides the financial flexibility to access capital to meet liquidity needs. In 2009, we expect to meet all of our liquidity needs from a variety of internal and external sources,

including borrowing capacity under our Credit Facility (as defined below), secured financings and other public or private sources of liquidity as discussed below, as well as our operating activities. To the extent that currently available internal and external resources do not satisfy our needs, we may seek additional external financing. Additional external financing could come from a variety of sources, such as public sales of debt or equity securities or unsecured or secured loans from financial institutions or other private or governmental lenders, among others. Private equity through joint ventures may also be used. Our ability to obtain additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to the real estate industry, our credit ratings and credit capacity, as well as the perception of lenders regarding our long or short-term financial prospects. At June 30, 2009, we have unrestricted cash, cash equivalents and cash in escrow of $456,064,000 available for both current liquidity needs as well as development activities, of which $93,440,000 relates to a Development Right for which we have not begun construction.

Unrestricted cash and cash equivalents totaled $215,788,000 at June 30, 2009, an increase of $150,082,000 from $65,706,000 at December 31, 2008. The following discussion relates to changes in cash due to operating, investing and financing activities, which are presented in our Condensed Consolidated Statements of Cash Flows included elsewhere in this report.

Operating Activities – Net cash provided by operating activities increased to $189,728,000 for the six months ended June 30, 2009 from $139,125,000 for the six months ended June 30, 2008. The increase was driven primarily by the timing of general corporate payables and the payment of interest amounts in 2009 as compared to 2008.

Investing Activities – Net cash used in investing activities of $276,057,000 for the six months ended June 30, 2009 related to investments in assets through the development and redevelopment of apartment communities, partially offset by a decrease in construction escrows of $47,413,000. During the six months ended June 30, 2009, we invested $313,668,000 in the development of the following real estate and capital expenditures:

•

We had capital expenditures of $2,091,000 for real estate and non-real estate assets.

•

We invested approximately $311,577,000 in the development of communities.

Financing Activities — Net cash provided by financing activities totaled $236,411,000 for the six months ended June 30, 2009. The net cash provided is due primarily to the pooled secured financing executed in April 2009 for $741,140,000 partially offset by the repayment of amounts outstanding on the Credit Facility, defined below, of $124,000,000, the redemption of unsecured notes for $206,173,000, the payment of cash dividends in the amount of $139,928,000 and the repayment of secured notes of $27,774,000.

Variable Rate Unsecured Credit Facility

We currently have a $1,000,000,000 revolving variable rate unsecured credit facility (the “Credit Facility”) with a syndicate of commercial banks that expires in November 2011 (assuming our exercise of a one-year renewal option). In the aggregate, we pay an annual facility fee of approximately $1,250,000. The 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 (0.68% on July 31, 2009). 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 $650,000,000. 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 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 July 31, 2009. At July 31, 2009, there were no amounts outstanding on the Credit Facility, $40,260,000 was used to provide letters of credit, and $959,740,000 was available for borrowing under the Credit Facility.

We are subject to financial and other covenants contained in the Credit Facility; our $224,400,000 variable rate, unsecured term loan; and the indenture under which our unsecured notes were issued. The financial covenants include the following:

•

limitations on the amount of total and secured debt in relation to our overall capital structure;

•

limitation on the amount of our unsecured debt relative to the undepreciated basis of real estate assets that are not encumbered by property-specific financing; and

•

minimum levels of debt service coverage.

We were in compliance with these covenants at June 30, 2009.

In addition, our secured borrowings may include yield maintenance, defeasance, or prepayment penalty provisions, which would result in us incurring an additional charge in the event of a full or partial prepayment of outstanding principal before the scheduled maturity. These provisions in our secured borrowings are generally consistent with other similar types of debt instruments issued during the same time period our borrowings were secured.

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 significant portion of the principal of these notes will be repaid substantially prior to maturity. If we do not have funds on hand sufficient to repay our indebtedness as it becomes due, it will be necessary for us to refinance the debt. This refinancing may be accomplished by uncollateralized private or public debt offerings, additional debt financing that is secured by mortgages on individual communities or groups of communities, draws on our Credit Facility or by equity offerings. Although we believe we will have the capacity to meet our currently anticipated liquidity needs, we cannot assure you that additional debt financing or debt or equity offerings will be available or, if available, that they will be on terms we consider satisfactory.

The following financing activity occurred during the six months ended June 30, 2009:

•

In April 2009, we entered into a loan facility with Deutsche Bank Berkshire Mortgage, Inc. on behalf of Freddie Mac. Under this facility, we completed a 5.86% fixed-rate secured financing for $741,140,000 pursuant to fourteen separate ten-year mortgage loans, each secured by one of our current communities. Each of the loans provides for payments of interest only during the first two years of the loan term, with payments of principal and interest (based on a 30 year amortization schedule) thereafter and the remaining principal amount and any unpaid interest due at maturity on the tenth anniversary. In each case the borrower under the loan is one of our subsidiaries or affiliates that owns the community. The loans are generally non-recourse to us and the borrowers. Each of the notes evidencing the loans is coterminous and subject to (i) a Master Cross-Collateralization Agreement, which provides for cross-collateralization of all of the loans and a cross-default and acceleration of all of the loans if there is an event of default under one

of the loans and (ii) a Master Substitution Agreement, which provides for the substitution of collateral under certain circumstances;

•

we obtained $93,440,000 in variable rate tax exempt bond financing related to a Development Right, the proceeds of which will be held in escrow until requisitioned for construction funding. This loan provides an option for us to request an additional construction loan of up to $83,560,000 subject to the lender’s discretion;

•

we repaid $4,143,000 in 8.08% fixed rate debt secured by a real estate asset formerly classified as a Development Right in Alexandria, VA in April 2009;

•

we redeemed $37,438,000 principal amount of our $150,000,000, 7.5% unsecured notes that mature in August 2009 for par and cancelled the notes upon purchase;

•

we redeemed $64,423,000 principal amount of our $200,000,000, 7.5% unsecured notes that mature in December 2010 for $63,135,000 with the discount below par recorded as a gain reflected as a reduction in interest expense and cancelled the notes upon purchase;

•

we repaid $105,600,000 in unsecured debt, representing the first tranche of our $330,000,000 unsecured variable rate term loan; and

•

we repaid $19,470,000 in variable rate debt secured by Avalon at Flanders Hill, located in Westborough, Massachussets.

The following table details debt maturities for the next five years, excluding our Credit Facility and amounts outstanding related to real estate assets classified as held for sale, for debt outstanding at June 30, 2009 (dollars in thousands).


	All-In			Principal
	interest			maturity	Balance outstanding									Scheduled maturities
Community	rate (1)			date	12-31-08		6-30-09			2009		2010		2011		2012		2013		Thereafter
Tax-exempt bonds
*Fixed rate*
CountryBrook		6.46	%	Mar-2012	$	14,680	$	14,326		$	365	$	766	$	816	$	12,379	$	—	$	—
Avalon at Symphony Glen		5.17	%	Jul-2024		9,780		9,780			—		—		—		—		—		9,780
Avalon at Lexington		6.94	%	Feb-2025		11,665		11,449			223		466		495		526		559		9,180
Avalon Campbell		6.49	%	Jun-2025		30,914		30,406	(2)		—		—		—		—		—		30,406
Avalon Pacifica		6.51	%	Jun-2025		14,023		13,793	(2)		—		—		—		—		—		13,793
Avalon Fields		7.79	%	May-2027		9,988		9,854			140		295		316		339		364		8,400
Avalon Oaks		7.49	%	Jul-2041		16,940		16,868			75		157		168		180		193		16,095
Avalon Oaks West		7.54	%	Apr-2043		16,795		16,729			67		142		152		162		173		16,033
Avalon at Chestnut Hill		6.15	%	Oct-2047		41,834		41,670			168		349		368		388		409		39,988

						166,619		164,875			1,038		2,175		2,315		13,974		1,698		143,675
*Variable rate* (3)
Avalon Burbank		1.97	%	Oct-2010		30,142		29,772			384		29,388		—		—		—		—
Waterford		1.09	%	Jul-2014		33,100		33,100	(4)		—		—		—		—		—		33,100
Avalon at Mountain View		1.14	%	Feb-2017		18,300		18,300	(4)		—		—		—		—		—		18,300
Avalon at Mission Viejo		1.40	%	Jun-2025		7,635		7,635	(4)		—		—		—		—		—		7,635
Avalon at Nob Hill		1.31	%	Jun-2025		20,800		20,800	(4)		—		—		—		—		—		20,800
Avalon Campbell		1.89	%	Jun-2025		7,886		8,394	(2)		—		—		—		—		—		8,394
Avalon Pacifica		1.91	%	Jun-2025		3,577		3,807	(2)		—		—		—		—		—		3,807
Avalon Bowery Place I		1.32	%	Nov-2037		93,800		93,800			—		—		—		—		—		93,800
Avalon Bowery Place II		1.75	%	Nov-2039		48,500		48,500	(5)		—		—		—		—		—		48,500
Avalon Acton		1.76	%	Jul-2040		45,000		45,000	(5)		—		—		—		—		—		45,000
Avalon Morningside Park		2.08	%	Nov-2040		100,000		100,000	(5)		—		—		—		—		—		100,000
West Chelsea		0.27	%	May-2012		—		93,440	(5)		—		—		—		93,440		—		—
Avalon Walnut Creek		3.04	%	Mar-2046		116,000		116,000	(5)		—		—		—		—		—		116,000
Avalon Walnut Creek		2.95	%	Mar-2046		10,000		10,000	(5)		—		—		—		—		—		10,000

						534,740		628,548			384		29,388		—		93,440		—		505,336
Conventional loans (6)
*Fixed rate*
$150 million unsecured notes		7.63	%	Aug-2009		140,000		102,562	(7)		102,562		—		—		—		—		—
$200 million unsecured notes		7.67	%	Dec-2010		200,000		135,577	(8)		—		135,577		—		—		—		—
$300 million unsecured notes		6.79	%	Sep-2011		300,000		300,000			—		—		300,000		—		—		—
$50 million unsecured notes		6.31	%	Sep-2011		50,000		50,000			—		—		50,000		—		—		—
$250 million unsecured notes		5.74	%	Jan-2012		235,000		235,000	(9)		—		—		—		235,000		—		—
$250 million unsecured notes		6.26	%	Nov-2012		250,000		250,000			—		—		—		250,000		—		—
$100 million unsecured notes		5.11	%	Mar-2013		100,000		100,000			—		—		—		—		100,000		—
$150 million unsecured notes		5.52	%	Apr-2014		150,000		150,000			—		—		—		—		—		150,000
$250 million unsecured notes		5.89	%	Sep-2016		250,000		250,000			—		—		—		—		—		250,000
Avalon at Twinbrook		7.25	%	Oct-2011		7,801		7,691			113		239		7,339		—		—		—
Avalon at Tysons West		5.55	%	Jul-2028		6,218		6,132			87		183		193		204		216		5,249
4600 Eisenhower Avenue		—		Apr-2009		4,175		—			—		—		—		—		—		—
Avalon Orchards		7.77	%	Jul-2033		19,322		19,169			158		333		357		382		409		17,530
Avalon at Arlington Square		4.81	%	Apr-2013		170,125		170,125			—		—		—		—		170,125		—
Avalon at Cameron Court		5.07	%	Apr-2013		94,572		94,572			—		—		—		—		94,572		—
Avalon Crescent		5.59	%	May-2015		110,600		110,600			—		—		—		—		—		110,600
Avalon Silicon Valley		5.73	%	Jul-2015		150,000		150,000			—		—		—		—		—		150,000
Avalon Darien		6.22	%	Nov-2015		51,749		51,461			315		660		702		746		793		48,245
Avalon Greyrock Place		6.12	%	Nov-2015		62,400		62,045			387		811		861		914		971		58,101
Avalon Commons		6.10	%	Dec-2013		55,100		55,100			—		—		693		734		53,673		—
Avalon Walnut Creek		4.00	%	Jul-2066		2,500		2,500			—		—		—		—		—		2,500
Avalon Shrewsbury		5.90	%	May-2019		—		21,130			—		—		183		285		301		20,361
Avalon Gates		5.91	%	May-2019		—		41,321			—		—		357		557		589		39,818
Avalon at Stamford Harbor		5.91	%	May-2019		—		65,695			—		—		568		885		937		63,305
Avalon Freehold		5.92	%	May-2019		—		36,630			—		—		317		493		522		35,298
Avalon Run East II		5.92	%	May-2019		—		39,250			—		—		339		529		560		37,822
Avalon Gardens		6.02	%	May-2019		—		66,237			—		—		572		892		945		63,828
Avalon Edgewater		6.05	%	May-2019		—		78,565			—		—		679		1,058		1,120		75,708
Avalon Foxhall		6.01	%	May-2019		—		59,010			—		—		510		795		841		56,864
Avalon Gallery Place I		6.01	%	May-2019		—		45,850			—		—		396		618		654		44,182
Avalon Traville		5.90	%	May-2019		—		77,700			—		—		672		1,047		1,108		74,873
Avalon Bellevue		5.90	%	May-2019		—		26,698			—		—		231		360		381		25,726
Avalon on the Alameda		5.89	%	May-2019		—		53,980			—		—		467		727		770		52,016
Avalon Mission Bay North		5.89	%	May-2019		—		73,269			—		—		633		987		1,045		70,604
Avalon Woburn		5.89	%	May-2019		—		55,805			—		—		482		752		796		53,775

						2,409,562		3,043,674			103,622		137,803		366,551		497,965		431,328		1,506,405
*Variable rate* (3)
Avalon at Flanders Hill		—		May-2009		19,735		—			—		—		—		—		—		—
Avalon at Newton Highlands		2.34	%	Dec-2009		34,945		34,230	(4)		34,230		—		—		—		—		—
Avalon at Crane Brook		2.24	%	Mar-2011		31,530		30,990	(4)		561		1,169		29,260		—		—		—
Avalon at Bedford Center		1.88	%	May-2012		16,361		16,121	(4)		252		527		560		14,782		—		—
Avalon Walnut Creek		3.39	%	Mar-2046		9,000		9,000	(5)		—		—		—		—		—		9,000
$105.6 million unsecured notes		0.00	%	May-2009		105,600		—			—		—		—		—		—		—
$112.2 million unsecured notes		1.95	%	Jan-2010		112,200		112,200			—		112,200		—		—		—		—
$112.2 million unsecured notes		1.81	%	Jan-2011		112,200		112,200			—		—		112,200		—		—		—

						441,571		314,741			35,043		113,896		142,020		14,782		—		9,000

Total indebtedness — excluding unsecured credit facility					$	3,552,492	$	4,151,838		$	140,087		$283,262	$	510,886	$	620,161	$	433,026	$	2,164,416


(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 fixed at June 30, 2009 and December 31, 2008 through a swap agreement. The portion of the debt fixed 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 June 30, 2009.

(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 June 30, 2009. Actual amounts drawn on the debt as of June 30, 2009 are $45,811 for Bowery Place II, $44,536 for Avalon Acton, $88,115 for Morningside Park, $35,345 for Walnut Creek, and $0 for West Chelsea.

(6)		Balances outstanding represent total amounts due at maturity, and are not net of $1,950 of debt discount as of June 30, 2009 and $2,035 of debt discount as of December 31, 2008, as reflected in unsecured notes on our Condensed Consolidated Balance Sheets included elsewhere in this report.

(7)		In April 2008, we redeemed $10,000 aggregate principal amount of our $150,000, 7.5% unsecured notes due in August 2009. In January 2009, we redeemed $37,438 principal amount of our $150,000, 7.5% unsecured notes due August 2009.

(8)		In January 2009, we redeemed $64,423 principal amount of our $200,000, 7.5% unsecured notes due December 2010.

(9)		In November 2008, we redeemed $15,000 aggregate principal amount of our $250,000, 5.5% unsecured notes due January 2012.

Future Financing and Capital Needs — Portfolio and Other Activity

As of June 30, 2009, we had 12 new communities under construction, for which a total estimated cost of $395,611,000 remained to be invested. In addition, we had seven wholly owned communities under reconstruction, for which a total estimated cost of $61,157,000 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, including cash in construction escrows, invested in highly liquid overnight money market funds and repurchase agreements, and short-term investment vehicles;

	•		the remaining capacity under our $1,000,000,000 Credit Facility;

	•		retained operating cash;

	•		the net proceeds from sales of existing communities;

	•		the issuance of debt or equity securities; and/or

	•		private equity funding, including joint venture activity.

Before planned reconstruction activity, including reconstruction activity related to communities acquired by the Fund or Fund II, or the construction of a Development Right begins, we intend to arrange adequate financing to complete these undertakings, although we cannot assure you that we will be able to obtain such financing. In the event that financing cannot be obtained, we may have to abandon Development Rights, write off associated 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 significant losses could be incurred.

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 and 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. 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 flows from communities sold will have a minimal impact on our ability to fund future liquidity and capital resource needs.

Off-Balance Sheet Arrangements

In addition to our 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,” of our Condensed 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 fulfillment 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 final certificate of occupancy for the project (Chrystie Place in New York City), which is expected in 2010. 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 June 30, 2009 were not significant. As a result we have not recorded any obligation associated with these guarantees at June 30, 2009.

	•		The Fund has 22 loans secured by individual assets with amounts outstanding in the aggregate of $436,556,000, with 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. The Fund also has $3,000,000 outstanding under a credit facility as of June 30, 2009, that matures in December 2009. The mortgage loans and the credit facility are payable by the Fund with operating cash flow or disposition proceeds 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 final liquidation of the Fund, the total amount of all distributions to that partner during the life of the Fund (whether from operating cash flow 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 $7,192,000 as of June 30, 2009). As of June 30, 2009, the expected realizable value of the real estate assets owned by the Fund is considered adequate to cover such potential payment to that partner under the expected Fund liquidation scenario. The estimated fair value of, and our obligation under this guarantee, both at inception and as of June 30, 2009 was not significant and therefore we have not recorded any obligation for this guarantee as of June 30, 2009.

	•		Fund II has one loan secured by an asset in the amount of $21,515,000 with a maturity of June 2019. This loan is payable by Fund II.

			In addition, as part of the formation of Fund II, we have provided to one of the limited partners a guarantee. The guarantee provides that if, upon final liquidation of Fund II, the total amount of all distributions to that partner during the life of the Fund (whether from operating cash flow 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 $412,500 as of June 30, 2009). As of June 30, 2009, the expected realizable value of the real estate assets owned by Fund II is considered adequate to cover such potential payment to that partner under the expected Fund II liquidation scenario. The estimated fair value of, and our obligation under this guarantee, both at inception and as of June 30, 2009 was not significant and therefore we have not recorded any obligation for this guarantee as of June 30, 2009.

	•		MVP I, LLC, the entity that owns Avalon at Mission Bay North II, has a loan secured by the underlying real estate assets of the community for $105,000,000. The loan is a fixed rate, interest-only note bearing interest at 6.02%, maturing in December 2015. We have not guaranteed the debt of MVP I, LLC, nor do we have any obligation to fund this debt should MVP I, LLC be unable to do so.

	•		Avalon Del Rey Apartments, LLC has a loan secured by the underlying real estate assets of the community for $46,366,000 maturing in April 2016. The variable rate loan had an interest rate of 3.66% at June 30, 2009. We have not guaranteed the debt of Avalon Del Rey Apartments, LLC, nor do we have any obligation to fund this debt should Avalon Del Rey Apartments, LLC be unable to do so.

	•		Aria at Hathorne Hill, LLC is a joint venture in which we have a non-managing member interest. The LLC is developing for-sale town homes in Danvers, Massachusetts. The LLC has three separate variable rate loans with aggregate borrowings of $4,124,000 and a weighted average interest rate of 2.93% at June 30, 2009. We have not guaranteed the debt of Aria at Hathorne, nor do we have any obligation to fund this debt should Aria at Hathorne be unable to do so.

	•		PHVP I, LLC, a consolidated joint venture in which we hold a 99.0% controlling interest, is constructing a public garage adjacent to our Walnut Creek development. As part of the construction management services we provide to PHVP I, LLC for the construction of the public garage, we have provided a construction completion guarantee to the related lender in order to fulfill their standard financing requirements related to the garage construction financing. Our obligations under this guarantee terminate upon (i) the issuance of a certificate of substantial completion and (ii) completion of a list of lender requirements. The certificate of substantial completion was issued on July 11, 2008 and the completion of the lender’s requirements list is nearing completion. We expect termination of the guarantee in 2009.

	•		In 2007 we entered into a non-cancelable commitment (the “Commitment”) to acquire parcels of land in Brooklyn, New York for an aggregate purchase price of approximately $111,000,000. Under the terms of the Commitment, we are closing on the various parcels over a period determined by the seller’s ability to execute unrelated purchase transactions and achieve deferral of gains for the land sold under this Commitment. However, under no circumstances will the Commitment extend beyond 2011, at which time either we or the seller can compel execution of the remaining transactions. At June 30, 2009, we have an outstanding commitment to purchase the remaining land for approximately $62,500,000.

There are no other lines of credit, side agreements, financial guarantees or any other derivative financial 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 office space. There has not been any material changes outside the ordinary course of business to our contractual obligations during the six months ended June 30, 2009.

Development Communities

As of June 30, 2009, we had 12 Development Communities under construction. We expect these Development Communities, when completed, to add a total of 4,035 apartment homes to our portfolio for a total capitalized cost, including land acquisition costs, of approximately $1,396,400,000. You should carefully review Item 1a., “Risk Factors,” of our Form 10-K for a discussion of the risks associated with development activity.

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

Total

Number of

capitalized

apartment

cost (1)

Construction

Initial

Estimated

homes

($ millions)

start

occupancy (2)

completion

stabilization (3)

Avalon White Plains

407

153.0

Q2 2007

Q3 2008

Q4 2009

Q2 2010

White Plains, NY

Avalon Anaheim Stadium

251

102.3

Q2 2007

Q4 2008

Q3 2009

Q1 2010

Anaheim, CA

Avalon Union City

439

120.9

Q3 2007

Q1 2009

Q4 2009

Q2 2010

Union City, CA

Avalon at Mission Bay North III

260

150.0

Q4 2007

Q2 2009

Q4 2009

Q2 2010

San Francisco, CA

Avalon Irvine

279

77.4

Q4 2007

Q2 2009

Q1 2010

Q3 2010

Irvine, CA

Avalon Fort Greene

631

306.8

Q4 2007

Q4 2009

Q1 2011

Q3 2011

New York, NY

Avalon Charles Pond

200

47.8

Q1 2008

Q1 2009

Q3 2009

Q1 2010

Coram, NY

Avalon Blue Hills

276

46.6

Q2 2008

Q1 2009

Q4 2009

Q2 2010

Randolph, MA

Avalon Walnut Creek (4)

422

151.7

Q3 2008

Q3 2010

Q1 2011

Q3 2011

Walnut Creek, CA

10.

Avalon Norwalk

311

86.4

Q3 2008

Q3 2010

Q2 2011

Q4 2011

Norwalk, CT

11.

Avalon Northborough I

163

27.4

Q4 2008

Q2 2009

Q4 2009

Q2 2010

Northborough, MA

12.

Avalon Towers Bellevue

396

126.1

Q4 2008

Q2 2010

Q2 2011

Q4 2011

Bellevue, WA

Total

4,035

1,396.4


(1)		Total capitalized cost includes all capitalized costs projected to be or actually incurred to develop the respective Development Community, determined in accordance with GAAP, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees. Total capitalized cost for communities identified as having joint venture ownership, either during construction or upon construction completion, represents the total projected joint venture contribution amount.

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

(3)		Stabilized operations is defined as the earlier of (i) attainment of 95% or greater physical occupancy or (ii) the one-year anniversary of completion of development.

(4)		This community is being financed in part by third party, tax-exempt debt.

Redevelopment Communities

As of June 30, 2009, there were seven communities under redevelopment. We expect the total capitalized cost to redevelop these communities to be $116,500,000 excluding costs prior to redevelopment. We have found that the cost to redevelop an existing apartment community is more difficult to budget and estimate than the cost to develop a new community. Accordingly, we expect that actual costs may vary from our budget by a wider range than for a new development community. We cannot assure you that we will meet our schedule for reconstruction completion or restabilized operations, or that we will meet our budgeted costs, either individually or in the aggregate. We anticipate maintaining the level of our redevelopment activity related to communities in our current operating portfolio for the remainder of 2009. You should carefully review Item 1a., “Risk Factors,” of our Form 10-K for a discussion of the risks associated with redevelopment activity.

The following presents a summary of these Redevelopment Communities:

Total cost

Number of

($ millions)

Estimated

apartment

Pre-redevelopment

Total capitalized

Reconstruction

reconstruction

restabilized

homes

cost

cost (1)

start

completion

operations (2)

Avalon Woodland Hills

663

72.1

110.6

Q4 2007

Q3 2010

Q1 2011

Woodland Hills, CA

Avalon at Diamond Heights

154

25.3

30.6

Q4 2007

Q4 2010

Q2 2011

San Francisco, CA

Avalon Symphony Woods I

176

9.4

14.2

Q2 2008

Q3 2009

Q1 2010

Columbia, MD

Avalon Symphony Woods II

216

36.4

42.6

Q2 2008

Q3 2009

Q1 2010

Columbia, MD

Avalon Burbank

400

71.0

94.4

Q3 2008

Q3 2010

Q1 2011

Burbank, CA

Avalon Pleasanton

456

63.0

80.9

Q2 2009

Q4 2011

Q2 2012

Pleasenton, CA

Avalon Watch

512

30.2

50.6

Q2 2009

Q1 2012

Q3 2012

West Windsor, NJ

Total

2,577

307.4

423.9


(1)		Total capitalized cost includes all capitalized costs projected to be or actually incurred to develop the respective Redevelopment 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, all as determined in accordance with GAAP.

(2)		Restabilized operations is defined as the earlier of (i) attainment of 95% or greater physical occupancy or (ii) the one-year anniversary of completion of redevelopment.

Development Rights

At June 30, 2009 we held 26 Development Rights for the future development of new apartment communities on land that is either owned by us, under contract, subject to a leasehold interest or for which we hold either a purchase or lease option. We generally prefer to hold Development Rights through options to acquire land, although for 13 of the Development Rights we currently own the land on which a community would be built if we proceeded with development. The Development Rights range from those beginning design and architectural planning to those that have completed site plans and drawings and can begin construction almost immediately. We estimate that the successful completion of all of these communities would ultimately add 6,688 apartment homes to our portfolio. Substantially all of these apartment homes will offer features like those offered by the communities we currently own. At June 30, 2009, there were cumulative capitalized costs (including legal fees, design fees and related overhead costs, but excluding land costs) of $74,764,000 relating to Development Rights that we consider probable for future development. In addition, land costs related to the pursuit of Development Rights (consisting of original land and additional carrying costs) of $225,634,000 are reflected as land held for development on the Condensed Consolidated Balance Sheet as of June 30, 2009.

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 invest in, 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 analyses. In the event that we do not proceed with a Development Right, we generally would not recover capitalized costs incurred in the pursuit of those communities, unless we were to recover amounts in connection with the sale of land; however, we cannot guarantee a recovery. 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 no longer probable, any capitalized pre-development costs are charged to expense.

The Company continues to evaluate its business, and in particular its development pipeline, in light of continued weakness in the economy and the capital markets. As part of this review, for the six months ended June 30, 2009 we recognized a charge of $22,583,000 related to the impairment of two land parcels as well as the write-off of pursuit costs with respect to Development Rights for land under option agreements that we no longer intend to develop. Should the Company decide not to proceed with other Development Rights, additional impairment charges and/or abandoned pursuit charges may be recognized in future periods. The timing and amount of any future impairment charges will be dependent on management’s decisions regarding future development, as well as future economic and capital market conditions.

You should carefully review Section 1a., “Risk Factors,” of our Form 10-K for a discussion of the risks associated with Development Rights.


				Total
		Estimated		capitalized
		number		cost
	Location	of homes		($ millions) (1)
1.	Rockville Centre, NY Phase I		210	$	78
2.	Northborough, MA Phase II		219		43
3.	Greenburgh, NY Phase II		288		77
4.	West Long Branch, NJ		180		34
5.	Plymouth, MA Phase II		92		20
6.	Wood-Ridge, NJ		406		92
7.	Seattle, WA		204		58
8.	Lynnwood, WA Phase II		82		18
9.	San Francisco, CA		173		65
10.	Wilton, CT		100		30
11.	Greenburgh, NY Phase III		156		43
12.	Rockville Centre, NY Phase II		139		51
13.	New York, NY		691		307
14.	Shelton, CT		251		66
15.	Roselle Park, NJ		249		54
16.	Dublin, CA Phase II		405		126
17.	Cohasset, MA		200		38
18.	North Bergen, NJ		164		47
19.	Brooklyn, NY		861		443
20.	Boston, MA		180		97
21.	Rockville, MD		240		62
22.	Stratford, CT		130		22
23.	Yaphank, NY		343		57
24.	Tysons Corner, VA		338		87
25.	Seattle, WA II		272		81
26.	Andover, MA		115		26


	Total		6,688	$	2,122


(1)		Total capitalized cost includes all capitalized costs incurred to date (if any) and projected to be incurred to develop the respective community, determined in accordance with GAAP, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees.

Other Land and Real Estate Assets

We currently own land parcels with a carrying basis of approximately $106,193,000, that we are no longer holding for development. We believe that the current carrying basis of these assets is such that there is no charge for impairment, or further charge in the case of assets previously impaired, required. However we may be subject to the recognition of further charges for impairment in the event that there are indicators of such impairment, and we determine that the carrying basis of the assets is greater than the current fair value, less costs to dispose.

Insurance and Risk of Uninsured Losses

We carry commercial general liability insurance and property insurance with respect to all of our communities. These policies, and other insurance policies we carry, have policy specifications, insured limits and deductibles that we consider commercially reasonable. There are, however, certain types of losses (such as losses arising from acts of war) that are not insured, in full or in part, because they are either uninsurable or the cost of insurance makes it, in management’s view, economically impractical. You should carefully review the discussion under Item 1a., “Risk Factors,” of our Form 10-K for a discussion of risks associated with an uninsured property or liability loss.

Many of our West Coast communities are located in the general vicinity of active earthquake faults. Many of our communities are near, and thus susceptible to, the major fault lines in California, including the San Andreas Fault

and the Hayward Fault. We cannot assure you that an earthquake would not cause damage or losses greater than insured levels. We have in place with respect to communities located in California, for any single occurrence and in the aggregate, $75,000,000 of coverage with a deductible per building equal to five percent of the insured value of that building. Earthquake coverage outside of California is subject to a $100,000,000 limit, except with respect to the state of Washington, for which the limit is $75,000,000. Our earthquake insurance outside of California provides for a $100,000 deductible per occurrence except that the next $350,000 of loss per occurrence outside California will be treated as an additional deductible until the total deductible incurred exceeds $1,400,000.

In May 2009, we renewed our property insurance policy for a one year term and experienced an increase in premiums of approximately 7% as a result of increased property values and an increased coverage level for certain insurable events. There were no other material changes in coverage.

In August 2009, we renewed our general liability policy and worker’s compensation coverage for a one year term, and experienced a decrease in the premium on these policies of approximately 25%, with no material changes in the coverage.

Just as with office buildings, transportation systems and government buildings, there have been reports that apartment communities could become targets of terrorism. In December 2007, Congress passed the Terrorism Risk Insurance Program Reauthorization Act (“TRIPRA”) which is designed to make terrorism insurance available through a federal back-stop program until 2014. In connection with this legislation, we have purchased insurance for property damage due to terrorism up to $250,000,000. Additionally, we have purchased insurance for certain terrorist acts, not covered under TRIPRA, such as domestic-based terrorism. This insurance, often referred to as “non-certified” terrorism insurance, is subject to deductibles, limits and exclusions. Our general liability policy provides TRIPRA coverage (subject to deductibles and insured limits) for liability to third parties that result from terrorist acts at our communities.

An additional consideration for insurance coverage and potential uninsured losses is mold growth. Mold growth may occur when excessive moisture accumulates in buildings or on building materials, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. If a significant mold problem arises at one of our communities, we could be required to undertake a costly remediation program to contain or remove the mold from the affected community and could be exposed to other liabilities. For further discussion of the risks and the Company’s related prevention and remediation activities, please refer to the discussion under Item 1a., “Risk Factors — We may incur costs due to environmental contamination or non-compliance,” in our Form 10-K. We cannot provide assurance that we will have coverage under our existing policies for property damage or liability to third parties arising as a result of exposure to mold or a claim of exposure to mold at one of our communities.

We also carry crime policies (also commonly referred to as a fidelity policy or employee dishonesty policy) that protect the company, up to $5,000,000 per occurrence, from employee theft of money, securities or property.

Inflation and Deflation

Substantially all of our apartment leases are for a term of one year or less. In an inflationary 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 inflation, 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 deflationary rent environment, we may be exposed to declining rents more quickly under these shorter-term leases.

Forward-Looking Statements

This Form 10-Q contains “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by our use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “project,” “plan,” “may,” “shall,” “will” and other similar expressions in this Form 10-Q, 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, revenue, NOI and earnings estimates;

	•		our declaration or payment of distributions;

	•		our joint venture and discretionary fund activities;

	•		our policies regarding investments, indebtedness, acquisitions, dispositions, financings and other matters;

	•		our qualification 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, Midwest, New England, Metro NY/NJ and Pacific Northwest regions of the United States and in general;

	•		the availability of debt and equity financing;

	•		interest rates;

	•		general economic conditions including the recent economic downturn; and

	•		trends affecting our financial condition or results of operations.

We cannot assure the future results or outcome of the matters described in these statements; rather, these statements merely reflect our current expectations of the approximate outcomes of the matters discussed. You should not rely on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. These risks, uncertainties and other factors may cause our actual results, performance or achievements to differ materially from the anticipated future results, performance or achievements expressed or implied by these forward-looking statements. You should carefully review the discussion under Item 1a., “Risk Factors,” on our Form 10-K for a discussion of risks associated with forward-looking statements.

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, increases in the cost of capital or lack of capital availability, 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;

	•		financing may not be available on favorable terms or at all, and our cash flows from operations and access to cost effective capital may be insufficient for the development of our pipeline which could limit our pursuit of opportunities;

	•		our cash flows may be insufficient to meet required payments of principal and interest, and we may be unable to refinance existing indebtedness or the terms of such refinancing may not be as favorable as the terms of existing indebtedness;

	•		we may be unsuccessful in our management of the Fund, Fund II or the REIT vehicles that are used with each respective investment fund; and

	•		we may be unsuccessful in managing changes in our portfolio composition.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. 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 financial results or a different presentation of our financial statements. Below is a discussion of the accounting policies that we consider critical to an understanding of our financial condition and operating results that may require complex or significant judgment in their application or require estimates about matters which are inherently uncertain. A discussion of our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 1, “Organization and Significant Accounting Policies” of our Condensed 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 June 30, 2009, our assets would have increased by $962,848,000 and our liabilities would have increased by $750,221,000 with the balance presented as noncontrolling interests. We would be required to consolidate those joint ventures currently not consolidated for financial 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 and if we were considered the primary beneficiary.

•

For entities in which we do not hold a controlling voting and/or variable interest, the contractual arrangement changed 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 significant 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 either (i) in advance of taking homes out of service when significant 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 specific financing, as well as for general corporate financing to the extent of our aggregate investment in the projects. Indirect project costs, which include personnel and office 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 the three months ended June 30, 2009 our development activities decreased by 10%, and there were no corresponding decrease in our indirect project costs, our operating expenses would have increased by $661,000.

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 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 quarter ended June 30, 2009 would have decreased by $7,476,400.

Asset Impairment Evaluation

We apply the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”) for consolidated operating apartment communities, Development Communities and Development Rights 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. We also apply the provisions of SFAS No. 144 for assessing the need to perform an impairment analysis and measuring impairment losses on the underlying long-lived assets held by unconsolidated joint venture investments. In addition, we apply the provisions of APB No. 18, “The Equity Method of Accounting for Investments in Common Stock” (“APB No. 18”), to determine if there has been an other than temporary decline in the value of investments in the Company’s unconsolidated joint ventures.

For both analyses, management judgment is required both to determine if a significant event has occurred, such that an impairment analysis is necessary, as well as for the assessment and measurement of any potential impairment. Under APB 18, in the event that there has been a loss in value for an investment, a loss is only recognized if it is other than temporary which requires management judgment.

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 2008, our net income would have decreased by approximately $210,500,000.

Our qualification as a REIT requires management to exercise significant judgment and consideration with respect to operational matters and accounting treatment. Therefore, we believe our REIT status is a critical accounting estimate.


Item 3.		Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to our exposures to market risk since December 31, 2008.


Item 4.		Controls and Procedures

	(a)		Evaluation of disclosure controls and procedures.

			The Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2009. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

			We continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

	(b)		Changes in internal controls over financial reporting.

			None.

Part II. OTHER INFORMATION


Item 1.		Legal Proceedings

			We are currently involved in litigation alleging that communities constructed by us violate the accessibility requirements of the Fair Housing Act (“FHA”) and the Americans with Disabilities Act. The Equal Rights Center filed a complaint against us on September 23, 2005 in the U.S. District Court, District of Maryland with respect to 100 properties. The lawsuit seeks monetary damages as well as injunctive relief, such as modifications to assets. On August 13, 2008 the U.S. Attorney’s Office for the Southern District of New York filed a civil lawsuit against the Company and the joint venture (CVP I, LLC) in which it has an interest that owns Avalon Chrystie Place. The lawsuit alleges that Avalon Chrystie Place was not designed and constructed in accordance with the accessibility requirements of the FHA. The Company designed and constructed Avalon Chrystie Place with a view to compliance with New York City’s Local Law 58, which for more than 20 years has been New York City’s code regulating the accessible design and construction of apartments. The Company intends to vigorously defend against these actions. We cannot predict or determine the outcome of these matters, nor is it reasonably possible to estimate the amount of loss, if any, that would be associated with an adverse decision or settlement.

			On August 1, 2008, we filed a lawsuit in the Superior Court of the State of Washington in the County of King (Avalon DownREIT V, L.P., v Grand-Glacier, LLC et al) relating to our assertion that the homeowners association in which our former Avalon Wynhaven community is a part systematically overcharged us for various shared costs. We recently sold this property and agreed to indemnify the buyer for annual association fees to the extent they exceed an amount that we each agreed was reasonable. The defendants have

filed a cross-claim against Avalon DownREIT V, L.P. seeking foreclosure of the property and satisfaction of all amounts alleged to be due. We intend to vigorously pursue our claim and defend against the counter claim. We cannot predict the likely terms of a final judgment or settlement.

In addition to the matters described above, we are involved in various other claims and/or administrative proceedings that arise in the ordinary course of our business. While no assurances can be given, we do not believe that any of these other outstanding litigation matters, individually or in the aggregate, will have a material adverse effect on our operations.


Item 1a.		Risk Factors

In addition to the other information set forth in this report, you should carefully consider the risk factors which could materially affect our business, financial condition or future results discussed in the Form 10-K in Part I, “Item 1a. Risk Factors.” The risks described in our Form 10-K are not the only risks that could affect the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results in the future. There have been no material changes to our risk factors since December 31, 2008.


Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds

			None.

			Issuer Purchases of Equity Securities


							(d)
							Maximum Dollar
					(c)		Amount that May
	(a)				Total Number of		Yet be Purchased
	Total Number		(b)		Shares Purchased		Under the Plans or
	of Shares		Average Price		as Part of Publicly		Programs
	Purchased		Paid per		Announced Plans		(in thousands)
Period	(1)		Share		or Programs		(2)
April 1— April 30, 2009		966	$	42.48		—	$	200,000
May 1— May 31, 2009		372	$	51.28		—	$	200,000
June 1— June 30, 2009		31	$	42.42		—	$	200,000


(1)		Reflects shares surrendered to the Company in connection with vesting of restricted stock or exercise of stock options as payment of taxes or as payment of exercise price.

(2)		As disclosed in our Form 10-Q for the quarter ended March 31, 2008, represents amounts outstanding under the Company’s $500,000,000 Stock Repurchase Program. There is no scheduled expiration date to this program.


Item 3.		Defaults Upon Senior Securities

None.


Item 4.		Submission of Matters to a Vote of Security Holders

			The Company held its 2009 Annual Meeting of Stockholders on May 21, 2009. The stockholders voted to elect Bryce Blair, Bruce A. Choate, John J. Healy, Jr., Gilbert M. Meyer, Timothy J. Naughton, Peter S. Rummell, Lance R. Primis, H. Jay Sarles and W. Edward Walter to serve as directors of the Company until the 2010 Annual Meeting of Stockholders and until their respective successors are duly elected and qualified.

			69,097,751 votes were cast for and 1,395,319 votes were withheld from the election of Mr. Blair.

			69,437,236 votes were cast for and 1,055,834 votes were withheld from the election of Mr. Choate.

			69,436,750 votes were cast for and 1,056,320 votes were withheld from the election of Mr. Healy.

			69,936,011 votes were cast for and 530,060 votes were withheld from the election of Mr. Meyer.

			69,976,786 votes were cast for and 516,284 votes were withheld from the election of Mr. Naughton.

			69,430,119 votes were cast for and 1,062,951 votes were withheld from the election of Mr. Primis.

			70,034,478 votes were cast for and 458,592 votes were withheld from the election of Mr. Rummell.

			69,984,887 votes were cast for and 508,184 votes were withheld from the election of Mr. Sarles.

			70,073,564 votes were cast for and 419,506 votes were withheld from the election of Mr. Walter.

			Stockholders voted to approve the AvalonBay Communities, Inc. 2009 Stock Option and Incentive Plan. 63,271,452 votes were cast in favor of approving the Plan, 3,450,877 votes were cast against, and 185,172 abstained. There were 3,585,569 broker non-votes on this matter.

			Stockholders ratified the selection of Ernst & Young LLP as the Company’s independent auditors for 2009. 69,601,422 votes were cast in favor of ratifying the selection of Ernst & Young LLP, 856,375 votes were cast against, and 35,271 abstained.


Item 5.		Other Information

None.


Item 6.		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-K of the Company filed on March 1, 2007.)

3(i).2	—	Articles of Amendment, dated as of October 2, 1998. (Incorporated by reference to Exhibit 3(i).2 to Form 10-K of the Company filed on March 1, 2007.)

3(ii).1	—	Amended and Restated Bylaws of the Company, as adopted by the Board of Directors on May 21, 2009. (Incorporated by reference to Exhibit 3.2 to Form 8-K of the Company filed on May 28, 2009.)

4.1	—	Indenture for Senior Debt Securities, 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 Registration Statement on form S-3 of the Company (File No. 333-139839), filed January 8, 2007.)

4.2	—	First Supplemental Indenture, dated as of January 20, 1998, between the Company and the State Street Bank and Trust Company as Trustee. (Incorporated by reference to Exhibit 4.2 to Registration Statement on Form S-3 of the Company (File No. 333-139839), filed January 8, 2007.)

4.3	—	Second Supplemental Indenture, dated as of July 7, 1998, between the Company and State Street Bank and Trust Company as Trustee. (Incorporated by reference to Exhibit 4.3 to Registration Statement on Form S-3 of the Company (File No. 333-139839), filed January 8, 2007.)

4.4	—	Amended and Restated Third Supplemental Indenture, dated as of July 10, 2000 between the Company and State Street Bank and Trust Company as Trustee. (Incorporated by reference to Exhibit 4.4 to Registration Statement on Form S-3 of the Company (File No. 333-139839), filed January 8, 2007.)

4.5	—	Fourth Supplemental Indenture, dated as of September 18, 2006 between the Company and U.S. Bank National Association as Trustee. (Incorporated by reference to Exhibit 4.5 to Registration Statement on Form S-3 of the Company (File No. 333-139839), filed January 8, 2007.)

4.6	—	Dividend Reinvestment and Stock Purchase Plan of the Company. (Incorporated by reference to Exhibit 8.1 to Registration Statement on Form S-3 of the Company (File No. 333-87063), filed September 14, 1999.)

4.7	—	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.)

4.8	—	Amendment to the Company’s Dividend Reinvestment and Stock Purchase Plan filed on March 26, 2004. (Incorporated by reference to the Prospectus Supplement filed pursuant to Rule 424(b)(3) of the Securities Act of 1933 on March 26, 2004.)

4.9	—	Amendment to the Company’s Dividend Reinvestment and Stock Purchase Plan filed on May 15, 2006. (Incorporated by references to the Prospectus Supplement filed pursuant to Rule 424(b)(3) of the Securities Act of 1933 on May 15, 2006.)


Exhibit No.		Description

10.1	—	AvalonBay Communities, Inc. 2009 Stock Option and Incentive Plan. (Incorporated by reference to Exhibit 10.1 to Form 8-K of the Company filed on May 28, 2009.)

10.2	—	Master Cross-Collateralization Agreement, dated as of April 24, 2009, between Deutsche Bank Berkshire Mortgage, Inc., parties identified on Exhibit A-Schedule 1 attached thereto and incorporated herein by reference., and Shady Grove Financing, LLC. (Filed herewith.)

10.3	—	Master Substitution Agreement, dated April 23, 2009, between Deutsche Bank Berkshire Mortgage, Inc., AvalonBay Traville, LLC and the entities identified on Schedule B attached thereto and incorporated therein by reference. (Filed herewith.)

10.4	—	Form of MultiFamily Note, dated April 24, 2009. (Used in connection with the properties identified on Exhibit B to the Master Cross-Collateralization Agreement dated April 23, 2009.) (Filed herewith.)

10.5	—	Form of Guaranty, dated April 24, 2009. (Used in connection with the properties identified on Exhibit B to the Master Cross-Collateralization Agreement dated April 23, 2009.) (Filed herewith.)

10.6	—	Form of Incentive Stock Option Agreement. (Incorporated by reference to Exhibit 10.1 to Registration Statement on Form S-8 of the Company filed on May 22, 2009.)

10.7	—	Form of Non-Qualified Stock Option Agreement. (Incorporated by reference to Exhibit 10.2 to Registration Statement on Form S-8 of the Company filed on May 22, 2009.)

10.8	—	Form of Stock Grant and Restricted Stock Agreement. (Incorporated by reference to Exhibit 10.3 to Registration Statement on Form S-8 of the Company filed on May 22, 2009.)

10.9	—	Form of Director Restricted Stock Agreement. (Incorporated by reference to Exhibit 10.4 to Registration Statement on Form S-8 of the Company filed on May 22, 2009.)

10.10	—	Form of Director Restricted Unit Agreement. (Incorporated by reference to Exhibit 10.5 to Registration Statement on Form S-8 of the Company filed on May 22, 2009.)

12.1	—	Statements re: Computation of Ratios. (Filed herewith.)

31.1	—	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer). (Filed herewith.)

31.2	—	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer). (Filed herewith.)

32	—	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer and Chief Financial Officer). (Furnished herewith.)

101	—	XBRL (Extensible Business Reporting Language). The following materials from AvalonBay Communities, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2009, formatted in XBRL: (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of operations, (iii) condensed consolidated statements of cash flows and (iv) notes to condensed consolidated financial statements.*

* As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

SIGNATURES

Pursuant to the requirements 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: August 10, 2009	/s/ Bryce Blair
	Bryce Blair
	Chief Executive Officer (Principal Executive Officer)


Date: August 10, 2009	/s/ Thomas J. Sargeant
	Thomas J. Sargeant
	Chief Financial Officer (Principal Financial Officer)